Renowned billionaire investor Howard Marks reveals shocking success rate- Only 5 good calls in 50-yr career

Renowned billionaire investor Howard Marks reveals shocking success rate: Only 5 good calls in 50-yr career

In a recent blog post, renowned investor Howard Marks said the best method to correctly predict the future performance of the markets “lay in understanding what was responsible for the current conditions”. By understanding this critically, Marks made five macro calls over his illustrious 50-year career, with a 100% rate of success.

Marks highlighted the significance of market extremes, noting that only a few times in a decade did markets reach such high or low levels that compelled action and offered a high probability of being right. Attempting to make market calls more frequently, especially when markets were closer to the middle ground, often led to poor success rates. Small mispricings could easily escalate into manias or crashes, making it challenging to time market movements accurately.

Decoding market movements

To “take the temperature of the market,” Marks suggested several key components. Engaging in pattern recognition by studying market history helped better understand the implications of current events. Recognizing cycles that stemmed from “excesses and corrections” and understanding the psychology behind extreme market optimism or pessimism provided insights into unsustainable price levels and directions.

Marks emphasized the importance of contrarianism, where the “easy money” lay in doing the opposite of emotional investors’ extreme views. However, he cautioned against diverging from the consensus all the time, as most of the time, the consensus tended to be right. Successful contrarianism required understanding what the herd was doing, why it was doing it, what was wrong with it, and what alternative actions should be taken.

Additionally, Marks underscored the significance of investor emotions in driving economic and market outcomes. He advised taking note of emotional swings and capitalizing on opportunities they presented. Resisting one’s own emotionality and standing apart from the crowd’s psychology were crucial for successful investing.

Marks suggested being on the lookout for illogical propositions and widely accepted beliefs that didn’t make sense, as they could signal potential opportunities or risks. Developing clear-eyed observations and assessments, rather than relying solely on quantitative data or calculations, was key to successful market observations.

Howard Marks’ personal experience

Regarding his own experience, Marks acknowledged that pattern recognition required time in the field and real-world experience, as opposed to solely relying on book learning. He reflected on how it took him over 30 years to gain the insight and experience needed to detect market excesses fully.

Howard Marks defined market cycles as a series of events causing one another rather than a predictable series of up and down movements. He highlighted the opportunities for bargain purchases resulting from overly negative psychology and the opportunities to sell at high prices arising from excessive optimism.

Marks also said that Oaktree rarely made bold or optimistic macro assumptions. Their goal was to construct portfolios with a generous “margin of safety” and avoid relying on the mistaken belief that the future could be predicted accurately. “But the bottom line is that, at Oaktree, we approach these things with great humility, diverging from our neutral assumptions and normal behavior only when circumstances leave us no other choice,” said Marks.