7 investment tips from Howard Marks
The two questions I always get when people hear what I do—besides “Do you have any good stock tips?”—are:
What do you think of the stock market today?
How do I find good stocks to invest in?
The first question is the toughest. I feel like an economist answering it: on the one hand... but on the other hand...
Honestly, I have no idea where the market is headed. This is one of the strangest situations I’ve seen in the 25 years I’ve been active in the stock market. It’s possible I wasn’t paying close attention in the first five years (during the dot-com era). Still, today, I see a market where, on one side, we experience bursts of euphoria, while on the other, companies are being unfairly left for dead.
In the past 20 years, the market seemed to move more in unison. "A rising tide lifts all boats" captures that idea well. Everything moved together, like the ebb and flow of the tide.
Now, however, we’re seeing parts of the beach where the water is crashing against the seawall, while other areas are completely dry—exposing the most remarkable shells.
So, where is the market today, and where is it going? “Only time will tell.”
As for the second question, I often refer to a 1994 memo by Howard Marks, where he offers seven ideas to keep in mind when searching for good stocks.
1. No sector or group of companies on the stock market has the birthright to always deliver high returns.
This feels especially relevant today. Remember, every company has a lifecycle. It starts with an idea, followed by confirmation that it works, rapid growth, slow growth, and eventually stagnation and decline.
For some companies, this process takes only a few years; for others, it spans decades.
Some companies manage to reinvent themselves a few times along the way.
But ultimately, any company with high margins will attract strong competition, face changes in consumer behavior, be disrupted by new technologies, or encounter government regulations.
2. What matters most is not what you invest in, but when and at what price.
Don’t get me wrong. He’s not saying you shouldn’t do your research. But essentially, there are no inherently good or bad investments. And he’s not suggesting you should try to time the market either. It’s more about where the company is in its lifecycle or price cycle.
A stock from the best company can be a bad investment if you pay too much for it. Conversely, a stock from a poor company can be a great investment if you buy it cheap enough.
3. The most important factor in investing isn’t economics or accounting but psychology.
Marks compares investing to a popularity contest. The biggest risk is buying a stock at the peak of its popularity.
At that point, all the positive expectations are already priced in, and there are few new buyers left.
It’s safest to buy a stock when no one wants it. Over time, the popularity, and thus the price, can only go up.
4. In short, invest like a contrarian.
An investment that "everyone" knows is cheap is a contradiction. If everyone knows it’s cheap, why haven’t they bought it yet and driven up the price? And if they already have, why is the price still low?
5. Take the bet no one else wants.
This repeats point three: if everyone wants the same stock, it’s hard for that stock to meet the high expectations.
On the other hand, you can buy stocks that no one wants so cheaply that it becomes easier for them to meet or exceed expectations.
6. As Warren Buffett says, “The less prudently others behave, the more prudently you should behave. When others are fearful, you shouldn’t be, but when they’re not fearful, you might want to be.”
The stock market—or more accurately, its movements—are driven by fear and greed at any given moment.
In times of fear, stock prices are so low that you don’t need to do much research. It’s often enough to buy cheap and wait.
But when greed takes over, the intelligent investor (according to Graham and Marks) has much more work to do.
7. Gresham’s Law states that "bad money drives out good money." This was true when paper money replaced gold, and it works in investing too. When investors appear who are uncritical and buy everything, it becomes harder for demanding investors to find opportunities with the right balance of risk and reward.
Today, we see many investors, active or passive, all buying the same stocks. It’s hard to find good opportunities there.
On the other hand, there are stocks that no one wants but are still profitable, growing, and have low debt. It’s easier to find opportunities in these.
Howard Marks emphasizes the importance of independent thinking.
My conclusion
For me, the focus isn’t on the stock price itself, but on how it relates to fair value. By concentrating on this and demanding a sufficient margin of safety, you can avoid disasters.
Buying great companies—something we’d prefer to do—will have to wait. For now, we’re focusing mainly on cheap companies where we can accurately assess the downside risk.