HOWARD MARKS: "The most important things in investing are ...."

We highly recommend this video for upping your investing game. Below are excerpts from a talk by billionaire investor Howard Marks, whose firm Oaktree Capital manages nearly US$100 billion in assets. He cites lessons learnt from books by various authors such as Nassim Taleb.

(My book) is not designed to tell you how to make money. And it's not designed to tell you how easy investment is or to try to make it easy. And in fact, my highest goal is probably to make it clear how hard it is.

Investing is very difficult because it's kind of counter intuitive. And it kind of turns back on itself all the time. And there are no formulas that work. So what I tried to do in the book is teach people how to think.

When I went to Wharton in 1963, the first book I remember learning was called Decision Making Under Uncertainty, by C. Jackson Greyson who became America's first energy czar. And I learned a couple of important things from that book.

Number one, that you can't tell from an outcome whether a decision was good or bad. Most people don't understand this. It’s totally counter intuitive.

But the truth is, in the real world where there's randomness at work -- if you build a bridge and it falls down, then you must assume that the engineer made a mistake that it was a bad decision to build the bridge that way.

The investment business is full of people who are “right for the wrong reason”. Made a bad decision, it didn't work out the way they thought, but they got lucky. And they were bailed out by events. 

If you look at investing as a field without randomness, where everything is determinative, you'll get confused because you will not draw the proper inferences from what you see. For example, you see somebody report a great return for the year. The scientist who thinks that the investment world runs like the world of physics might think, well, great return, that means the guy's a great investor. But in truth, it might be somebody who took a crazy shot and got lucky.

But one very important lesson for you to learn is that you should not act as if the things that should happen are the things that will happen. Again, in the world of the physical sciences, you could probably bet that that's true.

And the electrical engineer knows that if he turns on a light switch over here, the light will go on there every time because it's subject to physics. Not in the world of investing.

For every possible phenomenon, there is a range of things that can happen. There may be one where it's possible to discern which one is the most likely. And if we draw a probability distribution, that may be the highest point on the distribution -- the most likely single outcome but that doesn't mean it's going to happen.