On 22 November 2022, famed investor Howard Marks released his latest memo entitled, “What Really Matters?”
As usual, it was an insightful read. Marks talked about what really matters in the stock market for investors (and vice versa, what doesn’t matter).
Here are a couple of quotes in the memo that I thought would be worth highlighting.
Short-Term Events Don’t Matter
“One of the critical mistakes people are guilty of – we see it all the time in the media – is believing that changes in security prices are the result of events: that favorable events lead to rising prices and negative events lead to falling prices. I think that’s what most people believe – especially first-level thinkers – but that’s not right. Security prices are determined by events and how investors react to those events, which is largely a function of how the events stack up against investors’ expectations. “
“Macro events and the ups and downs of companies’ near-term fortunes are unpredictable and not necessarily indicative of – or relevant to – companies’ long-term prospects. So little attention should be paid to them.”
“It’s clear from observation that security prices fluctuate much more than economic output or company profits. What accounts for this? It must be the fact that, in the short term, the ups and downs of prices are influenced far more by swings in investor psychology than by changes in companies’ long-term prospects. Because swings in psychology matter more in the near term than changes in fundamentals – and are so hard to predict – most short-term trading is a waste of time . . . or worse.”
Trading Mentality Doesn’t Matter
“If you ask Warren Buffett to describe the foundation of his approach to investing, he’ll probably start by insisting that stocks should be thought of as ownership interests in companies.”
“To me, buying for a short-term trade equates to forgetting about your sports team’s chances of winning the championship and instead betting on who’s going to succeed in the next play, period, or inning.”
“Wanting to own a business for its commercial merit and long-term earnings potential is a good reason to be a stockholder, and if these expectations are borne out, a good reason to believe the stock price will rise.”
Short-Term Performance Doesn’t Matter
“Obviously, no one should attach much significance to returns in one quarter or year. Investment performance is simply one result drawn from the full range of returns that could have materialized, and in the short term, it can be heavily influenced by random events. Thus, a single quarter’s return is likely to be a very weak indicator of an investor’s ability, if that.”
Volatility Doesn’t Matter
“I define risk as the probability of a bad outcome, and volatility is, at best, an indicator of the presence of risk. But volatility is not risk. That’s all I’m going to say on that subject.”
“Volatility should be less of a concern for investors:
– whose entities are long-lived, like life insurance companies, endowments, and pension funds;
– whose capital isn’t subject to lump-sum withdrawal;
– whose essential activities won’t be jeopardized by downward fluctuations;
– who don’t have to worry about being forced into mistakes by their constituents; and
– who haven’t levered up with debt that might have to be repaid in the short run.”
“[I]nvestors should take advantage of their ability to withstand volatility, since many investments with the potential for high returns might be susceptible to substantial fluctuations.”
“In many cases, people accord volatility far more importance than they should.”
Hyper-Activity Doesn’t Matter
“”When I was a boy, there was a popular saying: Don’t just sit there; do something. But for investing, I’d invert it: Don’t just do something; sit there. Develop the mindset that you don’t make money on what you buy and sell; you make money (hopefully) on what you hold.”
What Matters In the End?
“What really matters is the performance of your holdings over the next five or ten years (or more) and how the value at the end of the period compares to the amount you invested and to your needs.”
I think most people would be more successful if they focused less on the short run or macro trends and instead worked hard to gain superior insight concerning the outlook for fundamentals over multi-year periods in the future. They should:
– study companies and securities, assessing things such as their earnings potential;
– buy the ones that can be purchased at attractive prices relative to their potential;
– hold onto them as long as the company’s earnings outlook and the attractiveness of the price remain intact; and
– make changes only when those things can’t be reconfirmed, or when something better comes along.
“Of critical importance, equity investors should make their primary goals (a) participating in the secular growth of economies and companies and (b) benefiting from the wonder of compounding. Think about the 10.5% yearly return of the S&P 500 Index (or its predecessors) since 1926 and the fact that this would have turned $1 into over $13,000 by now, even though the period witnessed 16 recessions, one Great Depression, several wars, one World War, a global pandemic, and many instances of geopolitical turmoil.”
““Asymmetry” is a concept I’ve been conscious of for decades and consider more important with every passing year. It’s my word for the essence of investment excellence and a standard against which investors should be measured.”
For those who are interested, you can access the full memo here.
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