Howard Marks talks about the psychology of investing. He thinks the market may be too optimistic, like the third stage of a bull market where everyone believes things will stay great forever. He mentions Bitcoin (price swung from $7,000 to $65,000; his son is bullish, he's unsure), Coca-Cola (Buffett held for 50 years, a value example), and Amazon (used tech to disrupt bookstores, showing tech is everywhere).
Howard Marks, co-founder of Oaktree Capital, discussed the importance of investment psychology on the Invest Like the Best podcast. Reflecting on the 2020 market sell-off and rapid recovery, he emphasized that evaluating markets requires a combination of quantitative and qualitative factors, especia
Howard Marks, co-founder of Oaktree Capital, discussed the importance of investment psychology on the Invest Like the Best podcast. He reviewed the 2020 market sell-off and rapid recovery, emphasizing that assessing markets requires combining quantitative and qualitative factors, especially during extreme conditions where psychology is more critical than data. Marks distinguishes between risk and uncertainty, noting that rising stock prices easily lead to analytical blind spots. He suggests avoiding crises by changing one's model of the world and shares discussions with his son about the concept of value, as well as the benefits of writing. The core argument: Investors must dare to be different, accept loneliness and error, and embrace the unknown.
Howard Marks believes the 2020 market volatility differs from traditional cycles because it was triggered by an exogenous shock (the pandemic), not endogenous factors (excessive optimism). Traditional cycles follow a pattern of "excess and correction": optimism drives asset prices too high, followed by a correction to too low, then a rebound. In 2020, however, the recession stemmed from government-mandated business closures to contain the virus, while the recovery was artificially driven by the Fed and Treasury, not by the market's natural reversion to trend. Marks notes this bears no resemblance to the 2008 financial crisis or any prior crisis in "cause, speed, magnitude, and impact."
Marks warns that if the Fed continues intervening to prevent recessions, it may accumulate greater risks. He uses a forest fire analogy: if small fires are not allowed to burn away underbrush, a catastrophic inferno eventually results. Similarly, if every economic downturn is thwarted by liquidity injections, the market builds up "fuel" of excessive optimism, ultimately leading to a more severe crisis. He cites the "three stages of a bull market": Stage 1, a few insightful people see improvement possible; Stage 2, most accept improvement is happening; Stage 3, everyone believes things will be great forever. The current market may have entered Stage 3, and investors should be cautious.
In conversations with his son Andrew, Marks redefines value investing, arguing it should not be "theologized" into rigid rules focused solely on low P/E and low P/B ratios. He points out that traditional value investing excludes tech stocks, yet Buffett's long-term holdings of Coca-Cola (once a "Nifty Fifty" member) and GEICO (a growth stock) prove that "value" and "growth" are not opposites. Marks emphasizes that true value investing means "buying at a price below intrinsic value," and a low valuation multiple alone does not guarantee value — many low P/E stocks are cheap because their prospects are poor.
Marks believes investors cannot ignore technology, as it is now ubiquitous. Amazon used technology to invade the bookstore industry, a non-tech sector, showing that even without investing in tech companies, one can be disrupted by tech. He cites the S&P 500's criteria for classifying value vs. growth: growth stocks are based on sales growth, earnings growth, and price momentum; value stocks rely solely on low P/E, low P/S, and low P/B, with no mention of fundamental quality. Marks warns that this "cheapness-only" approach can mislead investors, as "cheap" and "value" are two different things.
Marks and his son still disagree on cryptocurrencies. Andrew argues that while Bitcoin has no cash flow, the same is true for gold, art, and the US dollar — their value stems from acceptance. Marks admits he has moved from "strongly opposed" to "cannot say my son is wrong," but still questions how to price Bitcoin (swinging from $7,000 to $65,000) and notes its value depends on assumptions like "whether it can replace X% of gold."
Marks believes that during extreme market periods, studying psychology helps investors more than analyzing quantitative data. He cites Ben Graham's metaphor: in the short run, the market is a "voting machine" (driven by emotion); in the long run, it is a "weighing machine" (driven by value). To understand voting results, one must study voters' psychology. Marks' memos rarely use numbers; instead, they judge whether "psychology is too optimistic or too pessimistic." For example, the February 2007 memo Running for the Exit flagged excessive optimism; the October 2008 memo The Limits of Negativism flagged excessive pessimism.
Marks emphasizes that risk is "more things can happen than will happen" and cannot be quantified ex-ante or ex-post. He cites Elroy Dimson of London Business School: "Risk means more things can happen than will happen." Buying an asset at $100 and selling at $200 does not prove it was "risky" at purchase — because other possible outcomes are unknown. Marks notes that academia defines risk as volatility because it is quantifiable, but professional investors truly care about "the probability of loss," which cannot be measured in advance.
Marks uses writing to clarify and deepen his thinking, calling it one of the most beneficial habits from his investment career. He has written memos since 1990, receiving almost no response for the first decade, but persisted because he "enjoyed it." The January 2000 memo bubble.com accurately predicted the tech bubble burst, making him "an overnight success." Marks stresses that writing forces thinking to be "more specific and clearer," as written content must withstand scrutiny. For instance, in a 2006 memo on risk, he first realized that "risk cannot be quantified ex-post" — an insight that emerged during the writing process, not beforehand.
Marks argues that many important investment skills cannot be learned through reading; they must be experienced firsthand. He quotes physicist Richard Feynman: "If electrons had feelings, physics would be much harder." Markets are composed of people, who do not always act as expected. The panic of October 2008 or the frenzy of Q2 2020 can only be truly understood by those who lived through them. Marks notes that in normal market environments, financial analysis usually works; but during extremes, understanding "why the market defies conventional logic" is key.
Marks believes that outstanding investment performance requires investors to dare to be different, dare to be wrong, and dare to look wrong. He quotes David Swensen, former CIO of the Yale Endowment: "Investment management requires taking uncomfortable, idiosyncratic positions." If you make the same investments as everyone else, you will only achieve the same returns. But being different means: when others buy, you sell, and the asset may rise for another year, making you look foolish. Marks cites Keynes: "It is better for reputation to fail conventionally than to succeed unconventionally."
Marks criticizes committee decision-making, arguing it "dilutes any great insight any member might have," leading to mediocre results. He advises investors to act contrarian at extremes: when everyone says "now is the time to buy," it is usually a top; when everyone says "now is the time to sell," it is usually a bottom. But contrarian action requires courage, because "being early and being wrong are indistinguishable."
| Position | Guest's Stance | Key Data |
|---|---|---|
| Bitcoin / Cryptocurrency | Not explicitly stated (shifted from "opposed" to "cannot say my son is wrong") | Price range from $7,000 to $65,000; if replacing 50% of gold, target price $500,000/coin |
| Coca-Cola | Positive (as a value investing case) | Buffett has held for ~50 years |
| GEICO | Positive (as a growth investing case) | Possibly Buffett's most profitable investment |
| Amazon | Positive (as a case of tech disrupting non-tech sectors) | Used technology to invade the bookstore industry |
1. "Risk means more things can happen than will happen" (Howard Marks) — Risk cannot be quantified ex-ante or ex-post because other possible outcomes are unknown. Volatility is not risk; the probability of loss is, but the latter cannot be measured in advance.
2. "Value investing has been theologized" (Howard Marks) — Traditional value investing focuses only on low P/E and low P/B, but "cheap" does not equal "value." Many low-valuation stocks are cheap because of poor prospects, while high-valuation stocks may be worth the price.
3. "If you can't make a judgment on the FANGs, you can't say the S&P 500 is overvalued" (Andrew Marks, as relayed by Howard) — Judging market overvaluation solely by the overall P/E ratio is superficial, as some companies (e.g., tech giants) deserve high P/E ratios. Making such a judgment requires deep expertise.
4. "Being early and being wrong are indistinguishable" (Howard Marks) — Even if a contrarian decision is ultimately correct, it will look wrong in the short term. Investors must be willing to "look wrong" for a period to earn excess returns.
5. "It is better for reputation to fail conventionally than to succeed unconventionally" (Keynes, as quoted by Howard) — This is why most people cannot invest contrarian: failing with the crowd is not punished, but succeeding unconventionally invites immense pressure beforehand.
6. "The three stages of a bull market: Stage 1, a few insightful people see improvement possible; Stage 2, most accept improvement is happening; Stage 3, everyone believes things will be great forever" (Howard Marks) — The current market may have entered Stage 3; investors should be wary of excessive optimism.
7. "If electrons had feelings, physics would be much harder" (Richard Feynman, as quoted by Howard) — Markets are composed of people, who do not always act as expected. This is why investment experience cannot be replaced by reading.
8. "You can't say 'I'm an investor, but I exclude the parts of the world that are changing' from your portfolio" (Howard Marks) — Technology is now ubiquitous; even without investing in tech companies, one can be disrupted by tech. Amazon's invasion of bookstores shows that "non-tech" sectors are not safe.