The Rational Investor #002: Howard Marks on Recessions
Happy Saturday to you,
Welcome to the 2nd edition of The Rational Investor Newsletter.
Today’s passage comes from Howard Marks’s I Beg to Differ Memo from July 2022. If you’ve never taken the time to read through his memos, I believe it’s the best education for investors that exists, and it’s all freely available. While I differ in my investing approach, I believe the way that Marks thinks about and explains risk, uncertainty, and forecasting (amongst many other topics) from first principles and logic is without equal.
I highly recommend reading not just his memos, but also his books, The Most Important Thing Illuminated and Mastering the Market Cycle.
As you read today’s passage, consider it in light of the constant recession forecasts we’ve been subjected to for the better part of two years now.
Onto the main event…
Here’s Howard Marks on Investing through Recessions (emphasis is as Marks writes in the memo itself):
All the discussion surrounding inflation, rates, and recession falls under the same heading: the short term. And yet:
- We can’t know much about the short-term future (or, I should say, we can’t dependably know more than the consensus).
- If we have an opinion about the short term, we can’t (or shouldn’t) have much confidence in it.
- If we reach a conclusion, there’s not much we can do about it – most investors can’t and won’t meaningfully revamp their portfolios based on such opinions.
- We really shouldn’t care about the short term – after all, we’re investors, not traders.
I think it’s the last point that matters most. The question is whether you agree or not.
For example, when asked whether we’re heading toward a recession, my usual answer is that whenever we’re not in a recession, we’re heading toward one. The question is when. I believe we’ll always have cycles, which means recessions and recoveries will always lie ahead. Does the fact that there’s a recession ahead mean we should reduce our investments or alter our portfolio allocation? I don’t think so. Since 1920, there have been 17 recessions as well as one Great Depression, a World War and several smaller wars, multiple periods of worry about global cataclysm, and now a pandemic. And yet, as I mentioned in my January memo, Selling Out, the S&P 500 has returned about 10½% a year on average over that century-plus. Would investors have improved their performance by getting in and out of the market to avoid those problem spots ...or would doing so have diminished it? Ever since I quoted Bill Miller in that memo, I’ve been impressed by his formulation that “it’s time, not timing” that leads to real wealth accumulation. Thus, most investors would be better off ignoring short-term considerations if they want to enjoy the benefits of long-term compounding.
Two of the six tenets of Oaktree’s investment philosophy say (a) we don’t base our investment decisions on macro forecasts and (b) we’re not market timers.
As Marks insinuates, when you consider the fact that investment returns have averaged about 10% per year for the last century, it’s easy to see the silliness of basing investment decisions on macro forecasts or attempting to time the market.
Is trying to figure out what will happen next worth the effort? That’s doubtful, at best…
The best way to increase the probability of a successful investing outcome is to understand that it is time—not timing—that carries most of the weight. As it always will.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
Enjoy the weekend!
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