I really enjoyed reading THIS MEMO from Howard Marks.
Howard in a long-standing successful investor. He has sought and achieved market beating returns over his investing lifetime. The memo “I beg to differ” is a salutary reminder of exactly what it takes to be a superior (as in better than the market average) investor. Essentially “in order to achieve superior returns in the investment world, you have to be different and be okay with the potential of being wrong.” (my emphasis).
Or, put another way, to get outsized returns we need to think differently than others, act differently to them, invest in things they will not, avoid things others love and be willing to accept much wilder ups and downs along with significant periods of doing worse than everyone.
That is a very tall order. An order TCFP cannot hope to fill. Knowing and acknowledging that is the keystone of everything TCFP does.
However, most of the investing world – both professional and retail investors – are still conditioned to believe that superior returns are the name of the game. This is a catastrophic mistake for most.
This belief results in wealth destroying thoughts and actions and much worse outcomes than could have easily been achieved. This shows up clearly in the stats. The average investor gets a significantly worse investment return than the average investment – the average investor does things that reduces the return available to them. In striving for superior returns many get inferior returns. In the pursuit of “more” they often end up with “less”.
The irony is that no-one at our level needs these superior returns. The vast majority of (realistic) financial objectives can be met by accepting the easily obtained market average return. The market average return is “sufficient”, and all it requires a modicum of sustained discipline to achieve.
To accept “sufficient” a shift in mindset, here is my attempt at that shift:
- To achieve long-term superior returns you must be as Howard describes a “second level thinker”.
- That means being able to think at a very deep, highly complex level compared with others – i.e. have superior thinking compared to others.
- You might be a second level thinker in your usual work, but can you be in an area you do not work in, that you have not dedicated time to?
- Even then to get those superior returns you will need the ongoing confidence to be out on a limb a lot of the time.
- And have the humility to recognise your mistakes and sell investments at a loss from time to time.
That all sounds exhausting. Do we really have the time or inclination or resources to achieve second level thinking as it relates to investment markets?
I think not, so let’s stop believing the hype of superior returns. As an alternative to “superior” TCFP focuses on “smarter”:
- Smarter plan structure (e.g. using the correct products).
- Smarter efficiency (e.g. reducing tax / using available allowances).
- Smarter asset allocation (e.g. covering long, medium and short-term needs).
- Smarter taking advantage of the less smart (e.g. buying when prices are temporarily lower).
- Smarter about costs (e.g. do not pay more than you absolutely need to).
- Smarter about sticking to the plan (e.g. by helping you see that everything should work out fine despite any short-term hiatuses).
What I hope you see and feel is that our real value is based all in helping you with all of the above. In aggregate it is all about doing the right things and the right time and nothing to do with pulling an investment rabbit out of the hat. An investment rabbit you have no need for.
Superior is exciting and seductive – but it comes at a huge cost (financially and emotionally) with no guarantee of success.
Smart is not exciting, costs less but is easily achieved.
You might say that smart is boring but effective!