Last Friday I was lucky enough to meet some of the world’s best investors. Guest hosting Sky News live from the Sohn Hearts and Minds conference at Sydney’s Opera house, I sat next to Howard Marks, Kerr Neilson, Shane Finemore and Leah Zell.
All four have very different approaches to investing, from global small caps (Leah Zell) right through to distressed debt and private equity (Howard Marks).
What struck me most was how consistent they were when asked to hypothesise about the future.
Here’s the full interview with Oaktree’s Howard Marks.
https://www.youtube.com/watch?v=XehCvLvqP08
Note his comments on crystal ball gazing towards the end:
“I am not someone who invests on the basis of expectations for the future … When you react to what actually happens rather than guess about what might happen, I think you make less mistakes”.
Or here’s the interview with Shane Finemore from Manakay.
https://www.youtube.com/watch?v=NOF75WGT5Gc
“We look for great businesses that we can understand that are trading at a big discount to our appraisal value and so it’s really about where we go shopping rather than any particular view about market valuations in aggregate”.
Many people think good investors have some special insight into the future. Yet what actually makes them good is recognising that the future is unknowable.
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Steve, ‘those who predict are very clever at pretending to know the unknowable..’ is a quote that appears a number of times in II and Forager writings over time…
I’ve always said that being a great investor is two-thirds of being a good Buddhist because at its essence the inner game of investing is simply a matter of cultivating two of the three Buddhist virtues: “amoha” (freedom from delusion) and “alobha” (freedom from attachment).
Ironically, the more high-powered the money-management industry becomes, the rarer these two qualities become.
The comments in the videos are simply a manifestation of amoha.
I think its also because another commonality of great investors is that they tend to think probabalistically, rather than in black and white definitives. Most weaker investors tend to form a firm view about what they think is likely to happen in the future, and invest accordingly, but in so doing, ignore other possible outcomes, while also overestimating their ability to accurately predict the future.
Usually the consensus view on the outlook is indeed the most likely outcome, but major moves are driven by changes of opinion, and the possibility of a future surprise and change in opinion is generally underestimated.
Meanwhile, probabalistic thinkers, by definition, need to consider multiple potential futures. Good investors think this way, and often find opportunity by identifying situations where the consensus view, while quite possibly right, is already priced in, whereas alternative scenarios are not. This requires both imagination as well as an acknowledgment that the future is generally more uncertain than is generally believed.
Its also a manifestation of the age old saying that “doubt is the domain of the wise”. Weak thinkers are given to black and white, unifactoral explanations. Strong thinkers are more nuanced. Nuanced thinking doesnt make for a punchy peter schiff type soundbite of the outlook, but it does result in better judgement.
Those are probably excellent points.
Classic Howard Marks. But couldn’t agree more.
Imagination and probabilities are definitely crucial elements.
If we think B and W then we are more likely to make errors as we can become over confident in our decisions.
Using the past to predict the future is definitely about probabilities but also flawed as past correlations don’t guarantee future outcomes.
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