The latest memo from one of my investing mentors – Mr. Howard Marks make me think of only one word – “Grounded”

That’s why I believe it is a very important letter to read in these times of rising euphoria. Marks talks about “risk”, which is slowly and steadily being overshadowed by things like optimism, bright future, great leadership, 50000 Sensex and numerous other superlatives.

According to me, there are two kinds of people watching the market today. One who remained invested and/or invested a few years back and is finally seeing his/her portfolio in the green – heck it may be 2x, 3x or more and is feeling proud of being proved right. We’ll come to being “right” in a few moments. Let call these people the Gladiators because these are the people who were brave enough to be in the ring long before the war began.

Another set of people are the onlookers and friends of the investors who are being bombarded by the pink bulletins like Effervescent Times and Bull Standard (my painful attempts at puns 😉) and are feeling the pain of #FOMO as Marks calls it – Fear of Missing Out. Lets call these people the Spectators.


The Gladiators

So the Gladiators are now the ones proudly tom-toming their current success and feeling an aura of invincibility. Dreams like starting their own hedge fund like Buffet and also writing their own investing books like Pabrai and Guy Spier are very common. I personally am guilty as charged on these counts too. For people like me (shamless plug) and my fellow gladiators –it helps to feel “Grounded” when we read the wise words of Marks on “Risk” – that four letter word, which nobody wants to even think about now.

[box] Here are four key points which Marks highlighted

#1 – the future should be viewed not as a fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and, hopefully on the basis of insight into their respective likelihoods, as a probability distribution

#2 – He quotes Elroy Dimson, a professor at London Business School : “Risk means more things can happen than will happen.” This brief pithy statement contains a great deal of wisdom

#3 – Knowing the probabilities does not mean you know whats going to happen

#4 – Even though many things can happen, only one will[/box]

Reading these four key points over and over again makes me realize that we ought to be humble and grateful that the one thing which did happen was perhaps the future we were hoping for and hence our calls proved right. Having said that we still need to be cautious.

Towards the end of the memo, he reiterates Buffet’s statement:

…the less prudence with which others conduct their affairs , the greater the prudence with which we should conduct our own affairs.

Marks goes on to suggest towards the end of the memo:

“While investor behavior hasn’t sunk to the depths seen just before the crisis (and, in my opinion, that contributed greatly to it), in many ways it has entered the zone of imprudence.”

To sum up the story for the Gladiators – its time to be cautious and not be imprudent and to end with one more line from Marks –

“Today its more important to pay attention to loss prevention than to the pursuit of gain”

 The Spectators

 Now if you’ve been one of the spectators and read this far, I hope I have fed you enough information to tread cautiously and not be swayed by throwing caution to the wind.

Perhaps you can start by getting your feet wet though a Systematic Investment Plan in some good growth MFs and thus benefit from the rupee cost averaging and thus totally not running away from #FOMO.

This is what Marks has to say on #FOMO

It’s important to worry about missing opportunities, since people who don’t can invest too conservatively. But when that worry becomes excessive,  FOMO can drive an investor to do things he shouldn’t do and often doesn’t understand, just because others are doing them: if he doesn’t jump on the bandwagon, he may be left to live with envy

At the cost of being repetitive the message of Marks is clearly to be cautious and take your decisions with a good degree of due diligence. Demand a good margin of safety in your investments. As a firm believer in cycles (thanks to Marks again), the tide will turn someday and you will get an opportunity to make wise purchases at bargain prices.


 Be Prudent. Don’t stay Foolish. Read Howard Marks full memo here.