Many cliches of investing do not stand up to serious interrogation
Howard Marks explodes myths about efficient markets, risk, forecasts and being a contrarian
Howard Marks once sent a memo to clients of Oaktree Capital titled It’s Not Easy. In it he listed "a collection of time-honoured bromides that range from (a) only effective part of the time to (b) just plain wrong". It went something like this: The market is "efficient", meaning asset prices reflect all available information and thus provide accurate estimates of intrinsic value. The efficient market hypothesis assumes people are rational and objective. But since emotion so often rules in place of reason, the market doesn’t necessarily reflect what’s true, but rather what investors think is true. Thus prices can range all over the place. Because people are risk averse, risky deals are discouraged and the market awards appropriate risk premiums as compensation for incremental risk. Investors’ risk aversion fluctuates between too much and too little. When it’s the latter, scepticism and conservatism dry up, due diligence is inadequate, risky deals are easy to pull off and compensation...
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