Howard Marks: Latest Memo: You Bet!

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We’ve just been reading Howard Marks’ latest memo titled – You Bet! in which he discusses an observation he made when he was seventeen after reading the book Decisions Under Uncertainty: Drilling Decisions by Oil and Gas Operators by C. Jackson Grayson, Jr. His observation was that you can’t tell the quality of a decision from the outcome saying:

As Grayson explained, you make the best decision you can based on what you know, but the success of your decision will be heavily influenced by (a) relevant information you may lack and (b) luck or randomness. Because of these two factors, well-thought-out decisions may fail, and poor decisions may succeed. While it might seem counterintuitive, the best decision-maker isn’t necessarily the person with the most successes, but rather the one with the best process and judgment. The two can be far from the same, and especially over a small number of trials, it can be impossible to know who’s who.

Here’s some excerpts from the memo:

All the ideas discussed above are important in investing, just as they are in gambling. In both pursuits, it all comes down to Jack Grayson’s title: Decisions Under Uncertainty. As I’ve learned in the 56 years since first reading his book:

You have to be able to understand which companies or assets are favored and the attractiveness of the proposition
You need a sense for whether your holding is a good one and for the chance the competition – the market, which you’re playing against – might have better You need the discipline to follow a process and the wisdom to accept that no process is sure to produce good results

You have to understand the significance of the information you have, as well as that which you don’t have. You need the nerve to bet heavily based on what you think you know and a healthy respect for what you may not know
You need to control greed and fear, hopefulness and despondency. You have to resist making an unwise bet just because it could enable you to catch up with the indices or the competition

Investing is a game of skill – meaning inferior players can’t expect to be above average winners in the long run. But it also includes elements of chance – meaning skill won’t win out every time. In the long run, superior skill will overcome the impact of bad luck. But in the short run, luck can overwhelm skill, and the two can be indistinguishable.

You can find Howard Marks’ latest memo here: Howard Marks Memo: You Bet!

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