Howard Marks: One Of The Most Essential Ingredients In Investing Is The Ability To Look Stupid

In this interview with Shane Parrish on The Knowledge Project Podcast, Howard Marks provides some great insights into the importance of looking stupid in order to become a successful investor. Here’s an excerpt from the interview:

Some people don’t get contrarian thinking. And one of the things I say is that everything that’s important in investing is counter-intuitive. And everything that’s obvious is wrong. So you go up to a hundred people on the street and you say here’s a company that’s a tech company, and everybody’s buying it. The stock has tripled in the last month and we should buy it.

Some large percentage of the people will say yeah that makes perfect sense. Some small percentage will say no, if it’s tripled in the last month it’s probably some kind of a boom which means that it has become unjustifiably popular. If everybody’s buying it we should sell it.

That’s contrarian thinking right. That’s second-level thinking and I think that a lot of people…

Look I’ve thought about this a long time. I’ve made my money in asset classes that when I got there were unpopular, like high-yield bonds in 1978. I thought to myself if you went up to a bunch of people in the straight world, the straight investing world, and you said you should buy this because nobody else is, most of them will say what are you crazy! If they’re not buying it by definition it has no merit and we can’t do that. And anyway we don’t want to do something which is different from what everybody else is doing because if it turns out to be a mistake we’ll look stupid.

Question: How important is that ability to look stupid in terms of out-performance?

It’s essential. It is one of the most essential ingredients and again I wrote a memo back in ’06, I think it was. I wrote one called, ‘Dare To Be Great‘, and I said in order to be great you have to dare to be great and then in ’14 I updated it to ‘Dare To Be Great II‘, and I said everybody dares to be great. The question is not the dare to be right, the question is do you dare to be different. Because clearly… you have to diverge from the pack is required if you’re going to be superior in anything and number two, do you dare to be wrong. Number three – do you dare to look wrong because even things which are gonna be right in the long run maybe look wrong in the short run, so you have to be willing to live with all those three things.

Different, wrong, and looking wrong in order to be able to take the risk required and engage in the idiosyncratic behavior required for success.

You can listen to the entire interview here: