Howard Marks: The Psychological Factors That Affect Security Prices

In this interview with David Rubenstein, Howard Marks argues that the impact of a company event on its security prices is not direct or mechanical. Rather, it is mediated by people’s reaction to the event. Here’s an excerpt from the interview:

Marks: Number one is that people believe in the ability to predict the future.

Either their ability or others that they can identify.

And in general I agree with John Kenneth Galbraith who said, “There are two kinds of forecasters, the ones who don’t know and the ones who don’t know they don’t know.”

So I think that the average person has to learn that they don’t know what the future holds and nobody else does either.

The other thing is people believe that there’s kind of a direct and mechanical linkage.

If a company has a good event the securities do well, if they have a bad event, like earnings, securities do poorly.

But that’s not the case because there’s a intermediate step, which is people’s reaction.

So it’s not just whether the event was positive it’s how people reacted to the event that determines the impact on the security prices, and that’s two different things.

So you can’t forget the the psychological and human factor.

You can watch the entire discussion here: