In his memo titled Irrational Exuberance, Howard Marks discusses two investment philosophies: prudent investing and the approach that worked during the 1999 tech boom. Prudent investing emphasizes factors like diversification, value investing, and taking profits. This approach would have led to underperformance in 1999.
The 1999 tech boom approach focused on buying and holding growth and technology stocks, regardless of price. This was successful during that specific period, but risky in general.
This highlights that sometimes traditional wisdom doesn’t apply, especially in periods of market exuberance. Here’s an excerpt from the memo:
Lastly, I want to share what I told the board of a charity whose Investment Committee I chair. I listed some of the elements that have been at the foundation of prudent investing during my time in the business and more:
- pursuing both appreciation and income,
- balancing growth and value investments,
- balancing the desire for gain and the fear of loss,
- buying companies with a history of profitability,
- caring about valuation parameters,
- emphasizing cheap stocks,
- taking profits and reallocating capital,
- rotating industries, groups and themes,
- diversifying.
- hedging,
- owning some bonds, and
- holding some cash
How did this list do in 1999? It was a recipe for disaster! Every one of these elements would have caused you to underperform. What should you have done? Just two things:
- bought growth and technology stocks that had already appreciated, and
- held them as they rose further, refusing to sell at any price.
Thus in one more way, wisdom was turned on its ear in this period.
You can read the entire memo here:
Howard Marks – Irrational Exuberance
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