Howard Marks: Investment Strategies for Consistently Outperforming the Market

In this presentation at the NBIM Investment Conference, Howard Marks discusses the strategy of identifying companies likely to deliver positive, unanticipated news, thus achieving above-average portfolio performance. By predicting such surprises and adjusting portfolio weights accordingly, an investor can benefit when the market reacts positively to the news, driving up stock prices. This approach requires a deviation from consensus thinking, termed “deviate perception.” The challenge lies in consistently being correct in these predictions against an intelligent and competitive market. That’s why as an investor, it’s always great to study on concepts such as Return On Capital.

Here’s an excerpt from the presentation:

Marks: The next is coming where, is knowing where returns come from.

You can have an average portfolio and do average, or you can say well this is a company that I think is going to deliver positive news which is unanticipated by others, positive surprises.

And if you can figure out which ones will deliver positive surprises you can overweight your portfolio toward those, and then when the news comes out and it conforms with your view, everybody else says oh I wish I had more.

They go out and buy it that forces the price up. You are an above average performer. So that’s the root.

How regularly can it be accomplished? That’s the question.

If you think different from others you have what we call a deviate perception, deviate perception. How often will you be right as opposed to the consensus being right, and you being wrong?

This is at the heart of things. Again you’re up against intelligent competition and when I started my career at a large and bureaucratic institution, in the equity department, people would ask well what do you think you can make for us?

And the answer was 12%. Well how do you arrive at 12?

Well the S&P 500 does 10 on average, has done at that point in time for 60 years. So if you can get 10 without any effort you should be able to get well let’s say 20% better with a little elbow grease, in other words 12.

But what if all the elbow grease in the world doesn’t accomplish anything. Because the market’s efficient and you can’t get an advantage.

Then it’s not only a waste of effort but it’s a waste of management fees. And of course management fees are the only certainty in the investing world.

You can watch the entire presentation here: