Howard Marks: Why Overconfidence in Investing Is Dangerous

In his book – The Most Important Thing, Howard Marks highlights the importance of recognizing the limits of our knowledge in investing. If the future were certain, it would be rational to invest aggressively, targeting the biggest winners without fear of loss, making diversification unnecessary.

However, because the future is uncertain, acting as though you know it is perilous. Overconfidence in supposed knowledge can lead to significant risks, as echoed by Amos Tversky and Mark Twain. Marks emphasizes that acknowledging the limits of what we can know and operating within those boundaries offers a substantial advantage, avoiding the dangers of overestimating our capabilities.

Here’s an excerpt from the book:

If you know the future, it’s silly to play defense. You should behave aggressively and target the greatest winners; there can be no loss to fear. Diversification is unnecessary, and maximum leverage can be employed. In fact, being unduly modest about what you know can result in opportunity costs (forgone profits).

On the other hand, if you don’t know what the future holds, it’s foolhardy to act as if you do. Harkening back to Amos Tversky and the powerful quote that opened this chapter, the bottom line is clear.

Investing in an unknowable future as an agnostic is a daunting prospect, but if foreknowledge is elusive, investing as if you know what’s coming is close to nuts. Maybe Mark Twain put it best: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Overestimating what you’re capable of knowing or doing can be extremely dangerous—in brain surgery, transocean racing or investing. Acknowledging the boundaries of what you can know—and working within those limits rather than venturing beyond—can give you a great advantage.

You can find a copy of the book here:

Howard Marks – The Most Important Thing