In this Addendum titled – Random Thoughts on the Identification of Investment Opportunities, Howard Marks explains why psychology is more crucial in investing than accounting or economics. He explains that future price changes depend on whether an investment becomes more popular or less popular over time.
Investing is compared to a popularity contest, where buying at the peak of popularity is risky because all positive factors are already reflected in the price. The best opportunities arise when an asset is unpopular, as its price can only increase as it gains favor.
Marks advises being wary of highly attended conferences, suggesting that the safest investments are those either undiscovered or recovering after a downturn.
Here’s an excerpt from the Addendum:
The discipline which is most important in investing is not accounting or economics, but psychology. The key is who likes the investment now and who doesn’t. Future price changes will be determined by whether it comes to be liked by more people or fewer people in the future.
Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.
The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity and thus its price can only go one way: up.
Watch which asset classes they’re holding conferences for and how many people are attending. Sold-out conferences are a danger sign. You want to participate in auctions where there are only one or two buyers, not hundreds or thousands. You want to buy things either before they’ve been discovered or after there’s been a shake-out.
You can find the entire Addendum here:
Random Thoughts on the Identification of Investment Opportunities – Howard Marks
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