Howard Marks: Every Investor Needs To Choose Between Optimizing and Maximizing

During his recent Behind The Memo Podcast with Morgan Housel, Howard Marks discusses his philosophy on investing, emphasizing prudence, risk management, and the importance of long-term survival over short-term gains.

Marks advocates for an optimizing approach, where investors carefully manage their risks to ensure they can weather the bad days, rather than chasing maximum returns that could jeopardize their financial stability.

His wisdom serves as a reminder that success in investing is not just about winning big but also about surviving through the tough times.

Here’s an excerpt from the podcast:

Well, Morgan, a great observation. It’s one I hadn’t heard from you before, including the story of Rick Guerin. But, every investor has to make a choice at some point in time, between optimizing and maximizing.

Optimizing means, you try to do well, but you also try to set up your affairs so that you’ll be able to last for the long term as Morgan describes. Maximizing is just trying to get the most you can, the soonest you can. And that’s the essence of what Morgan just went through.

And this whole thing brings me back to one of my three favorite adages that in total, I think sum up the whole, well, 90% of what you have to know in the financial world. But, never forget the person who was six feet tall, who drowned crossing the stream that was five feet deep on average. The concept of surviving on average is meaningless.

You’ve got to survive every day. And that means you have to importantly survive on the bad days. And if you have set up your affairs to maximize every step you take to maximize beyond an optimal point, reduces your probability of survival.

And when you take on debt to own bigger positions, to amplify your winnings when you win, it’s like putting rocks in a knapsack and you’re trying to cross that stream. And the more rocks you have in the knapsack, the less likely you are to get across the stream when you hit a low point.

And everybody makes investments for one reason. They think they’re going to win. Nobody buys investments and says “Well, I want to have a diversified portfolio, so I should have some winners and some losers.”

Every investment that everybody makes, they think they’re winners, but at the same time, they’re not all going to be winners. And you have to be prepared for when things go against you. And that means optimizing, taking a reasonable approach in terms of the sum of your aggressive capital structure and your aggressive investments rather than maximizing.

You can listen to the entire interview here: