Howard Marks Memo: Touchstones

Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult, including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that “being too far ahead of your time is indistinguishable from being wrong.”) Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.

A few things that can help, however. First, after even a little time spent in the investment business, everyone should know that the herd is usually wrong at the extremes and pays dearly for its error. Second, some contrarians have records that are very impressive. And third, an accurate reading of investor mood and behavior – perceptive inference of danger or opportunity based on what others are doing in the market – can give investors a good leg up toward being effective contrarians.

I say we never know where we’re going, but we sure as heck ought to know where we are. The cycle isn’t unknowable or unbeatable. Touchstones like those enumerated above are there for everyone to see, but few people take full advantage. The key is to be among those who do.

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The philosopher Hannah Arendt wrote:

. . . no matter how much we may be capable of learning from the past, it will not enable us to know the future. (The Origins of Totalitarianism, 1951)

We cannot know what the future holds, and history cannot tell us. But awareness of that limitation is a key lesson in itself. Mastering it increases our likelihood of investment success.