Tuesday, June 9, 2015

Howard Marks: The Value of "I Don't Know"

Back in April on CNBC, Howard Marks complimented what a previous CNBC guest had said that day:

"I listened to your previous guest and he said 'I don't know'. I love when people say that because so few people do."

Then, later in the interview, he added "that's why I like that fellow who said I don't know. I also don't know. He and I should have a drink."

He went on to explain that "I don't like it when people claim to know" what will happen and then went on to paraphrase the following John Kenneth Galbraith quote:

"There are two kinds of forecasters: those who don't know, and those who don't know they don't know." - John Kenneth Galbraith

Marks added that "I have much more respect for the first group."

To me, for similar reasons, another phrase worth remembering is "I have no idea".

The good news is that it's not necessary to make accurate predictions to invest well though some seem to think it's important and, as a result, behave accordingly. What is required -- among other things -- is an ability to estimate value, sticking to what you know, some real price discipline, and patience. Yet no less important is an appreciation for what simply can't be reliably predicted or known.

Charlie Munger once said:

"It's kind of a snare and a delusion to outguess macroeconomic cycles...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?"

So confident prognostications should mostly be ignored.

The future has always been uncertain. That will continue to be true even if the perception of uncertainty necessarily fluctuates. In other words, just because the future is perceived to be more or less certain -- at any particular point in time -- doesn't mean that it actually is.

For investors, the emphasis needs to be on compounded effects over decades, while being aware many unexpected events will occur -- both the negative and the positive variety -- and there's little point in trying to predict them. In fact, attempts to do so is usually a distraction. Investing is already tough enough to do well without such expensive diversions.

Margin of safety, flexibility, price discipline, and patience can, at least to an extent, protect against uncertainties and the inevitable misjudgments.

A sound investment approach is inherently flexible and open-minded and relies, in principle, on a substantial margin of safety. Some unusual ability to foresee what's going to happen, staring into an always uncertain future, is not required (and may even do harm by diverting time and energy away from what really matters).

Remaining focused on what you know is not a small advantage.

Knowing what you don't know is an even bigger one.

Adam

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