Either be emotionless or act like you are

Investing in the modern world.

My thought process has developed over the years to come to the point that I started documenting ideas, thoughts, and notions of individuals from the investment world. Besides many others, one of them is Howard Marks of OakTree Capital. His podcast interview with Tim Ferris, who is himself one of the great thinkers and practitioners of our time, stimulated me to pick up my pen and start writing what he was saying. Today I will cover some of my reflections on what I wrote down during the interview. I will throw in some of his quotes from the interview.

One of the first themes that Howard touched upon was the idea that investors who are ready, prepared, mentally, and financially, benefit the most from a financial crisis or recession. How relevant is that to today’s situation! I could not help but think the obviousness, yet criticality of this notion. It would be awful to not be prepared! It will depend from investor to investor, region to region, industry to industry, to gauge the level of readiness he or she is at, at the time of recession. Does it mean to remain a pessimist and practice frugality even in investments? Tough one to answer.

Note to self: Check readiness for worst-case.

There is certainly more to it. What if you can predict the future? But you are not divine! The best way would then be to revisit each decision made in the future.

Howard’s firm Oak Tree Capital is based on the ancient Japanese philosophy of “MUJO”, which may be approximated into one word: impermanence. This very idea drives his company. Nothing is forever, the wheel of law turns, the future is unpredictable.

“You can’t predict, you can’t prepare.” Howard emphasized. Oak Tree Capital invested $500 million PER WEEK for 15 weeks, during the 2008 financial crisis! Let that sink in.

Imagine a man slowly walking towards a cornered tiger, while the whole village is running away. The man killed the tiger.

He “justified” this by saying that as an investor you have to consider the likely scenarios and prepare for some of them. He just thought it was worth it to go heavily in at that time, of course in consultation with his partner Bruce Karsh, whom he talks about in detail later on.

Howard’s insightful comments throughout the interview blew me away. I felt ashamed of myself for having a thought process not worth anything constructive. I felt ashamed for having friends and family, as bad as it may sound, not worthy enough to call themselves practitioners. In one way a common man is practicing the laws of life, without realizing that what he’s doing is so financially important that the biggest and the best of investors have to bring their thinking down to the level which helps them make decisions that have a long term social and economic impact. Sounds like we are talking about decision-makers in the Capitol Hill, or the Wall Street or the Shard. We might as well be.

To me, I remind myself, there could be more to it!

Skepticism and optimism are two feelings that all humans experience every day. One would like to be optimistic though, living in bliss. Ignorance is one such example of a bliss.

Investors have to maneuver their lives on a very different level. In fact, the word level should be used very carefully. There is certain negativity associated with it in the societies that we are in. Or maybe it is just in my mind. We’ll find out. Investors have to utilize both feelings for their benefit. Too much optimism, you are the worst investor. Too much skepticism, you missed out on a great deal. Howard is an avid supporter of skepticism. He believes that optimism has created more trouble than skepticism. There are more too-good-to-be-true deals out there than there are bargains, must-buys for a professional investor.

On an investor’s part, skepticism comes with demand, questions, authority, and power. One must realize that one has more authority and power to ask questions before one makes an investment than afterward. It is his right. Additionally, he must not also forget his authority after the investment. But what he has lost when he made the investment is his ability to make due diligence. After the investment, he may still be able to ask questions but their nature would be expected to be more towards the operational aspects of the investment or the company in which the investment is made.

Be prepared

Investors are finance gurus, life practitioners, social animals, and the list can go on. They have to deal with Mathematics, science, excel sheets, socialites, technical people, people living paycheck to paycheck, nerds, coders, realtors…as I said the list can go on.  They tend to get asked a lot of questions. The top two things that an LP would ask an investor are “how much” and “when”? Howard eloquently quoted someone:

“If you name a price, don’t name a date and if you name a date, then don’t name a price. Then you won’t be wrong!”

Another interesting thing that Howard mentioned was that there has to be an understanding of what is right at the moment. In other words, one has to understand that there is a cycle of life. This cycle umbrellas all industries and regions. There are mini-cycles not necessarily in sync with another bigger one. An investor must understand that the decisions he makes about investing rest on where we are in the relevant cycle.  “The most important thing”, as Howard puts it, changes in every decision, every cycle, every industry, and type of investment.

Where we stand in the cycle defines the risk. Risk must be considered very carefully. It is time to be aggressive when we are low in the upcycle. It is time to be cautious when the upcycle has gone on for some time. This is the time to put money off the table. This is particularly relevant to markets. For me, this is a crucial aspect of the skepticism that Howard mentioned earlier. Skepticism is a necessary component of decision making.

Most people are inherently biased. They could be aggressive or cautious. Most are cautious. To me, caution is limiting. It limits your view of the world. It could then be taken as positive or negative. Limited view could mean high focus, while it could also mean relevance is reduced. It will then be up to the investor to substantiate the risk with the amount of caution practiced.

Successful investing is a game of nerves, emotions, ideas, and values. Emotion is a crucial metric to measure. Emotions are natural to humans. An acute awareness of nature must exist in order to keep a check on the viability of the investment. Howard put it simply like this:

“Either be emotionless or act like you are!”

Putting together, there are a lot of ideas that will be at play in the time of decision making.

Find an anchor of positivity

This is crucial since buying into something that others are terrified to keep is terrifying! You need an idea, a hope, a minuscule optimism, and tons of skepticism to find the right investment.

“To teach yourself to be unemotional is to counter human nature”

Then again, how do you balance the personal emotions vis a vis professional ones? It is important to become a second-level thinker, a contrarian.

Keep in mind that some things cannot be changed. You cannot make your team taller in an NBA game :)

“(As a result of a bad investment,) if the world ended, it didn’t matter what we did. But if it didn’t end, we didn’t do our job.”

I would end this here and add a second part to continue my thoughts on Howard’s conversation.