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Deep Thoughts from Howard Marks

I just wanted to pass on this great talk from Howard Marks at the CFA Institute.  He touched on a variety of different topics and many that I fully agree with:

  • Risk and reward are not necessarily correlated.  After all, if riskier assets could always be counted on to generate higher returns then they wouldn’t be riskier.  Therefore, volatility can’t be “risk”.  This is why so many academic models of the financial markets end up leading us astray.  Instead, Marks says that risk means there is a high probability of more uncertain outcomes.  You might have seen the chart below from Marks depicting this concept which basically shows that the distribution of uncertain outcomes increases as you take more risk.  This is a vast improvement on the idea of the efficient frontier which simply implies that more risk will generate more return which often leads people to think that they’ll do better simply by owning stocks “for the long-run” or something like that.


  • Marks notes that making predictions is incredibly difficult.  Instead, it’s better to focus on ways in which we can improve our probabilities of good outcomes.  Many times in the financial markets we’re better off knowing what we don’t know.
  • We’re all going to be wrong a significant amount.  One of the keys is ensuring that we don’t make significant mistakes.
  • You have to learn second level thinking which involves thinking differently and better.

I don’t agree with everything Marks says, but there’s a lot of good thinking here so give it a listen if you have some time.