Howard Marks - Embracing the Psychology of Investing

Principles & Lessons:

• Risk is not quantifiable in advance or after the fact; it is a concept grounded in unmeasurable uncertainty, not volatility. Howard Marks distinguishes between volatility and risk, arguing that professional investors care about “unsatisfactory outcomes” (i.e., losses), not fluctuations in price. He critiques academia’s reliance on volatility because it is “quantifiable,” but emphasizes that “you can’t measure the probability of a bad outcome.” Even after an investment ends, one cannot determine whether it was risky, because “you don't know the other things that could have happened.” This insight requires a deep shift in explanatory models: if something cannot be quantified, it must be understood via judgment, not statistics.
• Investor psychology—not valuation ratios—is often the dominant force in markets, especially at extremes. Marks repeatedly returns to the idea that market behavior is shaped by psychological forces more than by fundamental data, especially in the short term. He explains: “I don’t say that the P/E ratio is too high or too low… what I say usually is psychology’s too buoyant or it’s too negative.” This explains why market outcomes can diverge from apparent logic; understanding the crowd’s beliefs and misjudgments becomes more crucial than analyzing prices in isolation. As he puts it, “to understand your market, you have to understand the motivation of the people in it.”
• You cannot outperform by being average; to achieve superior results, you must be willing to be different, wrong, and appear wrong. Marks emphasizes that “you can’t have a highly superior outcome… if you don’t do things that are different from others.” This is not a slogan—it’s a principle rooted in the competitive structure of markets. To outperform, one must deviate from consensus (which by definition produces average returns), endure periods of looking wrong, and accept the discomfort of standing alone. The real constraint is not knowledge but emotional and institutional tolerance for deviation: “Do you dare to be different? Do you dare to be wrong? Do you dare to look wrong?”
• Most investing knowledge is not codifiable and must be learned through doing, not reading. According to Marks, “you have to learn that through experience… when the market gets to extremes… that’s when you really have to know what’s going on.” This is not a rejection of theory but a recognition that investment environments are non-repeating, multi-causal, and affected by human behavior. Like Feynman’s quip—“physics would be harder if electrons had feelings”—Marks argues that markets, being made of people, are unpredictable in ways that resist formal modeling. This implies a hierarchy: conceptual clarity and judgment must sit above quantitative technique.
• Value investing must adapt to a world in which durable value includes dynamic change, not just static cheapness. Through conversations with his son Andrew, Marks reflects on the limitations of traditional value investing: “It had become theologized… formalized and rigorous but limiting.” He critiques the reliance on low P/E or P/B ratios without considering the reasons behind them, calling this “just cheapness.” He argues that real value lies in “what you get for your money,” not in metrics alone—and that includes businesses with rapid change and uncertain futures, like technology. Thus, value must be redefined as explanatory power over long-term outcomes, not just the presence of low multiples.
• Markets are not random walks—they are shaped by cycles of excess and correction driven by human behavior. Marks offers an explanatory model of market cycles not as stochastic ups and downs but as departures from and returns to trend lines: “Cycles are best understood not as ups and downs… but as excesses and corrections.” He explains how optimism drives prices above intrinsic value, triggering a correction, which overshoots downward due to pessimism, and eventually reverts. This model reframes cycles as driven by epistemic error (overconfidence or panic), not by chance—thus requiring interpretative judgment, not mere data analysis.
• Expertise is necessary when investing in domains characterized by rapid change, especially in assessing growth and technology. Marks concedes that superficial analysis is inadequate for dynamic sectors: “You can’t talk about these companies based on the superficial take, you have to get deeply involved and develop an expert view.” His discussions on technology, FAANG stocks, and fast-growing firms illustrate the necessity of domain-specific knowledge. This limits the generalist investor’s reach: unlike slow-moving sectors of the past, modern investing in high-growth environments demands not just beliefs, but well-grounded explanatory knowledge, developed through immersion.
• Writing is not just a communication tool—it is a method of clarifying thought and discovering insights. Marks describes writing as a way to refine and test ideas: “Once you’ve written it down, you have to be able to say, does that make sense?” Writing forces the kind of explicit reasoning that reveals inconsistencies, gaps, and assumptions. He shares how some of his most important insights (like the idea that risk cannot be quantified even after the fact) emerged while writing. This positions writing as a form of epistemic feedback—a way of testing explanatory coherence, not merely documenting conclusions.

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