Howard Marks is one of Wall Street’s wisest investors. He co-Chairs Oaktree Capital Management which has approximately $100 billion in Assets Under Management. He’s also the author of The Most Important Thing: Uncommon Sense for the Thoughtful Investor. With eloquence and deep insight, his book delivers a masterclass in the philosophy and psychology of investing that is relevant to anybody interested in investing, or who is just pondering where their pension might end up! I’ve summarised two of my favorite ‘most important things’ identified in the book including here, the thinking of Marks and Nassim Taleb on the role of luck and randomness in life and business, and in another post the importance of second level thinking, a key skill for any contrarian investor.
Appreciating the Role of Luck
Marks is a keen follower of Nassim Taleb, whose ideas he says he finds novel and provocative. He quotes Taleb’s book Fooled By Randomness at the start of the chapter on luck:
Randomness (or luck) plays a huge part in life’s results, and outcomes that hinge on random events should be viewed as different from those that do not… Clearly my way of judging matters is probabilistic in nature; it relies on the notion of what could have probably happened… If we have heard of [history’s great generals and inventors], it is simply because they took considerable risks, along with thousands of others, and happened to win. They were intelligent, courageous, noble, had the highest possible obtainable culture in their day – but so did thousands of others who live in the musty footnotes of history.
This is Taleb’s idea of ‘alternative histories’ – other things that could have happened just as easy as the ‘visible histories’ (i.e. noteworthy events) that did. Marks sees this as particularly relevant to investing:
The fact that a strategem or action worked – under the circumstances that unfolded – doesn’t necessarily prove the decision behind it was wise. Maybe what ultimately made the decision a success was a completely unlikely event, something that was just a matter of luck. In that case, that decision – as successful as it turned out to be – may have been unwise, and the many other histories that could have happened would have shown the error of the decision.
All told, Marks encourages the reader to remember that:
Every once in a while, someone makes a risky bet on an improbable or certain outcome and ends up looking like a genius. But we should recognise that it happened because of boldness, not skill… One good coup can be enough to build a reputation, but clearly a coup can arise out of randomness alone. Few of these ‘geniuses’ are right more than once or twice in a row [Taleb refers to them as ‘lucky idiots’].
Howard Marks on decision making
He also provides some fascinating anecdote on decision making which all of us should bear in mind when making hard choices:
The first thing I remember learning at Wharton in 1963 was that the correctness of a decision can’t be judged from the outcome. Because of the randomness at work in the world and the unpredictability of the future, lots of bad decisions lead to good results, and lots of good decisions end in failure.
The correctness of a decision can’t be judged from the outcome. Nevertheless, that’s how people assess it. A good decision is one that is optimal at the time it is made, when the future is by definition unknown. [It is] one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known.
Having had this very conversation with a coaching client recently, a note of caution should go to entrepreneurial readers who concentrate their attention on individuals and their business success stories. The role of luck, combined with a story telling narrative fallacy (another Taleb coined term), can provide a potent illusion of preordained and planned success that overstates skill and understates the role of luck. The reality is far more complex.