The power of critical thinking is a rare skill that is progressively being diluted by the noise of incoherence. See how complexity can be broken down into narrative with a coherent mindset. Just listen to how this coherent mind breaks down the tough questions in his interview with Shane Parrish of Farnham Street. Welcome to Howard Marks.
The conversation held is far reaching and touches on many important topical issues of economic and political reality, however the insightful opinion demonstrates that mature enlightening conversations can be held where the underlying issues can be unpacked provided we are prepared to engage in thoughtful discussion allowing for possible long lasting solutions to be developed that go beyond traditional economic or political treatment.
Now of course, when I listen to the narrative I am continuously drawing parallels between the statements made and the fundamental basis of the philosophies surrounding trend following or trading momentum….but as you dig deep, the foundational pillars of this narrative are common to many investment styles such as Value-investing. The methods for exploiting arbitrage in these markets are vast and there is not a one size fits all in this game.
Listening to enthralling conversations such as this highlights our own propensity for bias but more importantly outlines how a coherent mind can identify these biases when well thought through and allows us to peer deep into how complex systems such as our financial markets actually work without accommodating a tendency to let narrow opinion or our personal preferences dominate the agenda.
One of the major insights taken from this interview is that a market is a mix of a multitude of participants, each with a different opinion or agenda. The interactions between participants are exceedingly complex but we don’t really need to understand these to make our bread and butter. Where our wealth creation occurs aside from simple luck are in those rare moments when we act in a contrarian way to the broad opinion of the participant mix….not all the time….but during those times where emotions start to dominate the trading agenda.
This is where the principles of capital protection through a systematic method of managing risk such as diversified trend following ensure that we are there to “Act” during those rare moments, have tight stops in place to avoid the big losses…and have open ended profit conditions to make those occasional bonanza windfalls from uncertainty itself to pay for our patience in the game.
Trend following has been a very tough game since the 2008 GFC as these required unpredictable moments of uncertainty where collective behaviours start dominating the noise of the efficient markets have been few and far between…..but the success of the movement should be rather couched in terms of ‘have the players in the trend following game been able to preserve their capital and are still in a position to participate’ as opposed to how much wealth this segment have contributed to their clients over this tough period. The outcome is not a reflection of validity of the decision making processes involved.
We recognise that history may not repeat.,…but it certainly does rhyme…and when policy makers get it wrong and/or when excesses start to over-accumulate or when fear grips the investment community with apocalypse statements…..that is when this method will reap the bounty and the pain endured in the last decade will be understood by the investment community..