Happy Saturday friends,
Last week, I mentioned that I've been re-reading The Most Important Thing Illuminated by Howard Marks, which has been the subject of my last two podcast episodes. I may do one more from the book (we'll see), but if you haven't already subscribed, I'd love for you to join me by clicking here to find your podcast player of choice!
This week's Rational Investor Newsletter quote is about the perils of following the crowd--a concept that I'm confident does not get enough attention.
So, here is Mr. Howard Marks [emphasis is mine]:
The truth is, the herd is wrong about risk at least as often as it is about return. A broad consensus that something's too hot to handle is almost always wrong. Usually, it's the opposite that's true.
I'm firmly convinced that investment risk resides most where it is least perceived, and vice versa:
- When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it's not risky at all. Broadly negative opinion can make it the least risky thing since all optimism has been driven out of its price.
- And, of course, as demonstrated by the experience of Nifty Fifty investors, when everyone believes something embodies no risk, they usually bid it up to the point where it's enormously risky. No risk is feared, and thus, no reward for risk bearing--no "risk premium"--is demanded or provided. That can make the thing that's most esteemed the riskiest.
This paradox exists because most investors think quality, as opposed to price, is the determinant of whether something's risky.
But high quality assets can be risky, and low quality assets can be safe.
Not surprisingly, following the crowd--especially during euphoric markets and deep into bear markets--comes with great risk.
From where I'm sitting, it doesn't feel like we're in either of these camps at the moment, but the world changes fast, so ya never know.
But, we'd be wise to remember that wherever the crowd is, it's probably wrong.
Along those lines, there's a great quote that I have struggled to find the source of. I believe it's from Nick Murray[1], but for the life of me, I cannot find where he (or whomever) said it. In any case, it's on the topic of following the crowd and it's a good one. He (or somebody) said something to this effect:
"If everybody was right, everybody would be rich. Since everybody isn't rich, everybody can't be right."
There's more wisdom in that quote than most investors could ever imagine.
That's all for this week.
As One More Reminder: This week on the podcast, I shared a couple of great quotes from Howard Marks on how he defines "risk." I have received some great responses to the first few episodes. If you haven't listened yet, I hope you'll check it out. And if you do, I hope you enjoy it!
Until next time, invest rationally.
-Ashby
[1] If you know where this quote is from, please let me know! :)