Thursday, January 14, 2016

Howard Marks Memo: On the Couch

Link to Memo: On the Couch
I woke up early on Saturday, December 12 – the morning after a day of significant declines in stocks, credit and crude oil – with enough thoughts going through my mind to keep me from going back to sleep.  Thus I moved to my desk to start a memo that would pull them together.  I knew it might be a long time between inception and eventual issuance, since every time I dealt with one thought, two more popped into my head.  In the end, it took a month to get it done.
Professor Richard Thaler of the University of Chicago is a leading expert on behavioral economics and decision-making (in fact, he’s such a significant figure in the field that he was given a cameo role in the movie The Big Short).  He opens his new book, Misbehaving, with Vilfredo Pareto’s assertion that “the foundation of political economy and, in general, of every social science, is evidently psychology.”  I’d apply that equally to the not-so-scientific field of investing.
It has been one of my constant refrains – dating back all the way to “Random Thoughts on the Identification of Investment Opportunities” (January 1994) – that in order to be successful, an investor has to understand not just finance, accounting and economics, but also psychology.  A thorough understanding of how investors’ minds work is essential if one is to figure out where a market is in its cycle, why, and what to do about it.  For me, the markets’ recent behavior – certainly on December 11, but also at other points in 2015 – reinforces that observation. 
This memo is my attempt to send the markets to the psychiatrist’s couch, and an exploration of what might be learned there.