Marks outlines four ways to achieve superior returns: buying below value, financial structure, adding operational value, and premium valuations.
“You apply the right financial structure, which also which often means leverage, you add value intrinsically to the operation, and you see it go to a premium valuation relative to what you pay.”
Marks says optimism and credulousness dominate today's market, making excess returns harder to achieve.
“I think you would have to say, optimism, not pessimism, credulousness, not skepticism, are in the ascendancy today, and when optimism and credulousness are in the ascendancy, it gets hard to make return investments that will produce what we call excess returns,”
Marks quotes Buffett preferring lumpy 15% returns over smooth 12% if you can survive volatility.
“And if you can survive long enough to enjoy the long term benefit of the lumpy 15, it beats the hell out of the smooth 12.”
Marks explains risky assets must appear to offer high returns, but don't have to deliver them.
“What the relationship means is that an asset that appears to be risky has to appear to offer a high return or else nobody will buy it.”
Marks notes the last three years rank among the top six in S&P 500 history.
“The S and P 500 stock index has been around for about a century. There have been ninety seven or ninety eight three year periods by definition.”
Marks says 2023-2025 is the seventh best three-year period for the S&P 500 in a century, signaling elevated optimism.
“The period, twenty three four five is for the S and P 500 is, I think, the seventh best three year period out of the last 100. Seventh out of a 100.”
Marks quotes Buffett preferring a lumpy 15% return over a smooth 12%, challenging excessive focus on volatility.
“And I would say to people, if you'd rather have a smooth 12 than a lumpy 15, you have to ask yourself what's going on.”
Marks says S&P valuation suggests very low single-digit returns over the next ten years based on historical PE ratios.
“Historically, if you bought at this PE ratio, your return over the next ten years averaged in the very low single digits.”
Marks defines real investment accomplishment as making money with controlled risk, not just returns.
“To me, the real accomplishment is making money with the risk under control. And that's what thinking about risk, I think, helps you do.”