Marks argues you can protect against extreme tail risks but won't like the premium cost.
“I'm concerned that there could be nuclear war, and I'm concerned that there could be inflation at 20%. Mhmm. Well, can protect yourself against that.”
Marks argues good investing comes from buying things well, not buying good things; price determines outcomes.
“it's not what you buy, it's what you pay that counts. Good investing doesn't come from buying good things, it comes from buying things well.”
Marks defines proper private asset valuation as the price an intelligent, unemotional buyer would pay today.
“I think it should be valued at what an intelligent, unemotional buyer would pay for it today.”
Marks argues AI makes the world more unpredictable than any time in his lifetime, challenging investment decision-making.
“the changes that are underway today, and in particular the introduction of AI, render the world much less predictable than at any time, probably any time ever, and certainly any time in my lifetime.”
Marks notes the S&P 500 has doubled since September 2022 while intrinsic values have not, discouraging analysis.
“I mean, company values haven't doubled, intrinsic values, but prices have doubled, so it's been a great time, and great times encourage the desire to put money to work and discourage analysis,”
Marks recalls nifty fifty stocks in 1969 where banks believed nothing could go wrong at any price.
“These were the 50 best and fastest growing companies in America, where nothing could go wrong and there was no price too high.”
Marks says holding nifty fifty stocks for five years from September 1969 resulted in 95% losses.
“So if you bought the stocks the day I got there, I think it was 09/22/1969, if I'm not mistaken, and if you held them tenaciously for five years, the greatest company is America, you lost about 95% of your money.”
Marks argues good investing is not just buying good things but buying things well at the right price.
“it's not what you buy, it's what you pay. And good investing is not just a function of buying good things, but of buying things well.”
Marks defines risk as the probability of an undesirable outcome, not volatility or fluctuation.
“Risk, in my opinion, and my view has evolved, risk is the probability negative outcome, of an undesirable outcome.”
Marks defines risk as the probability of an undesirable outcome, not volatility.
“Risk, in my opinion, and my view has evolved, risk is the probability negative outcome, of an undesirable outcome. It is not the volatility of the stream.”
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 do not have to deliver them.
“If a risky asset can be counted on to have a high return, then it's not risky. So it can't be true. It's incorrect on its face.”
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 cites Dimson saying the future is a probability distribution, not a single outcome that can be predicted.
“The future is not a set single thing that if you're smart enough, you can figure it out what it's going to be and it's going to materialize and make you right.”
Marks argues the future is a probability distribution of possibilities, not a single predictable outcome.
“It's a probability distribution. It's a range of possibilities in each thing, whether it's GDP growth next year or inflation next year, or who's going to win the next election,”
Marks explains why the claim that riskier investments have higher returns is logically incoherent.
“if it were true that taking more risk is the surefire path to a higher return, then it wouldn't be risky. Can't be right. So I was always unsatisfied with that.”
Marks states that 99% of startups and 90% of venture capital investments fail despite high return potential.
“something like probably 99% of all startups fail, probably something like 90% of all the investments that venture capital funds make fail.”
Marks warns that at PE ratio of 23, historical S&P returns over next decade were always between 2% and -2%.
“And it showed that historically, you bought the S and P when the PE ratio was 23, in every case, there were no exceptions.”
My First Million
“The only thing I'm sure of is if you zig when they zig, you're not gonna outperform.”
Marks raised $8 billion in early 2007, took only $3.5 billion, held rest in standby fund.
“But we would like to have the remainder of your interest in a standby fund that will implement if the stuff hits the fan.”
Marks argues academics chose volatility as risk measure because it was quantifiable, not because it was accurate.
“I think that volatility can be an indicator of the presence of risk, a symptom if you will, but it's not risk itself.”
Marks defines risk as the probability of loss, not volatility as academics measure it.
“So if risk is not volatility, then what is it? And in my opinion, and in the real world sense, risk is the probability of loss.”
Marks says buying at highs and holding through declines eventually recovers as new highs exceed old highs.
“The fact that you experienced a downward fluctuation might have been uncomfortable for a little while. But by the time the new high is achieved, you're you're you're back to to your cost and more.”
Marks quotes Rick Kane saying everything interesting in finance happened outside two standard deviations, not within them.
“My friend Rick Kane once said that 96% of financial history has occurred within two standard deviations, but everything interesting has happened outside of two standard deviations.”
Marks asserts risk is not a function of asset quality, opposing conventional belief about quality and safety.
“One of the most important things for every investor to learn is that risk is not a function of asset quality. This too sounds counterintuitive.”
Marks argues investment success comes from buying things well, not buying good things, as any asset can become overpriced.
“My conclusion was it's not what you buy, it's what you pay. And investment success doesn't come from buying good things, but from buying things well.”
Marks argues no asset is so good it cannot be overpriced or so bad it cannot become attractively cheap.
“There are no assets that are so good that they can't become overpriced and dangerous. There are very few assets that are so bad that they can't be cheap enough to be attractive as investments.”
Marks refutes the idea that riskier assets produce higher returns, arguing they only offer higher expected returns to induce participation.
“Very simply, if it were true that riskier assets produce higher returns, then they wouldn't be riskier, would they? So that can't be the right explanation.”
Marks says risky assets must offer higher expected returns to attract investors, but do not have to deliver them.
“What the upward sloping line, the positive correlation, means is that investments that are perceived as being risky have to be perceived as offering higher returns to induce people to make those investments.”
Marks argues imprecise expert judgment about loss probability beats precise but irrelevant volatility numbers.
“I believe imprecise qualitative expert opinion about the probability of loss is far more useful than precise but largely irrelevant numbers concerning past and projected volatility.”
Marks argues risk control should follow soccer's continuous play model, not American football's discrete offense-defense switches.
“I think the right model for thinking about whether we need risk control isn't American football, it's soccer. In American football, the team with the ball has the offense on the field.”
Wharton School
“I think that one of the things you're taught here is that volatility is a measure of risk. Volatility is risk.”
Marks states risk cannot be quantified in advance and historical volatility is not a good risk indicator.
“risk is unquantifiable in advance. You can make reference to the historical volatility, the historical standard deviation, but number one, that's not a very good indicator of risk.”
Wharton School
“Even when it's over, you can't tell. Was that a safe investment that it was sure to produce a double? Or was it a risky investment where you got lucky?”
Marks says high-quality assets can be risky if overpriced, citing nifty-fifty stocks that lost almost everything from 1969 to 1974.
“A high quality asset can be priced so high that it's risky. I started work at Citibank in September 1969, when I got out of Chicago Booth.”
Wharton School
“And if you bought those stocks, the day I got there in '69, and you held them firmly for five years, you lost almost all your money.”
Marks challenges the risk-return line saying if higher returns are certain from risky assets, they aren't risky.
“if you can count on higher returns from a risky asset, then by definition, it's not risky. So it's kind of an oxymoron. And I was never comfortable with this graphic.”
Marks defines exceptional investors as those achieving good returns disproportionate to risk taken.
“I think that an exceptional investor is someone who has a good return disproportionate to the risk born. A good return with the risk under control.”
Marks argues investors must not assume likely outcomes will occur, unlike in physical sciences where determinism applies.
“you should not act as if the things that should happen are the things that will happen. Again, in the world of the physical sciences, you can probably bet that that's true.”
Marks cites definition that risk means more things can happen than will happen.
“There's a professor at the London Business School who put it succinctly. He said risk means more things can happen than will happen. And again, this is profound in my opinion.”
Marks quotes London Business School professor defining risk as more outcomes being possible than will actually occur.
“risk means more things can happen than will happen. And again, this is profound in my opinion. In the economic world, people generally make their decisions based on something called expected value,”
Marks states the secret to investing is buying assets for less than intrinsic worth, not buying quality.
“So if you buy a high quality asset and I say in the book, there's a guy on the radio when I lived in LA,”
Marks cites buying America's best companies from 1968 to 1973 lost 90% due to overpricing.
“if you bought the bonds of Hewlett Packard, PerkinElmer, Texas Instruments, Merck, Lilly, Xerox, IBM, Kodak, Polaroid, AIG, Coca Cola, and Procter and Gamble, and if you bought them all in 'sixty eight and you held them until 'seventy three, you lost 90% of your money. Why? Because they were overpriced.”
Marks reveals fund averaging 37th percentile yearly ranked fourth over fourteen years because managers blow up spectacularly.
“What percentile do you think that fund was in for the whole fourteen years? Four. Four. And if you think about it, it's really almost mysterious. Why the fourth, not the thirty seventh?”