We can learn a lot from reading Howard Marks’ memo to his Oaktree Capital’s clients.

A few excerpts:

  1. Charlie Munger: It’s not supposed to be easy. Anyone who finds it easy is stupid.
  2. … people who think it can be easy overlook substantial nuance and complexity.
  3. For your performance to diverge from the norm, your expectations – and thus your portfolio – have to diverge from the norm, and your have to be more right than the consensus. Different and better: that’s a pretty good description of second-level thinking.
  4. What’s clear to the board consensus of investors is almost always wrong.
  5. First, most people don’t understand the process through which something comes to have outstanding moneymaking potential. And second, the very coalescing of popular opinion behind and investment tends to eliminate its profit potential.
  6. In short, there are two primary elements in superior investing:
    1. seeing some quality that others don’t see or appreciate (and that isn’t reflected in the price), and
    2. having it turn out to be true (or at least accepted by the market).
  7. … investment risk resides most where it is least perceived, and vice versa:
  8. This paradox exits 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. It’s just a matter of price paid for them.
  9. … the riskiest thing in the world is the widespread belief that there’s no risk.
  10. Regardless of whether the fundamental outlook is positive or negative, the level of investment risk is determined largely by the relationship between the price of an asset and its intrinsic value.