Don’t be a victim of good times in the market; how to make money during stock market extremes This is, however, very different from simply diverging from the consensus all the time
Dhirendra Kumar
CEO, Value Research
The investors who find themselves obsessing with the current highs of the markets should carefully read and understand the following memo published recently by famed investment manager, Howard Marks, on his firm Oak Tree Capital’s website. It states, “When the markets are at extreme highs or lows, the essential requirement for achieving a superior view of their future performance lies in understanding what’s responsible for the current conditions. Everyone can study economics, finance and accounting and learn how the markets are supposed to work.
But superior investment results come from exploiting the differences between how things are supposed to work and how they do work in the real world. To do that, the essential inputs aren’t economic data or financial statement analysis. The key lies in understanding the prevailing investor psychology.” Marks may well have written about what is going on in India at the moment. He has been a successful fund manager, and unusually for a professional fund manager, he also writes extremely well on investing. His writing is generally in the form of popular memos on investing or as posts on the firm’s website. Even Warren Buffett has said that when a memo from Marks arrives, he drops everything to read it.
The impact of market highs on investor psychology is remarkable. As the high comes tantalisingly near and is reached, and then keeps repeating itself, more and more investors go into a frenzy of investing and a sort of ‘buying panic’ breaks out. In his memo, Marks discusses “taking the temperature of the market”. He recommends that one should “watch for moments when most people are so optimistic that they think things can only get better, an expression that usually serves to justify the dangerous view that no price is too high”.
This is the buying panic that I often warn investors about because market highs are actually a risky and dangerous time. Marks goes on to say: “Remember that in extreme times, because of the above, the secret to making money lies in contrarianism, not conformity. When emotional investors take an extreme view of an asset’s future and, as a result, take the price to unjustified levels, the ‘easy money’ is usually made by doing the opposite. This is, however, very different from simply diverging from the consensus all the time.” This is an important distinction he makes. Most of the time, markets are neither too high nor too low. They are in the ‘OK zone’.
We must appreciate that Marks is a professional investment manager. When he talks about the psychology of mass investors and how he takes advantage of that, he’s talking about people like us, about our psychology. The investors who make psychological mistakes give away their money to smart investors. ‘Victim’ is a harsh word to use, but in a way, it’s quite appropriate in this context. If an expert investor is saying that the key lies in understanding investor psychology, then for the retail investor, the key lies in understanding his own psychology. Whether your investments make money for you or they make money for someone else depends on this. The lesson that investors should draw from this is: don’t be a victim.
(The author is CEO, VALUE RESEARCH.)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
