Howard Marks Memo: It’s All a Big Mistake

Mistakes are a frequent topic of discussion in our world.  It’s not unusual to see investors criticized for errors that resulted in poor performance.  But rarely do we hear about mistakes as an indispensible component of the investment process.  I’m writing now to point out that mistakes are all that superior investing is about.  In short, in order for one side of a transaction to turn out to be a major success, the other side has to have been a big mistake.

There’s an old saying in poker that there’s a “fish” (a sucker, or an unskilled player who’s likely to lose) in every game, and if you’ve played for an hour without having figured out who the fish is, then it’s you.  Likewise, in every investment transaction you’re part of, it’s likely that someone’s making a mistake.  The key to success is to not have it be you.

Usually a buyer buys an asset because he thinks it’s worth more than the price he’s paying.  But the seller sells the asset because he thinks the price he’s getting exceeds its value.  It’s pretty safe to say one of them has to be wrong.  Strictly speaking, that doesn’t have to be true, thanks to differences in things like tax status, timeframe and investors’ circumstances.  But in general, win/win transactions are much less common than win/lose transactions.  When the dust has settled after most trades, the buyer and seller are unlikely to be equally happy.

I consider it highly desirable to focus on the topic of investing mistakes.  First, it serves as a reminder that the potential for error is ever-present, and thus of the importance of mistake minimization as a key goal.  Second, if one side of every transaction is wrong, we have to ponder why we should think it’s not us.  Third, then, it causes us to consider how to minimize the probability of being the one making the mistake.