Howard Marks has written a quite a remarkable memo that will be impossible for me to do the proper justice on. However, here are few key highlights from his memo:
- He shares perspectives having been in investing for 53 years.
- He has seen two major sea changes during that time.
- One sea change included the evolution of the bond market in the late 70s and most importantly, a shift in investor mindset to thinking about risk and return (which was not the way investors thought about investments back then).
- The second sea change had to do with macroeconomic policy and use of interest rate controls to not only control inflation but also feed a market fueled by declining interest rates (and turbo charged by leverage) resulting in four decades of 10.3% growth when looking at the S&P 500.
- The third sea change he sees is where we are now. While I definitely oversimplify (you need to read the memo), the fuel of declining interest rates are unlikely to be a tailwind at our backs as compared to the prior 40 years. If you believe some of these perspectives, it seems as though many investors will need new investment strategies (e.g., rebalancing of portfolios from equity to credit instruments).
As a behavioral finance person, I see some perils of using fast, autonomous thinking and the need to try to use more slow, reflective thinking. I also see the role of inertia. Like many other people, my portfolio is heavily tilted to equities. How can people both re-think and maneuver? At the same time, how can they leverage behavioral principles and avoid biases of anchoring, such as to the past? Potentially we can use behavioral tools like whiteboard exercises to re-imagine paths to go forward. We can potentially use behavioral tools to address issues associated with forecasting, prediction, and risk. There is also the need for personalized solutions. And if there is a sea change (or if we at least need to prepare for one), there is also a need to think about how to distribute solutions to the masses. There are behavioral implications lurking. How will individual investors manage? How will the finance community and its distribution networks address such behavioral considerations? There are definitely behavioral issues to consider and address, and it will be interesting to participate in the debates and also work on block-and-tackle solutions.