https://www.youtube.com/watch?v=YVe2enQ0SOw
A recent conversation between Howard Marks and Alper Daglioglu highlights a fundamental investing principle: comfort and good investing rarely coexist.
Here is why embracing discomfort is essential for long-term investors:
- The Necessity of Discomfort When Buying: Truly attractive valuations only appear in environments marked by extreme fear, uncertainty, and forced selling. Buying when the financial system feels like it is collapsing should feel terrible. "If you committed to spend money... and you're not uncomfortable there's something wrong with you." It is human nature to feel terrified when staring into the abyss, but courage to endure that discomfort is required because times of abject terror are precisely when prices are at their lowest relative to intrinsic value.
- The Danger of Feeling Comfortable: Conversely, feeling comfortable with an investment is often a warning sign. If an investment feels easy or universally accepted, it usually means the broader market is euphoric and carefree. During these comfortable times, prices are pushed to their maximum relative to intrinsic value, meaning prospective returns are low and risk is high. It is an oxymoron to look for a "bargain price security that everybody loves"; if everyone feels comfortable enough to love it, it is highly unlikely to be on the bargain counter.
- Embracing "Uncomfortably Idiosyncratic Positions": To achieve better-than-average results, investors cannot embody the same psychology as the average investor; they must diverge from the crowd and behave as contrarians. "Good investing requires the adoption of uncomfortably idiosyncratic positions." Investors must dare to be different, dare to be wrong, and dare to look wrong, all of which naturally invoke psychological discomfort.
- Enduring the Discomfort of Volatility: Another major source of discomfort is price fluctuation. Seeing portfolio prices move up and down makes both investment managers and their clients incredibly uncomfortable. Because of this discomfort, the investment industry has largely adopted the flawed concept that volatility is the same thing as risk and must be avoided. Excessive concern over interim volatility is "one of the wrongest things about the investment profession." Investors should be willing to endure the discomfort of a "lumpy 15% return" rather than paying a premium for a comfortable, "smooth 12%".