Management Is Battling Entropy

Management is always an exercise in battling entropy. Order tends to disorder and the application of energy is required to restore order. It’s an immutable law of the universe and it’s a law of management. In tough times, the disorder comes at you a whole lot faster and requires a lot more energy to manage.

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Making High Quality Active Management Decisions

The most important distinction in the investment world does not separate individuals and institutions; the most important distinction divides those investors that have the ability to make high-quality active management decisions from those investors without active management expertise. Few institutions and even fewer individuals exhibit the ability and commit the resources to produce risk-adjusted excess returns.

– David Swensen

Confirmation Bias

Many investors – especially equity and growth equity investors – have a positive bias. People tend to look at negative developments and characterize them as isolated. They ignore contagion and second order consequences. In positive periods, investors engage in selective perception – they only see the good and skewed interpretation – whatever happens, people interpret it positively in a bull market. In recent years, the central bank, by pushing rates to zero, mandated that people – we can think of them as handcuffed volunteers – indulged in highly risky behaviour. The market eventually reached a tipping point where the reality could no longer be ignored.

Howard Marks

Every Trend Gets Overdone

What the wise man does in the beginning, the fool does in the end. That’s the nature of the investment business – every trend gets overdone – in the investment business, the most important, single-biggest decision a strategist has to make is whether to play offense or defense. When do you turn aggressive? We just try to figure out when the negatives are being over-emphasized. It’s feel – there’s no science. Everybody should understand their own psychology – are you generally an optimist or a pessimist? Personally, I’m more conservative – but my caution is overcome by the desperation I see around me. When everybody thinks there’s no hope, I find it easier to turn bullish. If the fundamentals are a little worse, but the psychology is drastically worse, that results in cheap prices and one can be less cautious.

– Howard Marks