Experience, they say, is the best teacher. Fair enough, but when it comes to being a great investor, learning from experience can be very expensive, particularly in times of volatility. When the market is volatile, letting trial and error take its course can set you back years financially.
Here's an alternative: Follow the wisdom of great investors. Pay attention to what successful investors have said (and done) about risk and volatility, and learn from their success (and failures).
One investor who fits the bill is Howard Marks. Mr. Marks isn't as well known as Benjamin Graham, Warren Buffett, Peter Lynch or Jeremy Grantham, but I'd put his wisdom on equal footing. He's the co-founder of Oaktree Capital Management, a U.S.-based asset management company with about $100-billion under management. He's also the author of a couple of highly influential books, such as The Most Important Thing: Uncommon Sense for the Thoughtful Investor, which I would recommend to anyone.
Over the years, I've come to appreciate Mr. Marks's "common sense" approach to investing. Like Mr. Buffett, he has an uncanny ability to cut through the financial jargon and explain ideas and strategies in a folksy, persuasive way. I've captured some of his wisdom below, and coupled it with my own experience and insight.
The No. 1 job of any investor: control risk
Mr. Marks is a big believer in the "think risk first" approach. He believes his job as a money manager isn't to perform or outperform – it's to keep capital safe.
This is an important point for investors to remember as we enter a period of volatility. Don't get complacent about high-risk investments or speculative positions. Don't worry about keeping up with the benchmark, or a model portfolio, or your next door neighbour. Instead, focus on protecting what you've worked hard to build.
Investors who can control risk and "live to fight another day" (Mr. Marks's words) are the ones most likely to come through this period of uncertainty unscathed.
Safety comes from buying things for less than they're worth
To Mr. Marks, safety doesn't come from holding traditionally "safe" assets (such as cash or GICs). Rather, safety comes from a careful analysis of what an asset is worth, and comparing that with what it costs. This is classic value investing; it's also how most high-net worth investors I've met actually invest.
Instead of looking for a "silver bullet" that will keep your portfolio safe, focus on determining what potential investments are actually worth. Then, buy things that are currently priced lower than that.
Rule #1: Most things prove to be cyclical. Rule #2: Some of the greatest opportunities come when people forget Rule #1
Throughout his career, Mr. Marks has been a keen student of history. He's always looking to the past as a way to understand the present.
Because of this, he doesn't put much stock in "this time it's different" type of thinking. To his mind, there is precedent for most of what happens in the market. To his mind, markets generally move in cycles, and this is the key to understanding how great investors make money.
As certain assets get caught in the market volatility, there will be opportunities for those who understand that what is unloved now will likely come back into favour in time – right now, energy, commodities and gold miners come to mind.
"Should" doesn't mean "will"
When speaking about market events and opportunities, he's reluctant to use the word "will," opting instead for "should."
Some will see this as a subtle distinction. But I think it's powerful wisdom.
Rather than stick to a thesis and insist that everyone else is irrational, Mr. Marks allows for outcomes other than the one he thinks will happen.
When we admit we can't predict the future with 100-per-cent accuracy, we're less inclined to take unnecessary risks.
Can't hold it for five years? Don't even think about holding it for five minutes
Mr. Marks has been in the financial industry for more than 30 years. Over that time, he's been a vocal critic of a market that has become much more short-term focused.
I agree with him. When companies make decisions based on what's good for the stock, it's often at the expense of what's good for the business.
When investors watch their portfolios on a daily basis, it can distract them from the long-term picture.
This long-term perspective has led Mr. Marks to favour more secure holdings. He's not really one to make "high risk/high return" investments, or use leverage or complicated hedging strategies. Instead, he focuses on quality stocks and bonds he can hold on to for five years without worrying all that much.
This is exactly the approach the vast majority of investors should be taking right now. In times of volatility, a relentless focus on quality might be the best protection there is.
Thane Stenner is the director of wealth management and the founder of StennerZohny Investment Partners+ within Richardson GMP Ltd. He is also Chairman Emeritus for TIGER 21 Canada.