Additional Quotes from “The Most Important Thing”- Knowing what you don’t know

Knowing where we stand and knowing what we don’t know


Previously, we discussed Marks’ thoughts on finding bargains and patient opportunism, contrarianism and psychological pitfalls in investing, market cycles, risk and attitudes to risk, and price and the relationship of price to value.

In the next two chapters, Marks’ discusses the value of knowing what you don’t know in markets, and having a sense of where we stand in terms of market behavior.

The Most Important Thing is ……….Knowing What you don’t Know

Awareness of the limited extent of our foreknowledge is an essential component of my approach to investing.

I’m firmly convinced that (a) it’s hard to know what the macro future holds and (b) few people possess superior knowledge of these matters that can regularly be turned into an investing advantage.

On the other hand, the more we concentrate on smaller-picture things, the more it’s possible to gain a knowledge advantage.

The important thing in forecasting isn’t getting it right once. The important thing is getting it right consistently. If you’re always an outlier, you’re likely to eventually be applauded for an extremely unconventional forecast that correctly foresaw what no one else did. But that doesn’t mean your forecasts are regularly of any value.

While we may know what will happen much of the time, when things are “normal”, we can’t know much about what will happen at those moments when knowing would make the biggest difference.

Most of the time, people predict a future that is a lot like the recent past. •   They’re not necessarily wrong: most of the time the future largely is a rerun of the recent past. •   On the basis of these two points, it’s possible to conclude that forecasts will prove accurate much of the time: They’ll usually extrapolate recent experience and be right.

Just as forecasters usually assume a future that’s a lot like the past, so do markets, which usually price in a continuation of recent history.

Once in a while, however, the future turns out to be very different from the past. •   It’s at these times that accurate forecasts would be of great value. •   It’s also at these times that forecasts are least likely to be correct. •   Some forecasters may turn out to be correct at these pivotal moments, suggesting that it’s possible to correctly forecast key events, but it’s unlikely to be the same people consistently. •   The sum of this discussion suggests that, on balance, forecasts are of very little value.

The key question isn’t “are forecasters sometimes right?” but rather “are forecasts as a whole—or any one person’s forecasts—consistently actionable and valuable?” No one should bet much on the answer being affirmative.

Most of the investors I’ve met over the years have belonged to the “I know” school. It’s easy to identify them. •    They think knowledge of the future direction of economies, interest rates, markets and widely followed mainstream stocks is essential for investment success. •    They’re confident it can be achieved. •    They know they can do it. •    They’re aware that lots of other people are trying to do it too, but they figure either (a) everyone can be successful at the same time, or (b) only a few can be, but they’re among them.

They’re comfortable investing based on their opinions regarding the future. •    They’re also glad to share their views with others, even though correct forecasts should be of such great value that no one would give them away gratis. •    They rarely look back to rigorously assess their record as forecasters.

Marks believes you can’t know the future; you don’t have to know the future; and the proper goal is to do the best possible job of investing in the absence of that knowledge.

No one likes having to invest for the future under the assumption that the future is largely unknowable. On the other hand, if it is, we’d better face up to it and find other ways to cope than through forecasts.

The biggest problems tend to arise when investors forget about the difference between probability and outcome—that is, when they forget about the limits on foreknowledge. Some of the biggest losses occur when overconfidence regarding predictive ability causes investors to underestimate the range of possibilities, the difficulty of predicting which one will materialize, and the consequences of a surprise.

The question of whether trying to predict the future will or will not work isn’t a matter of idle curiosity or academic musing. It has—or should have—significant ramifications for investor behavior. One key question investors have to answer is whether they view the future as knowable or unknowable. those who feel they don’t know what the future holds will act quite differently: diversifying, hedging, levering less (or not at all), emphasizing value today over growth tomorrow, staying high in the capital structure, and generally girding for a variety of possible outcomes.

Investing in an unknowable future as an agnostic is a daunting prospect, but if foreknowledge is elusive, investing as if you know what’s coming is close to nuts. Acknowledging the boundaries of what you can know—and working within those limits rather than venturing beyond—can give you a great advantage.

The Most Important Thing is…….Having a sense of where we stand

Market cycles are unpredictable, in terms of their extent, as well as their timing. The only thing we can predict about cycles is their inevitability.

Why not simply try to figure out where we stand in terms of each cycle and what that implies for our actions?

We cannot know how far a trend will go, when it will turn, what will make it turn or how far things will then go in the opposite direction. However, every trend will stop sooner or later. We may never know where we’re going, but we’d better have a good idea where we are.

Try to (a) stay alert for occasions when a market has reached an extreme, (b) adjust our behavior in response and, (c)  most important, refuse to fall into line with the herd behavior that renders so many investors dead wrong at tops and bottoms.


When I say that our present position (unlike the future) is knowable, I don’t mean to imply that that that understanding comes automatically. Like most things about investing, it takes work. Those who are unaware of what’s going on around them are destined to be buffeted by it. As difficult as it is know the future, it’s really not that hard to understand the present. If we are alert and perceptive, we can gauge the behavior of those around us and from that judge what we should do.

We must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panic selling, we should become aggressive.

We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.

Further Review of “The Most Important Thing”-On Finding Bargains

Finding Bargains and Patient Opportunism

Previously, we discussed the book contents in relationship to  psychological pitfalls in investing, cycles and the market pendulum, risk and attitudes towards risk, price and the relationship between price and value. The following two chapters deal are sort of “how-to” chapters, in the sense they inform us as to find bargains in the markets, and where to look for bargains, and they also tell us about the value of patient opportunism in markets.

The Most Important Things is…….Finding Bargains

The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst.

The first step is usually to make sure that the things being considered satisfy some absolute standards. It’s not unreasonable to want to emphasize assets that fall within a certain portion of the risk spectrum. In other words, there can reasonably be some places investors won’t go, regardless of price.

The starting point for portfolio construction is unlikely to be an unbounded universe. Some things are realistic candidates for inclusion, and others aren’t. The next step is to select investments from it. That’s done by identifying those that offer the best ratio of potential return to risk, or the most value for the money.

The process of investing has to be rigorous and disciplined. Second, it is by necessity comparative. Whether prices are depressed or elevated, and whether prospective returns are therefore high or low, we have to find the best investments out there.

Our goal isn’t to find good assets, but good buys.Thus, it’s not what you buy; it’s what you pay for it.  The tendency to mistake objective merit for investment opportunity, and the failure to distinguish between good assets and good buys, get most investors into trouble.

What is it that makes price low relative to value, and return high relative to risk? Unlike assets that become the subject of manias, potential bargains usually display some objective defect. Bargains are often created when investors either fail to consider an asset fairly, or fail to look beneath the surface to understand it thoroughly, or fail to overcome some non-value-based tradition, bias or stricture. Generally, the greater the stigma or revulsion, the better the bargain.

First-level thinkers tend to view past price weakness as worrisome, not as a sign that the asset has gotten cheaper.

A bargain asset tends to be one that’s highly unpopular. Fairly priced assets are never our objective, since it’s reasonable to conclude they’ll deliver just fair returns for the risk involved.

A good place to start is among things that are:   •   little known and not fully understood; •   fundamentally questionable on the surface; •   controversial, unseemly or scary; •   deemed inappropriate for “respectable” portfolios; •   unappreciated, unpopular and unloved; •   trailing a record of poor returns; and •   recently the subject of disinvestment, not accumulation.

The necessary condition for the existence of bargains is that perception has to be considerably worse than reality. Investment bargains needn’t have anything to do with high quality.

We’re active investors because we believe we can beat the market by identifying superior opportunities. It’s obvious that investors can be forced into mistakes by psychological weakness, analytical error or refusal to tread on uncertain ground. Those mistakes create bargains for second-level thinkers capable of seeing the errors of others.

The Most Important Thing is …… Patient Opportunism

There aren’t always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive.

Patient opportunism—waiting for bargains—is often your best strategy.

You’ll do better if you wait for investments to come to you rather than go chasing after them.You tend to get better buys if you select from the list of things sellers are motivated to sell rather than start with a fixed notion as to what you want to own. An opportunist buys things because they’re offered at bargain prices. There’s nothing special about buying when prices aren’t low.

This is one of the hardest things to master for professional investors: coming in each day for work and doing nothing.

It’s essential for investment success that we recognize the condition of the market and decide on our actions accordingly. The other possibilities are (a) acting without recognizing the market’s status, (b) acting with indifference to its status and (c) believing we can somehow change its status. These are most unwise.

investors needn’t feel pressured to act. They can pass up lots of opportunities until they see one that’s terrific. One of the great things about investing is that the only real penalty is for making losing investments. There’s no penalty for omitting losing investments, of course, just rewards. And even for missing a few winners, the penalty is bearable. Missing a profitable opportunity is of less significance than investing in a loser.

The motto of those who reach for return seems to be: “If you can’t get the return you need from safe investments, pursue it via risky investments.” You simply cannot create investment opportunities when they’re not there. The dumbest thing you can do is to insist on perpetuating high returns—and give back your profits in the process.

The truth is, there’s no easy answer for investors faced with skimpy prospective returns and risk premiums. But there is one course of action—one classic mistake—that I most strongly feel is wrong: reaching for return.

Trying to earn aggressive returns not only doesn’t ensure that you will achieve them but also increases the likelihood that by making increasingly risky investments you will incur losses and fall far short, exacerbating your problem.

High valuations can often go higher and last for longer than expected, continually frustrating disciplined and patient value investors. To wring high returns from a low-return environment requires the ability to swim against the tide and find the relatively few winners. High-return environments, on the other hand, offer opportunities for generous returns through purchases at low prices, and typically these can be earned with low risk.

The absolute best buying opportunities come when asset holders are forced to sell, and in those crises they were present in large numbers. Usually, would-be sellers balance the desire to get a good price with the desire to get the trade done soon. The beauty of forced sellers is that they have no choice. They have a gun at their heads and have to sell regardless of price. The difficulties that mandate selling—plummeting prices, withdrawal of credit, fear among counterparties or clients—have the same impact on most investors. In that case, prices can fall far below intrinsic value.

The key during a crisis is to be (a) insulated from the forces that require selling and (b) positioned to be a buyer instead. To satisfy those criteria, an investor needs the following things: staunch reliance on value, little or no use of leverage, long-term capital and a strong stomach.

More Excerpts from “The Most Important Thing Illuminated”-On Negative Influences

On combating negative influences and Contrarianism


In the review of the previous chapters of the book, we dealt with importance of price and the relationship between price and value, then in another post, we dealt with the recognition of risk and the control of risk. In the last post, we considered the cyclical nature of investment markets, and the pendulum like swings between greed and fear, and euphoria and despair.

The next two chapters deal with the negative influences on investor psychology and the need to embrace contrarianism to be successful in markets. Here are the excerpts:

Chapter 10: The Most Important Thing is ……Combating Negative Tendencies

The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—-these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring.

Inefficiencies—mispricings, misperceptions, mistakes that other people make—provide potential opportunities for superior performance. Exploiting them is, in fact, the only road to consistent outperformance.

Many people possess the intellect needed to analyze data, but far fewer are able to look more deeply into things and withstand the powerful influence of psychology. Many people will reach similar cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently. The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.

These psychological factors create opportunities for superior investors to augment their results by refusing to hold at the highs and by insisting on buying at the lows. Resisting the inimical forces is an absolute requirement.

The first emotion that serves to undermine investors’ efforts is the desire for money, especially as it morphs into greed. from time to time greed drives investors to throw in their lot with the crowd in pursuit of profit, and eventually they pay the price. The combination of greed and optimism repeatedly leads people to pursue strategies they hope will produce high returns without high risk;  It makes them pay elevated prices for securities that are in vogue; and hold things after they have become highly priced in the hope there’s still some appreciation left.

The counterpart of greed is fear—the second psychological factor we must consider. Fear is overdone concern that prevents investors from taking constructive action when they should.

The third psychological factor which clouds investors minds is the tendency to engage in willing suspension of disbelief- people’s tendency to dismiss logic, history and time-honored norms. This tendency makes people accept unlikely propositions that have the potential to make them rich. However, the process of investing requires a strong dose of disbelief. Inadequate skepticism contributes to investment losses.

The fourth psychological contributor to investor error is the tendency to conform to the view of the herd rather than resist—even when the herd’s view is clearly cockeyed. Many people who don’t share the consensus view of the market start to feel left out. Eventually it reaches a stage where it appears the really crazy people are those not in the market.

The fifth psychological influence is envy. However negative the force of greed might be, always spurring people to strive for more and more, the impact is even stronger when they compare themselves to others. People who might be perfectly happy with their lot in isolation become miserable when they see others do better.

The sixth key influence is ego. Investing—especially poor investing—is a world full of ego. Since risk bearing is rewarded in rising markets, ego can make investors behave aggressively in order to stand out through the achievement of lofty results. the road to investment success is usually marked by humility, not ego.

The final influence Marks’ talks about is a phenomenon he calls capitulation, a regular feature of investor behavior late in cycles. Investors hold to their convictions as long as they can, but when the economic and psychological pressures become irresistible, they surrender and jump on the bandwagon.

The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets. This is especially true at the market extremes. The result is mistakes—frequent, widespread, recurring, expensive mistakes.

To avoid losing money in bubbles, the key lies in refusing to join in when greed and human error cause positives to be wildly overrated and negatives to be ignored. Doing these things isn’t easy, and thus few people are able to abstain. In just the same way, it’s essential that investors avoid selling—and preferably should buy—when fear becomes excessive in a crash.

Mastery over the human side of investing isn’t sufficient for success, but combining it with analytical proficiency can lead to great results.

Investors who believe they’re immune to the forces described in this chapter do so at their own peril. What weapons might you marshal on your side to increase your odds?

  • a strongly held sense of intrinsic value
  • insistence on acting as you should when price diverges from value, •   enough conversance with past cycles—gained at first from reading and talking to veteran investors, and later through experience—to know that market excesses are ultimately punished, not rewarded
  •  a thorough understanding of the insidious effect of psychology on the investing process at market extremes
  • a promise to remember that when things seem “too good to be true,” they usually are
  •  willingness to look wrong while the market goes from misvalued to more misvalued (as it invariably will), and
  • like-minded friends and colleagues from whom to gain support (and for you to support).


Chapter 11: The Most Important Thing is ………Contrarianism

There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite.

Doing the same thing others do exposes you to fluctuations that in part are exaggerated by their actions and your own. It’s certainly undesirable to be part of the herd when it stampedes off the cliff, but it takes rare skill, insight and discipline to avoid it.

the key to investment success has to lie in doing the opposite: in diverging from the crowd. Those who recognize the errors that others make can profit enormously through contrarianism.

Buy low; sell high” is the time-honored dictum, but investors who are swept up in market cycles too often do just the opposite.

market extremes seem to occur once every decade or so—not often enough for an investor to build a career around capitalizing on them. But attempting to do so should be an important component of any investor’s approach.

Just don’t think it’ll be easy. You need the ability to detect instances in which prices have diverged significantly from intrinsic value. You have to have a strong-enough stomach to defy conventional wisdom (one of the greatest oxymorons) and resist the myth that the market’s always efficient and thus right. You need experience on which to base this resolute behavior. And you must have the support of understanding, patient constituencies. Without enough time to ride out the extremes while waiting for reason to prevail, you’ll become that most typical of market victims: the six-foot-tall man who drowned crossing the stream that was five feet deep on average.

Accepting the broad concept of contrarianism is one thing; putting it into practice is another. On one hand, we never know how far the pendulum will swing, when it will reverse, and how far it will then go in the opposite direction. On the other hand, we can be sure that, once it reaches an extreme position, the market eventually will swing back toward the midpoint (or beyond).

On the third hand, however, because of the variability of the many factors that influence markets, no tool—not even contrarianism—can be relied on completely.

Contrarianism isn’t an approach that will make you money all of the time. Much of the time there aren’t great market excesses to bet against.

Even when an excess does develop, it’s important to remember that “overpriced” is incredibly different from “going down tomorrow.” •   Markets can be over- or underpriced and stay that way—or become more so—for years. •   It can be extremely painful when the trend is going against you.

If you look to the markets for a report card, owning a stock that declines every day will make you feel like a failure. But if you remember that you own a fractional interest in a business and that every day you are able to buy in at a greater discount to underlying value, you might just be able to maintain a cheerful disposition.

it’s not enough to bet against the crowd. Given the difficulties associated with contrarianism just mentioned, the potentially profitable recognition of divergences from consensus thinking must be based on reason and analysis. You must do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong. Only with the confidence created by a strong decision-making process can investors sell speculative excess and buy despair-driven value.

The ultimately most profitable investment actions are by definition contrarian: you’re buying when everyone else is selling (and the price is thus low) or you’re selling when everyone else is buying (and the price is high). These actions are lonely and, uncomfortable. What’s clear to the broad consensus of investors is almost always wrong. … The very coalescing of popular opinion behind an investment tends to eliminate its profit potential.

Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out.

Superior investors know—and buy—when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don’t see its merit. Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.

there are two primary elements in superior investing: seeing some quality that others don’t see or appreciate and having it turn out to be true (at least have the market accept it as true).

Every time a bubble bursts, a bull market collapses or a silver bullet fails to work, we hear people bemoan their error. The skeptic, highly aware of that, tries to identify delusions ahead of time and avoid falling into line with the crowd in accepting them. So, usually, investment skepticism is associated with rejecting investment fads, bull market manias and Ponzi schemes.

In dealing with the future, we must think about two things: (a) what might happen and (b) the probability that it will happen.

In general, following the beliefs of the herd—and swinging with the pendulum—will give you average performance in the long run and can get you killed at the extremes.

Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t

skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.

The herd applies optimism at the top and pessimism at the bottom. To benefit, we must be skeptical of the optimism that thrives at the top, and skeptical of the pessimism that prevails at the bottom.

Not only should the lonely and uncomfortable position be tolerated, it should be celebrated. The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left. When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain.

Thus, a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.

It’s our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling—and if our view turns out to be right—that’s the route to the greatest rewards earned with the least risk.

More Excerpts from “The Most Important Thing” by Howard Marks-On Cycles

Howard Marks on Cycles
Howard Marks on Investing Cycles

Previously, we reviewed chapters on risk, and on an investors attitude to risk. The next two chapters (8 and 9) focus on the cyclical nature of markets, and how we can take advantage of the pendulum of markets.

Here goes:

  • It is essential to remember that just about everything is cyclical.
  • there’s little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future.
  • we never know what lies ahead, but we can prepare for the possibilities and reduce their sting.
  • there are two rules we can hold to with confidence:
  • Rule number one: most things will prove to be cyclical. •   Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.
  • the underlying principle is that things will wax and wane, grow and decline. The same is true for economies, markets and companies: they rise and fall.
  • basic reason for the cyclicality in our world is the involvement of humans. people are emotional and inconsistent, not steady and clinical.
  • objective factors do play a large part in cycles, of course—factors such as quantitative relationships, world events, environmental changes, technological developments and corporate decisions. But it’s the application of psychology to these things that causes investors to overreact or underreact, and thus determines the amplitude of the cyclical fluctuations.
  • The extremes of cycles result largely from people’s emotions and foibles, nonobjectivity and inconsistency.
  • Cycles are self-correcting, and their reversal is not necessarily dependent on exogenous events. They reverse (rather than going on forever) because trends create the reasons for their own reversal. Success carries within itself the seeds of failure, and failure the seeds of success.
  • Look around the next time there’s a crisis; you’ll probably find a lender. Overpermissive providers of capital frequently aid and abet financial bubbles. In the financial world, if you offer cheap money, they will borrow, buy and build—often without discipline, and with very negative consequences.
  • Understanding that cycles are eventually self-correcting is one way to maintain some optimism when bargain hunting after large market drops.
  • Cycles will never stop occurring. If there were such a thing as a completely efficient market, and if people really made decisions in a calculating and unemotional manner, perhaps cycles (or at least their extremes) would be banished. But that’ll never be the case. And yet, every decade or so, people decide cyclicality is over. They think either the good times will roll on without end or the negative trends can’t be arrested. At such times they talk about “virtuous cycles” or “vicious cycles”—self-feeding developments that will go on forever in one direction or the other.
  • This belief that cyclicality has been ended exemplifies a way of thinking based on the dangerous premise that “this time it’s different.” These four words should strike fear—and perhaps suggest an opportunity for profit—for anyone who understands the past and knows it repeats. Every once in a while, an up- or down-leg goes on for a long time and/or to a great extreme and people start to say “this time it’s different.” They cite the changes in geopolitics, or behavior that have rendered the “old rules” obsolete. They make investment decisions that extrapolate the recent trend.
  • It’s essential that you be able to recognize this form of error when it arises. It turns out that the old rules do still apply, and the cycle resumes.
  • There is a right time to argue that things will be better, and that’s when the market is on its backside and everyone else is selling things at giveaway prices. It’s dangerous when the market’s at record levels to reach for a positive rationalization that has never held true in the past. But it’s been done before, and it’ll be done again. Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do. When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.
  • The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc.
  • Investment markets follow a pendulum-like swing:   •    between euphoria and depression, •    between celebrating positive developments and obsessing over negatives, and thus •    between overpriced and underpriced.
  • This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at a “happy medium.”
  • The pendulum also swings with regard to greed versus fear; willingness to view things through an optimistic or a pessimistic lens; faith in developments that are on-the-come; credulousness versus skepticism; and risk tolerance versus risk aversion.
  • The swing in the last of these—attitudes toward risk—is a common thread that runs through many of the market’s fluctuations. The greed/fear cycle is caused by changing attitudes toward risk.
  • Risk aversion is the essential ingredient in a rational market, as I said before, and the position of the pendulum with regard to it is particularly important. Improper amounts of risk aversion are key contributors to the market excesses of bubble and crash.
  • Reaping dependably high returns from risky investments is an oxymoron. The main risks in investing are two: the risk of losing money and the risk of missing opportunity. It’s possible to largely eliminate either one, but not both. In an ideal world, investors would balance these two concerns. But from time to time, at the extremes of the pendulum’s swing, one or the other predominates. When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.
  • The ultimate danger zone is reached when investors are in agreement that things can only get better forever. That makes no sense, but most people fall for it. It’s what creates bubbles—just as the opposite produces crashes.
  • Major bottoms occur when everyone forgets that the tide also comes in. Those are the times we live for.
  • The significance of all this is the opportunity it offers to those who recognize what is happening and see the implications. At one extreme of the pendulum—the darkest of times—it takes analytical ability, objectivity, resolve, even imagination, to think things will ever get better. The few people who possess those qualities can make unusual profits with low risk. But at the other extreme, when everyone assumes and prices in the impossible—improvement forever—the stage is set for painful losses.
  • In theory with regard to polarities such as fear and greed, the pendulum should reside mostly at a midpoint between the extremes. But it doesn’t for long. Primarily because of the workings of investor psychology, it’s usually swinging toward or back from one extreme or the other
  • The pendulum cannot continue to swing toward an extreme, or reside at an extreme, forever. Like a pendulum, the swing of investor psychology toward an extreme causes energy to build up that eventually will contribute to the swing back in the other direction. Sometimes, the pent-up energy is itself the cause of the swing back—that is, the pendulum’s swing toward an extreme corrects of its very weight.
  • The swing back from the extreme is usually more rapid—and thus takes much less time—than the swing to the extreme.
  • The occurrence of this pendulum-like pattern in most market phenomena is extremely dependable. But just like the oscillation of cycles, we never know:   •   how far the pendulum will swing in its arc, •   what might cause the swing to stop and turn back, •   when this reversal will occur, or •   how far it will then swing in the opposite direction.


Portfolio Composition as on March 31, 2017

Portfolio Holdings, March 31, 2017

The following stocks constitute at least 1% of my portfolio as on March 31, 2017. These 39 stocks amount to 81% of my total investment portfolio.


Porfolio Composition, March 2017
Holdings which constitute at least 1% of Investment Portfolio

Some discussion is warranted. The average age of my holdings is around 2 years, and as can be seen, there are very few stocks in the red. These include United Spirits (McDowell), ILFS Investment Managers (Which has given great dividends though), IDFC and IDFC Bank Combo (Which on the other hand is a looong term bet). NMDC has barely broken even. Even with NMDC, the dividends have been great.

Where have the best gains come from: Clearly Can Fin Homes, KRBL and Oriental Carbon have given the best percentage gains. I bought all of these when the markets were at a trough in September 2013. The largest absolute gain has come from Bajaj Finserv, which was again bought in the same period.

I am reasonably happy with the overall portfolio mix. It consists of realty (Oberoi and NESCO), MNC (Cummins, United Spirits, Akzo, Grindwell Norton), Pharma (Shilpa and Ajanta), NBFC (Bajaj Finserv, Canfin Homes, IndiaBulls Housing Finance), Banking (IDFC and IDFC Bank), Great Indian Mid to Small Cap Companies with an export focus (Balkrishna Tyres, Bharat Forge, PI, Aarti Industries, Polymedicure, Mayur, OCCL), and IT (Eclerx, MPS). There is considerable diversification. However, I am comfortable with the diversification.