Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 357

Howard Marks on uncertainty, forecasting and doubt

Howard Marks is Co-Chairman of Oaktree Capital Management, and we have featured several extracts from his memos to clients to help understand how a global leader is investing during a pandemic.

This is a summary of his latest memo dated 11 May 2020, titled simply 'Uncertainty'.

 

Like many of us, Howard Marks has been at home for two months. It has given him plenty of extra time to be philosophical about markets, and it is reflected in a memo which poses more questions than answers.

He admits with some frustration that many economic forecasts vary significantly when presented with exactly the same facts and assumptions. He quotes economics consultant Neil Irwin:

“The world economy is an infinitely complicated web of interconnections. We each have a series of direct economic interrelationships we can see: the stores we buy from, the employer that pays our salary, the bank that gives us a home loan. But once you get two or three levels out, it’s really impossible to know with any confidence how those connections work.”

And Ian E Wilson, former Chairman of GE:

“No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.”

We all have in-built biases

Marks acknowledges there are some things we know for certain about the future, such as the trend to shopping online, but since everyone is aware of the change, it does not help in the pursuit of extra returns. Most forecasts are mere extrapolations of recent trends and are already built into prices.

The conundrum is that while forecasts are unlikely to create above-average returns, all investors like to frame their buying and selling into some macro picture of the future. The investment industry thrives on making a vast amount of forecasts which clients devour.

Marks says our views of the future reflect our biases:

“One of the biggest mistakes an investor can make is ignoring or denying his or her biases. If there are influences that make our processes less than objective, we should face up to this fact in order to avoid being held captive by them. Our biases may be insidious, but they are highly influential.”

We should all reflect on how we consume news and absorb gleefully the views that confirm our biases. We all seek confirmation biases. Marks quotes Shahram Heshmat in Psychology Today:

“Once we have formed a view, we embrace information that confirms that view while ignoring, or rejecting, information that casts doubt on it. Confirmation bias suggests that we don’t perceive circumstances objectively. We pick out those bits of data that make us feel good because they confirm our prejudices. Thus, we may become prisoners of our assumptions.”

The best example in global news is the Murdoch empire including Fox News. Those who embrace its right-wing views feel affirmed by the authority of its presenters, including in Australia, Andrew Bolt, Alan Jones, Peta Credlin and Chris Kenny. They often have strong opinions on climate change, Donald Trump and nationalism that their audience loves. Their programs are watched by people who want their views affirmed, and generally ignored by people who disagree with them. Most people are also drawn to reading one newspaper, say The Australian versus The Sydney Morning Herald, and the political and social emphasis in the respective letters to the editor clearly reflect this.

So it’s difficult to be objective and open to opinions from all perspectives.

Marks goes as far as saying that excessive trust in forecasting is dangerous. We need to admit to uncertainty, investigate before we invest and proceed with caution. At the same time, to outperform the market requires a departure from the crowd. Great investments begin with discomfort, since the market is usually avoiding them. It also takes resolve and confidence to hold a position when it declines, until it eventually becomes a winner. Or not, as investors must also decide when they have made a mistake.

Intellectual humility

Marks dwells in this memo on the concept of ‘intellectual humility’ and its impact on decision-making abilities in politics, health and elsewhere. It is similar to open-mindedness, where people with strong beliefs recognise their fallability and are willing to be proven wrong.

He says people with a view of the future should also assign a probability that their opinion will be correct. Not all predictions are equally likely and should not be relied upon to the same extent. Anyone who is sure about what will happen is probably deceiving themselves. He adds:

“To put it simply, intellectual humility means saying 'I'm not sure, 'the other person could be right', or even 'I might be wrong'. I think it’s an essential trait for investors; I know it is in the people I like to associate with.”

In fact, experts should not only know about their subject, but the limits of their knowledge and expertise. In the pandemic, the experts are not sure because they know it is reasonable to disagree on the best policies to pursue. We should be wary of supreme confidence. As medical statistician, Robert Grant, said:

“I’ve studied this stuff at university, done data analysis for decades, written several NHS guidelines (including one for an infectious disease), and taught it to health professionals. That’s why you don’t see me making any coronavirus forecasts.”

Amusingly, Marks writes that incompetent people have a double disadvantage, not only because they are incompetent, but they are probably unaware of it. How many amateur epidemiologists have surfaced in the past couple of months? True experts should express themselves by acknowledging the limits of their knowledge.

And so Marks concludes (to quote him):

  • The world is more uncertain today than at any other time in our lifetimes.
  • Few people know what the future holds much better than others.
  • Investing deals entirely with the future, meaning investors can’t avoid making decisions about it.
  • Confidence is indispensable in investing but too much of it can be lethal.
  • The bigger the topic (world, economy, markets, currencies and rates) the less possible it is to achieve superior knowledge.
  • Our decisions about smaller things (companies, industries and securities) have to be conditioned on assumptions regarding the bigger things, so they, too, are uncertain.
  • The ability to deal intelligently with uncertainty is one of the most important skills.
  • We should understand the limitations on our foresight and whether a given forecast is more or less dependable than most.

 

Graham Hand in Managing Editor of Firstlinks. Howard Marks has written regular memos to his clients and they can all be accessed here.

 

RELATED ARTICLES

Howard Marks: the investing game has changed

Howard Marks on the best opportunities in 2024

Five timeless lessons from a life in investing

banner

Most viewed in recent weeks

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Welcome to Firstlinks Edition 607 with weekend update

After the recent market correction, we screen the ASX 200 for potential investment ideas, including cheap stocks, those offering sustainable, high dividend yields, and quality companies at reasonable prices.

  • 17 April 2025

Latest Updates

Property

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

Strategy

CBA, AUSTRAC and our Orwellian privacy laws

Imagine receiving an email from your bank demanding to know if you keep cash at home and threatening to freeze your accounts if you don't respond in seven days. This happened to me and it raises disturbing questions. 

SMSF strategies

The ultimate superannuation EOFY checklist 2025

Here is a checklist of 27 important issues you should address before June 30 to ensure your SMSF or other super fund are in order and that you are making the most of the strategies available.

Shares

Why 'boring' Big Four banks remain attractive

Despite a brief correction last month, Australian bank share prices have continued their impressive run. Recent results show the banks remain in good shape though some are faring better than others. 

Investment strategies

Ophir on Trump, constant improvement, and Life360

In this interview, Ophir’s Andrew Mitchell outlines how he’s handled recent Trump-fuelled volatility, his three key criteria for picking stocks, and why he thinks Life360 is set for much bigger things.

Investment strategies

Investor warns of danger in Big Super’s pet asset class

Dan Rasmussen says the capital pouring into private assets outstrips the opportunity set and the economic substance of most companies being bought and lent to. The true test will come when inflows turn to outflows.

Economy

Government investment is remarkably effective

A new study challenges the notion that Government spending is wasteful - public investment can yield major long-term economic gains, often outperforming private investment in driving GDP growth.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.