At odds with Howard Marks

Like the rest of the world, I too am a great fan of Howard Marks. His memos are legendary stuff and I like to read them and savor them as much as anyone else. Much as I admire his work, it does not mean that I have to agree with everything that he says. For example, in one of his recent memos, Marks writes, “Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead.”

While one can agree that the long term wisdom of crowd sentiment is certainly questionable, it is undeniably a fantastic indicator of near term sentiment. In this context, Daniel Kahneman’s point is very valid. He says, “If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.”

But what if your objective is not long term stock ownership? The number of people who are engaged in short term work is extraordinarily large. After all, you cannot thrust Long Term down the throats of everyone, can you? Exercising every day is very good practice for life- we all know that. But how many of us do it? Very few. Does it guarantee long, disease free life? No, it doesn’t. But the odds are good for it if you do exercise. In a similar manner, long term investing can be good for everyone’s financial health. But there is no guarantee of that either. Just that the odds are better. We are all playing the odds, therefore. So is the short term player. He too is playing the odds that he can get it right, even if others cannot. Who is to say he is wrong? No one, repeat no one, is qualified to say that. Not even you, Mr Marks.

Sentiment is a great indicator of trends and turning points in the trends. Technical analysis, well applied, is unique in its ability to capture these. Ignorance of the strengths of a tool should not lead one to believe that such strengths do not exist. When emotions rule, fundamentals hold absolutely no meaning whatsoever. Sentiment is created by emotions. It waxes and wanes because emotions do. If we can harness those fluctuations into a meaningful template, then one is also well placed to take advantage of the short term. It boils down to creating such templates. Only TA can help build you such templates and capturing market action as a series of tableaux that can then be read to decipher what lies ahead in the short term.

Don’t knock a game because you can’t play it. If you don’t wish to, that’s still your call. It cannot be however, made into a judgement. Instead, leave it to those who can.

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