The second memo from Howard Marks, named “First Quarter Performance” written in 1991, I am reviewing today, is very short but very important to understand from investor perspective.

Howard starts this memo by saying

“The mood swings of the securities markets resemble the movement of a pendulum.”

The price of a stock, always behave like pendulum, its rotates from high to low and low to high, it’s a basic nature of pendulum, in between high and low, there is a midpoint, where it stands, for very short period of time, and swings from extreme of its arc. Whenever it is at extreme, it is ultimately reaches toward the midpoint of the pendulum.

Investment markets always move like pendulum

-Between euphoria and depression,

-Between celebrating positive developments and obsessing over negatives, and thus

-Between overpriced and under-priced.

The market always move in extreme direction, the speed might differ, but if you look at long term swings, it’s always like a pendulum, the story behind the business, the multibaggers ideas, research coverage, and the overpaying investors, create euphoria, and the stock price moves, and negative news, bad economics, highly pessimist crowd, creates depression. This euphoria, to depression and positive to negative development creates overpricing to the under pricing of the stock, not talking about the valuation, it also changes in the same direction.

Investor psychology seems to spend much more time at the extremes than it does at a “happy medium.”   

Howard Marks further writes about the Investor psychology, these extreme swings are the result of Investor psychology, the fundamental change in the business is slow, it might be positive or negative, but the change in the psychology of the investor is irrespective of the business change, and it’s very fast, it might be positive or negative, buy or sell, good or bad.

Investor psychology plays very important role in investing, the control over your emotions, saves a lot of money. At the extreme the investor psychology stays for a long period of time.

“It would be wonderful to be able to successfully predict the swings of the pendulum and always move in the appropriate direction, but this is certainly an unrealistic expectation. We consider it far more reasonable to try to (1) stay alert for occasions when a market has reached an extreme, (2) adjust our behaviour slightly in response and, (3) most importantly, refuse to fall into line with the herd behaviour which renders so many investors dead wrong at tops and bottoms.” 

So, by predicting swings, you can make big money, right, but its dead wrong, people called this “Trend” whenever you switch on TV set the technical analyst always speak about the trend, positive trend, negative trend, short term trend, long term trend, I don’t know how to make money from the trends? But i know one thing very clear, trends are not last long, its reverse, and if you buy at the top or middle at the trend, you are having maximum risk, for minimum gains, so its better, to avoid, and stay alert when market has at its reach, and adjust your behaviour according to that, and refuse to take participate in swings, because you are just following the herd.

So, it’s better to pay fair price for a stock, fair valuation is the indicator, that pendulum is at midpoint, and not at extreme. The bargain will be available at midpoint. If market at the extreme, adjust your behaviour, and buy when stocks are available at fair prices, just like contrarian investing.

First time investor, even mature investor, are victim of pendulum, they bought stock, at the extreme, and they think, it will never come back to midpoint, they are bullish and pays very high price, like wise when stocks are available at bargain they think, it will never move, and they lost opportunity. It’s very easy to be correct in extreme at swings, but difficult to be correct in the midpoint.

If you know the basic nature of the stock market, you are at much safer side; you have an advantage of adjusting your behaviour according to the situation. But if you don’t, know the basic nature, you can’t have a privilege to adjust your behaviour.


In 1991 memo, Howard Marks explains great points.

  • Market swing like pendulum
  • Between euphoria to depression
  • Between positive to negative
  • Between overpriced to underpriced
  • Investor psychology plays important role in swings
  • Stay alert when market reach at extreme
  • Adjust your behaviour
  • Avoid herd behaviour

You can buy Howard Marks Book The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor” is must read for every value investor, it’s a great read….

(Disclaimer: All figures and data used from Howard marks Memo 1991, (You can download from Oaktree capital site), All are my opinions only, this is only for educational purpose only. I am not genius or clever to understand all things, I may be wrong in interpreting the data and letter, take your decision on your own)


To Your Success with Lot of Love!


Harish S Kawalkar


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