Howard Marks of Oaktree recently offered some excellent thoughts on his investment philosophy and style. But this one paragraph really jumped out at me:
“What is your secret sauce?
No. 1, it’s possible, especially in inefficient markets, to gain a knowledge advantage. By definition, an inefficient market is one where hard work and skill can pay off. We can also control our psyche and emotions so that we don’t make the human mistakes that are so common. Of course the other thing is we have a philosophy of controlling risk. So that doesn’t necessarily make us the winner rather than the loser in the transaction, but it increases the probability that we engage in transactions of the sort that we and our clients want.”
There are a few ways to access better knowledge in an inefficient market. You either have better sources, illegal information or you just simply have a superior understanding. That’s why I always emphasize the importance of a sound top-down approach. If you don’t understand the monetary system you’re more inclined to make mistakes in micro managing your portfolio. You make silly mistakes like misunderstanding how the Fed operates, how QE works, how fiscal policy impacts the economy, how bond auctions works, etc etc. Misunderstanding these important macro functions has resulted in endless predictions for hyperinflation, rising bond yields, falling stock prices, etc. But if you had a sound understanding of the system – if you had a better understanding – you sidestepped all of these predictions that were clearly wrong if you understood how the system works.
You don’t need to cheat or steal to get better information or knowledge. Sometimes it’s a matter of putting in the effort to obtain it.