Memos form Howard Marks- Thinking about skill and luck in investing


Joseph Walsh –

Howard Marks, CFA charterholder and Co-Chairman of Oaktree Capital writes regular memos about financial markets, and recently has written one titled ‘You Bet!’. Although written at the start of this year, the message is timeless and is of great value for those beginning to study the world of finance and investing.

In the memo, he identifies the overlap between games of luck, gambling and investing. Games that most represent investing are those that have hidden information, skill and luck all at play. Making intelligent decisions under uncertainty is one of the key skills that is consistent throughout these areas.

His conclusion to the memo says it best:

Investing is a game of skill – meaning inferior players can’t expect to be above average winners in the long run. But it also includes elements of chance – meaning skill won’t win out every time. In the long run, superior skill will overcome the impact of bad luck. But in the short run, luck can overwhelm skill, and the two can be indistinguishable.