The Rewind: Uncertainty

Episode Summary

Executive Summary: Howard Marks argues that investing is fundamentally an exercise in dealing with uncertainty, especially during the pandemic, when forecasts are weakest and biases strongest. He emphasizes that confidence is necessary but must be calibrated by humility, probability assessment, and skepticism toward macro predictions, since most are just extrapolations already priced into markets.

Main Topics: Uncertainty as the central investing problem (Priority: 5/5): Marks frames the memo around the idea that the future is unknowable, especially in a crisis, and that investors must make decisions without false certainty. Forecasting, probabilities, and limits of macro prediction (Priority: 5/5): He distinguishes between making a forecast and judging how likely that forecast is to be right, arguing that most macro forecasts are low-value extrapolations. Bias, confirmation bias, and the danger of self-deception (Priority: 5/5): Marks explains how people selectively accept information that supports their existing views, especially during stressful periods like COVID-19. Confidence versus humility in investing (Priority: 5/5): He argues investors need confidence to act and hold positions, but too much confidence becomes hubris; intellectual humility is the necessary counterweight. Why Oaktree focuses on the micro rather than the macro (Priority: 4/5): Marks reiterates that Oaktree avoids broad macro bets because superior knowledge is harder to achieve at that level; company and security analysis is more tractable, though still uncertain. Epistemic humility and expert credibility (Priority: 4/5): He cites research and commentary showing that true experts acknowledge limits, calibrate confidence to evidence, and differ from charlatans who overstate certainty. Pandemic-era uncertainty and economic complexity (Priority: 4/5): Marks uses COVID-19, the economy, oil, and policy response as examples of interacting unknowns that made 2020 unusually hard to forecast.

Key Arguments: Most forecasts are profitable only if they are both correct and non-consensus; consensus-like predictions are already embedded in prices. A forecast is not enough; investors must also judge the probability that the forecast is correct. Macro forecasting is especially poor because the bigger the topic, the less likely anyone has superior knowledge. Confidence is essential in investing, but it must be balanced with humility and constant re-examination of assumptions. People naturally exhibit confirmation bias, which distorts how they process information and reinforces prior beliefs. Intellectual humility means recognizing that one's beliefs may be wrong and that evidence may be incomplete or flawed. Because many economists and strategists do not track their track records, their forecasting skill is often untested and overstated. In crises, randomness, lack of precedent, and interacting variables make historical analogies less reliable. Investors should 'invest scared' enough to preserve discipline, avoid overbetting, and protect against permanent loss. True expertise is not certainty; it is confidence calibrated to evidence and awareness of limits.

Data Points: Memo frequency in 2020: 13 memos - Marks says he wrote 13 memos in 2020, about triple his normal output. Normal memo frequency: about 1 per quarter - He contrasts 2020's output with his usual pace. 2020 pandemic memo streak: 6 memos in 6 weeks - He wrote a memo a week for six weeks as the pandemic began. Original memo date: May 11, 2020 - The memo 'Uncertainty' was originally published on this date. Pandemic-related major factors: 4 - Marks highlights the pandemic, economic contraction, oil price collapse, and Fed/government response. U.S. GDP long-run growth: about 2% per year - An example of a widely known macro pattern that is unlikely to generate alpha because it is already consensus. Bruce Karsh 2008 buying pace: $450 million per week - Marks cites distressed-debt purchases during the financial crisis over the last 15 weeks of 2008. Financial crisis comparison: 15 weeks - The period during which Oaktree averaged $450 million per week of investment. Quote date reference: 250 years ago - Marks attributes the Voltaire quote to roughly 250 years prior. Historical quote reference: 50 years ago - He notes the Simon & Garfunkel lyric 'A man hears what he wants to hear and disregards the rest' as from about 50 years ago.

Pivotal Quotes: "No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all of your decisions are about the future." — Ian Wilson: Used to underscore the core asymmetry investors face: they must act on an unknowable future using only past information. "Doubt is not a pleasant condition, but certainty is absurd." — Voltaire: Marks closes with this line to emphasize that uncertainty is unavoidable and must be accepted rather than denied. "A man hears what he wants to hear and disregards the rest." — Simon & Garfunkel: Referenced to illustrate confirmation bias and the human tendency to filter information to fit existing beliefs.

Implications: Investors should favor humility, evidence, and risk control over confident macro calls. The episode reinforces that durable returns come from disciplined process, not pretending to know the unknowable.