Howard Marks’s “Expert Opinion”

Supported by Greenhaven Road Capital, finding value off the beaten path.

I like reading things Howard Marks writes. There is the book The Most Important Things (which we looked at in this post. There are also Marks’s memos. And like Michael Mauboussin‘s documents from Credit Suisse, they are FREE!

I’ve been thinking about the combination of free and valuable.  This blog is free and (somewhat) valuable. Marks’s and Mauboussin’s writings are free and valuable. The library is free and valuable.

So, we don’t need to pay for things that are valuable. Joel Greenblatt wrote that for many investors, “The Wall Street Journal, a phone to call for company information and news releases, and a library card can do the trick.”

But there are things that are free are NOT valuable. Some free things are anti-valuable. We’ll get to those below.

One final caveat before the notes. Your time may be better spent reading Marks’s memo Expert Opinion (pdf) than this post. I did my best to write something helpful, but, it’s like an appetizer where Expert Opinion is the main course.

For those who will continue, let’s begin.

1/ Entertainment or information?  Serendipitously I read Expert Opinion the day after I watched this:

In that video, Cal Newport suggests three reasons to quit social media.

  • Social media is entertainment. Newport compares it to slot machines and when he said this I immediately thought of emoji. Recategorizing social media as entertainment may help us consume less/more of it. Richard Thaler writes in Misbehaving that people tend to use bucket budgets as a way to keep track of expenses. We can do the same thing with our attention. Imagine Twitter in the same bucket as television. How much of that do you want in your day?
  • Social media is NOT important to your success. Newport’s thesis is that rare and valuable jobs require rare and valuable skills. The Moats and Podcasts post is an examination of this. Things anyone can do (e.g. tweet, podcast) are things that are not valuable. As Tren Griffin wrote, “supply is the killer of value.”
  • Social media is actually hazardous. Newport says that fragmented attention can reduce your ability to do deep work, as well as increase depression (read that abstract and note the parallels to investors/investing) and anxiety.

Marks’s comments about the media suggest it too is more entertainment than informative. If media was more information we would have less hindsight bias like this:

“In particular, now it’s considered to have been a big mistake for Clinton to fail to address the concerns of white men and set out a solution for those who lost jobs and were omitted from economic progress. But during the campaign, no one pointed to this error.”

Information takes work. Consumers need fluency and an understanding of the background conditions. A knowledge of history would help too. If we’re making a list, let’s open up some cognitive space to think about the survivor bias and alternative histories too. It’s work.

“Biological creatures ordinarily prefer effort minimization in routine activities and don’t like removals of long-enjoyed benefits,” said Charlie Munger.

The media knows this. Daniel Kahneman wrote a book about our preference for thinking fast. That means thinking visually and seeking confirmation.

“Following the media experts, while entertaining,” writes Marks, “can be a waste of time intellectually.”

2/ You have to be there.  I’ll bang this drum as long as needed. You have to go to the front lines, the plantations, the place where the winds of the real world blow in people’s faces and get your information there. Alternatives don’t work.

Another story of serendipity.

The day before I read the Expert Opinion, I listened to Lisa Servon on NPR’s Fresh Air. Servon is a professor with a focus on consumer banking. She wanted to know more about unbanking – people without checking and savings accounts. One day she invited a payday lender (scurge!) to her class at Penn. This is her account (emphasis mine):

“This guy to come into class and tell us what was going on. And Joe Coleman showed up – he’s the person I’m referring to – was a very smart, interesting man who spoke very persuasively about why he believed his businesses were really serving the community. And it made a lot of sense. And so I was trying to really square Joe’s story with the data, and it didn’t add up, combined with my knowledge that, you know, my feeling and my experience that low-income people do make smart, economic decisions when they can.


Do you see what happened there? Servon’s not an idiot. She’s not reacting. She’s studied an idea, compared it to her own life, and drew a conclusion (that should sound familiar to you!). Then she found new information and found out she wasn’t quite right. To her credit, Servon wanted to know more.

She worked for four months as a payday lender. She WAS THERE. She learned a lot.

“that experience showed me why I needed to be behind that window because even though I was working there and dealing with people every single day, I still, with my own biases and having grown up using mainstream financial services, didn’t get that.”

It gets better.

When her four months were up Servon walked around the counter and told her customers she was a researcher and wanted to ask them questions. They told her EVEN MORE!

That’s what being there does.

Marks writes, “It’s clear that people who work in the media hadn’t understood many average Americans.” Bingo.

The most (positive) extreme example might be the story told in Mountains Beyond Mountains. Paul Farmer, our protagonist is a rural doctor in Haiti and says, “I would read stuff from scholarly texts and know they were wrong. Living in Haiti, I realized that a minor error in one setting of power and privilege could have an enormous impact on the poor in another.”

Here’s how that went. The predominate medical theory for how someone got AIDS was that they shared an intravenous drug needle or had multiple concurrent sexual partners. Farmer went to Haiti and saw that the people were too poor to buy drugs and had sequential partners (one at a time). What gives? I’ll leave the solution in the book because our big point is this: You have to be there!

I don’t know how right he is, but Chris Arnade seems to have the correct methodology:

3/ “What do experts know?” Half-way through the memo, Marks lays into the New York Post football experts. Their record was not much better than the flip of a coin. “Virtually none of the eleven experts’ overall picks added value after fees (sound familiar?)” Marks writes, “Even the average of the experts’ “best bets” wouldn’t have produced a positive return after fees.”


It’s almost as if those experts were there to entertain rather than inform. It’s too bad there isn’t a system that would help us make better picks. Or put another way, to forecast results in a super way.

Actually, there is just a system that comes in a reusable, convenient, portable, form that purchasers are encouraged to write in and take notes (colloquially known as “book”). Superforecasting by Phillip Tetlock was a great book. We actually used Tetlock’s framework to make better sports predictions when we asked Is Bill Simmons a superforecaster? The answer was yes. Here’s why.

  1. Superforecasters pick their spots. The NY Post experts didn’t do this. They picked every NFL game. Are you saying that the most watched market in the world doesn’t provide pockets of value? Yes.
  2. Superforecasters break intractable problems into tractable subproblems. Marks writes that he had a lunch with Warren Buffett and they both agreed that information should be knowable and important. If an intractable problem cannot be reduced into tractable subproblems it is not knowable.
  3. Superforecasters balance the inside view with the base rate. Are you saying that NY writers have a bias toward NY teams? Yes. Marks agrees, pointing out the mangy week 16 picks from the experts.
  4. Superforecasters don’t overreact or underreact to new information. Are you saying that talking heads on television and in newspapers may overreact? Yes. #boatgate
  5. Superforecasters distinguish some degree of doubt. They avoided, “granularity as bafflegab,” Tetlock writes. Are you saying that all these statistics I hear about winning records in a different time zone against a team with less than 40 games played together might be data mining and irrelevant? Yes.
  6. Superforecasters balance overconfidence. As Daryl Morey reminded us, people don’t like to hear maybe this, and maybe that, but it’s often the best answer.
  7. Superforecasters check for hindsight bias. Lol.

People can be more accurate than a coin. It’s going to take more information (like reading Superforecasting) and less entertainment (social media).

4/ Knowing and caring. Maybe my favorite part from the memo:

“People have been preoccupied with when interest rate increases would take place, and that’s the question I’ve been asked most often. My response has been consistent: How would I know, and why do you care.

Jason Zweig gave similar advice as it related to indexing.

The ultimate beauty of index funds is that they get you utterly out of the business of guessing what will happen next. They enable you to say seven magic words: “I don’t know, and I don’t care.”

Will value stocks do better than growth stocks? I don’t know, and I don’t care — my index fund owns both. Will health care stocks be the best bet for the next 20 years? I don’t know, and I don’t care — my index fund owns them. What’s the next Microsoft? I don’t know, and I don’t care — as soon as it’s big enough to own, my index fund will have it, and I’ll go along for the ride.

5/ Metaphors. “The metaphor is a cover-up.” – Amos Tversky

Marks writes that people often ask him “what inning are we in?” This metaphor assumes that a lifecycle (market, stock, macro, etc.) is like a baseball game. If you know what point of the game it is then you can take advantage of the moment. It’s a simple way to convey a complicated idea. But as Tversky warns, it’s not the whole picture. Marks agrees:

“A standard baseball game consists of nine innings, so “second inning,” “sixth” or “ninth” has a clear meaning. But with the things we’re wondering about here, we never know how long the game will run.”

Metaphors can be good for somethings. Steve Jobs told Walter Isaacson:

“People know how to deal with a desktop intuitively. If you walk in to an office, there are papers on a desk. The one on top is the most important. People know how to switch priorities. Part of the reason we model our computers on metaphors like the desktop is that we can leverage this experiences that people already have. “

We use metaphors a lot. Pay attention and make sure you aren’t communicating too much.

6/ Certainty is a red flag.

Marks writes, “there are no facts about the future, just opinions. Anyone who asserts with conviction what he thinks will happen in the macro future is overstating his foresight, whether out of ignorance, hubris or dishonesty.”

If you are certain about the future, Seth Klarman has advice on what to do:

“Those who can predict the future should participate fully, indeed on margin using borrowed money, when the market is about to rise and get out of the market before it declines. Unfortunately, many more investors claim the ability to foresee the market’s direction than actually possess that ability. (I myself have not met a single one.) Those of us who know that we cannot accurately forecast security prices are well advised to consider value investing, a safe and successful strategy in all investment environments.”

Thanks for reading. Hopefully this has been entertaining and informative!

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