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How psychology drives investing or not investing

Howard Marks, Chairman of Oaktree Capital and one of the world’s most successful investors is in Australia this week and it was interesting to listen to his interview.

By the way, I also listen to Howard Mark’s podcast called “The Memo” and recommend it.

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Speaking in Sydney this week he repeatedly discussed the overriding effect of investor sentiment and individual psychology on investment decisions. Marks has long emphasized the view that it’s the behaviour of market participants themselves that creates market risk, not specific types of products, investment strategies, or for that matter financial institutions. Rather, market situations are rarely black or white decisions, yet this is the type of thinking that drives many investment decisions. Marks puts investor psychology down to 90% of investment decisions regardless of the fundamentals.

He stated, “When people think the outlook is flawless, they take on too much risk, they lever up too much…And when things change a little bit, people become hopeless. They are afraid everything will go lower, and they’d better get out. Since everyone feels that way, there are no buyers. And so, prices cascade downward, basically. That’s what happens”.

Marks believes that the main problem is that people have short memories and are quick to forget what they have learnt. On one hand you have things like prudence, memory, and an awareness of history. And on the other hand, you have the desire to get rich. When you are a few years down the track from a market correction, the memory fades and the desire to get rich takes over.

Let’s not make the same mistake.

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