The Futile Quest for the Perfect Bottom
In a recent address at his alma mater, the Wharton School, Howard Marks, the renowned co-founder of Oaktree Capital, dissected a pervasive and costly investor mentality. He identified one of the most misguided strategies in investing: the determination to "wait for the bottom" before buying.
Marks dismantled this approach on both logical and practical grounds. Logically, the absolute market bottom is only identifiable in hindsight. No investor can ever know with certainty that a given day represents the final decline. Basing purchase decisions on such an unknowable event is fundamentally flawed.
The Core Principle: Good Buying, Not Just Good Assets
What, then, is a sound basis for making an investment? Marks offers a clear alternative: whether the price is compellingly cheap. He argues that investors can and should assess if an asset is trading below its intrinsic value—judging its "cheapness." This is a fundamentally different skill from attempting to pinpoint the absolute low point of price movement.
He elaborates a central tenet: superior investment results come not merely from "buying good things," but more critically from "buying things well." The distinction is profound.
- No Asset is Safe at Any Price: There is no asset so excellent that it cannot be overpaid for. Even the finest company becomes a risky, low-return investment if the entry price is too high.
- The Twofold Test: Successful investing ultimately hinges on two judgments: first, objectively assessing the underlying quality and potential of an asset, and second, having the discipline to acquire it only at a price that offers a margin of safety.
The Rarity of the "Compounding Machine"
Marks cautions that truly great investment opportunities—those capable of generating compounding returns over decades, or "compounding machines"—are exceptionally rare. An investor may encounter only a handful in a lifetime.
Given this scarcity, the most common and regrettable error after identifying and acquiring such an asset is selling it far too early, before its full value has been realized. Maintaining patience and conviction is as crucial as securing an attractive entry price.