Howard Marks is a world-renowned investor whose philosophy offers important insights to investors. In this article, we will explore the difference between “optimization” and “maximization,” and why these concepts are crucial for investors. Specifically, we will examine what Marks means by “surviving on average” and why survival is key to successful investing.
Optimization vs. Maximization: Howard Marks’ Investment Philosophy
Howard Marks argues that investors will inevitably have to choose between “optimization” and “maximization.”
What is Optimization?
Optimization prioritizes stability, focusing on building strategies that allow survival even during tough times. In other words, it aims for sustainable growth, enduring both good and bad times.
What is Maximization?
Maximization refers to aggressive investment with the aim of achieving the highest possible returns as quickly as possible. However, overly maximizing can lead to unstable outcomes, and the higher the risk, the lower the chance of success.
Howard Marks advises investors to favor careful optimization, emphasizing that it’s not about surviving on average but surviving every day.
Why “Surviving on Average” Is Meaningless
Marks stresses why the concept of “surviving on average” is irrelevant. He gives this example:
Never forget the man who drowned crossing a stream with an average depth of 5 feet, despite being 6 feet tall.
This means that while everything may seem fine on average, it’s crucial to have a strategy that can withstand unfavorable scenarios. Investors must prepare for the worst, not just the average situation.
Why Careful Risk Management Is Necessary
Marks explains the importance of prudent risk management in investing. He compares carrying too much debt or pursuing aggressive investments to crossing a stream with a heavy backpack. The heavier your backpack, the lower your chances of safely crossing the stream.
Why Choosing Optimization Leads to a Successful Investment Strategy
According to Marks’ philosophy, every investor expects to win. But reality is different. Not everyone can win, and investing requires preparation not only for winning but also for losing. For this reason, choosing optimization over maximization is wise. Optimization is a type of investment strategy that helps you survive even during bad times.
Conclusion: The Importance of Optimization in Investment
Marks’ message is clear. Investing is not just about succeeding; it’s about enduring difficult times and surviving. Maximization may seem appealing in the short term, but for long-term survival and sustainable growth, carefully optimized strategies must be chosen. These strategies reduce risk and provide a crucial defense that helps investors survive even during tough times.
Reference: TAM, “Howard Marks: Every Investor Needs To Choose Between Optimizing and Maximizing”