What Does the Market Know? by Howard Marks

With the markets undergoing a correction or crashing, depending on what your perspective, it is always better to take a step back and consider things. In 2016, the markets had one of the worst starts to a year, ever. The S&P with down by 10% in a span of under 10 days and there was pandemonium across the global markets. Howard Market is a legendary wall street investor who specializes in distress debt.

He wrote the following memo in Jan 2016, in response to this question "Does the market’s decline worry you?” posed by a Bloomberg TV anchor. The memo that resulted is a treasure trove of perspective, here are a few highlights:

In Thursday’s memo, “On the Couch,” I mentioned the two questions I’d been getting most often: “What are the implications for the U.S. and the rest of the world of China’s weakness, and are we moving toward a new crisis of the magnitude of what we saw in 2008?” Bloomberg invited me on the air Friday morning to discuss the memo, and the anchors mostly asked one version or another of a third question: “does the market’s decline worry you?” That prompted this memo in response.

The answer lies in a question: “what does the market know?” Is the market smart, meaning you should take your lead from it? Or is it dumb, meaning you should ignore it? Here’s what I wrote in “It’s Not Easy” in September and included in “On the Couch”:

especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead.

The rest of this memo will be about fleshing out this theme (meaning you can stop reading here if you’ve had enough or are short on time).

So, what does the market know? First it’s important to understand for this purpose that there really isn’t such a thing as “the market.” There’s just a bunch of people who participate in a market. The market isn’t more than the sum of the participants, and it doesn’t “know” any more than their collective knowledge.

My bottom line on this subject is that the market price merely reflects the average insight of the market participants.

Now let’s think about the first goal of investing: to buy low. We want to buy things whose price underestimates the value of the underlying assets or earnings (value investing) or the future potential (growth investing). In either case, we’re looking for instances when the market is wrong. If we thought the market was always right – the efficient market hypothesis – we wouldn’t spend our lives as active investors. Since we do, we’d better believe we know more than the consensus. So by definition we must not think the market – that is, the sum of all other investors – knows everything, or knows more than we do, or is always right. That’s point number two

It seems clear to me: the market does not have above average insight, but it often is above average in emotionality. Thus we shouldn’t follow its dictates. In fact, contrarianism is built on the premise that we generally should do the opposite of what the crowd is doing, especially at the extremes, and I prefer it.


Do you wish you had taken the market’s instruction in 2008 and sold bank stocks? Or do you wish you had rejected its advice and bought instead? In short, did the market know anything?

It’s a matter of logic: if price movements reflect average opinion, following their supposed advice can’t help you perform above average.

First, does it make sense to sell something if the price is low relative to the fundamentals, just because you fear it may fall in the short run?

In my experience, most people who are lucky enough to sell something before it goes down get so busy patting themselves on the back that they forget to buy it back.
Here’s the full memo