Once upon a time, Howard Marks was a staunch supporter of basic financial truths:
In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it. (emphasis original)
Assuming “pyramid scheme” means the Greater Fool Theory, this is 100% correct. Unfortunately, money has a habit of changing people, even the greats like Howard Marks. He has somewhat changed his tune on crypto recently, presumably because his son, Andrew holds Bitcoin.
Back in 2017, my memo There They Go Again . . . Again included a section on cryptocurrencies in which I expressed a high level of skepticism. This view has been a source of much discussion for me and Andrew, who is quite positive on Bitcoin and several others and thankfully owns a meaningful amount for our family. While the story is far from fully written, the least I can say is that my skeptical view has not borne out to date.
And:
In the case of cryptocurrencies, I probably allowed my pattern recognition around financial innovation and speculative market behavior – along with my natural conservatism – to produce my skeptical position. These things have kept Oaktree and me out of trouble many times, but they probably don’t help me think through innovation. Thus, I’ve concluded (with Andrew’s help) that I’m not yet informed enough to form a firm view on cryptocurrencies. In the spirit of open-mindedness, I’m striving to learn. Until I do, I’ll be referring all requests for comments on the subject to Andrew (although I’m sure he’ll decline).
Let’s go back to our Adam and Brian comparison. Number go up, so no reason to be skeptical, right? You may recall that we challenged Marks on his newfound stance and said
Why does it matter that his skeptical view has not borne out to date? It’s about process, not outcomes, isn’t it? Is Howard Marks letting a good outcome cloud his judgment?
It is very clear that Marks originally understood crypto was speculation. He had preached “trusting the process” when it came to investing, and he was right. Decisions should not be evaluated based on the outcomes:
You can’t tell from an outcome whether a decision was good or bad. It’s very important, most people don’t understand this, totally counterintuitive.
In that same video, Marks made it clear that this is a fundamental principle that also applies to finance:
In the real world, where there is randomness, good decisions fail to work all the time. Bad decisions work all the time. Investment business is full of people, who are, quote, right for the wrong reason.
It also happens to apply to basketball.