Howard Marks: Are You Swimming Naked? The Hidden Dangers of Malinvestment

In this discussion with Edward Chancellor, Howard Marks explains how bad investments often fly under the radar until put to the test by challenging circumstances. It’s only then that the error’s real impact becomes clear. Here’s an excerpt from the discussion:

Marks: The error is in the bad decision.

What Hayek called, and again, I learned this from Edward’s book, and I love it, malinvestment.

And we think of investing as being a constructive activity, providing money for projects, but malinvestment is the use of money.

The error takes place at the time the investment is made erroneously, but it only becomes apparent at the time that it is stressed by events in the environment.

Warren Buffet said, I think it was early ‘09, just commenting on what we had seen in the Global Financial Crisis, that “It’s only when the tide goes out that we find out who’s been swimming naked.”

I wrote in one of my books on the subject of risk that you may have a construction flaw in your house, but it only becomes apparent when there’s an earthquake.

Of course, I was living in California at the time where people actually think about earthquakes from time to time. But it’s the same thing.

Bad investment does not show up as an error right away. Bad investment shows up as an error when it is stressed and tested by difficult circumstances in the environment.

You can listen to the entire discussion here: