Aggression to Defense: Howard Marks' Six-Step Roadmap for Risky Times

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Last Sunday, I did a deep dive into an important concept called Investcon, introduced by Howard Marks. It’s a crucial idea that can help you navigate market cycles more effectively.

Below are my notes on what I read, studied, and found particularly interesting.

Happy Knowledge Compounding!

 

 

Howard Marks uses the term "INVEST-CON" in his investment philosophy to describe different levels of investment readiness, inspired by the Pentagon's DEF-CON system for military alertness. In his recent memos (especially "The Calculus of Value"), Marks laid out a 6-stage "INVEST-CON" hierarchy for navigating overheated markets and extreme valuations.

 

 

 


The Six Stages of INVEST-CON

 

  1. Go Short: This is the most aggressive and risky stage, where an investor actively bets against the market by short-selling assets. Marks considers this a near-impossible stage to implement with any certainty, as it requires the conviction that a market downturn is imminent.

 

  1. Eliminate All Holdings: This stage involves selling off all assets to move to a 100% cash position. Like going short, Marks views this as an extreme measure that is rarely, if ever, justifiable due to the high risk of missing out on potential market gains.

 

  1. Trim Defensive Holdings as well: At this stage, an investor begins selling even the safest or most defensive assets, signifying a belief that a broad and deep market correction is underway.

 

  1. Sell Off the Remaining Aggressive Holdings: This stage involves selling off the last of the high-risk, speculative assets in the portfolio, indicating a strong conviction that the market is overvalued and a correction is likely.

 

  1. Reduce Aggressive Holdings and Increase Defensive Holdings: This is the stage Marks believes the market is currently in. It's not a panic move, but a measured re-balancing. The goal is to reduce exposure to highly priced or speculative assets and increase allocations to safer holdings, such as cash, high-quality bonds, or defensive stocks. This reflects a state of heightened caution and a focus on capital preservation.

 

  1. Stop Buying: This is the initial step towards a defensive posture. It means an investor should pause or cease new purchases of stocks or other aggressive assets, except for exceptionally compelling opportunities. It's a signal to stop chasing returns and instead wait for better valuations.

 

Marks emphasizes that it is "essentially impossible" to be certain enough to implement the more extreme stages (1-3). He advocates for a more practical approach, with his current position being "INVEST-CON 5," which involves incrementally shifting toward defense. The core of the framework is about being a counter-cyclical investor—being willing to be aggressive when others are fearful and defensive when others are optimistic.

 

 

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Happy Knowledge Compounding

Jitendra Kumar Gupta

Caution: These are my personal views and shared only for the education and knowledge purpose.

 

 

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