5 Questions Every Investor Should Ask According to Howard Marks | Exploring Markets

5 Questions Every Investor Should Ask According to Howard Marks

Always remember that in the stock market, there's always someone on the other side of you.

When you buy a stock, someone out there, they could be anywhere, is selling it to you. When you sell a stock, someone out there, they could anywhere, is buying it from you. That one thought might make you do things a little differently.

Why would someone be taking the other side of your trade or investment? Do they know something you don't? Do they have a better plan than you do?

All of these questions bring us to Howard Marks. The legendary value investor and stock market thinker. He once wrote about this problem. Especially for value investors who are trying to discover deep and hidden value. Before you buy any stock, you need to ask yourself a few questions. Without the answer to these, you can never be so sure. Perhaps the person taking your bet is smarter than you. Or even worse, maybe the Efficient Market Hypothesis is more real than you think. Here's what Marks once wrote, and then a link to the person who showed us this:

1. Why should a bargain exist despite the presence of thousands of investors who stand ready and willing to bid up the price of anything that's too cheap?

2. If the return appears so generous in proportion to the risk, might you be overlooking some hidden risk?

3. Why would the seller of the asset be willing to part with it at a price from which it will give you an excessive return?

4. Do you really know more about the asset than the seller does?

5. If it's such a great proposition, why hasn't someone else snapped it up?