The Cycle In Success
Success is something every investor pursues, yet Howard Marks argues that success itself can become one of the greatest sources of future failure. Throughout history, periods of exceptional performance have often encouraged excessive confidence, complacency, and poor decision-making. Likewise, periods of failure frequently motivate reflection, discipline, and eventual improvement. This chapter explores how success and failure create their own recurring cycle, influencing both investors and businesses in ways that are often overlooked.
Marks begins with a powerful observation: success carries within itself the seeds of failure, while failure often contains the seeds of future success. When investors experience repeated gains, they naturally become more confident in their abilities. Over time, this confidence can develop into overconfidence. Investors begin believing that their success results entirely from superior skill while ignoring the favorable market conditions that may have contributed significantly to their performance.
Howard Marks explains that success changes behavior. Investors who have performed well often become less cautious, more willing to take risks, and increasingly convinced that their judgment cannot be questioned. They may begin borrowing more aggressively, paying higher prices for assets, or ignoring warning signs that would previously have concerned them. Ironically, these behavioral changes often increase the likelihood of future losses.
The chapter highlights the delicate balance between confidence and humility. Confidence is necessary because investors must believe in their analysis when making decisions that differ from popular opinion. However, confidence should always be accompanied by humility—the recognition that markets remain unpredictable and that even the best investors will occasionally make mistakes. Maintaining both qualities simultaneously allows investors to act decisively without becoming reckless.
Howard Marks also emphasizes that the greatest bargains rarely appear among investments that everyone loves. Instead, attractive opportunities are often found in businesses or industries that conventional wisdom has dismissed. These investments make many people uncomfortable because they currently appear unpopular, misunderstood, or risky. Investors willing to perform careful analysis rather than simply following public opinion often discover exceptional long-term value in these overlooked opportunities.
One of the chapter's most memorable warnings is simple: do not confuse brains with a bull market. During prolonged market advances, many investors mistakenly believe that rising asset prices confirm their superior intelligence. In reality, a favorable market environment can make average investment decisions appear brilliant. Only when conditions become more challenging does genuine skill become easier to distinguish from simple good fortune.
The same cycle applies to businesses themselves. Companies experiencing rapid success often expand aggressively, become complacent, or lose operational discipline. Meanwhile, businesses facing temporary setbacks frequently adapt, innovate, and improve their efficiency. As a result, today's market leaders may eventually struggle, while today's underperformers may become tomorrow's strongest performers. Understanding this recurring pattern helps investors avoid assuming that current success will last forever.
The chapter concludes by reminding readers that success should never eliminate humility. Every investment cycle creates winners and losers, but those positions rarely remain permanent. Investors who remain disciplined after success and resilient after failure are far more likely to achieve lasting performance than those who allow temporary outcomes to define their confidence.