February 27, 2013 (DJIA 14,075.37, S&P500 1,515.99)
Notes to Video given by Howard Marks of Oaktree Capital
The following is a video from youtube and notes prepared by someone who uses the alias on The Motley Fool of StuyvesantGrad70. StuyvesantGrad70 has given me direct permission to include his excellent notes on this website.
"When you think you know something, the question is,
does the market know it too?" Howard Marks, Oaktree Capital
I think that quote is so strong.
The following is a link to the excellent and worthwhile video:
The following are the excellent and copious notes taken by StuyvesantGrad70 on December 1, 2012:
Few people have what it takes to be great investors.
People think that to be a good investor, you have to understand companies.
But the market has an understanding of companies.
If you understand the companies the same as the market does, and if the market and you are right, then you are not going to make any special profits.
Success comes in understanding things better than the market.
Most people donít understand things better than the market.
Most people donít understand the need for understanding things better than the market.
Too many people try to simplify investing.
Liking the product has nothing to do with making the company a good investment. or it is just the very first step of many steps.
You have to think better than the average investor and at a higher level.
The consensus has an opinion. The consensus is not a moron.
Much of the time the consensus is about right.
To do better than the consensus, you have to think differently than the consensus.
It means you have to find the times when the consensus is wrong.
Then you have to think differently, better, and be correct, when the consensus is wrong, which is not all the time.
When someone gives me an idea for a stock or a macro trend, the first question I always ask is, ďand who doesnít know that?Ē Thatís really the question.
When you think you know something, the question is does the market know it too? If it does, then youíre idea has no relevance to superiority.
I try to create an environment where one personís success doesnít have to come at the expense of another.
Everyone collectively can be more successful than they would have been separately.
You have to start with smart people who are also wise, and introspective.
I donít get the concept of trading to make money.
So I like to surround myself with other people who donít like the idea of trading to make money. I donít say my way is the only way.
Many pension funds or endowments used to have a rule: we wonít invest in any bonds that are rated below investment grade, below BBB.
So if everyone is saying we wonít do that, then that is going to be cheap.
People individually and markets are ruled by emotion, and as long as emotion takes over, then efficiency will not be realized.
When everyone thinks one way, then there should be a reward for thinking the other way.
If you are the only person in the world thatís open to making investment x, then maybe it is available to you cheaply.
Having patient capital is a great advantage.
In our distressed debt fund, the money is locked up for 10 or 11 years, so we can be patient.
We always try to stress the danger of over-confidence.
It is better if you invest scared, to worry about losing money.
The most dangerous thing is to think youíve got it figured out.
Or to think you canít make a mistake.
You always have to recheck, to bounce your ideas against yourself and others.
You have to do things that are lonely, uncomfortable.
It is warmer in the herd.
But if you only hold popular positions, you canít do better than average, by definition.
You have to be strong enough in ego to hold difficult, unusual positions, and stay with them.
You have to have a view which is different than the consensus and you have to stay with it, and you have to be right.
Charlie Munger said to me, none of this is easy, and anyone who thinks it is easy, is stupid.
We define risk primarily as the potential for losing money.
We donít have empathy with the view that risk is variability, that variability is a thing to be avoided.
In good times, I hear people say, the way to make more money is to take more risk.
Oneís goal is to make smart investments, even if they involve risk, but not because they involve risk.
What risk means is a greater range of outcomes, some of which are negative.
You have to only make investments where you are rewarded for taking that risk, and where you can withstand the risk.
That requires diversification, patient capital, and eventually being right in your ideas.
When 30 year Treasuries yield 3 percent, that sets the bar for everything else.
That means everything else trades at not very high returns.
That means we are in a low return environment.
One of the hardest things is to obtain high returns in a low return world.
If you insist on doing so, you can get into trouble.
I personally am not worried about the return to hyper-inflation.
Inflation is modest, it could go higher.
Everyone would like to see it go higher, because usually higher inflation is associated with prosperity.
Governments around the world would like to see it so they can pay their debts with low value currency.
I always get into trouble when I stray into the macro.
Where does inflation come from?
Demand pull comes from too much money chasing too few goods, I donít think we have that.
Cost push comes from escalation of the factors of production, I donít see that.
Most of the possible sources of inflation would come from international concerns.
Like the man in China who has been working for 60 cents a day, demanding $1.20 per day.
It could happen, but I donít think itís going to be pervasive enough to pitch us into hyper-inflation.
If you went to the horse race, would you always bet on the favorite?
The favorite, assuming the crowd is intelligent, is the horse with the highest probability of winning.
That doesnít mean that the favorite is always the best bet.
You might have another horse, which has a lower probability of winning, but the odds are so much higher, then thatís the smart bet, leaving alone anything specific that you know about the horses.
You have to make investments where the risk can be assessed, diversified, and where you are highly paid to do so.
So called safe, so called high quality investments are not always, or in fact are rarely, the best bet.
We donít want to invest in high quality or safe things, because a so called safe thing that has bad odds is a bad investment.
Sometimes I think the word quality should be banned from the investment business, if you want to make money,
Jim Grant called Treasuries certificates of confiscation.
They are a safe investment, in the sense that the outcome is known, and not really subject to variation.
I think they are not a good investment because the known outcome is a non-attractive one.
You can by the ten year Treasury and lock up the certainty of 1.9% return for ten years.
Is that really a good thing to lock up?
Under what circumstances will that turn out to have been an attractive investment?
The answer is, in my opinion, deflation or depression.
I donít think we are going to have those things.
Anyway, we canít plan on having them.
So the range of options under which that safe investment turns out to be a smart investment is rather narrow.
Jeremy Grantham said people think about the risk-free return, Treasuries are the return-free risk.
If you invest whenever you find a stock that is selling for a third less than your estimate of intrinsic value, and you donít care about the macro, or the temperature of the market, then you are acting as if the world is always the same, and the desirability of making investments is always the same.
But the world changes radically, and sometimes the investing world is highly hospitable when price are depressed, and sometimes it is very hostile, when prices are elevated.
You are saying, just look at the micro, buy them whenever they are cheap.
I canít argue with that.
On the other hand, it is much easier to make money when the world is depressed, because when it stops being depressed, it is like a compressed spring, that comes back.
If you buy a cheap stock when the market is high, it is a challenge.
The market, being high, is generally followed by a decline, then for you to make money in your cheap stock, you have to swim against the tide.
If you buy when the market is low, and that lowness is going to be corrected by a general inflation, and you then buy your cheap stock, then you have the tailwind in your favor.
It is unrealistic to say I donít care what is going to happen in the world, I know a cheap stock when I see one.
If you donít follow the pendulum and understand the cycle, then that implies that you always invest as much money as aggressively.
That doesnít make any sense to me.
Anything that has gone down in price a lot is potentially source of opportunity.
The question is, has it declined sufficiently, relative to reality.
So if a stock was fairly priced 5 years ago at X, today the stock is down half, but in a sense, reality is also down half, then the stock is only fairly priced.
Lower in price, but not cheaper.
What the investor has to do i weigh out, on the hand price, and the other hand, reality.
Everybody thinks very dire thoughts about Europe and the euro, and I would be the last person in the world to argue against that position.
European stocks are lower in price because of macro conditions, but are the macro conditions being viewed too pessimistically?
How do you know?
Are you capable of thinking different and better about the fate of Europe?
I donít think so.
I donít think anybody has a good handle on what is going to happen in Europe, so how can gaming the European situation give you an edge?
If you donít have superior insight, then how can something be to your advantage?
We donít bet on macro forecasts.
I donít think it is easy to be above average in correctness with regards to the macro.
We are active in less efficient markets only.
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