Howard Marks: Déjà Vu All Over Again

[3/23/12 - VE1 passed along the latest memo from Howard Marks.]

... If I were asked to name just one way to figure out whether something’s a bargain or not, it would be through assessing how much optimism is incorporated in its price.

No matter how good the fundamental outlook is for something, when investors apply too much optimism in pricing it, it won‟t be a bargain. That was the story of the Internet bubble; the Internet was expected to change the world, and it did, but when the optimism surrounding it proved to have been excessive, stock prices were decimated.

Conversely, no matter how bad the outlook is for an asset, when little or no optimism is incorporated in its price, it can easily be a bargain capable of providing outsized returns with limited risk.

Even with a bad “story,” the price of an asset is unlikely to decline (other than perhaps in the very short term) unless the story deteriorates further or the optimism abates. And if there‟s no optimism built into its price, certainly the latter can‟t happen.

Marks is the chairman of Oaktree Capital. His memos dating back to 1991 are accessible from the website.

He's also wrote a book called The Most Important Thing in which he sort of he puts together and polishes up his collection of memos over the years.

*** [9/10/17]

There They Go Again ... Again / Yet again?

Charlie Rose interviews Seth Klarman

Charlie Rose interviews Seth Klarman. The first 18 minutes is about "Facing History", his nonprofit organizaiton. Then they got to the book of "Margin of Safety". Klarman's view of Warren Buffett's three stages of investing: "Warren evolves three stages". He said he is still in the first stage.

1. Buy cigarbutts at good prices
2. Buy great companies at great prices
3. Buy great companies at so so prices.

the 11 market-cap leaders of the past 86 years

In recent weeks, Apple (Nasdaq: AAPL) has firmly established its market capitalization leadership among the companies of the S&P 500. It has surged past ExxonMobil (NYSE: XOM) into the No. 1 position by a considerable margin. Surprisingly, the crowning of a new market cap leader is far more unusual than you might think.

There have been only 11 distinct leaders since 1926, which makes the emergence of a new one about as frequent as an American war (we've had around 10 of those since then, by my count).

high risk, low reward

In an absolute sense, it's of course true that the more money investors put at risk, the more they'll gain if their investments increase in value. However, with the kind of risk that's become synonymous with volatility in investment argot, the opposite has been true. On average, high-beta investments--those whose prices have swung wider than an index over a given period of time--have historically generated worse returns than less-volatile alternatives.

The pattern has been persistent. This study, which appeared last year in the CFA Institute's Financial Analysts Journal, found that between 1968 and 2008, a portfolio comprising the least-volatile quintile of the market's 1000 largest stocks swamped the most-volatile quintile over the course of 40 years. And in this explanation of why boring can be beautiful, Morningstar ETF analyst Samuel Lee cites the work of Lasse Pedersen and Andrea Frazzini. In this 2011 paper, the duo find better risk-adjusted returns resulting from "betting against beta" across a broad range of asset types and geographic boundaries over a 50-year time frame.

History doesn't always repeat. Over a lengthy stretch of time, though, investors have fared better by taking on less risk, not more.