[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?
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