Marks[165]
“[T]here are two main risks in the investment world: the risk of losing money and the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can’t eliminate both. One of the prominent features of investor psychology is that few people are able to (a) always balance the two risks or (b) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one…and in doing so make the other one deserving attention.” – Howard Marks[166]
“The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring.” – Howard Marks
“As Warren Buffett told Congress on June 2, 2010, ‘Rising prices are a narcotic that affects the reasoning power up and down the line.’” – Howard Marks
“Asset prices fluctuate much more than fundamentals.” – Howard Marks[167]
“One of the most important things we can do is take note of other investors’ attitudes and behavior regarding risk. Fear, worry, skepticism and risk aversion are the things that keep the market at equilibrium and prospective returns fair. But when investors don’t fear sufficiently – when they’re risk tolerant rather than risk averse – the let down their guard, surrender their discipline, accept rosy projections, enter into unwise deals, and settle for too little in the way of prospective returns and risk premiums.” – Howard Marks[168]
“There’s nothing more risky than a widespread belief that there’s no risk…but that’s what characterized the investment world [leading up to the onset of the crisis in mid-2007]. It was possible to conclude in 2005-07 that investors were applying insufficient risk aversion and thus engaging in risky behavior, elevating asset prices, reducing prospective returns, and raising risk levels. What were there signs?
- The issuance of non-investment grade debt was at record levels.
- An unusually high percentage of the issuance was rated triple-C, something that’s not possible when attitudes toward risk are sober.
- ‘Dividend recaps’ went unquestioned, with buyout companies borrowing money with which to pay dividends, vastly increasing their leverage and reducing their ability to get through tough times.
- Credit instruments were increasingly market by few or no covenants to protect lenders from managements’ machinations, and by interest payments that could be made with debt rather than cash at the companies’ discretion.
- Collateralized loan debt obligations were accepted as being respectable instruments – with the risk made to vanish – despite the questionable underlying assets.
- Buyouts of larger and larger companies were done at increasing valuation multiples, with rising debt ratios and shrinking equity contributions, and despite the fact that target companies were increasingly cyclical.
- Despite all of these indications of falling credit standards and rising riskiness, the yield spread between high yield bonds and Treasury notes shrank to record lows.
- The generous capital market conditions and low cost of capital for borrowers caused buyout fund managers to describe the period of as ‘the golden age of private equity.’ Conversely, then, for lenders it was the pits.”
— Howard Marks[169]
“If I had to identify a single key to consistently successful investing, I’d say it’s ‘cheapness.’ Buying at low prices relative to intrinsic value (rigorously and conservatively derived) holds the key to earning dependably high returns, limiting risk and minimizing losses. It’s not the only thing that matters – obviously – but it’s something for which there’s no substitute. Without doing the above, ‘investing’ moves closer to ‘speculating,’ a much less dependable activity.” – Howard Marks[170]
“So if you could ask just one question regarding an individual security, asset class or market, it should be ‘is it cheap?’ Oaktree’s investment professionals try to ask it, in different ways, every day. And what makes for cheapness? In sum, the attitudes and behavior of others. I try to get away from it, but I can’t. the quote I return to most often in these memos, even 17 years after the first time, is another from Warren Buffett: ‘The less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs.’ When others are paralyzed by fear, we can be aggressive. But when others are unafraid, we should tread with the utmost caution. Other peoples’ fearlessness invariably translates into inflated prices, depressed potential returns and elevated risk.” – Howard Marks[171]
“Nothing can reduce returns, worsen terms or raise risk fatster than ‘too much money chasing too few deals.’ It’s disproportionate flows of capital into a market that give rise to the disastrous race to the bottom such as we saw in 2005-07. Greater sums are provided to weaker borrowers at lower interest rates and with looser terms. Higher prices are paid for assets: first less of a discount from intrinsic value, then the full intrinsic value, and eventually premiums above intrinsic value.” – Howard Marks[172]
“Security analysis and knowledgeable investing aren’t easy. Investors must be alert for fuzzy or incomplete information, and for companies that don’t put their interests first. They must invest only when they know what they don’t know, and they must insist on sufficient margin for error owing to any shortcomings.” – Howard Marks, March 2002 Memo “Learning from Enron”:
“Time and time again, the combination of pressure to conform and the desire to get rich causes people to drop their independence and skepticism, overcome their innate risk aversion and believe things that don’t make sense.” – Howard Marks, The Most Important Thing
“People who might be perfectly happy with their lot in isolation become miserable when they see others do better. In the world of investing, most people find it terribly hard to sit by and watch while others make more money than they do.” – Howard Marks, The Most Important Thing
Kindleberger: Manias, Panics, and Crashes
“The big ten financial bubbles
- The Dutch Tulip Bulb Bubble 1636
- TheSouthSeaBubble 1720
- TheMississippiBubble 1720
- The late 1920s stock price bubble 1927-1929
- The surge in bank loans toMexicoand other developing countries in the 1970s
- The bubble in real estate and stocks inJapan1985-1989
- The 1985-1989 bubble in real and stocks in Finalnd,NorwayandSweden
- The bubble in real estate and stocks inThailand,Malaysia,Indonesiaand several other Asian countrites 1992-1997
- The surge in foreign investment inMexico1990-1993
- The bubble in over-the-counter stocks in the United States 1995-2000″
“The thesis of this book is that the cycle of manias and panics results from the pro-cyclical changes in the suppply of credit; the creddit supply icnreases relatively repaidly in good times, and then when economic growth slacken, the reate of growth of credit has often declined sharply. A mania involves increases in the prices of real estate or stocks or a currency or a commodity in the present and near-future that are not consistent with the prices of the same real estate or stocks in the distant future.”
“‘There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.’ Unless it is to see a nonfriend get rich.”
“In the ruin of all collapsed booms is to be found the work of men who bought property
