howard-marks-image

Indianapolis CFA Society Investment Forum Notes

 There was a recent CFA event in indianapolis, with a fantastic line-up, including Michael Mauboussin.  Below is Part II from Howard Marks.

Part I with Michael Mauboussin, on Untangling Skill & Risk (Outcomes – past, present, future) can be found at –at this link

You can also check out Howard Mark’s favorite books, and his resource page.

Part 2 – Howard Marks- The Most Important Things in the Current market Environment

Environment:

* (3) things influence asset prices: Fundamentals, Psychology, Technicals

* Since 2009:

o Fundamentals are ‘Iffy’

o Psychology has rebounded

o Technicals – centered on cash inflows vs. forced selling

* Heavy market influence due to interest rates near zero

o Fixed income – strong

o Equities – lackluster

o Europe/Emerging Markets – corrected

Macro Questions:

o Developed world & competition

o Job creation

o Confidence and behavior of consumers

o Austerity impact

o Delevering vs. previous hyper debt

o Pace of recovery

o Inflation vs. deflation – He had a comment along the lines of “Not both… If your coming to me for the answer, that says something about how desperate you are.”

(my note-There’s irony in there somewhere…)

o Europe outlook – murky & scary

o Political involvement in economy – questionable leadership

o Emerging world reliance of developed world

o Hard/soft landing in China

* Nobody pays their debts, they continually refinance. Makes that point even for ‘AAA’ ratings. They rely on the capital markets.

* Sees a drawn out, weaker recovery – ‘Saucer’ vs. V shaped

Prepare for Tomorrow:

* People deal with the future by assuming that it’s like the past

* Be careful not to blindly extrapolate

* Consider that the past outcome was one of multiple possibilities (alternate histories)

1982-2007-actual-versus-possible

* ‘82’-‘99’ was about as good as it gets…

* Analogy of a bucket where you continue to draw out one ball at a time.

o The more times in a row that a white ball is pulled out, the more future expectations change and expect that trend to continue.

o Might be prudent to consider that there are a lot of black balls left in the bucket that have yet to be pulled out.

range-of-possibilities-chart

* Possible futures may be less favorable than past possibilities…

* Cyclical outlook positive, but worrisome secular trends

* Analogy of a pendulum

o Investors can be on Offense, Defense, or in the Middle

o Posits that one be moderate, and venture towards offense or defense in a fashion contrarian to the activity of others

Structuring Portfolios

* Should one prepare for prosperity? –Not if prosperity looks like the 90’s

* Worry more – Losing money or missed opportunity? -References pendulum analogy above and swing counter to the crowd

* What is the key?

o Money and nerve – that’s all

o Discernment, discipline, risk control, selectivity

* Marks’ Current Stance – Move forward with caution

* Price is very important – nearly anything can be good at the right price

* Low expectations

Too Cautious?

* Safety in Investing comes from margin for error

* Ensuring a margin for error is incompatible with maximization

* Girding for the bad is more essential than preparing for the good

* Worry more – Losing money or missed opportunity

 Q & A

Q. Thoughts on currencies

A. Current market relatively efficient.

Information advantage not likely.

Talked about ‘know it alls’… but for the ‘non-know it alls’… diversify

Q. Thoughts on GDP

A. Historically GDP 3%-4%.

Oaktree has no numbers and are not economists

3% more likely

Does not like the idea of a historical risk premium

Q. China – ideas/impact to portfolio management

A. Not really an impact

Discussed overbuilt… bubble… avoid

Control of that and how it is dealt with is a question

Q. Offense vs. Defense

A. Recalled committee at U. of Pennsylvania Previous memo: ‘Dare to be Great’ Dare to Be Great – Sept 2006

Requires ‘non-institutional behavior’ from an institution

Avoid group-think

Ask members to acknowledge their tendency, say on a 1-10 scale… Then try to sit that aside when considering best direction

Via Dustin Hunter, SunRift Capital Partners

(These notes are to the best of my recollection and trusty ink pen. Discrepancies are due to my error in understanding & transcribing.)

(In Part 3, we will round up notes from Bob Doll’s presentation)