Milken Institute chairman, Michael Milken, and co-chairman and co-founder of Oaktree Capital Management, Howard Marks, have a conversation on the ongoing cycles that govern the stock market and reveal how investors can read and profit from these patterns.
A Conversation With Howard Marks: Mastering The Market Cycle – International Harvester vs Poland
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Well first of all it's from a book called The Brief History of Financial Euphoria which I read a very long time ago which I recommend to everyone it gives you a good feeling for cyclicality for the behavior of the herd for the importance of contrarianism. And it is an honest book in the sense that it is brief and I enjoyed that.
But the point is that in investing in particular one of the outstanding characteristics is shortness of memory. And the point is we we know so much from history but if we disregard history we know so little if we disregard history then every time something happens I knew we have to start from scratch figuring out what it means if we understand history we can put it in a way we can do what I call in the book pattern recognition and we can say oh yeah that's like that. I saw that 10 years ago and 30 years ago. And that's it. And here's what it comes from and here's what plays out and here's what it's going to result in.
But most people ignore history. Most booms and you know I probably lived through about a half a dozen real booms in my 50 years in the business.
Are usually about something new and the Internet 99 of the Nifty Fifty Xerox and sixty nine whatever it might be.
Subprime mortgage securities and the people who get excited about it who cut into it who are intoxicated by the positives and willing to ignore the negatives. If you say to them you know well that happened 20 and 40 years ago and it ended badly. What they say is they use the four worst words in the world. It's different this time.
The rules of the past don't apply. You know it.
Yes the average PE ratio historically has been 16 but now it's 32 and that's OK because the Internet has changed the world. And something like that.And so go back one slide though if you will and what it says is that past experience to the extent that it is part of memory at all is dismissed as the primitive refuge of those who do not have the insight to appreciate the wonders of the present.
And you know if you say to somebody in 99 who's buying an Internet stock which has no profits and no sales and you know at an astronomical price you just don't get it. You're an old fogy. And the point is that the past is relevant. And now you can bring up that next slide Michael because that was a good one. Thank you. And most of the time it's not different now. Clearly some of the time it is different but not as often as people think.
Let's talk for a moment about this slide by Reinhart and there was a book written this time it's different. And it really related to sovereign debt and credit and so I'm at Berkeley and 65 studying credit and almost all sovereign debt is rated Triple J. And it's considered the least risky debt of all and the head of the Federal Reserve. Paul Volcker in the 70s is telling everyone that no country ever defaulted ever went bankrupt. Yet it has absolutely nothing to do with history. And I think I want to just underline this point that Howard has made here.
When you step back in history ask yourself have you done the original research. What is common wisdom in it was I listened to Paul Volcker in that period of time that Chairman Volcker talking in the speech I remember most Howard was one in around 80 or 81 that Poland is not international harvester. Both Poland and International Harvester were trading at 31 cents on the dollar. And his point was Poland is a country. Countries don't default. And don't go bankrupt. And of course International Harvester could go bankrupt. Well he was right but he was wrong. International Harvester paid you off 100 cents on the dollar. Never missed an interest payment. And Poland reorganized its debt in the 30s. So for every dollar of debt you got 30 cents of it. He was right semantically. He was just not right financially.