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Published on Mar 14, 2016

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THE MOST IMPORTANT THING BY HOWARD MARKS0:00we study billionaires in this is episode 73 of the investors podcast and testing
0:13from Mount Airy Maryland
0:16investors podcast
0:20read the books in summarize the lessons waters tell you when it's cold will give
0:26you double investing strategies your host Preston Parrish person is everybody
0:36doing out there this is Preston Pearson I'm your host for the investors podcast
0:40is usually accompanied by my co-host Denmark and today we've got a book and
0:46this one was written by a billionaire and that is Howard Marks and for anybody
0:51in the investing community particularly the value investing community Howard
0:54Marks is a very famous name and somebody that a lot of people follow quite
0:59closely and the name of his book is written one book and the name of the
1:03book is the most important thing and it's uncommon sense for the thoughtful
1:08investor Warren Buffett's endorse this I see his really short endorsement on the
1:13front of it says this is that rarity a useful book so he has a bunch of people
1:19that have endorsed this Klarman John BOGO Joel Greenblatt all the big names
1:25have endorsed this book and for the most part I thought it was a good book I
1:29would say that this is hands down the best investment book that a person
1:32should read but I think that it's something that's very important and it
1:36is very sound advice and I think it's a very good refresher for maybe people
1:41that have read the intelligent investor in some of them a little bit more
1:44complicated I think that this is a great book to just listen to on like your
1:49audible device sir I wouldn't necessarily say you have to actually get
1:53the hard copy a lot of investing books you really kinda need to get the hard
1:57copy because there's math in it or there's charts are equations and things
2:01like that this wasn't one of those kind of books this book was more just put on
2:06and listen to and it's just giving you good sound advice in things to think
2:11mitigate your risk is a is the best way I can describe this so stick did you
2:15have any opening comments on your thoughts of the book as far as whether
2:19you liked it didn't like it or what not
2:21yeah i think im probably
2:22the same place where you are facing it was a great book good book perhaps not
2:26great it's more like a philosophical book and an old weekend use that word
2:31for a really investment book was kinda like this is how you should look at in
2:36mastering it should do that you have some principles for at least not losing
2:40all your money and probably also to make a decent return it was more of that kind
2:44of a book at say yes and we'll go through chapter by chapter that's kinda
2:48give people the highlights of the book so you can kind of see what we're
2:51referring to but in general very good book I liked it went pretty fast how
2:56long did it take to listen to an audible was like five six hours something like
3:00that and you are some of the books and you said the foreperson with a lot of
3:03numbers and so on like you sometimes you have to be listened to a definite didn't
3:07have to do that for this book was really easy breezy with this book was easy to
3:11listen to and it wasn't that long was pretty short so real fast I'll give you
3:15kind of a background on Howard Marks Howard Marks was born in 1946 as net
3:21worth is closed the two billion dollars right now he was born and raised in
3:26Queens New York so people from Queens out there that's where our marc was
3:31originally from and he went to the Wharton School of Business for his
3:35undergrad and then he went to the Chicago Booth School of Business for his
3:39masters after that he worked for Citigroup starting in 1969 as an Equity
3:44Research analyst said he was in stark starting out and then by 1985 he went
3:48into high-yield bonds and convertible securities so he's done with i think a
3:53lot of people in the industry when you're working in fixed income that's
3:55the more sought after role because you're dealing with a very large
3:59quantities of money when you're dealing with fixed-income bonds and things like
4:03that so after that in 1995 he left with five other partners and then they opened
4:09up their Oaktree Capital Management Company and just the kind of get through
4:14some numbers on the performance of oak tree which has been around since 1995
4:19they've averaged 19 percent returns since that time frame so they've done a
4:24really well
4:25extraordinarily well compared to other investors out there at the time
4:29of writing action say his company was managing eighty billion dollars that's
4:33what's written on his book here in this book came out was a 2011 I believe ya
4:392011 was when this book was published so let's go ahead and dive into the book
4:43alright so here we go chapter one second level thinking I really like this
4:47discussion and what he's talking about second level thinking as he says most
4:51people that are in the market are just level 1 thinkers and what he means by
4:57that is let's say that you have a company that their net income went up
5:02for the quarter so the level 1 thinker would would hear that that the Prophet
5:07went up and then immediately want to go out and buy more of that stock because
5:12the profits improving and marks really tries to caution people and give people
5:18an idea of how complex things can really be whenever you're looking at something
5:23like that so let's just dig deeper and talk about second level thinking so a
5:28second level think I would say yeah the Prophet went off but how did they do
5:32that how did they get their net income to go higher and was their revenue in
5:36lockstep with previous you know means if you will so what you do is you go in and
5:42you look at the income statement say yeah well there there net income went up
5:46but they pulled all these assets off the balance sheet and sold them and that
5:51increase their income statement and when we look on the income statement you can
5:55see that the revenues have been contracting for the last five quarters
5:59or seven quarters so they've got an issue with sales in in generating
6:03revenue in their offsetting that by pulling things off their balance sheet
6:06and that's just the tip of the iceberg for second level thinking I mean most
6:10people that are investing here that conversation that I just threw out there
6:14any black yeah that's pretty basic stuff so that might even be classified as
6:19level 1 thinking so then he goes into even more discussion and I really like
6:24the way that he laid this out in the book because what he's talking about is
6:27100% true and what you know that immature or the level 1 think I might be
6:31doing in order to buy he's doing the exact opposite and he's selling in those
6:37circumstances because he feels like he has more knowledge and
6:41more robust background of to understand what's actually happening I think his
6:44main advised was that for you as an investor you have to ask yourself am i
6:48lol once a quarter or a second level think that's that's really the the
6:52question to ask yourself and if you're not second level thinker well then you
6:57probably shouldn't be in a stock by in the first place or at least you
7:00shouldn't be buying individual stocks so another example just a really generic
7:04samples that is saying OK
7:06company reports earnings so the little one thing might be saying it's a nice
7:11and it's by the company and this is saying perhaps have so many people knows
7:15that and likes that there is probably valued so it's just another small you
7:20know need example of how to think differently than basic what is saying is
7:24that if you don't think as a second level thinking how can you be smarter
7:29than other people you need to be smarter than other people to other people in the
7:33market and that was his simple premise for this chapter all rights everyone's
7:36gonna like the second chapter in his book and it's all about the efficient
7:40market hypothesis Warren Buffett has a fantastic example he brings this up and
7:46Howard Marks brings us up in the book where he talks about coin wrappers and I
7:50know anyone who's read about Warren Buffett they've probably heard this
7:52example but if there's people out now I have it on an adjusted explain it to you
7:56from that vantage points you understand what we're talking about so Warren
8:00Buffett has this example that he likes to use where he says if you lined up
8:05called a million people and they all had the coin
8:08after the first coin flip half of them would be out and then half of them would
8:12still be in because they had called the correct heads or tails and if you
8:17continue to do that time and time again you know after 10 times in a row you
8:22might have this is called a hundred people left out of the group that you
8:26originally started with that had correctly forecast in every single coin
8:31toss in a row without any mistakes he said whenever you have that these people
8:35these ten people that would have you know correctly called their their coin
8:39toss they would most likely be going out and writing books in telling the world
8:43how good they are coin flipping and what they did in order to call the coin flip
8:48appropriately he said most likely these same people would be bragging to the
8:52opposite sex on
8:53how well they were able to forecast their coin flipping him and 190 just
8:57goes off and it's really kind of a fun conversation with what he's really
9:00getting at is the chance of somebody just basically always being right
9:05whenever you're dealing with a large sample set and so when you think about
9:09that from an investment standpoint you can have people that have been doing
9:13really well in the market for college 10 years just because maybe they're one of
9:18those people that are in the small portion of the sample set with Buffett
9:22dens z10 attorneys conversation on its head and he said that is true
9:27like that exists just based off of statistics that need this law and
9:32everything exists he says but the one thing that they're not accounting for is
9:35what happens if everybody who was flipping the coin was from the same
9:40hometown and they all had the same teacher taught them something he said
9:45there'd probably be something to that makes it not normal and normal
9:50distribution anymore he's getting at is he says it all these people that have
9:54done extremely well in the market they pretty much came out of the gramm value
9:58investing background and employ the same principles which you know Warren Buffett
10:03Howard Marks all these guys are employing these value investing
10:06principles taught by Benjamin Graham so that's where he's like thats what makes
10:11it different and that's one of the arguments that he uses whenever he's
10:14typically debating this efficient market hypothesis one of the examples and
10:18Howard Marks uses in the book he says he's talking about Yahoo whenever he was
10:22valued at $237 and 2000 but by 2000 wanted it plummeted to just $11 and so
10:29therefore the market was wrong at least one of these instances and I totally
10:34agree with that so I look my personal view of how I see the efficient market
10:38hypothesis I look at it a lot like weather patterns I know that that's
10:43really strange example but let me explain so whenever you talk about
10:48efficiency and the thesis for the efficient market hypothesis I think has
10:54a lot of validity to it except for at the very end of it so the thesis in a
10:58minute generalize this is that at any given point I'm the market is
11:02appropriately price I somewhat agree with
11:06that statement now where I think it comes off the rails as whenever they say
11:10and therefore you cannot profit from the market if it's always 100% efficient
11:17that's where I disagree with it and let me explain why so if we were going to
11:22try to project a forecast of what it's gonna be like in let's just call my old
11:29hometown pittsburgh Pennsylvania what's the weather gonna be like tomorrow and
11:33pittsburgh Pennsylvania I'm pretty sure you could project and predict with that
11:38gonna be like very close not exactly you can't say the temperatures gonna be 32.3
11:4456 degrees you can maybe say hey the temperatures gonna be approximately 32
11:49degrees at nine o'clock in the morning thats future forecast what you're doing
11:55is you're looking at models and you're looking at pressures within the system
11:58of all those molecules in now and there's tons of things happening now am
12:03I gonna say that the weather pattern is inefficient that it's not operate now it
12:08its operating an optimal environment where the pressures between highs and
12:14lows in everything
12:16are co-existing in their optimize it any given snapshot in time they are
12:21perfectly organized ok based on the fundamentals in and the pressures that
12:25exist if you had to stop time they are perfectly organized but that doesn't
12:30mean you can't project and see where things are going with a reasonable
12:34amount of probability that's why I disagree with the efficient market
12:38hypothesis because I see financial markets operate very similar manner
12:42there's pressures that exist there's capital that's flowing from one asset
12:45class to another and when you can see the velocity of how that money is
12:49flowing from one asset class to another you can make reasonable projections so
12:54that's my opinion it's kind of a strange opinion I don't know if other people out
12:58there would agree with it I'm sure if I told that to a college professor like
13:01stick they probably roll their eyes and say you cannot profit but let's hear
13:05sticks opinion I'm definitely one of those professors that don't believe in
13:09the vision
13:10and listen to a show before we definitely discussed that quite a few
13:15times and I'm really happy you actually had this discussion president because it
13:19kinda sounds like we feel that the stock might be or value which we do I mean
13:25don't don't get us wrong but it might seem like the money is always irrational
13:29it's actually not a definite new group lesson that to some extent it's somewhat
13:34deficient mean there is a reason why is priced a citizen there's a reason why
13:37berkshires priced at three hundred billion and eighty million right it's
13:42not a complete coincidence but you just really need to understand that there's
13:46something called the long run and in the long run the market is very very
13:49efficient and then we have two short run and then a lot of hiccups are just
13:53happened in the market and just one more thing is that we also offer talk about
13:57individual stock picks so you might have an efficient manner and you have tents
14:01and thousands of livestock issues but you just might have 15 starts they're
14:05heavily or priced on the price and that still means that might sound like it's
14:09extremely inefficient but still might be somewhat sufficient so I'm really happy
14:12we had this discussion oppressed let me provide a real-world example because
14:16this was literally in the news last night and just so everyone knows it's 29
14:21January 2016 so last night
14:24Amazon after the market closed came out and Amazon said that their revenues and
14:29in the head of a decent profit that they had listed but the revenues are really
14:34starting to drop off and starting to level out I don't remember when we had
14:37this conversation maybe it was six months ago maybe not even that long ago
14:41I think maybe you is with james o'shaughnessy we're talking about the
14:45Amazon I can't remember who the guest was but we were there talking about
14:48Amazon and one of the comments that I had made was
14:51understand how it's being traded it's being really trading off of a multiple
14:55of the revenue so whatever the revenue is pretty much where the market cap is
15:00being treated and to me that kind of makes a lot of sense because a lot of
15:04people would make the argument that Amazon could quickly change their
15:07algorithms and basically pointed 10 percent profit margin if they wanted to
15:11but they're not so my argument at that point I'm I said yeah it's growing it's
15:16been growing like a weed but you can kinda see that
15:19ebenezer starting to slow down a little bit I mean still growing very fast don't
15:23get me wrong folks it's growing really fast so you can start to see the
15:26revenues starting to slow down and I said on the show i I believe this is how
15:31the conversation went I said once those revenues start to pull back and he start
15:34the plat and you're dealing with the i mean this company is getting huge
15:38massive and growth at that level as a whole lot harder than whenever they were
15:44a couple hundred million dollars a promise you that
15:47so you're starting to see the with this last report that came out that the
15:51revenues are really starting to taper off and they're starting to plateau and
15:54when that happens you know my projection my opinion was that the stock is gonna
16:00get punished no I didn't have a time frame when I thought that could happen I
16:04could be you know next month that could be in a year I didn't know the timing of
16:08when that happens but what I was doing that having that conversation is
16:12identifying the risk of why I don't own Amazon
16:16I think it's a great company don't get me wrong I love the company I use it all
16:20the time but I found it at that point I'm in a discussion I was not going to
16:25take a position because of the inherent risks so this goes to this efficient
16:29market hypothesis a person you know and efficient market hypothesis would say
16:33it's impossible to predict what's gonna happen to the stark and that you know
16:36it's you cannot profit from that isn't really a profit but protection of
16:41principle discussion but whenever I was looking at that as I see that is a lot
16:45of risk it has a lot of downside in my opinion as things would change in
16:49revenues are starting to plateau out sure enough as and you came out last
16:53night the thing was down like seven percent as soon as the news in the
16:57aftermarket was Delic 7% as soon as the news came out and who knows what's gonna
17:01happen now moving forward it could rebound could go down even further I
17:05don't know but I do know that I think there's a lot of risk in the price
17:09whenever it's being traded at that multiple because I think they have you
17:11she's bringing in that that kind of margin really doing and sustain their
17:15competitive advantage one of this season's about this causes is that we
17:20all have access to the same information and that information is priced into the
17:25current stock price
17:26and I just think that the idea is wrong because of the promises that you need to
17:31be able to predict the unpredictable before it can be the market which is
17:35somewhat true if you think that everyone has the same amount of knowledge but
17:38again here we are and even pressed on my business partner we talk about all the
17:43time we don't have the same knowledge about Amazon so how can I expect that
17:48everyone in the world that is able to treat Amazon millions millions of people
17:52all have the same knowledge and therefore price Amazon the same way I
17:56just think that if you think about the CSIs behind by tomorrow should be
18:00efficient all times I just think is wrong so that was basically my point
18:04ok so in Chapters three in forum and kinda combine these chapter three is
18:09titled value and then chapter four is the relationship between price and value
18:14marks takes the exact same stance as Warren Buffett and what he's talking
18:19about is you gotta use the investor to figure out what the value of the
18:24businesses and you're obviously using some type of discount cash flow analysis
18:27or some type of valuation metrics to determine what you think the intrinsic
18:32value the businesses and then when he talks about is the relationship between
18:36this price that is being treated for on the market and the actual value that you
18:40determined it to be and I think that this discussion for anybody that may be
18:44joining the podcasts and hasn't listened to some of the earlier episodes or
18:48you've gone the buffets books and watched any of our videos there we go
18:51into a lot of detail describing different approaches to value stocks so
18:56if you're listening to this for the first time and you don't know how to do
19:00any of that
19:00or you'd like to learn how to do it go to our website buffett's books dot com
19:04it's 100% free
19:05over 10 hours of video content that teaches you this kind of stuff so with
19:09that I'm probably just gonna move on because his comments were very similar
19:13to Warren Buffett's in the main thing which he gets in the chapter 5 which is
19:17understanding risk
19:18and what he's talking about there is he's talking about one of your biggest
19:21risk is really the price that you pay me and making sure that you have a margin
19:26of safety built into the price that you pay so if you determine that a stock is
19:31worth $100 ok you are not gonna go in and pay something that is $140 for
19:40something that you think is worth a hundred and that conversation is so
19:44important because a lot of people don't realize is every time you pay a premium
19:48over something that you think it's worth let's say you paid $140 for something
19:52that you thought was worth a hundred your pain that 40% premium you've
19:56already handicapped your returns into the future
19:59you've already determined that a lot of probability that she returns are going
20:04to be significantly lower than what they would have been if you were able to $500
20:08and so I think a lot of people don't think about that I think most people
20:12don't even really understand the conversation but the faster that people
20:16can realize and understand what he's talking about in that section the faster
20:20I think they're gonna really come to protect their downside and perform quite
20:24well in the markets because they're gonna be minimising the risk
20:27yeah really like this discussion about how any asset is really attractive at
20:31the right price and how it is not attractive at the wrong price and just
20:36judging tapering sample prisoner know that you have been holding a junk bonds
20:41and that's not because junk bonds per se always should be short because it sounds
20:46like Jang sounds like a bad as it was short that no you look at what value and
20:51what's the price and you simply need to compare those to all the time like I
20:54would assume that you belong junk bonds if you could buy
20:57horrible junk bonds for $0.01 right but you can't do that so the price high so
21:02that's why are shown them so I think that's that's really something that we
21:05need to understand with Harmonix is that again any asset distracted at the right
21:10price and if it's priced too high and I think that's a fantastic comment
21:16where you're talking about a lot of people say I won't buy that I refuse to
21:20buy that will the price was a penny would you buy it and so you always have
21:24to have this conversation of there can be array praised regardless of how much
21:30risk is associated with
21:32something and I think that that's one of the key points at Howard Marks talks
21:35about this book I'm really glad that he did because that's a conversation that a
21:38lot of people typically don't have now
21:40relating this back to Benjamin Graham's book security analysis he talks about
21:45this idea is well and one of the key things that he wants people to
21:50understand is that you always always look at protecting your downside risk
21:55before considering the yield so let's say that you could buy something at a
21:59severe discount really cheap price and you can get 30% yield on it if you you
22:05know the system fixed income that it be expected to do a 30 percent yield
22:09assuming that the principal would be paid back at the end he's he says before
22:14you just go out and chase that yield you have to have a very thorough and deep
22:19understanding of what your chance of default is and that needs to be your
22:23first consideration opposed to the yield a lot of people put the cart before the
22:28horse they're just like I could make thirty percent then they don't even
22:31think about what the probability of default is on that purchase and just
22:36continues in this press that really wanna address one quick point that's one
22:40of things in the book what he's talking about being ahead of your time and being
22:44wrong and those two things can be there are difficult to separate sometimes like
22:48just because you profit from investment it must still be a bad investment you
22:53might still have value the risk
22:54wrong and even though that you lose my investment like the calculation that
22:57you're making the assessment might still be correct and that's really the problem
23:01with stock investing it's not like if I were to discuss football Preston and I
23:06would say hey I think that the Steelers will win this weekend and not me and we
23:14will figure out like really really fast like within that I was right or wrong is
23:17not like that whenever you doing a better stock market like when does this
23:21end it's not like the end of the football game when I right or wrong and
23:26there's this is really a philosophical discussion there hope marks house in
23:29this book and I think that's really important especially at times like this
23:32like when when the market is dropping you think he might have done something
23:36wrong and well perhaps you have but
23:39is really the whole idea of just ahead of its time are you indeed wrong with
23:43your decision to provide a quick update told people that I would do this with
23:49that high yield bond short position that I was putting on so I put it on at the
23:54beginning of December since December here we're almost two months later at
23:59the end of January and I said sup 3 to 5 percent since I put that on
24:05compared to the stock market from where I put this on I think the stock market's
24:09down what ten to fifteen percent since I put down on that position has beat the
24:13stock market so far
24:16emphasized so far it has beat the stock market by about i'd say close to 15%
24:21which is great that's awesome places so far that's worked out pretty well on
24:25continuing to hold it and we'll see where things go from here but this one
24:29to provide an update for people on it just so people know I'd much rather
24:33recommend a cash position than to do something like this I think that you
24:37know if you would have been in cash whenever I put this on you to beat the
24:40market by like 10 percent so I just want to emphasize that let's go ahead and
24:45keep moving with the book them so the next section that we're going to talk
24:49about and he gets into this whole discussion of risk which they can I just
24:52kinda really covered in Chapter seven but then he goes in the chapter 8 he
24:55talks about being attentive two cycles and I loved this conversation in this is
25:00something that you typically don't hear a lot of value investors talk about so I
25:05really really like the fact that he brought this up in the book and what
25:08he's talking about is the credit cycle me saying you really need to have an
25:12understanding of where you're at in the credit cycle is if you don't have that
25:16situation awareness aware you're sitting in time reference to where the cycles at
25:21you just kind of set yourself up for failure and I totally agree with that
25:27statement and the section I was really happy to see this so he even lays out
25:32some basic principles of determining where your at the credit cycle in kind
25:37of having an idea when maybe the market's getting a little overpriced and
25:41risky I think that's probably the best word to use is he's giving you tools in
25:47the book to identify whether he thinks it
25:50credit cycle starting to assume a lot of risk it where it's at and so one of the
25:55examples that he uses is whenever high-yield bonds remember he did some
25:59time as a as a high yield bond junk bond trader so he understands is quite well
26:04he says when high-yield bonds start to really elevate in yield in the yield
26:08starts to take off your probably entering kind of a period where you're
26:12at the end of a short-term business cycle or a credit cycle whatever you
26:16want to refer to it as so that's what we're seeing in the market right now
26:19that's why put on the short for high-yield bonds so you're seeing that
26:23one critical variable he also talks about some other variables he talks
26:26about profit margins for companies going down we're seeing that happen he lays
26:31out a few others I don't know still remembers all the the ones that he lays
26:34out in the book but the conversation is really refreshing because most value
26:38investors don't talk about this nature's you know completely ignored altogether
26:42people should definitely watch the video which seamlessly
26:46advertised as free media which advertised like hundreds of times the
26:51podcast orchestra della does that marijuana say and also like its animated
26:55and then also thought the president is going to be really happy about having
26:59chapter 8 of outsiders including the value investing book that was my
27:03thoughts I was listening to and I was like oh this is awesome finally somebody
27:08from the community of out and you know here's what I think a lot of people fail
27:14to recognize with Warren Buffett specifically is although but it doesn't
27:19talk about it he puts it in the practice and he does this okay and you can see
27:24that he does it by just looking at his balance sheet in looking at the way that
27:27he invests you know if you look at Berkshire Hathaway's balance sheet in
27:32the last year you can see his common stock holding is decreasing now it's not
27:37decreasing at a rapid pace because he's he's a guy who hold because he's got
27:40enormous capital gains and you pay if he sold so he's not going to sell cocaine
27:45makes more on the dividend then he does you know with his original purchase
27:48price so why in the world would he sell that he's not going to sell it if you
27:51look at his balance sheet you can see that his common stock position has
27:55decreased by is off the top my head and looked for a while I'd say ten billion
27:59the fifteen billion dollars over the
28:01past year came so he's decrease that position by about 10% you look at his
28:06cash position is cash position is like almost seventy to eighty billion dollars
28:10or something crazy like that he's increasing in in his cash position just
28:15keeps growing so for people to think them that Warren Buffett isn't being
28:19attentive to credit cycles I tell you I totally disagree with you i think he's
28:25putting the stuff in the practice but the only differences Howard Marks is
28:29writing about it
28:31Warren Buffett doesn't write about it because I don't think they are above it
28:34wants people to go out there and try to quote unquote time the market even
28:38though that's not what I would call it I would say he's he's managing his risk
28:42appropriately through proper asset allocation as time progresses in the
28:47credit cycle that's how I would describe it and for me I was really excited to
28:52see how it works to the city and chapter 9 marks talks about the title of that
28:56chapter is awareness of the pendulum somebody saying is it all these things
28:59go in cycles whether you're talking about commodities fixed-income
29:02you-name-it currencies a swing like a pendulum insulin you got something that
29:08swinging and one direction- you have to have awareness of where you're at and
29:12that swing are you out at the left limit or you out at the rate limit are you at
29:16center mass with accelerating to the other side and that's what I love this
29:21analogy I love this discussion because when we look at current market
29:24conditions let's talk about where that pendulums out right now
29:28oil I know we talk about it all the time but if you think that oil really has a
29:33lot more to lose I don't think that it has a whole lot more to lose a I think
29:37that this thing is getting ready to be paid out the limit might have already
29:41been paid we're seeing the price cut down late $26 it's already come back up
29:45the lake 33 I'm still holding tight but I I think about this analogy of where
29:50the pendulums at this things way out there it's out at its limit its getting
29:55ready to come back the other way and I think for anybody that doesn't agree
29:58with that i think that you may be missing a big opportunity here in the
30:02long run I will emphasize I still haven't taken a position that doesn't
30:05mean that I'm not watching this very closely you might be missing it sticks
30:09you know obviously in so maybe he's the smart guy I don't know
30:13well I'm $7 more happy than they were in like a week ago and I know you can put
30:19it like that I really like the analogy here bartender never heard about that
30:23before in a thing it's a really nice
30:25shaughnessy on presence hard about earlier in the podcast and he didn't use
30:30the same inaudible you're saying the same thing like whatever he was back
30:33testing it might look like well we have few drawbacks in there and then we had a
30:37bull market whatever but in the long term it looks fine but when you in the
30:42middle of it now seems conflict so fast and if you have a short-term horizon it
30:47can be really bad because you don't know when we'll flip and when we talk about
30:51all plus we don't know when we'll flip but we can always say which direction is
30:55it going to like the big swing is a going up and down and it's probably
30:59going up so that's the point room from this chapter the other one that I want
31:04to talk about is the currency of the USDollar I think that the USDollar is
31:10just i mean
31:11epic levels as far as its strength and I think that it really has nowhere to go
31:16but down at this point now I'm holding a lot of dollars and waiting for that
31:21opportunity to put that to use in other sectors but I recognize the fact that
31:27when we're looking at and thinking about this from a pendulums standpoint this
31:31thing is pegged at its limit its getting ready to swing the other way I think
31:35that the the catalyst for that happening as the fed basically saying that they're
31:39gonna do more quantitative easing their negative interest rates or whatever
31:42they're going to do some major adjustment here to offset this strong
31:46dollar it's killing emerging markets and so is that continues to happen I think
31:51the fed's going to have to change a policy that's going to cause the
31:54pendulum swung in the opposite direction and thats whenever I'm gonna change you
31:58know the way I'm seeing things we look at those are the two big things and I'm
32:02seeing right now that are definitely it that limitations with with the pendulums
32:06out alright so I was expecting this episode to be kinda short and it's
32:11actually going a little long and so what I'm gonna stop doing is just going
32:15chapter by chapter and i wanna talk about three main points that I had for
32:19the rest of the book
32:20really important and then stick I'm sure has some other points and he's gonna
32:24want to talk about them or just kind of wrap it up so one of the things that he
32:28talks about later in the book at say this is like in the last quarter of the
32:31book he talks about probability distribution and I really like this
32:36discussion because when he's talking about is it any given point in time
32:39there's this array of potential outcomes and I think that's something that a lot
32:44of investors don't think about whenever they're buying an individual stock or an
32:48index or whatever so let me just talk about this from current market
32:53conditions so when we look at the S&P 500 my opinion is that the S&P 500 is
32:58going to continue to get pushed down in the long term
33:00hey that's my opinion if I was an ass a probability of that happening I'd say
33:04you know I have a 75 percent confidence that the S&P 500 gonna continue to get
33:09punished throughout 2016 that's my opinion so that's what it would be like
33:13never see these weather forecast where they do a hurricane that's track to hit
33:18landfall and when it's five days from hitting landfall they've got this kind
33:23of path and it's like this array of options of where it could go you gotta
33:28left limit you gotta write limit then you got the most probable directions for
33:31the travel and when these things way out there and it's got a ways to go and
33:36there's many days before the storm will hit landfall the array is really wide in
33:40the potential for hitting something here stateside it might be from the tip of
33:44Florida clear up to like you know South Carolina or something it's got this wide
33:49path that it could hit and I think about that graphically in my head as I'm
33:53thinking about this array of things that could happen in financial markets select
33:58my example the S&P 500 you know the Fed could come out literally next week the
34:03Federal Reserve could just change their minds change everything and say we're
34:06gonna launched massive quantitative easing next week and if they did that
34:11the market in my opinion the market would go on now who knows if it would
34:15but my opinion is the market would go on to something like that happen and so
34:18that is a potential that is something that could happen and I think people
34:23when they're thinking about risk and they're thinking about a probability
34:26distribution of
34:27what could happen a lot of people don't consider bad things could happen they
34:33only account for what good things could happen to their investment so they'll
34:36take that position was so you take a short position in the S&P 500 it could
34:41go down it could do exactly what your expectation is or you can have something
34:44crazy that happens like that the Fed coming out and changing the policy and
34:48then it starts going in a different direction and so people have to be
34:51prepared and think through all those different options and understand what
34:57that distribution might look like because for people that don't understand
35:00the distribution they're not accounting for risk appropriately and that's what
35:03he's really talking about in the book and I love that conversation so one of
35:07the high points that I want to talk about is this idea of you want a
35:13specific class or specific stocks in your portfolio and is one of the most
35:18talks about seeing how that is the wrong way of looking at investing so you would
35:22have even as I sir saying to you well you should always have 20% in bonds are
35:27you a gin bombs or whatever he's saying that like from an investment perspective
35:32especially if you're an active investor that just doesn't make any sense at all
35:36like you would buy the best possible assets will buy them when they're cheap
35:40and you will not solve them when they are overpriced though there might be a
35:44lot of different reasons why you wouldn't do that which I Bob Warren
35:48Buffett's investment call before he had to pay a lot of capital gains but the
35:51intuition is still the same actually goes back to the thing we talked about
35:55being attractive at the right price and not being attractive at the wrong price
35:59so just for you guys out there if you ever hear about the optimal portfolio in
36:05terms of you should always have 30% in domestic stocks are 70% international
36:11stocks that just doesn't make any sense at least that's one of the points in the
36:14books and differently agree with that
36:17also because what was to happen is that you will not get a sufficient return and
36:22this was nothing about risk that rely and what he's saying is that you often
36:26hear investor saying I need to take on more risk to increase my return because
36:31there's this idea that the more risk to take the higher the return will be but
36:34if you think about that it really doesn't make that much sense because if
36:38you can just take on more risk
36:40to achieve a higher return by definition that wouldn't be risky so there was one
36:45of those small crooks are really liked about the book that this philosophical
36:49approach to your statement by that statement would be wrong and how to
36:54think about and that's been a definite like this one he had about how to assess
36:58risk and how you shouldn't be predetermined of what you want to own is
37:02always depending on the current market conditions so one of the conversations
37:06and I liked the book as well was this idea of defensive player versus an
37:11aggressive player and the example that he uses his tennis which I really liked
37:16because I think about this all the time whenever I try to play tennis because
37:19I'm a total amateur on the tennis courts and I've always had the opinion it's
37:24probably rooted in my idea of investing it whenever I play other people that are
37:29amateurs are you know moderately good my approach was always to play very
37:33defensive and just keep the ball in play and let them make the mistake and it's
37:38interesting to hear Howard Marks talk about this analogy of tennis when every
37:43stock about investing he says
37:44throws a professional player they can hit those winners and there's really
37:49hard shots they can blast it down the line that could put it back in the
37:52corner and they can do it with insane accuracy and consistency he said but the
37:57immature person that goes out there and plays they can't do that at all they're
38:00gonna miss it why they're gonna hit long they're gonna get into the net and so he
38:04says if you're an amateur in your not this this person this is like highly
38:08trained in just very skilled he said your chances of winning are so much
38:13higher if you just take the risk
38:16the replay of just keeping the ball in play just hit the shot even in play and
38:20forced the other person have the air I totally agree with that he said you
38:25asked him know where you're at you have to know your own capabilities and your
38:29own skill sets and know your limitations in order to do that is the person who
38:34doesn't know that they're gonna hit the ball long because they just want to hit
38:37it hard they're going to make that mistake time and time again and they're
38:40gonna lose the match overall because they're just not aware of their own
38:44limitations and so when you think about that from an investment standpoint
38:47you were the only person that really knows how much you know and so if you
38:52are just over aggressive and you're out there by an individual stock picks and
38:57you can't even tell the person you know what some of the lines on the income
39:00statement balance sheet you're probably not being realistic with what your
39:05actual knowledge is what your capabilities are and when that happens
39:10his opinion is you're gonna lose the match and so he said his philosophy it
39:15his capital investment company has always been to just keep the ball in
39:18play and keep it simple I totally agree I think that that is such sound advice
39:23and in good advice for people to follow I'm so happy that you brought this point
39:27out that was actually my last final wanna talk about this book was really
39:30nice and I just think that is interesting because whenever I start
39:34looking to value in their sting and obviously I read by Warren Buffett and I
39:38heard a song about his on his investments and how he made his analysis
39:41and like in a way I was very impressed but I was also very depressed because I
39:46was thinking how can I ever be smart enough to make the same investment
39:50decisions and Warren Buffett it just seemed very complex to me and still does
39:54like the thinking like Warren Buffett even though I I do what I can probably
39:59okay with me never being at that level so I'm not thinking about his personal
40:04saying like hitting the winners I'm not thinking about playing tennis like man
40:09the first name that came to mind was like to see animals but Roger Federer
40:16yeah sorry about that guys so you might not be like the very best at what were
40:22you doing but as long as you're not making horrible mistakes you're probably
40:26going to be fine and what she's saying is that the outstanding investment
40:30careers they're you know they're too short not receive MMS like Warren
40:34Buffett obviously but investments in careers doesn't end because they don't
40:39have enough winners particular because they're too many losses and that's
40:42something I think a lot about Mike rule number one is really not to lose money
40:47really think about risk that way you'll spend nine percent of the time thinking
40:51about how not solution money and then with the remaining 10% its own thing
40:55about how can I pick the best stocks
40:58alright guys that's all we have for you the name of the book
41:00was the most important thing we like the book is very good if you'd like to
41:04listen to this book for free 100% free
41:08go to our website the investors podcast are common if you go to any of the show
41:12notes pages at the bottom that we have a link for a thing called audible
41:17audible.com it's the Amazon it's an Amazon Service so all the books that
41:21they have on Amazon that are in an audio format audible is the service that
41:26Amazon has the application that you install on your smartphone amazon has so
41:30if you want to download that audible book the most important thing by
41:34billionaire Howard Marks you can go use that link and you can download it for
41:38free and listen to it but you gotta use are linked in order to get the benefit
41:41of having the first book for free so that's all we recommend that's how I
41:44listen to this book and he was very useful I really liked it and that's just
41:48a service that we have on our website for all of our listeners so we're gonna
41:52skip the question I think we're gonna do is consolidate questions in the future
41:55for episodes and we'll play some here and there at the end of episodes but if
41:59you want to record a question get a plate on a show good as investors dot
42:02com for anybody to record a questionable send a free signed copy of her book The
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42:28know how much we appreciate that but that's all we have for you guys and
42:32we'll see you guys next week
42:33thanks for listening to the investors bought gas to listen to more shows for
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