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Published on Mar 14, 2016

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Here’s what Charlie Munger had to say at the Daily Journal meeting

Charlie MungerCharlie Munger spoke at the Daily Journal Corporation's Annual Meeting of Shareholders today. Although Warren Buffett is the more well-known Berkshire Hathaway chief, Munger has been at his side through much of his investing career. Q4 2020 hedge fund letters, conferences and more Charlie Munger's speech at the Daily Journal meeting was live-streamed on Yahoo Read More

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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 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
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