Mark Yusko of Morgan Creek (find him on Twitter here) Q2 letter to investors. Below is a brief excerpt followed by the full letter in scribd:
Mark Yusko: Markets gripped in Alligator Jaws
So with the Alligator Jaws across the various markets beginning to close and an increasing number of pundits and financial commentators describing the New Normal, that somehow it really is different this time, and that the Fed (and other global Central Banks) has banished the business cycle, established permanent floors under equity markets and has figured out how to somehow manufacture growth and wealth out of debt (a feat that has never been achieved in many centuries of trying).
In the last letter we discussed “the seven-year cycle that seems to exist with respect to the business cycle (interesting to me that it’s precisely half of the 14 year innovation cycle I have written about in the past) and talked about how the peak in markets in 2000 and 2007 was followed by Recessions and larger losses in the equity markets in subsequent years.” Those two incongruous constructs of #TheNewNormal and “The Old Normal,” coupled with my stumbling across an increasing number of charts and graphs that show a number of market data follow this seven-year cycle and how another peak was forming in those same areas again in 2014, led me to start attaching #NotDifferentThisTime to many of my tweets and retweets (for Twitter users, you can find me at @markyusko).
This hashtag is a play on the famous Sir John Templeton quote, “the four most dangerous words in investing are this time it’s different” and the idea to use them as the theme of the letter prompted me to do a little research on the origin of the phrase and on Sir John as well.
What I found was a very compelling outline of his investment philosophy that I decided to include in the letter to provide some context for the overall theme. In searching for my opening picture, I found the image of the hourglass with Sir John’s wisdom and it reminded me of the quote that, “the more sand that passes through the hourglass, the more clearly we can see” (more on this theme later).
Then, in a serious case of “everything happens for a reason,” I had dinner with Peter Gutrich this week (our partner and a long-time friend) and he had a laminated copy of the 1995 cover of Forbes with a dapper Sir John making the point that to beat the market, you have to start by asking the right questions (much more on this later) lying on his coffee table in Denver. Amazing serendipity given I had composed most of this letter already and had decided that Sir John’s wisdom would be the theme.
Mark Yusko: Templeton’s 16 Rules for Successful Investing
In 1993, Sir John (who is clearly one of the most successful and intrepid investors of our time) did all investors a great service by putting his personal philosophy down on paper, 16 Rules for Successful Investing (which was published in the World Monitor: The Christian Science Monitor Monthly) in which he captured a lifetime of investment wisdom for the ages. Many of the individual tenets of the philosophy may seem “obvious,” or “common knowledge,” but taken together they represent an investing discipline that, when executed faithfully (that is the tricky part), can produce superior results over the long-term.
The challenge of executing the strategy is twofold: 1) adhering to the entire collection of Rules and 2) sticking to the discipline over time and not making “exceptions” when it would be easier or more expedient to do so. Sir John begins the essay with a little humor in which he says that he could sum up his message by reminding the reader of the famous advice of Will Rogers who said, “Don’t gamble, buy some good stock.
Hold it till it goes up…and then sell it. If it doesn’t go up, don’t buy it!” He then goes on to say that there is as much wisdom in that remark as there is humor and makes the following introductory commentary before diving into the 16 Rules: “Success in the stock market is based on the principle of buying low and selling high. Granted, one can make money by reversing the order, selling high and then buying low. And there is money to be made in those strange animals, options and futures.
But, by and large, these are techniques for traders and speculators, not for investors. And I am writing as a professional investor, one who has enjoyed a certain degree of success as an investment counselor over the past half-century and who wishes to share with others the lessons learned during this time.” What is truly remarkable about Sir John’s perspective is that his direct investment experience at the time of writing was six decades (that is some serious volume of sand through the hour glass) that spanned periods of War and Peace, Prosperity and Hardship, Bull Markets and Bear Markets and every transitional phase in between each extreme, so the applicability of his Rules is more timeless (in my opinion) given his vast experience base.
So let’s review the 16 Rules and discuss how they are relevant to today’s investment environment and why they lead us to the title of this quarter’s letter.
Mark Yusko: Rule No. 1 – Invest for Maximum Total REAL Return (#InflationIsRisk)
We could not agree more that this is the most important issue facing long-term investors and is, perhaps, the most widely misunderstood (or simply disregarded) risk in investing. Sir John makes the statement that investing for maximum total real return is the “only rational objective for most long-term investors”