Part 3 - Howard Marks - Insights From London Value Investor Conference, 9 May 2013

12th May '13 by Paul Scott

7 comments 7313 reads

This is the third part in a short series of articles about speeches I listened to at the London Value Investor Conference on 9 May 2013.

To read Part 1, please click here.

To read Part 2, please click here.

I've added my comments below in brackets, to make it clear what is Marks, and what is my commentary.

Howard Marks of Oaktree Capital

Howard Marks has a fairly astonishing CV! He is the founder & Chairman of Oaktree Capital Management which currently has $79bn of assets under management. More impressive even than that, is that Bloomberg stated in 2010, "Oaktree's 17 distressed-debt funds have averaged annual gains of 19% after fees for the past 22 years - about 7 percentage points better than its peers".

Howard's memos are available online here, and come highly recommended, "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something". (Warren Buffett).

He is the author of "The Most Important Thing: Uncommon Sense for the Thoughtful Investor".

The Human Side of Investing

Unlike previous speakers, who had talked mainly about the mechanics of equities investing, Marks talked more generally about the human, psychological side of investing. The subtitle to his speech is "the difference between theory and practice".

He began by outlining how the Efficient Market Hypothesis ("EMH") was just starting to be taught when he began his career, and in common with almost everyone outside of academia these days, he thinks EMH is untrue.

The reason EMH is untrue, is because markets are made up of people, with all our inherent flaws.

Theory also states that investors are risk averse, which Marks also believes to be untrue. He points to a lack of risk aversion being one of main causes of the 2008 crisis, as lending was too loose, with risk mis-priced.

Thought-provokingly, he explained that riskier assets only appear to offer higher returns, but often don't actually give higher returns, otherwise they wouldn't be risky!

Next, he demonstrated how the risk premium graph (X-axis = risk, Y-axis = return) fluctuates, becoming too shallow a line when investors are complacent, e.g. prior to 2008, when very little premium was demanded for considerable risk, or too steep in times…

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AlanJenkins2

12th May '13

It fails to directly address the problem that markets are overvalued but cash is a guaranteed slow death. - so being in and out are both bad.

Paul Scott

But are equity markets over-valued? There are still plenty of shares out there on perfectly reasonable PERs and paying good dividend yields. I would argue that most equities were significantly under-priced, and have now caught up with other assets to some extent.

Also consider that the Indices are not index-linked. So FTSE100 at 6.600 today is tons cheaper in real terms than FTSE100 at 6,600 in 1998. Corporate earnings have gone up enormously over the past 15 years, so the PER is now much lower than it was in 1998, despite the headline Index figure being the same.

Given that Bonds have no inflation protection, and lousy yields, I would say good quality equities on a PER of say 15 or less look far better long term value than bonds, since equities have built-in inflation protection.

Inflation is only eroding cash at 2-3% p.a., so if you avoid a market crash by being in cash for a year or two, then you've potentially saved yourself a 30-50% loss. I am increasingly warming to the idea of at least keeping some powder dry so that I've got some cash to deploy on a market correction. After all, you can only be a buyer on the dips if you have some cash with which to buy! Being 100% invested means you cannot take advantage of a market downturn.

Foregoing a 2-3% p.a. erosion from inflation for 6-12 months could turn out to be a very canny move, if you are then able to deploy that cash when the next market correction occurs.

Also, after having made spectacular returns on equities in the last year, surely taking some money off the table by banking the gains is a wise move? If you've made 40% in a year, then moving into cash and accepting that inflation will erode you by 2-3% in the next year, is overall a pretty attractive package, especially if you then have the firepower to buy back when the next market correction occurs.

Beginner

13th May '13

Hi Paul
Just a note to say 'thank you' for sharing the speakers' and your own insights with us. These are immensely interesting and useful, and I am really grateful for the service you are giving. I agree with the gist of your comments above. There is still some good value out there, it is simply being able to spot it. Buying equities is like striking any other bargain: you must do your research, know what you want, and only be prepared to pay a reasonable price for it. Patience is a virtue. Value investing should really be for the long term. (And maybe it is worth remembering 'Money isn't everything, but it is dead handy when you go to the shops!')

Thank you again
B

Glad you found it useful! I found the Conference, and doing these write-ups, really interesting & thought-provoking, it's always good to get charged up with sound value investing principles!
P.

ericb

yes Great write ups Paul thanks alot :)

Cisk

Paul, I can only echo the thanks provided by others for doing these posts - highly informative and useful aide-memoirs to many of us on the fundamentals of investing.

Whilst it would be foolish not to pay some attention to whether the market is over or under-priced, I personally feel that people are often too preoccupied with the market's valuation, and forget the fundamentals of what they invest in. If you buy 'sensible' companies in businesses that are understandable, that offer a growing yield and that aren't on a crazy p/e, and invest for the longer term then you stand a better chance of outperforming the market.

I often read David Schwart's weekend FT article - where he seems to perpetually say the market is overvalued one week and undervalued the next - with his point of view changing as often as the British weather.

The point is that there's no magic formula or crystal ball to second guess where the market is going.

SingSing

14th May '13

Many thanks for sharing this knowledge - excellent.
I read that Howard Marks book, it was a fantastic read..
There is a second edition which has a few known investors, including Greenblatt, make comments throughout on what Marks says - well worth getting your hands on.

Part 3 - Howard Marks - Insights from London Value Investor Conference, 9 May 2013

Howard Marks of Oaktree Capital

The Human Side of Investing

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Paul Scott

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