Howard mark memos
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This document contains memos from Oaktree Capital covering various topics in investing from 1990-2009. Some key points include: 1) It's important to protect against losses while also seeking above average returns consistently over the long term. 2) The market tends to swing between extremes of euphoria and depression, and the best approach is to stay alert for extremes and adjust behavior slightly. 3) The two most important factors for investment success are investing in high quality assets and paying a good price. 4) Forecasting the future is difficult and extraordinary performance only comes from correctly forecasting non-consensus views, which are also very hard to do.
Howard mark memos
- 1. Memos – Oaktree Capital Subash Nayak http://art-of-mental-modelling.blogspot.in/
- 2. October - 1990 Equity Investing ◦ If you take care of losers, the winners will take care of themselves ◦ There will always be cases and years in which, when risk-takers will get more return ◦ In long term, seeking relative performance, which is little above average, on a consistent basis, with protection against poor absolute result in tough time --- will give better result ◦ Buy a distressed company only if the cost price fully covered by asset value
- 3. April - 1991 Market tends to swing between extremes ◦ Euphorbia and depression ◦ Celebrating positive development and obsessing with negative development ◦ Overprice and underprice Investor psychology tends to spend more time at the extremes than the “happy medium” The best approach ◦ Staying alert for market extremities ◦ Adjusting behavior slightly in response ◦ Refusing to fall into line with the herd behavior
- 4. October - 1992 Two principal factor for investment success • Good quality investment • Not assured return, the risk being over- Quality paying for quality • Given two asset of similar quality, it is better to pay less than more Price • Buying any asset for less than its worth virtually assures success • Buying what no one else will buy at any price almost assures eventual success
- 5. February - 1993 Forecasting ◦ It is hard to be right ◦ Being right with average consistency doesn’t help ◦ An average forecast doesn’t help even if it’s correct ◦ Above-average profits come from correctly forecasting extreme events ◦ Extra ordinary performance comes only from correct non-consesus forecasts Non-consensus forecasts are hard to make, hard to make correctly, and hard to act on
- 6. February - 1993 Forecaster ◦ Most forecasts are extrapolation ◦ Forecasters are usually Most wrong at the extreme ◦ Extreme forecasts are hard to believe and act on ◦ Forecasting has to be right with the timing also ◦ It takes money to forecast, it cost money if forecast misses ◦ Few people revisit the forecast ◦ There is no alternative outcome ◦ Why would someone share a potentially profitable forecast with you ?
- 7. January - 1994 On Identification of investment opportunity ◦ No sector give consistent high return ◦ What matter most is at what price are you investing and when ◦ Psychology is most important discipline in investing ◦ It is best to act as contrarian Book the bet which no one else will When others are afraid, you needn’t be. When others are unafraid, you better be
- 8. February - 1994 Risk in a low-interest rate Market ◦ Low interest rate makes investment in Fixed income security a negative return post inflation and tax ◦ It also increases the denominator of DCF analysis resulting in high value calculation for equities ◦ So many folks starts moving from risk free instruments to risky instruments (like Debt MF, equity, hedge fund, leveraged equity investing) ◦ A progressively decreasing interest rate market favors those who takes more risk ◦ Too low interest rate and too high price is an eventual recipe for downturn ◦ Therefore it make sense for one to look for risk- adjusted return in such scenarios
- 9. February - 1994 Cornerstone of Oaktree investment Exploitation of opportunities in inefficient market Heavy emphasis Insistence on on careful analysis preserving capital Refusal to pursue Specialization maximum return rather than at the cost of dabbling maximum risk
- 10. April - 1994 Successful investing has at least as much to do with what you pay for an asset as it does with what the asset’s fundamentals are
- 12. January – 2009 2 important concepts that an investor must master ◦ Value ◦ Cycle (short term, easy-to miss long term) Investing – as blind folks finding what an elephant is, by touching Reason for long-term cycles ◦ Steady rise in willingness (for so many things like accepting new paradigm, relax dilligent standard, using past statistical average, use of opaque and complex financial instruments, more illiquidity, and risk acceptance)
- 13. January – 2009 What the wise man does in the beginning, the fool does at the end Increasing past earning growth doesn’t implies similar good return in future Stock returns can’t forever outpace earning growth Equity are an inferior asset class ◦ No promise for annual interest payment or repayment ◦ Equity – residual payment after debt payment ◦ Past higher return of equity is nothing but compensation for their inferior status and volatility ◦ Equity performs better only when priced rightly for future profits ◦ Sluggish future growth might actually make a stock underperform bond/fixed income returns
- 14. January – 2009 Scams; unsupported mortgages on overpriced home; over-leveraged hedge funds; insures with inadequate capital ◦ Exposed when tide goes down Recognizing times when historic data shouldn’t be extrapolated in an important part of dealing prudently with future Conclusion ◦ Study and remember events of the past ◦ Be conscious of the cyclical nature of things
- 15. July - 2009 Risk ◦ The feeling that “anyone can do it” – Not only it overstate the ease of investing, but also vastly understate the risk. ◦ Investor can’t make money without taking risk, but it is not same as saying risk taking is sure to make money ◦ There are few things as risky as the widespread belief that there’s no risk ◦ Illiquidity is nothing but another source of risk, and it should be treated no differently ◦ Risk premium – extra margin that is asked by the investor for taking risk.
- 16. July - 2009 Risk ◦ Investors desire to do thing that they haven’t done before, especially if those thing seems modern and sophisticated