As mentioned in a previous post, Howard Marks, Chairman of Oaktree Capital Management, is scheduled as one of the presenters for the 6th Annual Value Investing Congress West that will take place on May 3 & 4 in Pasadena, California. His book, The Most Important Thing, comes out in a few weeks. The book has the same title as a memo he wrote in July 2003, which is one of the best memos/articles/letters I’ve ever come across. In the memo, he lists a number of precepts that guide Oaktree, each one of which qualifies as “the most important thing.” I posted an excerpt on the “I don’t know” school of investing last week. Below is another excerpt from that memo on the importance being mindful of cycles, which gets at half of one of my favorite Howard Marks quotes: “In my opinion, there are two key concepts that investors must master: value and cycles.”
We must never forget about the inevitability of cycles. Economies and world affairs rise and fall in cycles. So does corporate performance. The reactions of market participants to these developments also fluctuate cyclically. Thus price swings usually overstate the swings in fundamentals. When developments are positive and corporate profits are high, investors feel good and often bid assets to prices that more than reflect their intrinsic value. When developments are negative, on the other hand, panicky investors are prone to sell them down to overly cheap levels. So prices sometimes represent high multiples of peak prospects (as they did with technology stocks in the ‘90s), and sometimes low multiples of trough prospects.
Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do. People often act as if companies that are doing well will do well forever, and investments that are outperforming will outperform forever, and vice versa. Instead, it’s the opposite that’s more likely to be true.
Readers of Value Investing World are eligible for a $300 discount to attend the Value Investing Congress West on May 3 & 4. To qualify for the discount, please use the link below and the discount code W11VIW6. The discount expires on April 14, 2011. Disclosure: Value Investing World receives a referral fee for registrations generated through the link.