Monday, April 30, 2012
“It is my contention that value does not mix so well with debt.”
“I do not think it is logical to try and outsmart the smartest people. Instead, my weapons are irony and paradox. The joy of life is partly in the strange and unexpected. It is in the constant exclamation ‘Who would have thought it?’”
“I attempt to cultivate my own insights and to recognise the precarious uncertainty of global macro trends. I attempt to observe such things first hand through my extensive travel (I promise no more YouTube videos), and seek to understand their significance by investigating how previous societies coped under similar circumstances. But first and foremost, I am always preoccupied with the notion that I just do not have the answer. I am not blessed with the notion of certainty. Someone once said we should think of the world as a sentence with no grammar. If we do I see my job as putting in the punctuation. But above all, my job is to make money.
In keeping with this theme, I want define the three ingredients that I believe make for an outstanding macro hedge fund manager. These are, in no stringent order:
1. Successful but contentious macro risk posturing.
2. The need to choose the asset class offering the highest probability of payout should the conviction hold true whilst offering an asymmetric loss profile should the original premise prove unfounded.
3. A best in class risk technique that stop losses the narrative and responds early with loss mitigation procedures (i.e. a method of staying solvent, rational and disciplined under pressure).
I have always figured that the first is the real key. That success was simply a matter of contentious macro posturing. In other words, going long very rich risk premium or buying cheap stuff. It is my assertion that what makes a great fund manager first and foremost is the ability to establish a contentious premise outside the existing belief system and have it go on to become adopted by the broader financial community. Bruce Kovner expressed the idea more eloquently when he said, “I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine...that the dollar can fall to 100 yen”. I am sure you are nodding in agreement, except Bruce was saying this when the USDJPY was well over 200, not today's rate of 80!
That is the kind of guy I want to be when I grow up.”
“Remember, Jesse’s [Livermore] demise was down to [i.e. because of] his shorting of the stock market. Without a doubt, as our transition starting in 2007 testifies to, bearish macro calls are better expressed through the use of fixed income strategies. There is a higher probability that such bets will pay out should the narrative be vindicated. One is long, not short, risk premium and the lower volatility enhances the persistency of the trade.”
Sunday, April 29, 2012
Friday, April 27, 2012
Thursday, April 26, 2012
Wednesday, April 25, 2012
By Howard Marks,
Author of The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor
People who might be perfectly happy with their lot in isolation become miserable when they see others do better. In the world of investing, most people find it terribly hard to sit by and watch while others make more money than they do.
Howard Marks: Emotion and ego: A lot of the drive in investing is competitive. High returns can be unsatisfying if others do better, while low returns are often enough if others do worse. The tendency to compare results is one of the most invidious. The emphasis on relative returns over absolute returns shows how psychology can distort the process.
I know of a nonprofit institution whose endowment earned 16 percent a year from June 1994 to June 1999, but since its peers averaged 23 percent, the people involved with the endowment were dejected.
Seth Klarman: Even the best investors judge themselves on the basis of return. It would be hard to evaluate yourself on risk, since risk cannot be measured. Apparently, the risk-averse managers of this endowment were disappointed with their relative returns even though their risk-adjusted performance was likely excellent, as borne out by their performance over the following three years. This highlights just how hard it is to maintain conviction over the long run when short-term performance is considered poor.
Without growth stocks, technology stocks, buyouts and venture capital, the endowment was entirely out of step for half a decade. But then the tech stocks collapsed, and from June 2000 to June 2003 the institution earned 3 percent a year while most endowments suffered losses. The stakeholders were thrilled.
There's something wrong with this picture. How can people be unhappy making 16 percent a year and happy making 3 percent? The answer lies in the tendency to compare ourselves to others and the deleterious impact this can have on what should be a constructive, analytical process.
Joel Greenblatt: This is incredibly important. Most institutional and individual investors benchmark their returns, and therefore most end up chasing the crowd: accent on the wrong sylLABle.
Excerpted from, The Most Important Thing Illuminated by Howard Marks. Copyright (c) 2012 Howard Marks. Used by arrangement with Columbia University Press.
Howard Marks, author of The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor, is chairman and cofounder of Oaktree Capital Management, a Los Angeles-based investment firm with $80 billion under management. He holds a Bachelor's Degree in finance from the Wharton School and an MBA in accounting and marketing from the University of Chicago. He is the author of The Most Important Thing: Uncommon Sense for the Thoughtful Investor, published by Columbia Business School Publishing.
Tuesday, April 24, 2012
-Thomas William Phelps, 100 to 1 inthe stock market
Monday, April 23, 2012
Friday, April 20, 2012
Thursday, April 19, 2012
Found via Naked Capitalism.
As your investment manager our goal is to own shares in outstanding public companies that boast both excellent long-term performance records and ethical corporate governance standards. In the normal course of business we shouldn’t need to vote against management’s recommendations on proxy issues, because we trust management to act in our best interest.
Unfortunately, this year we are voting against James A. Johnson as he stands for re-election to the board of directors of Goldman Sachs, which we own for Sequoia Fund and separately-managed accounts. Mr. Johnson also serves on the board of Target Corp., which we own, and which should issue its proxy soon. If Mr. Johnson stands for re-election at Target, we intend to vote against him. If you vote your own shares in accounts we manage for you, we recommend you vote against James Johnson.
“The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.
None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: ‘Most men would rather die than think. Many do.’”
Wednesday, April 18, 2012
Jeremy Grantham's 1Q Letter: My Sister's Pension Assets and Agency Problems (The Tension between Protecting Your Job or Your Clients' Money)
The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest. It explains the discrepancy between a remarkably volatile stock market and a remarkably stable GDP growth, together with an equally stable growth in “fair value” for the stock market. This difference is massive – two-thirds of the time annual GDP growth and annual change in the fair value of the market is within plus or minus a tiny 1% of its long-term trend as shown in Exhibit 1. The market’s actual price – brought to us by the workings of wild and wooly individuals – is within plus or minus 19% two-thirds of the time. Thus, the market moves 19 times more than is justified by the underlying engines!
You apparently can survive betting against bull market irrationality if you meet three conditions. First, you must allow a generous Ben Graham-like “margin of safety” and wait for a real outlier before you make a big bet. Second, you must try to stay reasonably diversified. Third, you must never use leverage. In my personal opinion (and with the benefit of hindsight, you might add), although we in asset allocation felt exceptionally and painfully patient at the time, we did not in the past always hold our fire long enough or be patient enough. It is the classic failing of value managers (and poker players for that matter) to get impatient and bet too hard too soon. In addition, GMO was not always optimally diversified. We are generally more cautious (or, if you prefer, “more experienced”) now than in 1998 with respect to, for example, both patience and diversification, and at least we in asset allocation always stayed away from leverage. The U.S. growth and technology bubble of 2000 was by far the biggest market outlier event in U.S. market history; we had previously survived the 65 P/E market in Japan, which was perhaps the greatest outlier in all important equity markets anywhere and at any time. These were the most stringent tests for managers, and we were 2 to 3 years early in our calls in both cases. Yet we survived, although not without some battle scars, with the great help that we did, in the end, win these bets and by a lot. Hypothetically, resisting the temptation to invest too soon in 1931 may have been a tougher test of survival in bucking the market. Luckily we, and all value managers, were not around to be tempted by that one. (Although Roy Neuberger – who died in December 2010, unfortunately – was, and he could talk about it as lucidly as any investor ever.)
This exemplifies perfectly Warren Buffett’s adage that investing is simple but not easy. It is simple to see what is necessary, but not easy to be willing or able to do it. To repeat an old story: in 1998 and 1999 I got about 1100 fulltime equity professionals to vote on two questions. Each and every one agreed that if the P/E on the S&P were to go back to 17 times earnings from its level then of 28 to 35 times, it would guarantee a major bear market. Much more remarkably, only 7 voted that it would not go back! Thus, more than 99% of the analysts and portfolio managers of the great, and the not so great, investment houses believed that there would indeed be “a major bear market” even as their spokespeople, with a handful of honorable exceptions, reassured clients that there was no need to worry.
Career and business risk is not at all evenly spread across all investment levels. Career risk is very modest, for example, when you are picking insurance stocks; it is therefore hard to lose your job. It will usually take 4 or 5 years before it becomes reasonably clear that your selections are far from stellar and by then, with any luck, the research director will have changed once or twice and your deficiencies will have been lost in history. Picking oil, say, versus insurance is much more visible and therefore more dangerous. Picking cash or “conservatism” against a roaring bull market probably lies beyond the pain threshold of any publicly traded enterprise. It simply cannot take the risk of being seen to be “wrong” about the big picture for 2 or 3 years, along with the associated loss of business. Remember, expensive markets can continue on to become obscenely expensive 2 or 3 years later, as Japan and the tech bubble proved. Thus, because asset class selection packs a more deadly punch in the career and business risk game, the great investment opportunities are much more likely to be at the asset class level than at the stock or industry level. But even if you know this, dear professional reader, you will probably not be able to do too much about it if you value your job as did the nearly 1100 analysts in my survey. Except, perhaps, with your own assets or, say, your sister’s pension assets.
Found via The Corner of Berkshire & Fairfax.
Related book: Steve Jobs
Aubrey K. McClendon is one of the most successful energy entrepreneurs of recent decades. But he hasn’t always proved popular with shareholders of the company he co-founded, Chesapeake Energy Corp., the second-largest natural gas producer in the United States.
McClendon, 52, helped cause Chesapeake shares to plummet amid the financial crisis when he sold hundreds of millions of dollars in stock to raise cash for himself. Later, to settle a lawsuit by shareholders, he agreed to buy back a $12 million map collection that he’d sold to Chesapeake.
His approach to running his company also is renowned: Among other employee perks, on-site Botox treatments are available at its headquarters in Oklahoma City, Oklahoma. Now, a series of previously undisclosed loans to McClendon could once again put Chesapeake’s CEO and shareholders at odds.
Found via The Big Picture.
"It's kind of a mythology that's developed around finance," says Mr. Shiller, a behavioral economist, professor at Yale University, and teacher of many future financiers. Rapacious Wall Street types, he says, may make handy bad guys in the movies. "The problem is, we can't live in a mythic world. We have to live in the real world."
Related book: Finance and the Good Society
This is a great example of Peter Bevelin pulling complementary quotes together from different Warren Buffett letters to shareholders in his new book, A Few Lessons for Investors and Managers. The book also includes thoughts from Peter that add to the discussion.
“Though the mathematical calculations required to evaluate equities are not difficult, an analyst - even one who is experienced and intelligent - can easily go wrong in estimating future "coupons." At Berkshire, we attempt to deal with this problem in two ways. (1992)
First, we try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change, we're not smart enough to predict future cash flows. Incidentally, that shortcoming doesn't bother us. What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. (1992)
If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. (1999)
Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital. (1996)”
Tuesday, April 17, 2012
This is to let you know that I have been diagnosed with stage I prostate cancer. The good news is that I’ve been told by my doctors that my condition is not remotely life-threatening or even debilitating in any meaningful way. I received my diagnosis last Wednesday. I then had a CAT scan and a bone scan on Thursday, followed by an MRI today. These tests showed no incidence of cancer elsewhere in my body.
....................Related article (Carol Loomis): How Berkshire Hathaway CEO Warren Buffett spent the week he found out he has prostate cancer: Business as usual.
Found via The Big Picture.
When a group of millionaires appear onstage with a Democratic President to call for higher taxes on people like them, you know one of two things: either the President is in Hollywood, or something interesting is happening in the country at large. In this case, it’s the latter. After three decades in which rising inequality was largely ignored, it has finally emerged as a serious political issue—or, at least, President Obama is trying to turn it into one.
Related previous posts:
The standard of living of the average American continues to fall. Real median household income today is near the same level as it was fifteen years ago, a remarkable statistic since the debt to GDP ratio is 100 points higher (Chart 1). The cause of this deterioration in living standards can be traced to the excessive accumulation of debt, as well as the debt proportion that has turned increasingly unproductive, or even counterproductive. When debt is utilized to finance nonproductive assets, an economic process is initiated that undermines prosperity. Productivity gains must be generated in order to boost income, and thereby the standard of living. If debt enhances productivity, incomes will expand and the economic pie will be enlarged. Otherwise, the debt increase exercise is debilitating to economic growth.
Monday, April 16, 2012
From the Distressed Debt Investing blog:
On April 5th, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. In my opinion, this may be one of the most important pieces of legislation enacted in the past 20 years. And investors of all sorts: angels, value, distressed, etc., should be paying attention.
It has surprised me that discussion of the JOBS Act has not perpetuated the "investing blog" universe given the ramification of this new legislation. I am hoping this post will be a springboard for institutional investors and writers to begin discussion of the bill and its implications for those in the professional money management business. I'd encourage you to forward this post to those who may be interested.