Seth Klarman on business valuation

From Margin of Safety:

Business valuation is a complex process yielding imprecise and uncertain results. Many businesses are so diverse or difficult to understand that they simply cannot be valued. Some investors willingly voyage into the unknown and buy into such businesses, impatient with the discipline required by value investing. Investors must remember that they need not swing at every pitch to do well over time; indeed, selectivity undoubtedly improves an investor’s results. For every business that cannot be valued, there are many others that can. Investors who confine themselves to what they know, as difficult as that may be, have a considerable advantage over everyone else.

Howard Marks presents at the Morgan Stanley Financials Conference

Link to webcast and presentation: Investing In A Low-Return World

[H/T ValueWalk]

Howard Marks on CNBC

Link to video

Howard Marks on the biggest investing errors

From The Most Important Thing:

The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing— these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring. 

Inefficiencies—mispricings, misperceptions, mistakes that other people make—provide potential opportunities for superior performance. Exploiting them is, in fact, the only road to consistent outperformance. To distinguish yourself from the others, you need to be on the right side of those mistakes. 

Why do mistakes occur? Because investing is an action undertaken by human beings, most of whom are at the mercy of their psyches and emotions. Many people possess the intellect needed to analyze data, but far fewer are able to look more deeply into things and withstand the powerful influence of psychology. To say this another way, many people will reach similar cognitive conclusions from their analysis, but what they do with those conclusions varies all over the lot because psychology influences them differently. The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.

Sanjay Bakshi quote

“In my view, the best form of float for someone who wants to be a value investor to manage other people’s money for a profit share or to invest in businesses at attractive prices using float at attractive prices.” -Sanjay Bakshi (from the comments of his Presentation on Floats & Moats)

The Soul of a Hedge Fund 'Machine'

Link to: The Soul of a Hedge Fund 'Machine'

The Bridgewater founder talks about how his firm measures employees and economies to steer its $160 billion in investments. 

How do you build the world's largest hedge fund? Bridgewater Associates founder Ray Dalio says he did it by creating a culture of "radical truth and radical transparency." Mr. Dalio's perhaps radical belief is that "everything is a machine"—including organizations and even the individual people within them. At his firm's Westport, Conn., headquarters, we are discussing the human machines at Bridgewater and the equally fascinating machine known as the U.S. economy. 

As for the people at his firm, the idea is to encourage everyone to accept unvarnished criticism as a treasured opportunity to learn and to solve problems. This is intended to allow constant refinement of business processes—also known as machines within the firm—from how Bridgewater buys office furniture to how it evaluates the world oil market.

..............

Related previous posts:

How The Economic Machine Works In 30 Minutes - by Ray Dalio

Ray Dalio: Principles of Bridgewater Associates

Cosmos: A Spacetime Odyssey: Episodes 12 and 13

I believe last night’s episode was the season finale. Below is a link to that episode, as well as the previous one, which I hadn’t yet linked to. You can also view them all, HERE.

Link to video: Cosmos: A Spacetime Odyssey: The World Set Free (Episode 12)

Link to video: Cosmos: A Spacetime Odyssey: Unafraid of the Dark (Episode 13)

Hussman Weekly Market Comment: We Learn From History That We Do Not Learn From History

Link to: We Learn From History That We Do Not Learn From History 

“We learn from history that we do not learn from history.” 

Georg Wilhelm Friedrich Hegel 

Last week, Investors Intelligence reported that bullish sentiment surged above 60%, coupled with a 5-year high in the S&P 500 and valuations beyond 18 times record trailing earnings. The same combination was last seen the week of the October 2007 market peak, last seen before that in January and May 1999 (which we should emphasize was good for only a 5% correction in the short run before a choppy run to the 2000 peak, but would still leave the S&P 500 more than 40% lower three years later), last seen before that the week of the August 1987 pre-crash peak, and last seen before that in January 1973, just before the S&P 500 lost half of its value. 

Market conditions presently match those that have repeatedly preceded either market crashes or extended losses approaching 50% or more. Such losses have not always occurred immediately, but they have typically been significant enough to wipe out years of prior market gains. Aside from the 2000-2002 instance, they also have historically ended at valuations associated with prospective 10-year S&P 500 nominal total returns in excess of 10%. At present, reliable valuation measures are associated with estimated total returns for the S&P 500 of just 2.0% annually over the coming decade. On the basis of historically reliable measures, the S&P 500 would have to move slightly below the 1000 level to raise its prospective returns to a historically normal 10% annually. Given short-term interest rates near zero, economic disruptions would probably be required in order to produce that outcome over the completion of the current cycle, and we have no forecast or requirement for that to occur. Of course, there is no shortage of historically unreliable measures available to offer assurance that equity valuations are just fine. 

Regardless of whether the market’s losses in this cycle turn out to be closer to 32% (which is the average run-of-the-mill bear market loss) or greater than 50% (which would be required to take historically reliable valuation measures to historical norms, though most bear markets have continued to undervalued levels), it’s going to be difficult to avoid steep losses without a plan of action. In our view, that action should be rather immediate even if the market’s losses are not. However uncomfortable it might be in the shorter-term, the historical evidence suggests that once overvalued, overbought, overbullish conditions become as extreme as they are today, it’s advisable to panic before everyone else does.

Quotes on doing what matters...

"There is nothing quite so useless, as doing with great efficiency, something that should not be done at all." -Peter F. Drucker

"We've got great flexibility and a certain discipline in terms of not doing some foolish thing just to be active -- discipline in avoiding just doing any damn thing just because you can't stand inactivity." -Charlie Munger

"There's no use running if you're on the wrong road." -Warren Buffett

Circle of competence...

"The best part of our knowledge is that which teaches us where knowledge leaves off and ignorance begins. Nothing more clearly separates a vulgar from a superior mind, than the confusion in the first between the little that it truly knows, on the one hand, and what it half knows and what it thinks it knows on the other." -Oliver Wendell Holmes (via Peter Bevelin's A Few Lessons from Sherlock Holmes)

..............

Related book: A Few Lessons for Investors and Managers From Warren Buffett