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Zone of Competence

~ Dollars, Sense, and Probabilities.

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Tag Archives: Howard Marks

Howard Marks: Focus on Buying Cheap, Avoiding Losers, and Survival

19 Sunday Apr 2015

Posted by JC in Uncategorized

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Howard Marks, Investing, Probabilities and Consequences

This is a great talk from Howard Marks. What a joy to see a brilliant mind in action. My notes and thoughts follow.

Randomness Dominates

You shouldn’t act as if the things that should happen are the things that will happen. Humility is needed.

Beware of outcome bias. You can’t tell from an investment outcome whether a decision was good or bad because of randomness and luck. The longer the successful track record, the more likely skill is involved.

Balancing Probabilities and Consequences Is Key

Thinking in terms of probabilities and the expected value from a course of action is the first step. But then you must think about the consequences of being wrong. A very small probability event that you can’t survive may make you choose a different course of action.

As Marks puts it, you don’t want to be the skydiver who is right 98% of the time.

“It’s not sufficient to survive on average. We have to survive on the bad days.”
— Howard Marks

Focus on Avoiding Losers

Charles Ellis says that if the game isn’t controllable, it’s better to work to avoid losers than to try for winners.

Risk control is Oaktree’s primary focus. They don’t swing for the fences. Oaktree’s motto: “If we avoid the losers, the winners take care of themselves.” Just lop off the left tail of the probability distribution.

Weed out the problems, like tending a garden. Focus on consistency.

The Relationship Between Price and Value

If you buy a high quality asset but you overpay for it, you are in big trouble. Remember the Nifty Fifty in the late 1960s and early 1970s.

“The secret for success in investing is buying things for less than they are worth.”
— Howard Marks

Planning Assumptions Versus Macro Forecasts

Macro forecasts are worthless, but planning assumptions are necessary with individual companies. Just don’t make big one-way bets based on these assumptions. Assume a range of outcomes and seek survivability.

Don’t Chase the Crowd

You make no money doing the things that everybody wants to do, you make money by doing the things nobody wants to do that then turn out to have value.

Howard Marks: Risk Rising, But Not Time to Head for the Exits

02 Monday Dec 2013

Posted by JC in Uncategorized

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Howard Marks, Risk, risk tolerance, Valuations

Howard Marks is a legendary investor at Oaktree Capital. In his latest memo, he sees heightened risk:

Certainly risk tolerance has been increasing of late; high returns on risky assets have encouraged more of the same; and the markets are becoming more heated. The bottom line varies from sector to sector, but I have no doubt that markets are riskier than at any other time since the depths of the crisis in late 2008 (for credit) or early 2009 (for equities), and they are becoming more so.

He says caution is appropriate, but we aren’t in the danger zone yet:

Is This a Sell Signal? If Not, Then What?

No, I don’t think it’s time to bail out of the markets. Prices and valuation parameters are higher than they were a few years ago, and riskier behavior is observed. But what matters is the degree, and I don’t think it has reached the danger zone yet.

First, as mentioned above, the absolute quantum of risk doesn’t seem as high as in 2006-07. The modern miracles of finance aren’t seen as often (or touted as highly), and the use of leverage isn’t as high.

Second, prices and valuations aren’t highly extended (the p/e ratio on the S&P 500 is around 16, the post-war average, while in 2000 it was in the low 30s: now that’s extended).

A rise in risk tolerance is something that should get your attention and focus your concentration. But for it to be highly worrisome, it has to be accompanied by extended valuations. I don’t think we’re there yet. I think most asset classes are priced fully – in many cases on the high side of fair – but not at bubble-type highs. Of course the exception is bonds in general, which the central banks are supporting at yields near all- time lows, meaning prices near all-time highs.

The whole memo is worth a read:

Howard Marks: The Race Is On

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