Money and Finance
- Jeremy Grantham's 4q Letter: "the Longest Quarterly Letter Ever"
Jeremy Grantham's 4Q Letter is comprised of three sections: Investment Advice from Your Uncle Polonius, Your Grandchildren Have No Value (And Other Deficiencies of Capitalism), and Investment Observations for the New Year...........Excerpts: Inflation...
- Howard Marks Memo: Hemlines And Investment Styles
While the details change, the pendulum-like fluctuation of investment styles is a constant. Fear versus greed, pursuit of safety versus aggressiveness, stocks versus bonds, and growth versus value are just a few examples of the areas in which we see this...
- A Bargain Hunter Stands Tall
KIPLINGER'S: What were you doing as the markets gyrated so dramatically in the fall?- BERKOWITZ: Although the fall in stock prices hurt our performance, it has been a blessing. We've been buying companies at prices that even when I was in my most...
- Legg Mason Value Trust Investment Commentary: Fourth Quarter 2007
I think the market is in for a period of what the Greeks refer to as enantiodromia, the tendency of things to swing to the other side. This is not a forecast, but rather a reflection on valuation. -All of the poorest performing parts of the market, housing,...
- Vaccinate Yourself Against 2014 Predictions With Silver Medals
Its prediction season! What will the market do? What will happen in economics? In the world? No one really knows but there sure are lots of people ready, willing, and able to give authoritative sounding predictions on what will happen in 2014. I follow...
Money and Finance
Barron's Interviews - Howard Marks and Rob Arnott
From November and December. Interestingly, they both mentioned convertible bonds as an attractive area right now.
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Interview with Howard Marks (11/17/2008):
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What went wrong with risk management?
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First of all, you need a risk manager who knows the business -- not somebody who knows everything about statistics but who has never been in the job. And you had risk managers who were statisticians. They could tell you what should happen most of the time.
First of all, you need a risk manager who knows the business -- not somebody who knows everything about statistics but who has never been in the job. And you had risk managers who were statisticians. They could tell you what should happen most of the time.
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But what should happen most of the time is a heck of a lot different from what will happen on a bad day. So they extrapolate history, but the trouble is that history changes.
But what should happen most of the time is a heck of a lot different from what will happen on a bad day. So they extrapolate history, but the trouble is that history changes.
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One of the great lessons is beware of platitudes, such as "There has never been a national decline in home prices." If you believe that there has never been a national decline in home prices and that there never could be, then you bid home prices up to levels that don't allow for the risk of widespread losses, because you concluded it could never happen. Then the fact that they are at those new high prices introduces, in itself, the risk of a national home-price decline.
One of the great lessons is beware of platitudes, such as "There has never been a national decline in home prices." If you believe that there has never been a national decline in home prices and that there never could be, then you bid home prices up to levels that don't allow for the risk of widespread losses, because you concluded it could never happen. Then the fact that they are at those new high prices introduces, in itself, the risk of a national home-price decline.
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So the actions of people relying on history change history, and that is what people lose track of.
So the actions of people relying on history change history, and that is what people lose track of.
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How did you and your colleagues at Oaktree react to the conditions that led up to the credit crisis?
How did you and your colleagues at Oaktree react to the conditions that led up to the credit crisis?
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I wrote a memo to our clients a few years ago titled "It Is What It Is." It said the first job of a money manager is to understand the environment you are operating in and its ramifications, and to act accordingly. We don't make predictions around here, and we didn't predict the things that are happening now. We said, though, that we were living in extremely bullish, euphoric and overconfident times, in which prospective returns are low and risk premiums are low, and that it wasn't a time to take risk.
I wrote a memo to our clients a few years ago titled "It Is What It Is." It said the first job of a money manager is to understand the environment you are operating in and its ramifications, and to act accordingly. We don't make predictions around here, and we didn't predict the things that are happening now. We said, though, that we were living in extremely bullish, euphoric and overconfident times, in which prospective returns are low and risk premiums are low, and that it wasn't a time to take risk.
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There's been a lot written about how retail-mortgage underwriting standards deteriorated. What about standards for underwriting deals?
There's been a lot written about how retail-mortgage underwriting standards deteriorated. What about standards for underwriting deals?
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We were in a period in which people weren't afraid of losing money; what they were afraid of was missing out on deals. So the competition to make deals got stronger and stronger, and people wanted to preserve and increase their share of the deal market.
We were in a period in which people weren't afraid of losing money; what they were afraid of was missing out on deals. So the competition to make deals got stronger and stronger, and people wanted to preserve and increase their share of the deal market.
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If you are a car manufacturer and you want to sell more cars, you would try to make a better car. But if your product is money and everybody's money is the same, how do you increase your market share? You participate in an auction in which one person says, "I will take [returns of] 7%," and another person says, "I will take 6%," and another person says, "I'll take 5%." So it is a race to the bottom. And since everybody's money is the same, for the most part, the way you compete is by making your money cheaper, and this cheap money is what drove markets.
If you are a car manufacturer and you want to sell more cars, you would try to make a better car. But if your product is money and everybody's money is the same, how do you increase your market share? You participate in an auction in which one person says, "I will take [returns of] 7%," and another person says, "I will take 6%," and another person says, "I'll take 5%." So it is a race to the bottom. And since everybody's money is the same, for the most part, the way you compete is by making your money cheaper, and this cheap money is what drove markets.
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When we spoke two months ago, you said it wasn't the day after Christmas in terms of buying opportunities. What do you see now?
When we spoke two months ago, you said it wasn't the day after Christmas in terms of buying opportunities. What do you see now?
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It is hard to say. If the world turns out to be reasonable, or at least within the context of what people are girding for today, then things are cheap. We know the world is going to get a lot worse over the next one, two or three years, but we don't know by how much. So, to say that things are cheap today is what I would call the perceived merits. But there are a lot of shoes yet to fall, and the merits could certainly deteriorate in the next year or so. I wrote a memo to my clients in September titled "Nobody Knows," and I stand by that title. If you are a smart person, that's all you can say.
It is hard to say. If the world turns out to be reasonable, or at least within the context of what people are girding for today, then things are cheap. We know the world is going to get a lot worse over the next one, two or three years, but we don't know by how much. So, to say that things are cheap today is what I would call the perceived merits. But there are a lot of shoes yet to fall, and the merits could certainly deteriorate in the next year or so. I wrote a memo to my clients in September titled "Nobody Knows," and I stand by that title. If you are a smart person, that's all you can say.
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[Quote worth repeating: "the actions of people relying on history change history, and that is what people lose track of."]
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..........
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Interview with Rob Arnott (12/22/2008):
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You've said that investors can't bank on equities returning 10% every year, on average. What's a realistic target?
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The yield for U.S. stocks is around 3.5%. Historically, earnings and dividends have grown about 4.5% per annum. So if you have 4.5% growth and a 3.5% yield, that's an 8% return. I'm sure your readers would love to hear a forecast of double-digit returns, especially given the biggest bear market since the 1930s. However, our starting point was from valuation levels that were so very rich that we are now merely back to levels that could provide long-term returns of around 8% from current levels. There are segments of the bond market where we can almost assuredly do better.
The yield for U.S. stocks is around 3.5%. Historically, earnings and dividends have grown about 4.5% per annum. So if you have 4.5% growth and a 3.5% yield, that's an 8% return. I'm sure your readers would love to hear a forecast of double-digit returns, especially given the biggest bear market since the 1930s. However, our starting point was from valuation levels that were so very rich that we are now merely back to levels that could provide long-term returns of around 8% from current levels. There are segments of the bond market where we can almost assuredly do better.
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You don't sound like you are sold on stocks, Rob, even after this huge selloff.
You don't sound like you are sold on stocks, Rob, even after this huge selloff.
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The problem I have with stocks -- and it is a very simple problem -- is that while stocks are nicely priced, they aren't attractively priced relative to their own bonds. The savagery of September, October and November was more drastic for bonds than it was for stocks. A 40% drop in stocks is big. A 20% to 30% drop in major categories of bonds is immense. So the take-no-prisoners market actually widened the opportunities on the bond side even more than on the stock side.
The problem I have with stocks -- and it is a very simple problem -- is that while stocks are nicely priced, they aren't attractively priced relative to their own bonds. The savagery of September, October and November was more drastic for bonds than it was for stocks. A 40% drop in stocks is big. A 20% to 30% drop in major categories of bonds is immense. So the take-no-prisoners market actually widened the opportunities on the bond side even more than on the stock side.
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Investment-grade corporate bonds are a vivid example of that. The yield spreads over stocks is averaging about six [percentage points] right now. If you can get a 3.5% yield on stocks and 9.5% on the same company's bonds, which is going to give you the higher return? The stocks will, if they show earnings and dividend growth faster than 6% -- but historically that's a stretch. So the bonds have been savaged worse than the stocks have, and actually represent the most interesting opportunity.
Investment-grade corporate bonds are a vivid example of that. The yield spreads over stocks is averaging about six [percentage points] right now. If you can get a 3.5% yield on stocks and 9.5% on the same company's bonds, which is going to give you the higher return? The stocks will, if they show earnings and dividend growth faster than 6% -- but historically that's a stretch. So the bonds have been savaged worse than the stocks have, and actually represent the most interesting opportunity.
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So you are talking about investment-grade bonds?
So you are talking about investment-grade bonds?
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Yes, investment-grade bonds. But for bonds below investment grade, the spreads are quite extraordinary. By the end of November, spreads had widened out to nearly 20 percentage points above Treasuries and also above the corresponding stock yields. Suppose 40% of those bonds go bust next year. And suppose that you get 50 cents on the dollar back on the bonds that go bust. By that point, you have lost your spread of 20 percentage points.
Yes, investment-grade bonds. But for bonds below investment grade, the spreads are quite extraordinary. By the end of November, spreads had widened out to nearly 20 percentage points above Treasuries and also above the corresponding stock yields. Suppose 40% of those bonds go bust next year. And suppose that you get 50 cents on the dollar back on the bonds that go bust. By that point, you have lost your spread of 20 percentage points.
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But such a scenario has to happen every year, until the high-yield bonds mature, in order to merely match Treasury returns. A 40% default rate every year for several years would be truly without precedent. So I view 2009 as an "ABT" year -- Anything but Treasuries. The less you hold in Treasuries, the better you are likely to do.
But such a scenario has to happen every year, until the high-yield bonds mature, in order to merely match Treasury returns. A 40% default rate every year for several years would be truly without precedent. So I view 2009 as an "ABT" year -- Anything but Treasuries. The less you hold in Treasuries, the better you are likely to do.
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- Jeremy Grantham's 4q Letter: "the Longest Quarterly Letter Ever"
Jeremy Grantham's 4Q Letter is comprised of three sections: Investment Advice from Your Uncle Polonius, Your Grandchildren Have No Value (And Other Deficiencies of Capitalism), and Investment Observations for the New Year...........Excerpts: Inflation...
- Howard Marks Memo: Hemlines And Investment Styles
While the details change, the pendulum-like fluctuation of investment styles is a constant. Fear versus greed, pursuit of safety versus aggressiveness, stocks versus bonds, and growth versus value are just a few examples of the areas in which we see this...
- A Bargain Hunter Stands Tall
KIPLINGER'S: What were you doing as the markets gyrated so dramatically in the fall?- BERKOWITZ: Although the fall in stock prices hurt our performance, it has been a blessing. We've been buying companies at prices that even when I was in my most...
- Legg Mason Value Trust Investment Commentary: Fourth Quarter 2007
I think the market is in for a period of what the Greeks refer to as enantiodromia, the tendency of things to swing to the other side. This is not a forecast, but rather a reflection on valuation. -All of the poorest performing parts of the market, housing,...
- Vaccinate Yourself Against 2014 Predictions With Silver Medals
Its prediction season! What will the market do? What will happen in economics? In the world? No one really knows but there sure are lots of people ready, willing, and able to give authoritative sounding predictions on what will happen in 2014. I follow...