Money and Finance
- Howard Marks Memo: The Race Is On
I’ve written a lot of memos to clients over the last 24 years – well over a hundred. One I’m particularly proud of is The Race to the Bottom from February 2007. I think it provided a timely warning about the capital market behavior...
- How Do You Say “minsky” In Mandarin? - By Christopher Pavese
Wikipedia defines a Minsky Moment as, “a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation...
- Richard Duncan Quotes
Longer excerpt from The New Depression (taken from my Kindle highlights, so the excerpts aren’t necessarily the paragraphs I have put them in below, and there may be things in between that I didn’t highlight).The quantity theory of money held that...
- Richard Duncan Quotes
Longer excerpt from The New Depression (taken from my Kindle highlights, so the excerpts aren’t necessarily the paragraphs I have put them in below, and there may be things in between that I didn’t highlight). [Irving] Fisher reasoned that the velocity...
- Howard Marks, The Most Important Thing, And The 6th Annual Value Investing Congress West
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...
Money and Finance
Howard Marks Memo: The Long View
The Importance of Cycles
In my opinion, there are two key concepts that investors must master: value and cycles. For each asset you’re considering, you must have a strongly held view of its intrinsic value. When its price is below that value, it’s generally a buy. When its price is higher, it’s a sell. In a nutshell, that’s value investing.
But values aren’t fixed; they move in response to changes in the economic environment. Thus, cyclical considerations influence an asset’s current value. Value depends on earnings, for example, and earnings are shaped by the economic cycle and the price being charged for liquidity.
Further, security prices are greatly affected by investor behavior; thus we can be aided in investing safely by understanding where we stand in terms of the market cycle. What’s going on in terms of investor psychology, and how does it tell us to act in the short run? We want to buy when prices seem attractive. But if investors are giddy and optimism is rampant, we have to consider whether a better buying opportunity mightn’t come along later.
In my opinion, there are two key concepts that investors must master: value and cycles. For each asset you’re considering, you must have a strongly held view of its intrinsic value. When its price is below that value, it’s generally a buy. When its price is higher, it’s a sell. In a nutshell, that’s value investing.
But values aren’t fixed; they move in response to changes in the economic environment. Thus, cyclical considerations influence an asset’s current value. Value depends on earnings, for example, and earnings are shaped by the economic cycle and the price being charged for liquidity.
Further, security prices are greatly affected by investor behavior; thus we can be aided in investing safely by understanding where we stand in terms of the market cycle. What’s going on in terms of investor psychology, and how does it tell us to act in the short run? We want to buy when prices seem attractive. But if investors are giddy and optimism is rampant, we have to consider whether a better buying opportunity mightn’t come along later.
...
Of all the investment adages I use, this one remains the most important: “What the wise man does in the beginning, the fool does in the end.” Practices and innovations often move from exotic to mainstream to overdone, especially if they’re initially successful. What early investors did safely, the latecomers tried in 2003-07 with excessive leverage applied to overpriced and often inappropriate assets. As I wrote in “It’s All Good” (July 2007), leverage was the “ketchup” of this period, used to make unattractive underlying investments appear tasty. The results have been disastrous.
Here’s another way to put it, from The Wall Street Journal of November 24,
That statement wasn’t made in reference to current events; that was Irving Fisher writing 76 years ago (“The Debt-Inflation Theory of Great Depressions,” Econometrica, March 1933). Borrowed money lets economic units expand the scale of their activity. But it doesn’t add value or make things better; it just makes gains bigger and losses more painful. There’s an old saying in Las Vegas: “The more you bet, the more you win when you win.” But they always forget to add “. . . and the more you lose when you lose.”
In one of those beautiful phrasings that demonstrate his mastery of language, Jim Grant of Grant’s Interest Rate Observer has described liquidity and leverage as “money of the mind.” By this he means they’re intangible and ephemeral, not dependable like assets or equity capital. Someone may lend you money one day but refuse to renew your loan when it comes due. Thus, leverage is purely a function of the lender’s mood. The free-and-easy lending of 2003-07 has turned into an extreme credit crunch, and the unavailability of credit is both the root and the hallmark of today’s biggest problems. Those who expand the scope of their operations on the basis of borrowed money should always consider the possibility that lenders will change their mind.
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Here’s another way to put it, from The Wall Street Journal of November 24,
When it comes to booms gone bust, “over-investment and overspeculation are often
important; but they would have far less serious results were they not conducted
with borrowed money.”
That statement wasn’t made in reference to current events; that was Irving Fisher writing 76 years ago (“The Debt-Inflation Theory of Great Depressions,” Econometrica, March 1933). Borrowed money lets economic units expand the scale of their activity. But it doesn’t add value or make things better; it just makes gains bigger and losses more painful. There’s an old saying in Las Vegas: “The more you bet, the more you win when you win.” But they always forget to add “. . . and the more you lose when you lose.”
In one of those beautiful phrasings that demonstrate his mastery of language, Jim Grant of Grant’s Interest Rate Observer has described liquidity and leverage as “money of the mind.” By this he means they’re intangible and ephemeral, not dependable like assets or equity capital. Someone may lend you money one day but refuse to renew your loan when it comes due. Thus, leverage is purely a function of the lender’s mood. The free-and-easy lending of 2003-07 has turned into an extreme credit crunch, and the unavailability of credit is both the root and the hallmark of today’s biggest problems. Those who expand the scope of their operations on the basis of borrowed money should always consider the possibility that lenders will change their mind.
-
- Howard Marks Memo: The Race Is On
I’ve written a lot of memos to clients over the last 24 years – well over a hundred. One I’m particularly proud of is The Race to the Bottom from February 2007. I think it provided a timely warning about the capital market behavior...
- How Do You Say “minsky” In Mandarin? - By Christopher Pavese
Wikipedia defines a Minsky Moment as, “a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation...
- Richard Duncan Quotes
Longer excerpt from The New Depression (taken from my Kindle highlights, so the excerpts aren’t necessarily the paragraphs I have put them in below, and there may be things in between that I didn’t highlight).The quantity theory of money held that...
- Richard Duncan Quotes
Longer excerpt from The New Depression (taken from my Kindle highlights, so the excerpts aren’t necessarily the paragraphs I have put them in below, and there may be things in between that I didn’t highlight). [Irving] Fisher reasoned that the velocity...
- Howard Marks, The Most Important Thing, And The 6th Annual Value Investing Congress West
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...