Howard Marks is an investor we like a lot her at Canadian Value Investors. He is a very thoughtful speaker and is also quite prolific (he publishes his letters here - https://www.oaktreecapital.com/insights/howard-marks-memos )
In October he spoke with Bloomberg and it’s well worth a watch!
Here are the highlights:
“We have the lowest prospective returns in history. My typically client, a pension fund, an endowment, needs 7% return on average to make the math work. And most people have accepted that you can’t make 7% today safely and dependably, and certainly not from developed world stocks and bonds. So that means you have to push out the risk curve and go further afield into new things or odd things, such as private equity and taking on the risk of being levered, or illiquid assets.”
Finding an edge in an efficient world – “[I started] in high yield bonds in November of 1978. the high-yield bond world started in 77 or 78, and I could put together portfolios that would have higher returns with lower risk. Then the market got a little more efficient, and then it was a great achievement to have a portfolio with a higher return with the same risk. When the market becomes more efficient, portfolios that are have higher returns generally have higher risks, so the world becomes less attractive from the point of view of a bargain hunter. Today or in in recent days I would say that the most the best inefficiencies have come cyclically not secularly, but cyclically, and there have been three four five six occasions in the last 25 years when at least the potential was there to add value by timing the market right and knowing when we were at extremes.”
CVI Note: Something that is top of mind for us here at CVI is that you have to take big big bets when the odds are heavily in your favor, because it won’t happen that often. As Warren Buffett says - “Well, we don’t want to nibble. But we would like to take big gulps in the stock market from time to time.”
How important today is scale size [in the investment business]? – “On the one hand having a bigger asset total permits you to have more staff in theory more expertise, on the other it reduces your flexibility and your selectivity. The truth about the investment business is that good performance brings more money, but at some point more money brings bad performance. So the goal is to arrest that process before you have too much money. Now there's no way to tell in advance what is too much money. You know, if you and I worked for firestone and we developed a new tire, say well how long how far will that run? You'd say well let's put it on a car and find out and you run it until it blows up. We don't have that luxury, we can't expand our assets until our performance blows up, so by definition we have to stop this side of the wall, which means we never really find out where the wall is. I think that limiting your assets is important and I think about our industry as ranging from artisans to factories. The artisans have less assets but you know do a more labor-intensive job and the ones with skill have better performance. The factories may competently manage their sums at low cost but are unlikely to have great performance.”
Again, it all comes down to this – you get great opportunities when you do the things that nobody else is willing to do. But when you do things that everyone else is eager to do, it is hard to imagine you are going to score any great bargains. And that’s where we are today… I think on one hand you want to invest because of the strength of the economy, and you don’t want to be left behind and fomo is a concern. But on the other hand, it is the time to be careful because the worst of loans are made in the best of times.