Thursday, 12 April 2012 00:00

Howard Marks: Speech Notes & Book Review

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Brief Notes From Howard Marks' Speech at 2012 Indy CFA Investment Forum (March 2012)

I was able to attend a conference just recently in my home city of Indianapolis at which Mr. Marks was a speaker. Not only is he an accomplished writer but he is a gifted public speaker (and somewhat of a jokester as I will reveal a little later in the blog).

Key Takeaways (the following is from my notes and is not a transcript):

Fundamentals, psychology, and technicals influence asset prices. Since 2009 fundamentals remained iffy, psychology has rebounded significantly, macro picture as scary as he has ever seen it.

Everyone was dependant on capital markets and as a result we won't see the same growth as credit won't be as available as in the past.

Europe: very cloudy, quite scary, Needs (or is working from) a new instruction manual

Risk: Alternative history concept learned from Taleb. Look at what could have happened. Think about possibility that things other than what you expect will happen.

Investing is when events collide with an investment portfolio. Offense vs. Defense decisions are the most important.

What were keys to success in great recession?

  • · You needed the nerve to invest
  • · You didn't need patience. Discernment, risk control, and selectivity did work in that particular period

Current stance:

  • · Move forward but with caution
  • · Lots of things wrong with the world but have recovery with modest expectations

It's not quality that's important it's the price. (My comment - but when quality can be purchased at the right price it can lead to great results)

What will make sure you do okay if world doesn't go your way? Margin of Safety.

 

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On a more personal level I did miss a conversation Mr. Marks was having in the hallway before his presentation but I was able to talk to him briefly before lunch (no earth shattering revelations) and I walked away very impressed. In fact I wish I had heard his IPO road show presentation before this encounter because I would have told him how impressed I was with his firms accounting standards. I don't know Mr. Marks personally but using that conservative standard really makes him, and his firm, a class act in my book.

He also has a sense of humor. Here is the first sentence he wrote when he signed my copy of his book, Memo to Oaktree Clients: "Don't sell this book on eBay. You'll never get another one. "Don't worry Mr. Marks I would never sell it (well maybe if a high quality company with a fifty foot moat stocked with crocodiles was selling at ones times earnings).

Book Review: The Most Important Thing Illuminated Edition

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It's my pleasure to announce that Howard Marks will be releasing a new copy of his book! The new edition is titled: The Most Important Thing Illuminated. This new version, (my understanding is that it will be available in a digital version only), is annotated by Chris Davis, Joel Greenblatt, Paul Johnson, and Seth Klarman. It also includes a new chapter: Reasonable Expectations.

I have to say I was very excited to learn that this new edition was going to be released. As I mentioned in a previous entry on this blog I found the first edition of his book to be a seminal investing work, one that deserves to be on the same shelf as The Intelligent Investor, Security Analysis, Common Stocks and Uncommon Profits, and the Berkshire Hathaway shareholder letters.

I was not disappointed when I read my review copy. I found that the annotated comments highlighted important sections in the text while also providing additional compelling perspectives but yet didn't get in the way of the flow of the book.

Don't just take my word on this, here are a few examples:

p. 58: Howard Marks: Understanding uncertainly: Dimson's formulation reminds us of a very simple concept: that many things are possible in the future. We can't know which of the possibilities will occur, and this uncertainty contributes to the challenge of investing. "Single scenario" investors ignore this fact, oversimplify the task, and need fortuitous outcomes to produce good results.

p. 104:Seth Klarman: Even the best investors judge themselves on the basis of return. It would be hard to evaluate yourself on risk, since risk cannot be measured. Apparently, the risk-averse managers of this endowment were disappointed with their relative returns even though their risk adjusted performance was likely excellent, as borne out by their performance over the following three years. This highlights just how hard it is to maintain conviction over the long run when short-term performance is considered poor.

Please allow me to make one additional comment on the annotations before I discuss the new chapter. I was not familiar with Mr. Johnson before reading his collection of annotations in the book but I found them insightful and thought provoking. I wish my college career had included being a student in his classes. You can find more information on him at this site: www.capatcolumbia.com.

The new chapter is Reasonable Expectations. This chapter develops the theme that investors need to keep their expectations grounded in reality to guard themselves from overreaching and thus taking on far more risk than is reasonable. Mr. Marks cautions his readers that one can never know when the exact right time to make a purchase is. Focus on buying it when its trading at below your estimate of value with the understanding that if its gets cheaper you will buy more as the price declines. The point is not to become despondent if the stock continues to decline after your purchase as it's almost impossible, and not reasonable, to expect to be able to catch the absolute button.

Here is a quote from this chapter in which Mr. Marks is telling his readers how an investor should have been thinking in the dark period of 2007-2009

"I need 8 percent. I'd be glad to earn 10 percent instead. Twelve percent would be even better. But I won't try for more than that, because doing so would entail risks I'm just not willing to bear. I don't need 20 percent."

I find that comment particularly interesting when you consider that Mr. Buffett has spoken on the record many times that he looks for investments that can earn him 15%.

In conclusion I certainly think the chapter is a valuable addition to the book. This new material, along with the added annotations, make the new edition a worthwhile purchase. All in all this new edition does the nearly impossible, it takes an already classic text and makes it an even more indispensable tool for investors!

Templeton's Way with Money: Strategies and Philosophy of a Legendary Investor Book Review

Amazon Kindle: Link

Amazon: Link

John Templeton is a legend in the investment business though I think to the current generation his investment insight is not nearly as well studied as are Benjamin Graham and Warren Buffett.

In my studies of successful investors and their investment approaches one common theme shines through. The theme is that they follow their own path and it's evident from the book that Mr. Templeton also refused to follow conventional investment wisdom. He preached against excess diversification, he went in search of bargain securities around the world (an approach not common at the time) and he refused to categorize himself as a growth or a value investor. He believed that growth is just a component that needs to accounted for in the valuation equation.

Why should you buy this book? It contains valuable information such as his investment principles, extracts from his letters to shareholders. The authors, one of whom worked for Mr. Templeton, help the reader develop a deeper understanding of the material by providing comments and insights as appropriate.

Besides his refusing to blindly accept conventional investment wisdom one of the other most valuable insights that an individual investor can learn from this book, in my opinion, is his policy concerning investment allocation. He understood that one of the great difficulties in investing is being able to buy when the market is declining so he developed a system that automatically invested more in stocks as they declined in market downturns (and did reverse when the market was rising) which helped make sure his clients were able to take advantage of stocks when they were cheap.

A worthy edition to read, study, and include in your investment library.

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