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Howard Marks On the Couch

Investment newsletters are a key component of most financial services firms, as they convey thinking behind action and performance. The most famous letter is Warren Buffett’s annual Berkshire Hathaway Shareholder Letter, and within each area of the markets, there are opinion leaders. Howard Marks of Oaktree Capital Management is the go-to newsletter writer in credit, and his memos cover high yield bonds, convertible securities, distressed debt, real estate, control investments and listed equities.

Introducing Howard Marks

Discussing the liquidation of Third Avenue’s Focused Credit Fund
Marks latest newsletter is entitled On the Couch, wherein he covers the importance of investor psychology in the arsenal of a successful investor (he lists the other usual suspects as finance, accounting, and economics). Given the recent sell-off in equity markets, credit, and commodities, he “attempts to send the markets to the psychiatrist’s couch” because he believes:

a thorough understanding of how investors’ minds work is essential if one is to figure out where a market is in its cycle, why, and what to do about it.

As always it makes for interesting reading, and the key takeaways are:
  • 2012-14 was an uncertain period, with low growth, China slowing, oil price halving, Middle East problems, and uncertainty about Fed rate hikes – and yet the S&P500 rose a cumulative 74%!
  • As 2014 closed, with a litany of macro risks, fully priced assets, and little likelihood of returns compensating for these risk, psychology and prices were high given the fundamentals
  • 2015 the negatives built up, and reached a tipping point, where investor psychology changed from risk tolerant to risk averse
    • Oil: “I think low energy prices today will contribute to better economic growth tomorrow. It’s just that everybody’s interpreting everything negatively these days”
    • Interest Rates: “There’s something wrong if an event that has been widely anticipated for years – and considered a near certainty for months – can be thought capable of significantly impacting the market when it becomes a fact. I think people may have jumped to an unwarranted – and negatively tinged –conclusion”
    • Third Avenue: “In terms of investor reaction, I find the announcement that Third Avenue’s Focused Credit Fund would liquidate to be the most interesting recent event. There isn’t much to be in doubt about in the meltdown of the Focused Credit Fund; clearly it reflected problems peculiar to that fund alone”
  • His prescription: Whereas Oaktree had previously recommended to “move forward with caution”, the recommendation is now to do so with less caution i.e. to take more risk. He then adds, that this recommendation comes with trepidation

Now, as discussed above, investors’ optimism has deflated a bit, some negativity has come into the equation, and prices have moved lower. Depending importantly on which market we’re talking about and how it has fared in recent months, we consider it appropriate to move forward with a little less caution.

Marks also addresses two common questions:
  1. Implications of China’s weakness? He quotes Paul Krugman suggesting that China is in trouble, but the consequences for the rest of us are manageable
  2. Are we heading for a 2008 event? “The bottom line for me is that a rerun of the Global Financial Crisis isn’t in the cards”
All in all its a great read, with a mildly bullish take on the current opportunity set, largely because he thinks markets have swung from unconcerned to too concerned.

Putting newsletters on the couch

Newsletters are vital to our assessment of market conditions, manager selection, and actionable investment ideas. We devour them. However they vary in quality and content considerably, and often only give a hint of what managers really think or do. We understand that the writers want readers to become clients, and don’t want to give away their secret sauce. However the newsletters of emerging managers are very similar to their funds – they disclose a lot more information to attract new clients than their larger, more successful competition.
As a long time reader of Howard Marks memos, it is really good to monitor, but becoming less useful in terms of information that I can glean to improve our decision making. I have read his book “The Most Important Thing”, and most of his letters, and they reference each other more and more. If you read his latest, you will immediately see this. Strip out content that he has previously published, and the regular reader will have much less current thinking to analyse.
On the other hand, someone new to Marks or Oaktree will discover extremely wise philosophical insights, and sensible market commentary.
 

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