Sunday, February 24, 2013

The brilliance of Howard Marks

So, Howard Marks' memos are brilliant and ubiquitous. The best stuff is usually in interviews because there, people tend to speak a little more from the heart; this poses its own conundrum - emotional comments can be misleading but with Marks, one can be sure that the interview is well worth one's time.

Speaks of:

1. Wealth effect - If people think they are getting wealthier on their savings/ assets, they go out and spend and that can have a strong influence on the real economy. Of course, we all know this - but it's worth pointing it out from time to time because the last time people were like this around this world was in 2007 odd.

2. Market hits a new high - its just an optical illusion. Think of the power of compounding and the opportunity costs

3. Inflation - Run by animal spirits. Very difficult to understand and control.

4. Psychological dilemmas - One wasn't happy (in the US) with a 6% yield in 2007 , and now is more than happy to get that much. People don't pay too much attention to principal risk

5. Stock yields: (I like thinking of stock pricing in terms of adjusted earnings yields)
My favourite part of the interview

What kind of challenges do investors face in what you are terming as a low-return world?
Six years ago you could get 6-7% on a T-note. You could get a decent return with total safety. That is impossible today. Today, you have to choose between a decent return and total safety. That is a great problem for investors. If you have to make any modicum of income you have to take some pretty substantial risk. Prior to the 1950s or something like that, stocks yielded more than bonds. Most people don’t know that. The reason was that the stocks were considered risky and so they had to yield more than bonds in order to attract investors to them. Then, starting around 1960, stocks became popularised in the US and they started to yield less than bonds. So in 1999, stock yields were negligible and bond yields were substantial. That has corrected now. A lot of stocks in the S&P 500 now yield more than a lot of bonds.

6. Gold: (True words of wisdom - it took me a while to realise it, but realise it I did. And this interview just bore the concept in)

What is your outlook on gold?
There is nothing intelligent to be said about gold. Nobody can tell you the right price for an ounce of gold. People will tell you it should go up or go down. To make any intelligent statements about investments you have to know what the right price is. You can’t do that with an asset like gold, which doesn’t produce any cash flow. So you can buy it out of superstition or ignore it because you are an atheist but you cannot buy it with an analytical foundation.

1 comment:

  1. Hey Tirath, this is Min, long time no talk. I have mixed feelings on gold. On one hand it is an asset with no counter-party risk (assuming you hold physical) and an established history as a store of value. Why do central banks hold gold and not diamonds and why is the German central bank trying to repatriate its gold holdings? On the other hand, it only benefits from turmoil. Judging by whats happening in Europe / US, looks like the turmoil will mostly be political and self-inflicted. Those are my views.