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Notes on 1991 Howard Marks (Oaktree Capital) Memo (Classic Guru Shareholder Letters Review)

November 06, 2012 | About:

Mark Lin

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It is common for investors to read the latest shareholder letters from investment gurus to understand their latest positions and opinions. However, it is often that the real wit and wisdom of the investment gurus are found in old classic shareholder letters.

This is one of many in a series of articles where I will extract relevant portions of classic guru shareholder letters and share with readers my views.

Here is the 1991 Howard Marks (Oaktree Capital) Memo.

Extracts:

(1) "...The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum "on average," it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward an extreme itself that supplies the energy for the swing back..."

(2) "...suspension of "end-of-the-world" thinking and an increased willingness to envision possible solutions caused our distressed-debt Special Credits portfolios to gain even more than either high yield bonds or convertibles..."

(3) "...We consider it far more reasonable to try to (1) stay alert for occasions when a market has reached an extreme, (2) adjust our behavior slightly in response and, (3) most importantly, refuse to fall into line with the herd behavior which renders so many investors dead wrong at tops and bottoms. ..."

Comments:

(1) Understanding the golden rule of mean reversion and have the courage to be greedy when others are fearful

(2) Fear engulfs us when we are faced with an uncertain world. If we could only "suspend end-of-world thinking and envision possible solutions," we will be in a better position to seize value opportunities staring us in the eye.

(3) There are two conditions for making money in stock markets: being right and being non-consensus.

You can read Marks' full memo here.


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