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Rupert Hargreaves
Rupert Hargreaves
Articles (746)  | Author's Website |

Vital Advice From Howard Marks

Marks writes in a letter to investors,

May 03, 2018

I am fascinated with history, or more specifically, market history and how investors reacted during different periods of different markets cycles.

Partly because I'm interested in history and partly because I want to be prepared for every market environment, I like to seek out investor letters and commentary from some of the best investors of all time during periods of market stress, such as the dot-com bubble or financial crisis.

Howard Marks (Trades, Portfolio) is undoubtedly one of the best commentators in this regard. His regular memos to investors have maintained the same investing framework ever since he started writing them in 1990. All that has changed during this period is the market environment. That's very clear throughout the letters as Marks applies his cool, value-focused mind to every climate no matter what the prevailing consensus among Wall Street analysts.

The dot-com bust

I recently stumbled across one of Marks' memos from 2000. Titled "We're Not In 1999 Anymore, Toto," the letter is a perfect example of Marks' investing style. Just after the dot-com bubble had burst, the highly acclaimed billionaire uses the memo to provide a post-mortem on the market environment, and a look at what went wrong, as well as what went right.

I have gathered some of the best quotes below. What's really interesting about them is the fact that they could apply to the market today if you just changed a few names. It is a stark reminder that no matter what analysts might want you to believe, it is never different this time.

Cycles always prevail.

"There's little I'm certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don't grow to the sky. Few things go to zero."

Long-term is long-term, not tomorrow.

"Another element that investors ignore in their optimism is time. It seems obvious, but long-term trends need time in order to work out, and time can be limited. Or as John Maynard Keynes put it, "Markets can remain irrational longer than you can remain solvent." Whenever you're tempted to bet everything on a long-run phenomenon, remember the six-foot tall man who drowned crossing the stream that was five feet deep on average."

"One of the great delusions suffered in the 1990s was that "stocks always outperform." I agree that stocks can be counted on to beat bonds, cash and inflation, as Wharton's Professor Jeremy Siegel demonstrated, but only with the qualification "in the long run." If you have thirty years, you can rest assured that equity returns will be superior. For someone with a thirty-year time frame, the decline of the NASDAQ in 2000 may have been a matter of indifference. But it didn't feel that way to most people."

It's never different this time.

"The five most dangerous words in our business aren't, "The check's in the mail" but "This time it'll be different." Most bubbles proceed from the belief that something has changed permanently. It may be a technological advance, a shortage or a new fad, but what all three have in common is that they're usually short-lived.

Most "new paradigms" turn out to be just a new twist on an old theme. No technological development is so significant that its companies' stocks can be bought regardless of price. Most shortages – whether of commodities or securities – ease when supply inevitably rises to meet demand. And no fad lasts forever."

Never forget valuation.

"The focus may shift from dividend yield to P/E ratio, and people may stop looking at book value, but that doesn't mean valuation is irrelevant. In the tech bubble, buyers didn't worry about whether a stock was priced too high because they were sure someone else would be willing to pay them more for it. Unfortunately, the "greater fool theory" only works until it doesn't. Valuation eventually comes into play, and those who are holding the bag when it does are forced to face the music."

Psychology can often be more important than investor sentiment:

"I don't believe in the ability of forecasts or forecasters to tell us where prices are going, but I think an understanding of investor psychology can give us a hint. When investors are exuberant, as they were in 1999 and early 2000, it's dangerous. When the man on the street thinks stocks are a great idea and sure to produce profits, I'd watch out. When attitudes of this sort make for stock prices that assume the best and incorporate no fear, it's a formula for disaster."

Disclosure: The author owns no share mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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