Tuesday, September 15, 2015

It's Not Easy

That's the title of Howard Marks' latest memo to clients, and one I highly recommend—especially given all the things that people worry about these days. One of the most important things that successful investors have to do is to 1) have a sense for what the market is assuming, and 2) decide whether the market is right or wrong in its assumptions. For most of the past seven years I've argued that the market was overly pessimistic about the future, and therefore it made sense to be long equities. As it turned out, the future didn't turn out to be as bad as the market thought, and prices rose impressively, despite some setbacks along the way. Here's just one of my posts that pointed out how pessimistic the market was, and how that presented an opportunity for investors whose own view of the future was not so pessimistic. When the world is worried about all the things that could go wrong (e.g., China, oil, the Middle East), then it makes sense to worry about what might go right. 

Some excerpts from Howard's memo:

[Investing is] not supposed to be easy. Anyone who finds it easy is stupid.
First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”
First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”

First-level thinking says, “I think the company’s earnings will fall; sell.” Second- level thinking says, “I think the company’s earnings will fall far less than people expect, and the pleasant surprise will lift the stock; buy.”

First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in, “The outlook for the company is favorable, meaning the stock will go up.”

Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account:
–What is the range of likely future outcomes? Which outcome do I think will occur? What’s the probability I’m right?
–What does the consensus think?

–How does my expectation differ from the consensus?


Benjamin Cole said...

Kudos to Scott Grannis on his outlook in recent years and his Apple stock.

However, if our choices in 2016 are Sanders or Trump, then I reserve the right to be bearish.

Or if the Fed thinks the war on inflation must go on, and on, and on...

William McKibbin said...

For me, investing is easy -- I choose equities that pay reliable dividends and rents -- period.

steve said...

As I have said ad nauseam this implies that you can somehow get an "edge" on the market by ascertaining when it is most advantageous to be investing. Utter nonsense. Market timing has never and will never work. You're either a stock investor for a very long time or not. PERIOD.

KEVIN C. said...

Benjamin, how could you have gone through the Obama Presidency and still think bad leaders were a cause to be bearish?

Lawyer in NJ said...

I would be bearish with regard to Cruz as well. For example, the Ex-Im Bank. There is a difference between "corporate welfare" and investment, and Cruz fails to see it.

Lawyer in NJ said...

Obama, being faced with a "loyal opposition" that sought to defeat from, as Mitch McConnell stated in January 2009, from Day 1, gets a very bad rap.

What did he do? He passed Romney's healthcare plan (the ACA), and the Republicans called it socialism, when any fair reading demonstrates that it is market-based.

Since then studies have shown that the rate of growth of healthcare spending has gone down while coverage has gone up.

Republicans should take credit for the plan, and I suspect that one day they will.

Studies have also shown that the ARRA helped offset the financial contraction that Obama inherited.

Both of those initiatives could have been improved if Republicans were willing to compromise. But as I noted above, they weren't willing to do so.

The problem some Republicans have is that they can't distinguish a true socialist in Sanders, from one that isn't, Obama.

Therein lies the reason this country's future isn't as bright as it could be.

Scott Grannis said...

Lawyer: you must have missed the news that Obamacare enrollments are only about 9 million and falling, thanks in part to projected premium increases of 20% or more; at this rate, the program will be insolvent before too long. You also overlook the fact that Obama and the Dems had a huge majority for several years and could (and did) pass anything they wanted. They made a big mistake, however, when they passed Obamacare without a single Republican vote; that was the first time in history that major social legislation was passed with no bipartisan support. You must also have missed my numerous posts which discussed the reasons the ARRA failed to stimulate the economy (e.g., very little was spent on infrastructure, and most of the money was spent on transfer payments)

And just because Romney's plan was at one point similar to Obamacare doesn't make it good policy.

Finally, Obamacare is the antithesis of a market-based plan, since it severely limits choices, mandates its purchase, and offers massive subsidies to millions.

DownSouth said...

Touché Scott, regarding your response to Lawyer.

Bob said...


It is actually true that when you are standing in the forest it is hard to see the trees.

Like so many liberals I know they just make up their reality as they go along. It's very disconcerting and almost impossible to relate to, unless you're standing next to one in the forest.

Definition of socialism: an economic theory or system in which the means of production, distribution, and exchange are owned by the community collectively, usually through the state. It is characterized by production for use rather than profit, by equality of individual wealth, by the absence of competitive economic activity, and, usually, by government determination of investment, prices, and production levels.

If that doesn't fit Obamacare nothing does.