We can learn a lot from reading Howard Marks’ memo to his Oaktree Capital’s clients.
A few excerpts:
- Charlie Munger: It’s not supposed to be easy. Anyone who finds it easy is stupid.
- … people who think it can be easy overlook substantial nuance and complexity.
- For your performance to diverge from the norm, your expectations – and thus your portfolio – have to diverge from the norm, and your have to be more right than the consensus. Different and better: that’s a pretty good description of second-level thinking.
- What’s clear to the board consensus of investors is almost always wrong.
- First, most people don’t understand the process through which something comes to have outstanding moneymaking potential. And second, the very coalescing of popular opinion behind and investment tends to eliminate its profit potential.
- In short, there are two primary elements in superior investing:
- seeing some quality that others don’t see or appreciate (and that isn’t reflected in the price), and
- having it turn out to be true (or at least accepted by the market).
- … investment risk resides most where it is least perceived, and vice versa:
- This paradox exits because most investors think quality, as opposed to price, is the determinant of whether something’s risky. But high-quality assets can be risky, and low-quality assets can be safe. It’s just a matter of price paid for them.
- … the riskiest thing in the world is the widespread belief that there’s no risk.
- Regardless of whether the fundamental outlook is positive or negative, the level of investment risk is determined largely by the relationship between the price of an asset and its intrinsic value.
Interesting read on using price-to-book ratio to identify value investments. Patrick O’Shaughnessy remarked that “if everyone tilts towards value, value stocks will stop being value!”
We should be equally excited and worried that factor investing—which I’ll define as buying a basket of stocks based on proven metrics like value and momentum, rather than buying them because of fundamental research—has become the rage. Excited because it has—historically—been a superior way to invest. But worried because as Yogi Berra said of some restaurant’s popularity, “nobody goes there anymore, it’s too crowded.”
Thara – What strike me as interesting is that the proportion of assets that are intangible started to increase significantly around 1999-2002 at the height of Dot-com bubble and the crash that followed.
Source: Investor’s Field Guide
UPDATE: the second post that on investing using price-to-book ratio. Some important points:
It has worked quite nicely in small-cap
It has not worked as well in large-cap stocks
Price-to-book delivers the best returns when it is used to compare each stock against all others, but requires taking large sector bets
Price-to-tangible book may be a slight improvement over regular price-to-book, but not by much
The very cheapest stocks (those with the lowest price-to-book ratios) have performed poorly
Price-to-book should not be used in isolation
Listen to his every words. It is an accumulation of decades of experience in the market.
[t]he degree to which an asset or security can be bought or sold in the market without affecting the asset’s price.
The key phrase is “without affecting the asset’s price.”
I am reading through the latest letter from Warren Buffet. There are several valuable lessons to learn from the master of value investment. Berkshire Hathaway has four major operations, which Buffet touched on in this letter. The key point here is that each operation works well in different stages of the financial cycle. Together, they make a good portfolio for all time.
Jack Schwager’s Market Wizards is a must read for any trader who wishes for success in trading. The premise is this: learn from the best in business which includes Ed Seykota, who realised over 250,000 percent return over 16 years. While any two traders in the book may differ drastically on implementation their visions, they all exhibit similar characteristics. Since its first publication in 1990, these lessons still relevant today. With minor alteration, I would suggest further that these lessons are applicable to life as well.