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Howard Marks - Time for Thinking

In this memo, Howard Marks writes that he consulted two persons to understand two issues better.

Page 8 is interesting.

FD does not like "on the one hand...on the other hand."  On page 10, Marks even says "on the third hand."  Also, he does not say "Time for Action."  You are forewarned, FD!

For those who are interested what the 32.9% Q2 decline really means, the postscript explains it all.

https://www.oaktreecapital.com/docs/default-source/memos/timeforthinking.pdf

 

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Re: Howard Marks - Time for Thinking

Thanks for posting.  As the SP500 approaches its all time high, I've been increasingly nervous about my 64:31:5 stocks:bond:cash allocation, wondering whether I should trim it to something closer to 60:30:10.   Marks article helped me see a rationale for why the stock market might continue to rise, and slow my trimming impulse. 

 

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Re: Howard Marks - Time for Thinking

It's an interesting memo, Learner.  It will not lead me to make any changes.

Thanks for posting.

Bob

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Re: Howard Marks - Time for Thinking

I already posted a thread about Marks latest comment (Marks with his usual comment)

The bull case

Looking at the stock market’s earnings yield, P/E inverted, when Treasuries yield less than “you add in the traditional equity premium, perhaps the earnings yield should be 4%.” Marks wrote. That suggests a P/E ratio of 25, so “the S&P 500 (NYSEARCA:SPY) shouldn’t trade at its traditional 16 times earnings, but roughly 50% higher.”

The S&P P/E stood at 22.22 at the end of Q1.

“If the earnings on the S&P 500 will grow to eternity at 2% per year, for example, the right earnings yield isn’t 4%, but 2% (for a p/e ratio of 50),” he added. “And, mathematically, for a company whose growth rate exceeds the sum of the bond yield and the equity premium, the right p/e ratio is infinity. On that basis, stocks may have a long way to go.”

When looking at the surge in tech, it “certainly can be argued that the tech champions of today are smarter and stronger and enjoy bigger leads than the big companies of the past, and that they have created virtuous circles for themselves that will bring rapid growth for decades, justifying valuations well above past norms,” he added.

The bear case

But warned that “in 1968, the companies of the Nifty Fifty – deploying modern wonders like computing IBM and dry copying (Xerox) – were likewise expected to outgrow the rest and prove impervious to competition and economic cycles, and thus were awarded unprecedented multiples.”

“In the next five years, their stockholders lost almost all their money.”

Can Marks be wrong? never!!!  it's a nice way to cover his axx and what he has been doing for years.

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Re: Howard Marks - Time for Thinking

Thanks for the linked article Learner. Thoughtful and informative, and a good discussion of the bull case as well.

 

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Re: Howard Marks - Time for Thinking

You all are welcome.  You too, FD.  No investment changes on my part either.  Actually, other than selling TREA in mid-March because of  the increased relative attractiveness of Trad's 3% guarantee, it has been years for me with no change.

Once again, Marks wrote "Time for Thinking," not "Time for Action."

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Re: Howard Marks - Time for Thinking

Thanks.

Actually I like his "third-hand" information:

"Even the best companies' stocks can become overpriced."

And quotes from Charlie Munger concerning the process of unlocking the mysteries of the markets, "It's not supposed to be easy.  Anyone who finds it easy is stupid."

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Re: Howard Marks - Time for Thinking

The explanation for the 32% drop in GDP was informative. So, we're back to the Fed and tech stocks driving the whole show and left with two unanswered questions; will a liquidity trap occur—which is the Fed pushing on a string—and are tech stocks very over-valued? Speculate away.

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Re: Howard Marks - Time for Thinking


@Learner wrote:

You all are welcome.  You too, FD.  No investment changes on my part either.  Actually, other than selling TREA in mid-March because of  the increased relative attractiveness of Trad's 3% guarantee, it has been years for me with no change.

Once again, Marks wrote "Time for Thinking," not "Time for Action."


Let's see how much Marks really matters to you  

In the last 10 years how many times have you acted solely based on Marks, or he was the biggest influence on you?

BTW, I think that most investors should buy and hold and do very little.  They may want to do rebalance if their portfolio is off by a certain %.  They should do NOTHING based on predictions or "experts".

and I don't follow any of the above for about 20 years

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Re: Howard Marks - Time for Thinking

There have been several posts that were caught up in the confusion of Q2 GDP change. As Marks notes, q-o-q is the correct way to look at quarterly GDP %change. Annualizing the %change by multiplying by 4 doesn't make sense as quarterly data are both in the numerator and denominator, and if one annualized them, x4 in numerator and denominator will cancel out.

Q2 GDP %change = (2020Q2 -2019Q2)/2019Q2

If annualized, then Q2 GDP %change = [4*(2020Q2 -2019Q2)[/[4*2019Q2] = (2020Q2 -2019Q2)/2019Q2    [so, the same]

YBB
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Re: Howard Marks - Time for Thinking

FD, from 2000 to 2020, I made very rare changes to my investment portfolio.  Those rare changes were not based on what anyone, Marks or not, said or wrote.  They were always the result of my changing circumstances and evolving thoughts.

I follow a variety of sources to learn more about some events and financial things.  Marks is one of them.

If you do not benefit from Marks in any way, is it not a waste of your valuable time to read his thoughts?  If you don't read him, how do you know his thoughts?

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Re: Howard Marks - Time for Thinking


@Learner wrote:

FD, from 2000 to 2020, I made very rare changes to my investment portfolio.  Those rare changes were not based on what anyone, Marks or not, said or wrote.  They were always the result of my changing circumstances and evolving thoughts.

FD: absolutely correct

I follow a variety of sources to learn more about some events and financial things.  Marks is one of them.

FD: I follow hundreds of articles too

If you do not benefit from Marks in any way, is it not a waste of your valuable time to read his thoughts?  If you don't read him, how do you know his thoughts?

FD: here is my main point, Marks thoughts FOR ME are way at the bottom compare to others.  They are too long (I guess he is loaded and bored), boring, repetitive, and hardly ever actionable. 


Marks conclusion: he can't predict the future? what? after so many articles over the years? 

Over the years I have read many articles about the economy, GDP, unemployment, inflation, Recession, feelings, "experts", predictions, prices are too high, inverted yield, PE, PE 10, it's illogical, rates can only go up and more and all were wrong about the stock market performance in the next 6-12-24 months.

Even earnings which in theory are more correlated to prices were so off.

Below is SP500 annual earnings.  I started after Dec 31, 2010(first year was 2011). and added all the numbers then divided by 10 and got 5.2% average annually.  It is not accurate but close enough to prove my point.  There is a common say that SP500 prices react mainly to earnings.  So how much did the SP500 have done since Dec 31, 2010?  PV(link) shows 12.77% average annually.  So, earnings were 5.2% but the actual performance was 12.77%

SP500 annual earnings

Mar 31, 2020-13.44%
Dec 31, 20195.35%
Dec 31, 201820.49%
Dec 31, 201716.21%
Dec 31, 20169.27%
Dec 31, 2015-15.42%
Dec 31, 20142.11%
Dec 31, 201315.82%
Dec 31, 2012-0.51%
Dec 31, 201112.41%
Dec 31, 201051.76%
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Re: Howard Marks - Time for Thinking

FD, I welcome your reply.  Thanks.  Perhaps you come from a professional or personal background that makes you disappointed when predictions turn out to be useless or when you do not see actionable predictions.  My professional background in engineering gave me the same inclination but I have trained myself sufficiently not to expect much from predictions to begin with.  It is not an issue for me when predictions prove to be worthless or when I do not see actionable predictions.

As for your point regarding S&P 500 earnings and performance, the theory is more complicated than that even though it still has its limitations but such a forum is not a place to delve into it.

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Re: Howard Marks - Time for Thinking

Learner,

It's my sense that some folks either don't know how to engage in a conversation or don't wish to.

As a substitute they either trash the works of others or superimpose their own soliloquy on what might have been a conversation. 

Frankly, this is no different from what I have observed in other dimensions of social life.. Some genuinely know how and wish to converse. Some have pat responses for all manner of things. I avoid the latter as best I can.

Take care.

Bob 

 

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Re: Howard Marks - Time for Thinking

Bob, my thinking has been evolving in the direction of where you are now but I have not quite arrived there yet.  Part of me still strives to see the best in every person and to disregard the rest but, with increasing age, I have less energy and enthusiasm to engage as I used to in my younger years.

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Re: Howard Marks - Time for Thinking

@Learner , thanks for starting this OP. But don't go out of your way to invite some posters to engage as you did in the OP.

Marks is a good read for me but I read his conclusion/ending first, and then the rest.

YBB
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Re: Howard Marks - Time for Thinking

@yogibearbull, in the future, I will remember your words.  It's sound advice.

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Re: Howard Marks - Time for Thinking

Stuff happens. I learned that from a poet, Robert Burns.

"But, Mousie, thou art no thy-lane,
In proving foresight may be vain;
The best-laid schemes o' mice an' men
Gang aft agley,
An' lea'e us nought but grief an' pain,
For promis'd joy!"

I had that reinforced by my father's experience as an aerospace engineer. His company designed the interior atmospheres for the early space missions -- for the space suits and the capsules for Mercury, Gemini, and Apollo. Later for Space Lab. When they took the first extended EVA's from the Space Lab something unexpected happened. It had never happened before, even on space walks:  the astronaut's visor fogged up. The engineers back on Earth initially fell back on that old saw: "It was a fart in a spacesuit." Later they figured out that they had underestimated the level of respiration and perspiration the astronauts would have during an extended EVA in which they were doing some real work.

The stock market follows some rules and patterns. But there is no universal law that it must go up. Even when we carefully measure the potential risk, there's always a potential fart in a spacesuit. Murphy's Law. Unanticipated things happen.

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Re: Howard Marks - Time for Thinking

Very good advice from Yogi.

Yogi is always willing to engage. It's not his initial impulse to be dismissive.

Is it any wonder that he is widely respected?

Bob

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Re: Howard Marks - Time for Thinking

 

Thanks for the link, Learner...I have read his assessments in the past.

But I suspect it is the last time I read Howard Mark's writings. 

And my recollection is he was advising (on balance, as he usually takes both sides) AGAINST any re-entering this market since COVID began.  Thus causing some to sell a lot, and for some, missing a great rebound recovery to date, with many funds going to new highs.  Trillions sit in Money Market type funds...waiting.

R48

 

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