Novel Investor

Compounding investing wisdom...

Howard Marks on Inefficiencies and a Contrarian Mindset

by Jon

Howard Marks talked to the CFA Society Chicago last week and streamed it live via Youtube. The video is embedded below (with links).

The entire talk is worth watching but the Q&A portion is what stood out most (his answer to why the market collapsed in the fourth quarter is brilliant @ 55:22). The Q&A starts around 31:35.

Three things stood out in the Q&A, which I transcribed below. The first question was on finding the line between market efficiency and inefficiency. The short version is markets are efficient but some inefficiency exists but it’s hard. Much of it is psychological and tends to be more pronounced at certain points in the market cycle. Marks explains what it takes to take advantage of those periods.

Later, Marks was asked about the right structure for capturing inefficiencies, which is where contrarianism comes in and he circled back around to the contrarian mindset at the end of the talk. He offers a great example on second-level thinking. And finally, he points out that it’s not about always being a contrarian but being an intelligent contrarian only when an opportunity exists that be taken advantage of.

Here’s Marks: Continue Reading…

Charlie Munger on Concentration

by Jon

I watched Charlie Munger’s at the Daily Journal Annual Meeting. As usual, Munger doesn’t pull any punches. One piece from Munger’s opening statement stuck out because it fits with a book I finally started reading called Concentrated Investing.

I think it’s safe to say that broad allocation strategies are not only the accepted norm but anything not in a broadly diversified wrapper is looked down upon these days. Which is both good and bad. Good because most people are better off broadly diversified, earning market returns. Bad because doing anything not seen as popular might turn the few people off who could actually handle a concentrated strategy.

What exactly are they handling? Well, the more concentrated the portfolio, the more volatile it’s likely to be compared to average market volatility and the more likely (and more often) it deviates positively or negatively from a market return. The combination of those two — the potential to underperform the market and higher volatility — is why a broadly diversified option is best for most people but also so enticing for anyone who can stomach the wilder ride.

Munger prefers an extremely concentrated, no turnover portfolio focused on a few huge opportunities. Huge opportunities like that require a lot more dedication, intelligence, and luck than most expect. However, you don’t need Munger’s big brain to come up with a simple process of identifying smaller opportunities that pop up more often. The right temperament and a higher turnover rate than zero are all that’s needed.

Here’s what Munger had to say: Continue Reading…

Ben Graham on the Trouble with Dollar Cost Averaging

by Jon

The most important argument in favor of dollar cost averaging — the only one that matters, in my opinion — is that it reinforces scheduled saving. And since most people get paid on a regular schedule, that makes it convenient too.

Of course, most arguments for and against DCA devolve into specifics around things like strategies or allocations. The specifics typically come with examples that make two questionable assumptions.

The first involves assumptions based on past performance, as it relates to the future. Unfortunately, the future isn’t guaranteed to look anything like the past.

The second is that we’re all rational actors.

Conveniently, Ben Graham tackled this in a paper devoted to new (at the time i.e. 1962) saving plans dedicated to buying stock (pensions plans, CREF, variable annuities, and DCA via mutual fund companies): Continue Reading…

“Cheap” Versus “Dear”

by Jon

It’s going to be a brief one since I’m traveling. No posts next week for the same reason.

While digging for stuff on Walter Schloss a few weeks ago, I found a short research piece he and Ben Graham helped on. The piece was published in January of 1951. It studied the performance of the “cheap” versus “dear” stocks in the Dow from 1914 to 1948.

It turns out the “dear” stocks outperformed “cheap” and the Dow in the first half of the period (1914 – 1931) in the run-up to the 1929 peak. But the “cheap” stocks extreme outperformance in the second half (1932 – 1948), drove it to outperform “dear” over the entire period.

The strategy implied is not something to use today but the explanation might sound familiar: Continue Reading…

Lessons from Three Ben Graham Speeches

by Jon

Benjamin Graham spent time throughout the 1940s and 50s lecturing about things he knew nothing about. The speeches came in the disguise of a “Market Outlook.” People wanted to know what would happen next. Graham’s response was typical:

The subject assigned to me for this afternoon is one about which, precisely speaking, I know nothing.

Those were the first words out of his mouth at a lecture given in November of 1952. Then he gave them a history lesson of sorts.

He repeated that in similar fashion in other speeches too. In 1942, inflation worries were the topic du jour heading into WWII. In 1950, people wanted to know how the second half of the century would turn out. In each case, Graham offered some lessons instead.

What follows are a few of those lessons from those three speeches mentioned, mostly without comment. Continue Reading…

Excerpts from the Latest Marks and Klarman Letters

by Jon

Howard Marks released his latest memo this week and Seth Klarman’s letter was leaked last week.

Marks’ Memo, titled “Political Reality Meets Economic Reality” covers just that. He spends the time on the second and third order consequences on two worrying trends in politics: tariffs and anti-capitalist sentiment.

Politicians perfected the offer of easy solutions to complex problems because they want soundbites that quickly get you to “yes.” Diving into second and third level consequences ruins their soundbite and puts votes at risk.

The memo is worth reading for Marks’s balanced take. I’ll add that the Appendix on “The Tax System Explained in Beer” is not to be missed. Continue Reading…

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