Contributed by: Shravan Kumar Sreenivasula,CFA
It was a pure pleasure to watch Howard Marks of Oaktree Capital speak in an event hosted by CFA Society India and ValueQuest Capital. I have read and followed most of his memos in the recent times and the concepts he was explaining were not new. But to listen from the horse’s mouth has its own impact.
Most importantly, on the current state of markets with regards to the investment cycle, he suggested that the US equity markets might be in the 7th innings (of the 9 innings) baseball game. For the Indian audience, it is approximately the fourth day of the five day test match. There have been no mishaps for a long time and the economic data points have largely been good. It has not yet reached the euphoric stage, as people are not yet giving ideas to him at the social gatherings.
Having said that, he proposed that predicting the movement of the markets is a futile exercise. Well, no one in the world knows where the markets would be at a given point in time. The better things to focus on are the businesses and the valuation one pays. It is important to structure the portfolio to tide over the headwinds.
While he mentioned that it is important to predict the cycles, it may be costly to get on and off the investment cycles in India as the trajectory is upwards. This is unlike some of the developed world markets like Japan where predicting cycles and investing at low prices & exiting at high prices may prove worthwhile.
The most difficult and important think is to tell the client that we do not have answers to the known unknowables (like where the markets will be next year). We might lose him to the competitor who might give him/her a perfectly logical answer whose probability of happening is low. Once the client experiences the impracticality of the prediction, he/she could come back.
The defining lesson for me was quoting Albert Einstein’s observation: “Not everything that counts can be counted and not everything that can be counted counts.” This is particularly important while thinking about risk in the portfolio – the money that can be lost.
He busted the myth that one could pay any price for a good company. He reminisced his first assignment at First National City Bank in 1968 where he invested heavily in “Nifty Fifty” stocks – America’s best and fastest growing companies paying high PE ratio (of 80-90x). The hard lesson of paying the right price was learnt over the next decade as valuations corrected significantly.
On choosing bond market to utilise his skill set, he mentioned that he was a conservative investor and hence bond market offered him the right fitment. For equities one has to be a dreamer.
In a lighter vein, for a debt market stalwart in Howard Marks, I expected more debt market participants. 495/500 people (thats 99%) who attended the session were from the equity markets. A phenomenal experience! Looking forward for his second book soon.