Howard Marks was on Bloomberg TV yesterday and it was a great interview. I think Bloomberg TV is way better than CNBC these days as they seem to ask better questions and give the guests more time to answer questions (rather than trying to make them say things that the interviewer wants to hear, or force / trick them into supporting a political view).
Anyway, any time you can hear someone like Marks speak, it's worth your time. Here's the link:
Howard Marks on Bloomberg TV
This blog is not about posting links so you know more is coming.
I don't intend to summarize the interview or anything like that. There were a couple of points in the interview that really struck me and I wanted to point that out. If you have followed and read Marks over the years, you know he is a really solid guy and very credible. So I found it interesting that he said:
Central Bank Actions Reasonable
He was asked if recent central bank actions were a mistake and he said no. He said the Fed is stimulative and it's appropriate that they are stimulative. He said that "their course is reasonable". I think Buffett is on that side too, defending the Treasury and the Fed in their actions in preventing an economic collapse.
Anyway, I tend to be on that side too so it's refreshing to hear people on this side (instead of the Fed bashers which seem to be the majority these days).
Ever since the financial crisis (and actually from before then, but a lot more since then), a major pet peeve of mine has been what I think is a big macro-forecasting bubble. Reading letters from value investors, I got so tired of reading about the macro. Many equity fund letters spend so much time talking about the debt, the crisis, the coming depression if politicians don't get their act together etc.
Others blamed their poor performance on the macro environment, saying that their mistake was ignoring the macro environment.
I have always thought that the equity funds that lost a lot of money lost money on poor securities analysis; Buffett's portfolio didn't blow up despite being heavy into financials and Buffett didn't sell down his stocks, buy puts, hedge or anything like that at all. He just stuck to strong balance sheets and he did just fine, thank you.
Others jumped into AIG, MER, BSC, LEH, FNM, FRE and suffered permanent loss of capital.
I would call that a securities analysis error, not a macro forecasting error.
But I still keep hearing stock experts spending so much time on the macro.
There's a difference between buying into risky, leveraged institutions and hoping that a recession won't get too bad, or just buying the strongest companies and not worrying about how bad a recession can get secure in the knowledge that the company you own can cope with everything but maybe the moon crashing into the earth (this is a Jamie Dimon scenario when asked if JPM can lose $50 billion or whatever it was during the congressional hearings).
Buffett has said over and over that he doesn't pay attention to the macro when evaluating investments. If he likes the business and the price, he doesn't check to see if the economic forecast is going to be OK. He doesn't worry about what will happen in Europe. He said he has never *not* done a deal or bought a stock due to macro concerns.
Marks on Macro
So anyway, it was very refreshing to hear Marks talk about the macro. He was asked about how macro is getting to be more important in investing in these volatile times. He said that most people think macro will determine investment results (so they pay a lot of attention to it). But he points out that in investing, there is always another side to it.
Of course, it's desirable to be able to forecast the macro to improve your investment results, but the big question is can you do it? Can it be done? Marks said that he personally doesn't believe that you can be consistently superior in macro judgements. The two key words are consistently superior.
He also noted that the smartest investors from Buffett on down don't make macro judgements; they find great values to invest in.
He was asked what he thought will happen in Europe (just after telling them that forecasting macro can't be done consistently). He said that it is a complex situation but he is sure of three things:
1. He doesn't know what will happen in Europe
2. Nobody knows what will happen in Europe
3. If you ask an expert what they think and take their advice, you're making a mistake.
He quoted Mark Twain: "It's not what you don't know that gets you into trouble, it's what you know for certain that just ain't true".
Can you know more than others? That's the real question.
Julian Robertson on Macro
Interestingly, Julian Robertson too was on Bloomberg TV in June and it was really interesting to hear him say something similar to Marks. Someone asked him about the Europe situation and the macro environment and Robertson said that the macro situation is always tough to call. And he said that the problem with hedge fund performance has been stock selection and not macro.
If you look at the performance of hedge funds and stock funds over the past few years, I would bet that the performance has been much more influenced by stock selection than market-timing. Guys like Bill Ackman and Buffett's recent hires have done very well in the recent past while other value funds have done horribly and it's not due to one of them getting out of stocks before the crisis and getting back in right at the low. They didn't do better because of their macro insight.
Of course, there are guys out there that specialize in macro. One big fund these days is Bridgewater Associates that pretty much make all of their money on macro. I suppose Bill Gross at Pimco is like that too. George Soros is another that has made a lot of money over the years doing macro trading/investing.
But these people do macro full time and it's their specialty. This is a lot different than a value investor who raises cash due to economic uncertainty and trying to enhance their returns through this macro 'insight'.
Marks on Best Opportunities Now
Marks was asked where he sees the best opportunities now and he said real estate and real estate debt. He said that people are staying away from the area and in terms of deal flow he sees a lot of opportunity there.
Like other value managers, he also likes residential real estate. He said it's a good idea to buy housing and housing related investments when the market is assuming that housing will never recover.
Most Important Point of Marks' Book
At the end of the interview, he was asked what is the most important point that he wants his readers to understand about investing. He said that he wants people to understand that it's not easy. He said that when he talked to Munger, Munger told him that none of this stuff is meant to be easy and anyone who thinks it is is stupid.
What is your thoughts on Einhorn? He is successful and makes reasonably good stock bottom up stock picks, in particular shorts. Also his book is a testament to his thorough work habits. But some of his trades, e.g. buying gold a couple of years ago, before the big run-up, are based on macro analysis. Or is it the problem that he does it well, but the value investing world has become full of poor Einhorn lookalikes?ReplyDelete
I like Einhorn, but yes, those macro trades make me scratch my head a little. I don't worry too much as they seem very limited risk-wise; it won't blow him up. Gold too is a bit too popular now for my taste. It seems like a classic one-decision trade, or what Howard Marks would call first level thinking (the central banks will print money and won't stop so therefore gold must go up). I wish some of these guys got interested in gold at $300/ounce instead.Delete
Prem Watsa too seems to be more and more macro, but he actually had done well over time and he did make money on the subprime collapse. But still, I wonder sometimes.
This happened in the early 90s too when equity-based hedge funds went into macro (Steinhardt did the carry trade in size and lost a lot of money in 94).
I get the feeling that there is this Burry envy or Paulson envy going around, and now it seems like everyone wants to find that next Big Short. That outlier, low probability, underpriced bet that will really put their performance in the stratosphere...
I think it won't pan out in most cases.
As Marks says in the video, investors shouldn't change their stripes. I liked the line where he said that just because you watch a movie and you like it, it doesn't mean you'll be able to make one.
In the excellent book “The Era of Uncertainty: Global Investment Strategies for Inflation” .The author a top ranked equity strategist quotes David Einhorn on lessons he learned from ignoring macro risk....This is a copy paste from the book directly:ReplyDelete
"David Einhorn of Greenlight Capital-Arguably most famous for shorting Lehman brothers in 2007 told his personal tale of learning this lesson at the value investing congress in October 2009.He referred to a speech he delivered in May 2005 at the Ira Sohn Investment Research Conference when he recommended MDC Holdings, a home builder at $67 per share. The stock reached %89 within two month, but anyone who held on to the position rode it down with the rest of the sector in 2007 He Said:
Some of my MDC analysis was correct: it was less risky than its peers and would hold up better in down cycle because it had less leverage and held less land. But this just meant that almost half a decade later, anyone who listened to me would have lost about 40% of his investment, instead of the 70 percent that the homebuilding sector lost.
The reason he gave for revisiting this story was that it was not bad luck, but bad analysis. he contrasted what he said that day with what he heard from legendary hedge fund manager Stan Druckemiller a bit late in the conference. Stan’s chosen topic was the grim story of the problems we faced from an expanding housing bubble inflated by a growing debt bubble. David wondered, even if Stan were correct, how would one translate such a big picture macro view into a successful investment strategy? He soon had the answer to his own question:
I ignored Stan, rationalizing that even if he were right; there was no way to know when he would be right. This was an expansive error. The lesson that I have learned is that it is not reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be “bottom up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure ratio more actively, worrying about what may be brewing in certain industries, and when apporporatie, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.
David then proceeded to discuss the macro risks he believed were facing the markets at that point in the late 2009.We couldn’t have aid it better ourselves.
I remember Einhorn saying that (I wasn't there but read about the comment) and many, many other value investors have said similar things in their letters to fund holders and I still sort of tend to not agree. I do think you have to be aware of what's going on; if there is a bubble, it's dangerous to use bubbled up earnings as normalized earnings.Delete
This is why I stayed away from financials all throughout the 90s and 2000s and only bought some after the collapse; it was hard for me to capitalize financial sector earnings when I thought there was a credit bubble of sorts so could never figure out what 'normal' earnings would be.
But that wasn't a macro call at all. It was just difficulty for me in figuring out what earnings to put a multiple on.
By the way, this is a theme that I have written about on this blog in the past. Here are some related posts:Delete
Here is one about the Superinvestors. The point is that these guys put up these impressive figures in really bad times (mostly the 1970s; performance is through 1983 or 1984):
They would have done nothing close to that, I think, if they tried to make macro calls. They just drilled down and focused on value stocks.
And this is what happens when people lean too hard on their macro calls. They can get the macro call exactly right, but they can still lose tons of money:
I know that's a bit extreme. But it's still a cautionary tale.
And here's Joel Greenblatt's performance figures (which I'm sure we're all aware of):
Greenblatt also stresses bottom-up analysis and advocates ignoring the macro and simple focusing on what something is worth and trying to pay less for it. He also disagrees with value investors blaming the macro on their performance.
I think the last crisis was so big, such a once in a lifetime event (financial crisis happens very often, but the last one was a big one!) that it has shaken many people into rethinking their strategy. I tend not to think that's a great idea.
Many people interpret buffet and other value investors statement’s on macro factors narrowly without looking at the context.ReplyDelete
Buffet has mentioned many times in his letters and speeches that most companies falls under two categories: either commodity businesses or franchise business. Under franchise business, Macro factors play no role as these companies historically demonstrated the ability to raise prices and navigate recessions, wars and boom bust cycles successfully. However, this is not true for commodity business. Therefore, ignoring macro factors when holding a commodity business is different than when holding a franchise business. Both react differently to the Macro environment.
I like Howard marks discussion on macro factors in his book. His conclusion was that forecasting macro is difficult; however, one can study cycles as cycle tends to repeat historically. So, knowing where you are in the cycle makes you better prepared for what to expect next and hence help you manage these macro risks without taking hassle of economic foresting.
I believe the lesson Einhorn learned falls in this catgory.It was a commodity business so, macro factors matters.
Yes, this always gets hotly debated. I too like Marks' comment on cycles. For me, I look at that like in my above response as a question of figuring out what normalized earnings is going to be. In good times, you don't want to put a high multiple on peak earnings and in bad times, you don't want to put a low multiple on trough earnings. So yes, you have to be aware of where you are in a cycle. But that's vastly different than trying to predict the direction of the economy which is what I consider 'macro'.Delete
For someone to say that times are bad today is not really a macro call in my mind. It's just reality of the moment. No forecast or prediction.
As for Buffett, he bought WFC in bad times in the early 90s, in OK times, and even at the peak of the bubble back in 2007 or so. He seemed totally indifferent to the coming storm and bought WFC stock anyway. And he missed the best opportunities to add more in Spring of 2009.
But for Buffett, that's just not his game. He is not going to time the market or make macro calls. He is such a long term holder that cycles don't matter all that much either. He simply won't buy stocks that will suffer permanent loss of capital in bad times.
Oh, and for his macro agnosticism, what about buying housing related businesses all throughout the 2000s? It was clear the bubble can't last forever but he kept buying into the housing related businesses.
He thought the prices and businesses were good, and he is long term enough not to have to worry about cycles; he knew eventually that even if housing collapsed, his businesses will survive and will do well on an eventual recovery.
And yes, this is why he typically avoided highly cyclical businesses and this is why he avoids debt. Don't forget, this is also why Benjamin Graham also looked at the balance sheet; he didn't want to have to get in and out of a stock based on the economy because a company is too leveraged. If a company is going to go under in a recession, they simply don't want to own it, period, wheter they can see a recession coming or not.
Anyway, this is a great discussion. Thanks for posting a comment.
Here is another interview with Howard Marks on Morningstar:ReplyDelete
I would recommend you read this piece by SG strategist Dylan Grice ,its a great piece and worth a deep read.its again about macro and value investing.ReplyDelete
i would recommend you subscribe to their global strategy report (Popular Delusion) ,its a value biased research with contrarian view.