From Howard Marks book "The most important thing"
-Risk avoidance is likely to lead to return avoidance as well. Risk control is the best route to loss avoidance.
None of us is in this business to make 4 percent. We could easily avoid all risk, and so could you. But we'd be assured of avoiding returns above the risk-free rate as well.
-The road to long term investment success runs through risk control more than through aggressiveness. Over a full career, most investors' returns will be determined more by how many losers they have and how bad they are than by the greatness of their winners. Skillful risk control is the mark of a superior investor.
-Risk avoidance is likely to lead to return avoidance as well. Risk control is the best route to loss avoidance.
None of us is in this business to make 4 percent. We could easily avoid all risk, and so could you. But we'd be assured of avoiding returns above the risk-free rate as well.
-The road to long term investment success runs through risk control more than through aggressiveness. Over a full career, most investors' returns will be determined more by how many losers they have and how bad they are than by the greatness of their winners. Skillful risk control is the mark of a superior investor.
It's easier to know what to do at extremes than it is in the middle ground, where I believe we are today(aug 2013)
When there's nothing clever to do, the mistake lies in trying to be clever.
-The process of intelligently building a portfolio consist of a) a list of potential investments b) estimates of their intrinsic values c) a sense of how their prices compare with their IV estimates d) an understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled.
- The first step is to make sure that the things being considered satisfy some absolute standards, that they meet some minimum criteria. For example someone may narrow their list to those whose riskiness falls withing acceptable limits, since there are risks with which the investor may not be comfortable. Examples are risk of obsolescence in a fast-growing segment of technology, a risk that a hot consumer product will lose its popularity, subjects that some investors consider beyond their expertise, some companies may be unacceptable because their industries are too unpredictable or their financial statements are not transparent enough.
-Usually its price has been falling, making the first-level thinker ask, "who would want to own that"? (It bears repeating that most investors extrapolate past performance, expecting the continuation of trends rather that the far-more-dependable regression to the mean. First level thinkers tend to view past price weakness as worrisome, not as a sign that the asset has gotten cheaper.
- Convertible securities give investors advantages of both bonds and stocks, they were only issued as a last resort by weak companies lacking alternatives, such as conglomerates, railroads and airlines. Mainstream investors felt they unnecessarily introduced complexity. Well, when everyone feels there is no merit in something, its reasonable to suspect its unloved and thus possibly under priced.
-One of the things I want to point out that there aren't always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive.
-So here's a tip : You'll do better if you wait for investments to come to you rather than go chasing after them. You tend to get better buys if you select from the list of things that sellers are motivated to sell rather than start with a fixed notion as to what you want to own.
- At Oaktree, one of our mottoes is "we don't look for investments; they find us". We try to sit on our hands, we don't go out with a buy list.
-Sometimes things are mostly fairly priced. Its essential that we recognize the condition of the market and decide on our actions accordingly. Ted Williams - one of the greatest hitters of baseball contributed to his own success by an intensive study of his own game. He broke down the strike zone into 77 baseball-sized cells and charting his results at the plate, he learned his batting average was much better when he only went after pitches in his "sweet spot".
- How to recognize the fat pitch? One way to be selective is to ascertain whether we're in a low return environment or a high-return environment.
-Forced sellers are beautiful and let down efficient markets. -Margin calls, withdrawals, ratings change etc. If chaos is widespread, plummeting prices, withdrawals of credit, feat among counter parties and prices can fall much below intrinsic value.
- Macro future is unknowable. The more we concentrate on smaller-picture, the better to gain advantage.
-Are forecasts as a whole consistently actionable and valuable ? Answer is NO
-If you know the future, its silly to play defence. You should behave aggressively and target the greatest winners; there can be no loss to fear. Diversification is unnecessary and maximum leverage can be applied. But its foolhardy since no one can know the future. Overestimating what you're capable of knowing can be extremely dangerous. Acknowledging the boundaries of what you can know - and working within those limits can give you a great advantage.
- Cycles : 1) redouble our efforts to predict future 2) ignore cycles, just try make good investments with total disregard for cycles (buy-and-hold) 3) figure out where we are in the cycle, and what that implies for our actions. To me, number 3 is the right one.
- The quality of a decision is not determined by the outcome. In the long run, there's no reasonable alternative to believing that good decisions will lead to investment profits. In the short run, we must be stoic when they don't. A good decision is one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known.
- the suboptimizers of the "I don't know" school put their emphasis on constructing portfolios that will do well in the scenarios they consider likely and not too poorly in the rest.
- In amateur tennis, the match goes to the player who hits the fewest losers. The winner just keeps the ball in play until the loser hits it into the net or off the court. Play defensive!
-There are two principal elements in defense. The first is exclusion of losers from portfolios. This is best accomplished by conducting extensive due diligence, applying high standards, demanding a low price and generous margin for error and being less willing to bet on continued prosperity, rosy forecasts and developments that may be uncertain.
-The second element is the avoidance of poor years and exposure to meltdown in crashes. In addition, this required thoughtful portfolio diversification, limits on the overall riskiness borne, and a general tilt toward safety.
-Sources of error are either analytical/intellectual or psychological/emotional. The former are straightforward:we collect too little information or incorrect information. Or perhaps we apply the wrong analytical processes, make errors in our computations or omit the ones we should have performed.
-one type of analytical error is "a failure of imagination". By this I mean either being unable to conceive of the full range of possible outcomes or not fully understanding the consequences of the more extreme occurrences.
-Inadequate due diligence leads to investment losses.
-The process of intelligently building a portfolio consist of a) a list of potential investments b) estimates of their intrinsic values c) a sense of how their prices compare with their IV estimates d) an understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled.
- The first step is to make sure that the things being considered satisfy some absolute standards, that they meet some minimum criteria. For example someone may narrow their list to those whose riskiness falls withing acceptable limits, since there are risks with which the investor may not be comfortable. Examples are risk of obsolescence in a fast-growing segment of technology, a risk that a hot consumer product will lose its popularity, subjects that some investors consider beyond their expertise, some companies may be unacceptable because their industries are too unpredictable or their financial statements are not transparent enough.
-Usually its price has been falling, making the first-level thinker ask, "who would want to own that"? (It bears repeating that most investors extrapolate past performance, expecting the continuation of trends rather that the far-more-dependable regression to the mean. First level thinkers tend to view past price weakness as worrisome, not as a sign that the asset has gotten cheaper.
- Convertible securities give investors advantages of both bonds and stocks, they were only issued as a last resort by weak companies lacking alternatives, such as conglomerates, railroads and airlines. Mainstream investors felt they unnecessarily introduced complexity. Well, when everyone feels there is no merit in something, its reasonable to suspect its unloved and thus possibly under priced.
-One of the things I want to point out that there aren't always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive.
-So here's a tip : You'll do better if you wait for investments to come to you rather than go chasing after them. You tend to get better buys if you select from the list of things that sellers are motivated to sell rather than start with a fixed notion as to what you want to own.
- At Oaktree, one of our mottoes is "we don't look for investments; they find us". We try to sit on our hands, we don't go out with a buy list.
-Sometimes things are mostly fairly priced. Its essential that we recognize the condition of the market and decide on our actions accordingly. Ted Williams - one of the greatest hitters of baseball contributed to his own success by an intensive study of his own game. He broke down the strike zone into 77 baseball-sized cells and charting his results at the plate, he learned his batting average was much better when he only went after pitches in his "sweet spot".
- How to recognize the fat pitch? One way to be selective is to ascertain whether we're in a low return environment or a high-return environment.
-Forced sellers are beautiful and let down efficient markets. -Margin calls, withdrawals, ratings change etc. If chaos is widespread, plummeting prices, withdrawals of credit, feat among counter parties and prices can fall much below intrinsic value.
- Macro future is unknowable. The more we concentrate on smaller-picture, the better to gain advantage.
-Are forecasts as a whole consistently actionable and valuable ? Answer is NO
-If you know the future, its silly to play defence. You should behave aggressively and target the greatest winners; there can be no loss to fear. Diversification is unnecessary and maximum leverage can be applied. But its foolhardy since no one can know the future. Overestimating what you're capable of knowing can be extremely dangerous. Acknowledging the boundaries of what you can know - and working within those limits can give you a great advantage.
- Cycles : 1) redouble our efforts to predict future 2) ignore cycles, just try make good investments with total disregard for cycles (buy-and-hold) 3) figure out where we are in the cycle, and what that implies for our actions. To me, number 3 is the right one.
- The quality of a decision is not determined by the outcome. In the long run, there's no reasonable alternative to believing that good decisions will lead to investment profits. In the short run, we must be stoic when they don't. A good decision is one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known.
- the suboptimizers of the "I don't know" school put their emphasis on constructing portfolios that will do well in the scenarios they consider likely and not too poorly in the rest.
- In amateur tennis, the match goes to the player who hits the fewest losers. The winner just keeps the ball in play until the loser hits it into the net or off the court. Play defensive!
-There are two principal elements in defense. The first is exclusion of losers from portfolios. This is best accomplished by conducting extensive due diligence, applying high standards, demanding a low price and generous margin for error and being less willing to bet on continued prosperity, rosy forecasts and developments that may be uncertain.
-The second element is the avoidance of poor years and exposure to meltdown in crashes. In addition, this required thoughtful portfolio diversification, limits on the overall riskiness borne, and a general tilt toward safety.
-Sources of error are either analytical/intellectual or psychological/emotional. The former are straightforward:we collect too little information or incorrect information. Or perhaps we apply the wrong analytical processes, make errors in our computations or omit the ones we should have performed.
-one type of analytical error is "a failure of imagination". By this I mean either being unable to conceive of the full range of possible outcomes or not fully understanding the consequences of the more extreme occurrences.
-Inadequate due diligence leads to investment losses.
