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Oaktree Capital's Howard Mark's most recent memo titled Ditto


kiwing100
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I like this memo a lot thanks.

Reading it makes me think a lot about portfolio positions. Lets say I manage a little portfolio for my grandma and I have 80% equities at the moment and 20% cash.

Now according to Mark's the bond universe is risky at the moment which have been my stand for the last 2 years. But am I risky with this equity % as well? 

Lets take a small sample of the portfolio I bought C this summer for this portfolio and 6 month later I have a 64% return should I sell to maybe buy MSFT to be prudent and a good contrarian?

These things keep me up at night and is very tough to call any-thought's?   

 

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Great memo, as always.  I'll quote the end (after he is talking about bonds getting too high, despite all the vocal concerns):

 

Please note that my comments are directed more at fixed income securities than equities.  Fixed income is the subject of investors' ardor today, since it's there that investors are looking for the income they need.  Equities are still being disrespected, and equity allocations reduced.  Thus they are not being lifted by comparable income-driven buying.

 

 

Seems like equities and cash makes the most sense, and I probably need to get more cash!

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My view is that this is a good time to double check the valuation on your holdings and pear down a little on the high-end ones.  Even if stock is not high, we have seen that stock and bond can be very correlated so if stock will be effected if the bond market ever tumble.  I guess this is where the fun is.

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Guest hellsten

Thanks. Great letter. It's just missing some stock recommendations ;)

 

He makes some good points:

Their scramble for returns has brought elements of pre-crisis behavior very much back to life. Please note that my comments are directed more at fixed income securities than equities.…Equities are still being disrespected, and equity allocations reduced. Thus they are not being lifted by comparable income-driven buying.

 

Over the years, I’ve become convinced that fluctuations in investor attitudes toward risk contribute more to major market movements than anything else. I don’t expect this to ever change.

 

I like his description of contrarian investors:

 

To be a successful contrarian, you have to be able to:

 see what most people are doing,

 understand what’s wrong about most people’s behavior,

 possess a strong sense for intrinsic value, which most people ignore at the extremes,

 resist the psychological pressures that make most people err, and thus

 buy when most people are selling and sell when most people are buying.

And one other thing: you have to be willing to look wrong for a while.

The contrarian will appear wrong, and the fact that his error comes in acting differently from most people will make him look like nothing but an oddball loser.

If you can’t stand living with the embarrassment of being unconventional and wrong, contrarianism may not be for you.

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Guest hellsten

My view is that this is a good time to double check the valuation on your holdings and pear down a little on the high-end ones.  Even if stock is not high, we have seen that stock and bond can be very correlated so if stock will be effected if the bond market ever tumble.  I guess this is where the fun is.

 

I'm not aware of any correlation. I'm curious by nature, so I Googled a bit and found this study:

http://www.cbsnews.com/8301-505123_162-57464128/the-correlation-of-bond-and-stock-returns/

 

Bonds co-moved more strongly with "bond-like" stocks. Large stocks, long-listed stocks, low-volatility stocks, stocks of profitable and dividend-paying firms, and stocks of firms with mediocre growth opportunities were more positively correlated with government bonds. In other words, portfolios of bond-like stocks -- stocks with the characteristics of safety as opposed to risk and opportunity -- showed higher correlations with long-term bond returns.

 

"bond-like" stocks sounds like another word for "high quality or "flight to quality". Anway, the word correlation makes me think of this:

http://xkcd.com/552/

 

The "flight to quality" gave us some good opportunities in 2012. If the trend continues and there's causality between "good deals" and "flight to quality" then 2013 should be a good year. Isn't "flight to quality" the opposite of what a contrarian investor would do? If so, then I'm quite sure there's some causality there. But what do I know, I'm no statistician, just a guy trying to find undervalued stocks. Macro investing is certainly not my game.

 

Here's a link to the study behind the CBS News article:

The correlation between bond and stock index returns is unstable, as documented by

many authors. We find that government bonds and stocks are closely connected from a crosssectional perspective, however. The relationships are intuitive. Government bonds covary more

closely with “bond-like” stocks: stocks of large, long-listed, low return volatility, profitable,

dividend-paying firms which are neither high growth nor distressed. Importantly, this

relationship remains stable even when the index-level correlation between bonds and stocks

breaks down. Furthermore, excess returns on government bonds, and relative returns on bondlike stocks over speculative stocks, are predictable by some of the same time series variables.

These findings suggest that empirical finance researchers might more profitably merge two

playing fields, bonds and the cross-section of stocks, that they often study in isolation. 

http://www.people.hbs.edu/mbaker/cv/papers/Comovement_RAPS.pdf

 

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hellsten,

pardon my ignorance, but whose quote is the one below?

 

"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

 

It looks like something the great Henry Singleton might have said… but I guess it is someone else instead!  :)

Thank you,

 

giofranchi

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Guest hellsten

hellsten,

pardon my ignorance, but whose quote is the one below?

 

"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

 

It looks like something the great Henry Singleton might have said… but I guess it is someone else instead!  :)

Thank you,

 

giofranchi

 

Hi Gio, it's Warren Buffett. I don't know where he said it :( I thought I'd add a quote in my signature to keep me focused :)

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hellsten,

pardon my ignorance, but whose quote is the one below?

 

"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

 

It looks like something the great Henry Singleton might have said… but I guess it is someone else instead!  :)

Thank you,

 

giofranchi

 

Hi Gio, it's Warren Buffett. I don't know where he said it :( I thought I'd add a quote in my signature to keep me focused :)

 

Ouch! Shame on me!  :-[

 

He is the best!  8)

 

Do you mind my using the same quote? I like it too much, and I guess twacowfca won’t get upset, because I wouldn’t trade his great uncle’s wisdom for anything less than WEB’s.  ;D ;D ;D

 

giofranchi

 

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Guest hellsten

hellsten,

pardon my ignorance, but whose quote is the one below?

 

"You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

 

It looks like something the great Henry Singleton might have said… but I guess it is someone else instead!  :)

Thank you,

 

giofranchi

 

Hi Gio, it's Warren Buffett. I don't know where he said it :( I thought I'd add a quote in my signature to keep me focused :)

 

Ouch! Shame on me!  :-[

 

He is the best!  8)

 

Do you mind my using the same quote? I like it too much, and I guess twacowfca won’t get upset, because I wouldn’t trade his great uncle’s wisdom for anything less than WEB’s.  ;D ;D ;D

 

giofranchi

 

Sure, I don't mind if we use the same quote. We already have a very similar investment process :)

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Thank you for the pointers to the interesting docs.  I would say that risk appetite for low-grade bond and stock is related.  From Howard Marks memo I gather that he is seeing that low-grade bonds are getting bid up to a level where its getting him worried.  I don't have any data to shows how this translates into stocks but currently we do see S&P hitting 5 year highs, but with macro stuff its hard to know anything that is actionable.  Certainly, there are always value stock around that you can find so it doesn't affect specific company analysis.  However, I just think maybe its time to check how much dry powder is available if something pops up.  What is your point of view?  Do you see a lot of stock with good value?  I don't really see much but maybe we got spoiled by the last few years.

 

 

My view is that this is a good time to double check the valuation on your holdings and pear down a little on the high-end ones.  Even if stock is not high, we have seen that stock and bond can be very correlated so if stock will be effected if the bond market ever tumble.  I guess this is where the fun is.

 

I'm not aware of any correlation. I'm curious by nature, so I Googled a bit and found this study:

http://www.cbsnews.com/8301-505123_162-57464128/the-correlation-of-bond-and-stock-returns/

 

Bonds co-moved more strongly with "bond-like" stocks. Large stocks, long-listed stocks, low-volatility stocks, stocks of profitable and dividend-paying firms, and stocks of firms with mediocre growth opportunities were more positively correlated with government bonds. In other words, portfolios of bond-like stocks -- stocks with the characteristics of safety as opposed to risk and opportunity -- showed higher correlations with long-term bond returns.

 

"bond-like" stocks sounds like another word for "high quality or "flight to quality". Anway, the word correlation makes me think of this:

http://xkcd.com/552/

 

The "flight to quality" gave us some good opportunities in 2012. If the trend continues and there's causality between "good deals" and "flight to quality" then 2013 should be a good year. Isn't "flight to quality" the opposite of what a contrarian investor would do? If so, then I'm quite sure there's some causality there. But what do I know, I'm no statistician, just a guy trying to find undervalued stocks. Macro investing is certainly not my game.

 

Here's a link to the study behind the CBS News article:

The correlation between bond and stock index returns is unstable, as documented by

many authors. We find that government bonds and stocks are closely connected from a crosssectional perspective, however. The relationships are intuitive. Government bonds covary more

closely with “bond-like” stocks: stocks of large, long-listed, low return volatility, profitable,

dividend-paying firms which are neither high growth nor distressed. Importantly, this

relationship remains stable even when the index-level correlation between bonds and stocks

breaks down. Furthermore, excess returns on government bonds, and relative returns on bondlike stocks over speculative stocks, are predictable by some of the same time series variables.

These findings suggest that empirical finance researchers might more profitably merge two

playing fields, bonds and the cross-section of stocks, that they often study in isolation. 

http://www.people.hbs.edu/mbaker/cv/papers/Comovement_RAPS.pdf

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Saw Howard Marks sold his house in Malibu for $75 million..must be nice..he purchased from the Herbalife founder in 2002 for $31 million

If rumors are true, he was a loser on the deal.

http://realestalker.blogspot.com/2013/01/update-howard-marks-in-malibu.html

 

"One canary told us the buyers were an extraordinarily rich Russian couple with "suitcases full of cash" who toured the property multiple times and wanted the property really bad. Another told us she heard the Marks' property had been shown very quietly with an asking price of $125,000,000, that the house was sold furnished and—most interestingly—that Mister Marks has told at least one friend or financial industry associate that after purchase price, renovations, decorating expenses, carrying costs and real estate fees he was gonna take a pocketbook punishing $20 million bath on the property. Imagine, children, having the pecuniary wherewithal to absorb a $20 million loss on a single property transaction and still be sick rich."

 

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