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Deep Thoughts From Howard Marks
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Sure.
But...it's different this time.
I can't tell you how many times a client will call me in ecstasy because I moved them to cash or shorted the market while everyone else is losing money. The result is their money usually grows while everyone else is crying.
Then the market reverses and I may not fully participate in the entire move up for various reasons. But my clients usually get at least 60-70% of the move. Obviously that are WAY ahead of everyone else at this point. Way ahead by any measure except one.
On the up move, what I often hear is how they're losing money because they don't have every single penny on black or red. "Managing risk" or "risk adjusted" are not terms the herd wishes to hear or acknowledge when the other pigs are feeding.
My clients are up at least 22% from the high of 2 years ago and half of them have convinced themselves they are losing money. Nearly impossible to argue with or even placate such thinking because it's not based upon anything other than greed, which is simply another form of fear. In this case, the fear of not getting their FULL share at the can't-miss sure-bet roulette table. Showing them their statement from 2 years ago doesn't work because in their eyes, they should be making MORE.
Most retail investors are willing to forgive their advisor if their accounts drop at the same time as their peers, regardless of whether the advisor should have seen it coming and moved out of the way. The investor is no worse off than his/her peers and that's who they talk to all day. Social pressure drives the herd, not logic or intelligence.
If the advisor is a contrarian, then by extension the investor becomes a contrarian, and their temperament might not be suited to it. Contrarian investors can't talk about their wins when everyone else is losing and they feel they're losing compared to their peers when they don't "make" as much on the up side. They don't have the emotional courage to stand alone, even if their account balance is way up.
The insanity of the average investor is clear to those on Wall Street and that insanity is used against them. And the average investor isn't too bothered because misery, and happiness, loves company. As long as the Smiths across the street and that prissy Marge at work aren't doing better than they are (and they aren't if they share investing styles) and they can participate in the social conversations without embarrassment, they are happy cattle.
FORT KNOX AND GOLD PLATED TUNGSTEN
http://news.goldseek.com/GoldSeek/1258049769.php
And here’s what the Chinese allegedly uncovered:
Roughly 15 years ago – during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] – between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day. I know folks who have copies of the original shipping docs with dates and exact weights of “tungsten” bars shipped to Ft. Knox .
Oh you are such an insider! Access to the most important documents in the history of the world, maybe Universe. Oh, to be you...to be so connected the THE TRUTH!
Generally speaking, sarcasm is cheesy and springs from a weak mind.
in his case it was velveeta left on a georgia
patio in july at high noon.....
Nothing quite as charming as a snarky anoymous post.
Nothing like a good conspiracy so I followed the link and it seems it is based in part on an obscure article from the crime blotter of the NY Post (but with no link) however I came across this related article from 2004 (and it would appear that Mr. Stuart A. Smith did indeed drop out of sight after a visit from the DA):
http://cache.zoominfo.com/CachedPage/?archive_id=0&page_id=586731361&pag...
well said CD.. I hear ya.
GC
You CFPs are gluttons for punishment.
LOL
Every Monday morning I wonder why I'm doing this all over again and every Friday afternoon I wonder why I did.
Good summation.
I think the tone of investing, at this time, relates to some comments in the article, but also just as important are the clients view of the world as you described.
In looking at items like;
free market, equilibrium, and risk.
The macroeconomic models assume equilibrium in the free market. But, as explained by Howard Marks, there is a certain Heisenburg uncertainty effect, in that, investing in the market changes it. The underlying assumptions in producing a gain on investment, is that the fundamentals remain as a base. Traditionally our "free market" has implied a certain amount of continuity, some internal (interest rates) and some external (oil), which I would submit is just as relevant as historical economic theories (equilibrium).
A quicker way to say this is; when is a free market not free any more? At what point do traditional economic theories become irrelevant in terms of the implied notion that investing is inherently long term? What do you do when working traditional models break down and no longer apply. One approach is to identify the new system. This is done by probing and testing or creating perturbations. If possible these market identifications should be used to correlate, reinforce the model, in real-time.
My strategies look more like a decision tree, based on the type of investment, that have different actions based on inputs, either price, sector or macroeconomic fundamentals. More like what you would find in a logic state machine in electronics. How you transition between the states depends upon the state you are in and the relevant inputs. Once a condition is met to change states, we would like to minimize execution time. Weather this is trading time, completing a contract, or clearing through an international pipeline.
Obviously, complexity like this is only viable with large portfolios.
Lets talk about risk. What if your research shows that, not only is the clients portfolio at risk, but indeed the nation in which he/she lives is at risk relative to capital investments. How do you rationally have someone think about the unthinkable. But, if presented in the cold light of risk, unemotional risk, objective risk, it should be presented and probabilities explored. Well what are the probabilities of a certain sequence of events.
Why would Warren Buffet buy a railroad and not another insurance company, or buy more J and J stock. What does Warren know about railroads. Well he knows enough to buy one at a premium using USDs. Makes you wonder?
Motivated by the future price of energy and connecting markets in the US, perhaps. Is this all he knows, probably not. But it makes you wonder why this purchase does not follow Benjamin Graham's Intrinsic value formula, unless your assumptions present a future America much different than its past.
Mark Beck
Mark Beck,
Clearly you're an intelligent, informed and confident investor and/or advisor, not sure which. And your comments are great. I always look for the hidden reason the big boys or any other (assumed) informed participant is doing something outside of their "normal" activity. And I also wondered about, and came to the same conclusion that Warren knows (or thinks he knows) something we don't.
I wish to simply remind you that I was speaking about the retail investor, the average Joe with small amounts of money ($50k to $500,00) mostly accumulated over time or from a 401(k) or pension distribution who knows little about investing and doesn't want to know.
For them, peer pressure and social discourse are all they really think about on a day to day basis. They measure themselves compared to their peers. The most common statement from my clients goes something like "I know I should be thinking about (fill in the blank) but...." and it's usually followed by some nonsense reason to follow the herd. I always respectfully listen and then explain my reasoning. Sometimes it works and sometimes it doesn't.
Do you think Buffet is anticipating a heavy increase in the price of oil? The value of coal powered rail will increase if oil prices rise.
Here's a couple thoughts........how about Handcuffs instead of immunity clauses in single page 700 billion bailout schemes.........and maybe applying Rico statutes to the folks selling $40 oil for $80.
FORT KNOX GOLD / PLATED TUNGSTEN BARS
http://news.goldseek.com/GoldSeek/1258049769.php
And here’s what the Chinese allegedly uncovered:
Roughly 15 years ago – during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] – between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day. I know folks who have copies of the original shipping docs with dates and exact weights of “tungsten” bars shipped to Ft. Knox .
This should give pause to gold bugs about the quality of gold being held in ETFs or even the quality of bullion that is being traded. Maybe a subtle attempt to undermine Gold's credibility as an alternative to paper currencies.
I have a hard time taking such conspiracy stories at face value... Central Bankers don't need to increase credibility of their paper currency -- just damage credibility of alternatives such as Gold...
re 'salting' gold bars -- here are the atomic numbers of pertinent metals..
gold - 79
lead - 82 delta gold - 3
tungsten - 74 delta gold - 5
silver - 47 delta gold - 32
why use tungsten when lead is harder to detect?? (as was known in ancient times and hence Archimedes' solution)
Unfortunately, the density of an element isn't dictated by its atomic number. This is mostly do to some elements being able to form shorter bonds then other elements, and thus getting a higher density out of similar atomic numbers. From wikipedia:
gold: 19.30 g/cm3 as base
lead: 11.34 g/cm3 delta 8.04
tungsten: 19.25 g/cm3 delta .05 our winner
and silver: 10.49 g/cm3 delta 8.81
you can tap lead with a hammer and "HEAR" the difference.a dead thud.
Tungsten is also extremely difficult to gold-plate. Lead is very easy.
The placement of this Gold story appears to be an attempt to create uncertainty in the minds of Gold newbies (Gold bugs will not be easily misdirected by such spurious stories). Density of tungsten is close to Gold but not exactly the same (19.35 vs 19.32 g/cc). So, a 400 oz. tungsten bar will have to be slightly smaller in size compared to a 400 oz. 24 carat Gold bar.
So, to suggest an International Gold buyer will easily be conned into buying tungsten coated gold bar appears to me a little far fetched.
A density difference of less than 0.3% requires extremely accurate equipment. The best "pycnometer" I can find on the web has in its best case a +-0.1% accuracy which is barely going to distingish tungsten from gold. And I don't think the usage of such tool is widespread in gold testing.
So yes, tungsten bars are very hard to detect in the first place, and then one needs to alter them a bit in order to confirm the 'discovery'. Probably melting them, as tungsten has a much higher melting point.
If still unsure, go buy some gold-coated tungsten from China Tungsten and check it yourself.
Interesting link: "Tungsten alloy for gold subtitution".
Someone commented on an earlier ZH post that tungsten has about 25% of the electrical conductivity of gold. I'm not knowledgeable about what all goes into assaying, but I would think that there is equipment out designed to test for these differences - something more sophisticated that your run-of-the-mill voltmeter.
If the tungsten is plated with gold it would pass a simple conductivity test.
Checking further .. seems that careful ultrasound measurements should be able to resolve whether or not a gold bar is a gold bar, or a gold plated tungsten bar .. from wikipedia, www.economicexpert.com ..
gold - speed of sound 1740 m/s at 293.15 K
gold - shear modulus 27 GPa
tungsten - speed of sound 5174 m/s at 293.15 K
tungsten - shear modulus 161 GPa
so sound would travel at measurably different speeds -- but 'salted' coins and jewelry would be just about impossible to detect, as would be bars which are 'salted' with tungsten pieces .. these would require extensive measurements
it has happened....and you don't understand
the gold market...
sounding far fetched and being real are two
different matters....
this is the same logic used to say that something
is too expensive - the price has never occurred
before thus ipso facto it is too expensive....pure nonsense...
Thing about contrarian trading in the current milieu is that the level of unpredictable government interference is so high that contrarianism based on the fundamentals is an even more difficult path, as the unsustainable trades are buoyed by fantastic, unprecedented and even irrational (i.e., when all are deleveraging, the government doubles down on debt) amounts of government support.
Exactly. It all reminds of that scene in The Princess Bride where the Dread Pirate is talking to the charlatan on the rock and the charlatan is trying to decide which cup of wine has the poison.
Turns out, they both had the poison. Dread Pirate was immune to it either way.
http://www.youtube.com/watch?v=TUee1WvtQZU
Inconceivable!
+1 for the brilliant Vizzini reference.
Tyler, excellent Sunday reading...
"Thus, if we’re going to rely on the market to settle things, we have to be willing to accept the consequences. "
Since the Great Depression, this country has been unable to accept the consequences of its fiscal actions. Trading the harsh lessons of reality for immediate calm and prosperity.
Trading the very future of its existence for selfish momentary hallucinations in wonderland.
This country has had 80 years to contract the delusional concepts that people get a free ride in life. Which, were we capable to be bold enough and do so, would enable it to be ready to absorb the next blow to it's conscience, whether that come in the form of an another economic collapse or war.
Some quotes to buttress that:
Just where do you feel we are in this cyclical journey? Hmmm?
Selfishness to complacency. Greed still exists. Complacent investors expect it to get back to normal.
All the stimulus plans have done is move the problems forward. When your wife goes on a spending spree to feel better about gaining a few lbs, she may feel better for a day or two. But in the end, when the credit card bills come - she's in an even shittier mood, AND she's still fat.
What I have always found interesting is that when the markets are bullish, people amplify the occasions their views were proved correct and discount the occasions they were wrong, convincing themselves they know what is going on, therefore positive news has a greater impact than negative news. When markets are bearish, the opposite is true and negative events have a greater impact than positive, as fear becomes the dominant emotion.
However, the way the markets are behaving at the moment seems to throw all of this out of the window - negatives like consumer confidence are apparently less important than mildly positive results from Abercrombie & Fitch. Though this seems to be more about an agreement between TBTB that any events that give the shorters confidence to sell should be met with a squeeze to break them. The problem is it is pushing prices to such levels that when the computers want to hand over the markets to actual investors, the entry levels are absurdly high and nobody in their right minds should jump in.
This is also exactly how a gambling addict behaves.
Mr. Marks uses a lot of words to make the point that buying low and selling high is the best approach. He also spends a lot of time talking about the unknowability of the future in the context of 'investing'.
Marks concludes:
Curious yet understandable is that in the plethora of examples or 'touchstones' as he calls them that he didn't bring up Oaktree's participation in the PPIP, which I think would be a great example of 'risk' or should I say 'no risk' and leverage or should I say extreme leverage in the context of the 'knowable'.
http://www.marketwatch.com/story/china-fund-to-invest-1-billion-in-la-fi...
A good post on the psychology of markets.
I would like to add: "Not only is 'Greed is good', but that 'Greed goes unpunished"
....When you have central bankers continuing to fuel bubbles, and then claiming they are only able to detect them "after the fact" and "we really can't dis-arm them anyway without chaos" (to paraphrase Greenspan)...
...When Central bankers (i.e. Alan "Put" Greenspan, and "Helicopter Ben", et. al...) completely eliminate moral hazard thru bailouts of "deserve to be bankrupt companies" and FED guaranties of their almost worthless paper, thereby guaranteeing extremely risky, but highly profitible behaviour...
You have solved absolutely nothing..
Central bank induced below market interest rates fueled the Great Depression, and it fueled this "great recession", and it will fuel the next one..
Just wait until the remaining middle class wakes up to the reality that in America, our motto is now to privatize the profits and socialize the losses.
Nothing more, nothing less.
Oaktree's 13Fs for the quarter ending June 30 compared to September 30 tell an interesting story
June 30 Form 13F Information Table Value Total: 5,258,281
http://www.secinfo.com/dsv8a.s1q.htm
Sept 30 Form 13F Information Table Value Total: 4,382,976
http://www.secinfo.com/dsv8a.s1m.htm
Thank you!
I'll call your Howard Marks and raise you a Mr Nice...
http://www.youtube.com/watch?v=6_tkSOCNaFY
loved mr nice, great book
"I say we never know where we're going but we sure as heck ought to know where we are"
and how we got there
it's more than the government being involved too little or too much
it's the type of involvement
and its intentions
Mr. Durden: Greed is good, but that's not the sentiment today. Fear still lurks in many investors hearts - particularly those who want to continue fighting the last war. Mr Mark's comment aren't bad, just about two years too late. My guess is counting the number of bearish comments on your site(and others) and dividing by the number of bullish comments have more predictive value than Mr. Marks cute aphorisms. An obsession at picking "the top" is occurring that borders on the pathological. Normally rational people don't seem to be aware that just because the market is up 60% means nothing, and that something that virtually everybody fears, probably has the lowest likelihood of recurring. An alternative that should be staring any observer in the face is that the dollar index has already created the worst crash in real equity prices in history. By the time iDXY prints 50, we may have traced a straight line to Dow 15000. This has precedent from the 1974 and 1982 lows and is the easiest way to flummox the preponderance of bears looking at simple (and probably wrong) answers. With all due respect, I'd say a valueable comment Mr Marks could have made is one on "misdirection" IMHO, It's where nobody is looking that you will find your answers to the riddle that is the market.
Mr. McCoy, fighting last year's war? That's a good one, clever jab.
There are far more people at tea parties protesting the fleecing of America by bankers and politicians then to complain about socialized medicine. They aren't there because they watch Glen Beck or Fox either.
These are not your typical protesting hooligans. They're highly educated, not involved in politics, hold influential positions in business. Most notably, they are people who have the clarity to see not just what is in front of them today, but what they are handing off to their future generations.
We'll see how much it's "last years war" when the working class understands what kind of submission and productivity it will require to pay the debts we have now accumulated.
Those same debts that we deem righteous enough for Oligarchs are clearly now more important than the countries ability to inflate a currency in a time of war to defend itself.
Let me ask a simple question, "just how many people get a cut from someone buying a house these days?" Why don't we compare that to say 50 years ago, 100 or 150?
Owning a home is no longer the American dream, owning a home is now how people are shaken down and robbed in blistering daylight, with an entire overclass of people waiting in line for their piece of the action.
If one wants to find "precedent" Mr. McCoy, you best be looking a little deeper in your history books.
I'm a novice and I am struggling badly. March was too low, agreed; but isn't 10K+ too high, dollar or no? I (now) understand the last war is merely the last war and (apparently) means nothing. Fair enough, lesson learned. Isn't the reality by itself of a dollar only Dow of 15K enough to "call the top"? Like, we already passed it awhile ago? To me the sentiment alone is a disaster- forget the reality. Geezuz, we're broke, period. Am I missing something? I don't understand all this dollar carry trade crap, quant implications and sundry monetary policy mechanisms and implications; I do understand we're broke. That to me, means my ass is had. So you are saying I should go long, accept 'even-steven' as the toilet bound dollar drives the Dow? I guess I'm a bear because I merely expect fair valuation- and to me wealth and value creation are the drivers. There is none of that now, nor for the foreseeable future. So the head fake is bullshit.
I have experience in highly leveraged investing (CDO,CLO,etc),some funds with 20x leverage. Institutions and individuals were giving us money to invest in these vehicles, this is all our fund invested in. If we said no, not a good time, then we would have not raised money, had significant withdrawals and eventually closed as CDO, CLO investing requires substantial fixed overhead.
Most of us knew we were in a massive bubble and we discussed what to do many times. The answer we came up with is that if we say stop the insanity, we become unemployed. Instead we decided it was not our job to say whether our asset class was a good choice for the current time, it was the job of the people who allocated money to our funds. Our goal was to simply outperform our asset class, if the asset allocation choice made by the pension fund was incorrect, that wasn't our fault, it was the pension fund's fault.
This is the problem in asset management, it is virtually impossible to find like minded investors to invest with you. If you take pension fund money you have to chase the market or they will find someone else to do it for them.
In an ideal world the brightest investors would work for pension funds and the goal of buyside people would be to land a pension job. Similar to moving from the sell-side to to the buy-side. Instead pension funds pay $100k to the person who can make $500k in the private market so the best investors are collecting their paychecks and making investments that they know will eventually fail.
Given the politics of paying government employees multiples more than anyone else in government we end up with a system in which failure is required to have success.
In equities, most funds until they reach the point of no longer caring if someone withdraws (probably any fund under $5 billion AUM) essentially have to trade month to month because their investors will withdraw if they have a poor 2 or 3 months in a row. With this pressure the same thing occurs as described above. If you strongly believe the equity market is overvalued but you are wrong by just 4 months you may have no money to manage when you are proved correct.
It may seem overly simple but if pension funds simply paid above private market rates, bubbles would be far less likely to happen because at the end of the day the idiots at CalPers and other pension funds drive bubbles with their shocking inability to allocate assets wisely.
h/t
Yeah I agree just look at Calpers, they just cut back some of their investment (100mil) with PIMCO because they "only" had 35%+ return and the asset class returned 42%. Yet didn't Wild Bill outperform the same class last fall?
This leads me to a question that continues to rack my brain these days, particularly in regards to equities and gold: who should a contrarian be contra to? In other words, who is the "herd"?
As David Rosenberg continually points out, the general retail investing public continues to move money out of equity funds and into debt funds:
"Once again, equity funds suffered a $4.7 billion net outflow last week. At the same time, bond funds saw a $7.5 billion inflow (on top of $10.2 billion on the last week of October) and an additional $358 million went into hybrids."
Not buying (aka selling) equities right now would be aligning oneself with the general retail public and being contrarian to the herd that is CNBC, wall street analysts and overly optimistic and self-interested CEOs.
However, if one considers the general herd to be the ma and pa retail investing public, then not buying equities right now would be moving in line with the herd.
If you were to ask the question, "what would surprise you more right now: Dow 12,000 or Dow 8,000?" I believe the Ma and Pa herd would say 12,000 while CNBC herd would say 8,000.
The same analysis can be applied to gold:
Buying gold right now would be considered contrarian to those who see Gold as an asset bubble. Buying gold right now would be moving in line with central banks, known hedge fund managers and the flurry of recent drudge report and tech ticker articles that retail investors have been reading. With Gold at an all time high and hitting its highs every single day, wouldn't calling Gold $2,000 be more contrarian to the "know it alls" who say "this always happens with gold" and are calling for $800?
So I'll ask all of you one more time, who is the herd?
I've been trying to short this market for months now, and I'm sick being on the wrong side of the trend. Looks like the algos along with the coordinated efforts of every central bank on the planet have done their job and the reflation trade is in the cards. Until the trends say otherwise, gold is my new best friend...
Looks like the music has started up again, time get dancing...
This has always been a bear market rally and the daily chart continues to show bearish divergence.
USD and VIX continues to warn of a bullish breakout.
http://www.zerohedge.com/forum/market-outlook-0