Howard Marks releases a new memo based on often used phrase “this time is different.” He highlights nine ideas, each a different form of those four words, that come up often today. His response to two ideas is worth highlighting.
The first is on the idea that we don’t have to have a recession.
When I hear people talk about the possibilities that the Fed will prevent a recession, I wonder whether it’s even desirable for it to have that goal. Per the above, are recessions really avoidable or merely postponable? And if the latter, is it better for them to occur naturally or be postponed unnaturally? Might efforts to postpone them create undue faith in the power and intentions of the Fed, and thus a return of moral hazard? And if the Fed wards off a series of little recessions, mightn’t that just mean that, when the ability to keep doing so reaches its limit, the one that finally arrives will be a douzy?
The push to minimize volatility in cycles — markets, business, economy — was the main theme that came out of the financial crisis. It’s not a new theme either. Except, what people really want, is what everyone wants — the upside without the downside that comes with it. It never works out that way, but it doesn’t stop people from trying again and again…
Unfortunately, doing so leads to unintended consequences that tend to blow up spectacularly. And, no surprise, it pushes people back to the same failed thought process: minimize volatility again. It’s a stupid cycle, in itself, that only benefits the small percentage of people that have accepted volatility as a natural part of the system.
If there ever was a lesson to learn from the crisis, it’s how insane and egotistical you have to be to think anyone can control something so complex and globally interconnected as our economy. And yet, here we are.
The second is his response to the recent growth versus value debate that arises whenever growth has an extended stay in the spotlight.
On the other hands, companies that do have better technology, better earnings prospects and the ability to be disrupters rather than disrupted still aren’t worth infinity. Thus it’s possible for them to become overpriced and dangerous as investments, even as they succeed as businesses (this was often the case with the Nifty-Fifty in 1968-73). And I continue to believe that eventually, after the modern winners have been lauded (and bid up) to excess, there will come a time when companies lacking the same advantages will be so relatively cheap that they can represent better investments (see value versus growth in 2000-02).
Understandably, the stocks of companies with bright futures are likely to be outperformers in times of economic growth and optimism, when investors are happy to pay up for potential. But stocks of companies with tangible value in the here-and-now are likely to hold up better in less positive times because (a) they’ve previously been disrespected and valued lower and (b) the rationale underlying their prices is less a matter of conjecture and faith. Thus a swing in favor of value may have to await a period in which the “champions” lose some of their luster, perhaps in a market correction. But it’ll come.
I remember the last time “value was dead.” Buffett was washed up too. At least, those were the proclamations from investors caught up in the Internet craze that took over the market. Old companies were “outdated” because the internet was taking over the world. It did, just not in the way everyone expected.
That whole episode is hard to describe. The best way to explain it is people who never in their life talked about stocks, talked about the latest Dotcom IPOs like it was the weather, only the Dotcoms were treated like a favorite sports team that could never lose. You really had to experience it firsthand.
Eventually, prices went south. All the optimism faded away. And everyone learned value was never dead. It was dormant.
Memo: This Time It’s Different
- The Price of Popularity – Enterprising Investor
- What are the Chances of Finding an Active Manager with Skill? – Behavioral Investment
- When Everything That Counts Can’t Be Counted – The Reformed Broker
- How to Win Any Argument About the Stock Market – B. Carlson
- More Art Than Science – Irrelevant Investor
- Study Of Old Real Estate Bubbles (1582-1810) Finds Two Surprising Similarities With Modern Bubbles – Real Estate Decoded
- Where to Invest in the Next 10, 20, and 30 Years? – 13D Research
- Consumers are Becoming Wise to Your Nudge – Behavioral Scientist
- How to Build Something that Lasts 10,000 Years – BBC
- Money was Not Enough for Crassus, the Richest Man in Rome – National Geographic
- We Could Have Had Electric Cars from the Very Beginning – LongReads