One thing Howard Marks does well is take the prevailing market view and flip it on its head. You can see it in a couple interviews he did in late September. Both interviews are brief and there is some overlap in topics, so I’m just going to pull out a few highlights.
Here’s his response to a question about how low yields and high multiples make this market extremely risky:
The riskiest thing in the world is the belief that there’s no risk. When people are talking about risk in the markets, that’s a healthy thing…When you turn on the TV, you don’t see raving bulls. They have not reissued Dow 36,000…That’s healthy. The problem is, that even though most people are not thinking bullish, most people are acting bullish…My late father-in-law used to call these people handcuff volunteers. They’re taking risk not because they want to – not because they’re bullish – but because they have to, to make a decent return.
So all the noise around how risky things are right now is a good thing. Thinking risks exist – being cautious – is a lot better than believing you can’t lose. But investors can’t think one way, yet do the opposite without accepting those risks.
If you are more worried about losing money than usual, what do you do? You could go to cash, but that’s a tough thing to do. The other thing you can do is raise your standards…We’re rejecting more. We’re insisting on a higher margin of safety.
In the chase for yield, some investors are doing the exact opposite. They throw out standards in the pursuit of higher yield. In the process, they take on more risk than they’re used to or are comfortable with. Just because something pays a higher yield today, does not mean they’ll earn it tomorrow. The real risk is ignoring the risks – default, selling before maturity, or selling after a big price drop.
Another risk is expecting a higher yield than what is possible.
The first thing that I’m sure of is that 5.5% high yield bonds are not going to deliver 8.6%. And 2% treasuries are not going to deliver 5% and so forth. And the biggest mistake you can make, in my opinion, is buy a 5% bond expecting to make 7%.
I meet with a lot of pension funds and they always ask me my view of the world. I give them my view and what I think what assets are attractive and what I think they can make. And then they say, “Well, our actuarial assumption is 7.5%. What do you recommend?” And I say, “I recommend you change it.”
But the problem is, the actuarial assumption – which I think is supposed to be the return you think you can make – has morphed into the return you need to turn today’s assets and predictable cash flows into the amounts you’ll need in the future to pay to meet your needs. It doesn’t necessarily have anything to do with what a prudent investor could make.
The great goal of retirement has two basic inputs: the amount saved and the return earned. If you lower one input (return earned), the other (amount saved) must be raised to meet the goal. The same idea fits when withdrawing money in retirement. Lower returns mean you need to withdraw less so you don’t run out of money.
Expecting more than what’s possible ignores the only input you control.
A lot of coverage around AI this week and I went overboard with the links below.
- What’s Something You Strongly Believe That’s Likely Wrong? – M. Housel
- John Maynard Keynes: Courage Is the Key to Investing – J. Zweig
- Influence and Pre-Suasion w/ Dr. Robert Cialdini (podcast) – Investors Podcast
- Remarks at the 40th Annual Central Banking Seminar – R. Dalio
- The AI Revolution: Why You Need to Learn About Deep Learning – Fortune
- Why Deep Learning is Suddenly Changing Your Life – Fortune
- Neural Nets, Self-Driving Cars, and the Future of the World – Wired
- Marc Andreessen explains how AI will change the world – Vox
- How Computers are Setting Us Up for Disaster – Guardian
- Elon Musk’s Wild Ride – Bloomberg
- A Flick of the Wrist – The Ringer