Howard Marks Memo from Oaktree Capital

Discussion in 'Share Investing Strategies, Theories & Education' started by pwnitat0r, 27th Jul, 2017.

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  1. pwnitat0r

    pwnitat0r Well-Known Member

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  2. Nodrog

    Nodrog Well-Known Member

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    I noticed this in the AFR today from Howard Marks about the potential dangers of indexing:
     
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  3. Snowball

    Snowball Well-Known Member

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    In the memo he noted something around indexing being somewhat self perpetuating and wondered where does the tipping point come where price discovery stops working because not enough people are doing it, since the weight of indexing will be a stronger indiscriminate buying force.

    I may not have remembered that right, but was an interesting read :)
     
  4. The Falcon

    The Falcon Well-Known Member

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    I think this is all a bit of a beat up...lead by active managers who are seeing outflows. I've seen Charley Ellis on the price discovery thing and from memory I think something like less than 10% active it may start to become an issue...but at that point mispricing and lack of research means that active management becomes very attractive again. I don't think that this is ever a real issue, look at how much money is moving into non cap weighted index products - these are classed as "Passive" but they are anything but.

    Humans aren't capable of accepting average... hope springs eternal so active management will survive.

    In a roaring bull market it's very hard to compete with cap weight...but cap weight will underperform value again at some stage, and the punters will dump the cap weight funds and head for what has outperformed.
     
    Last edited: 28th Jul, 2017
  5. The Falcon

    The Falcon Well-Known Member

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    The irony here is that the large cap active funds (closest indexers) lose fum to indexes who are buying the same stock they previously held but at lower cost to the owner.
     
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  6. Nodrog

    Nodrog Well-Known Member

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    Yeah not saying I agree with everything he says just adding to the thread info I found. Mark's also not your typical average fund Mgr with a lot to fear from the passive tsunami. So the vested interest aspect perhaps doesn't apply to Marks as much as others. After all the best Mgrs will benefit as the poor / average ones go to the wall. Is Marks smarter than Ellis or vice versa or are both talking their own book financially, intellectually and egotisically.

    The next big crash will be interesting as there's a lot more FUM in index product now. From memory the biggest risk with ASX ETFs is that the intermediaries being the Market Makers are not obliged to hang around if the crash is severe and they're concerned about large losses. Given that Vanguard ETFs invest in the underlying large wholesale funds I'm wondering if this makes them safer being somewhat more able to handle a sudden massive crash?

    I don't think anyone can say for certain including Ellis what would happen. I think we need to be honest and admit no one knows. Which is why I still like to spread our money around across Mgr and type of investing product structures. Equity ETFs investing in very liquid markets are potentially likely to be ok but there are a lot of Bond ETFs that could get into trouble. Even with Treasuries Australia is a small market lacking the liquidity compared to larger markets such as the US. Bernstein highlighted the dangers of Bond ETFs vs traditional index funds. Just another reason why I'm still a fan of Government guaranteed term deposits / cash vs bond funds / ETFs.

    One has to be able to sleep at night which is why we're progressively derisking the portfolio to a level that provides greater protection against some of the issues mentioned above. But of course we're retirees, younger investors are not impacted greatly by these things provided they've got the psychology to handle temporary / permanent loss of capital. More likely permanent loss of capital due to themselves when the going gets tough rather than the market / Mgrs!

    All investors should hope they experience a severe market crash sooner in their lifetimes rather than later to truely understand their risk tolerance. As @Il Falco mentioned awhile back, everyone thinks they'e a buy and hold investor in a bull market. Many will find out they're not with potentially devastating consequences.
     
    Last edited: 28th Jul, 2017
  7. OscarBravo

    OscarBravo Well-Known Member

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    I thought the whole thing was excellent and definitely worth a read. I expect there will be a lot of financial commentators today who will spend a lot of time trying to pull apart his arguments.


    At the end of the day, Marks is all time top 5 in my opinion and I’d rather listen to someone who is a professional risk taker rather than a commentator/allocator/whatever else
     
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  8. The Falcon

    The Falcon Well-Known Member

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    All fundies have a lot to fear from the passive tsunami....two words ; Fee pressure. I havent been following Oaktrees bond fund performance, their stock performance has never set the world on fire and i understand remuneration is bloody high....though he is pretty much just a figurehead these days.

    Ok, had a look at the memo rather than just the AFR summary. I cant argue with what Marks is saying....except for the underperformance of active managers being a "recent" thing.

    We know that ETFs cant be more liquid that the underlying holdings (another reason unlisted index funds make sense - dont need to worry about this) and that bond ETFs are particularly a worry for those that need liquidity. We know that an market with higher ETF participation will typically provide more volatility intra-day.

    What also stands to reason (well for me at least) is that the market is self levelling - i cannot conceive of a market which is 80% indexed and where the 20% active managers are killing it on the SPIVA scorecard and that 80% remaining in index ETFs....the punters will all tilt back to active! how can it not be? this is what punters do, flock to what has recently performed....human nature will not change. In any case, so much money is now moving in to "smart beta" or factor stuff which present their own problems ETFs are not monolithic.

    For the long term investor my view has not changed, and i have huge respect for Marks and love his work.
     
    Last edited: 28th Jul, 2017
  9. The Falcon

    The Falcon Well-Known Member

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    With due respect, I think you need to pay a little more respect to Charles Ellis. As a fundie yourself you'd be aware of his work with the Yale Endowment and his seminal 1975 paper surely.

    Commentators love Marks as he provides the best soundbites in the business. He's brilliant. I think of his stuff all the time, his views on risk in particular.

    I'd listen to both sides, understand the context and then decide for myself what that means for me. A raging bull can definitely be prolonged and fed by cap weighted money, and we expect higher volatility as it exits. As Marks would say "who doesnt know that?" That does not undo the case for long term buy/hold investors indexing core positions imho. ETFs vs. Index fund is a seperate matter again. I think most would be better with an unlisted index fund.

    When price discovery stops "working" active managers will have their day. I'll just stay still while money chases that recent performance.
     
    Last edited: 28th Jul, 2017
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  10. Nodrog

    Nodrog Well-Known Member

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    Well argued @Il Falco. Good old human behaviour at play. And it will always be the same, when it comes to fear and greed humans on average never seem to learn.

    This reinforces to me that the successful personal investor is one who is able to control his / her emotions, know their risk tolerance, minimise costs and as Bogle / Ellis / Malkiel would say, stay the course.
     
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  11. Zenith Chaos

    Zenith Chaos Well-Known Member

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    This is an interesting article
    http://www.top1000funds.com/insider/2010/12/01/diversification-is-not-enough-for-managing-risk/

    Best risk reward strategy in normal markets is the diversified efficient frontier portfolio - that is the index which in our case using ETFs such as Vanguard, ishares etc. You also need to complement that with some risk free asset (cash).

    My interpretation of the article, please correct me if I am wrong, for the same reason that we insure our houses, cars etc, situational hedging of our portfolio is important. Eg hedging through short options on the market to cover a major crash. The amount of hedging would decrease if the market fell back to normal (historical) levels.

    Does anyone here use direct hedging (bugging VGAD doesn't count)? I do not but it may be a more effective way of managing risk rather than selling down risky assets and taking tax hits. Opinions?
     
  12. Nodrog

    Nodrog Well-Known Member

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    If you want something with protective strategies check out WDE. Supposeably run by smart cookies but doesn't impress me much. Not sure how long it will be around for though given it seems to be one of Geoff Wilson's latest targets for activism.

    Wealth Defender Equities - Investor Centre

    Personally I manage equity risk by concentrating on dividends. All these expensive, hit and miss protective strategies are not a concern to me as capital volatility is irrelevant.
     
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  13. pwnitat0r

    pwnitat0r Well-Known Member

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    Most people's idea of risk is volatility. But, volatility and loss of capital are two completely different things.

    The ideal scenario for me would be a huge market correction or pull back for a few years while my partner and I keep our jobs so we can throw heaps of cash into the market.
     
  14. The Falcon

    The Falcon Well-Known Member

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    Efficient frontier is an interesting subject and one worth looking at - it is concerned with the optimal risk adjusted return, constructing a portfolio from risk / risk free assets. The risk free asset is not complementary to the stock component, it is one of two fundamental pieces. The problem is that efficient frontier for a given time period can only be determined in hindsight.

    Flicked through the rest of the article to be honest I binned it. They are talking about liability matching rather than shorting stock market. Insurance in this case is about drawdown limitation (floors) which can be implemented with stop loss for example. It's really a badly written (from my perspective) piece that I don't see much value in for the small investor. The problem with all of these strategies is they incur real costs in implementation (fees / taxes) and require a view of the future state of the market which I believe nobody has.
     
  15. Redwing

    Redwing Well-Known Member

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  16. Zenith Chaos

    Zenith Chaos Well-Known Member

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    A friend uses BBOZ. There's also BBUS for the US. I am confused now but I will build up a bigger cash allocation as my short term strategy.
     
  17. Nodrog

    Nodrog Well-Known Member

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    Yep, simple sounds better.
     
  18. b0b555

    b0b555 Well-Known Member

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    I'm thinking 50% GEAR and 50% BBOZ. Should eliminate the volatility ;)
     
  19. OscarBravo

    OscarBravo Well-Known Member

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    No doubt a legend and the loser's game (I think that's the one you are talking about?) is important. You've obviously also snookered me with the reference to literally the greatest set of allocators of all time.

    For what its worth, Swensen's discussion on active management for high dispersion asset classes informs a lot of my thinking. Unfortunately for me, I personally will never have access to top quintile PE or VC or (other high dispersion asset classes).

    Maybe my point was more this: people who allocate to fund managers tend to blame the fund managers when they underperform (or allocate poorly), whereas even though on average fund managers underperform, they have no one to blame but themselves. I find that fund managers, despite their performance, have a greater respect for risk taking than other financial participants and as a result I am more likely to consider seriously their positions on risk-taking.

    The discussion as to whether the funds management industry adds value is probably a discussion for another time!
     
  20. Nodrog

    Nodrog Well-Known Member

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    @OscarBravo said:
    Perhaps that's a good thing!

    Speaking of Swensen, Yale and other Endowment funds:

    How the Bogle Model Beats the Yale Model (Ben Carlson)
     
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