Chris Lau - Seeking Alpha

Monday, May 17, 2010

Notes on Risks from Howard Marks (Oaktree Capital)

In Marks' latest memo, Marks discusses the need for discipline, patience, and selectivity.

Many of you wonder why markets have risen so quickly, wonder why you're missing out, and are less observant on the risks attached to plowing in capital in the stock market.

Marks reminds investors that true risk managements involves forecasting the unknowable. The market fallout in Greece two weeks ago was an example. More are likely to come. Therefore, a sufficient margin of safety for the valuation of companies is warranted.

Below is a highlight from the memo.
A few important things about investing:
  • Investors generally overestimate their ability to see the future, and the worst of them act as if they know exactly what lies ahead.
  • It’s important to worry about what’s coming next. The fact that we don’t know what it is shouldn’t permit us to think there’s nothing to worry about.
  • Low asset prices allow us to invest aggressively, without much consideration given to worrisome fundamentals and the possibility of negative surprises. But as prices rise, so should our degree of concern over these things.
The bottom line is this: the fact that we don’t know where trouble will come from
shouldn’t allow us to feel comfortable in times when prices are full. The higher
prices are relative to intrinsic value, the more we should allow for the unknown.

Full Memo is here
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