Howard Marks was on Bloomberg TV yesterday and it was a great interview. I think Bloomberg TV is way better than CNBC these days as they seem to ask better questions and give the guests more time to answer questions (rather than trying to make them say things that the interviewer wants to hear, or force / trick them into supporting a political view).
Anyway, any time you can hear someone like Marks speak, it’s worth your time. Here’s the link:
This blog is not about posting links so you know more is coming.
I don’t intend to summarize the interview or anything like that. There were a couple of points in the interview that really struck me and I wanted to point that out. If you have followed and read Marks over the years, you know he is a really solid guy and very credible. So I found it interesting that he said:
Central Bank Actions Reasonable
He was asked if recent central bank actions were a mistake and he said no. He said the Fed is stimulative and it’s appropriate that they are stimulative. He said that “their course is reasonable”. I think Buffett is on that side too, defending the Treasury and the Fed in their actions in preventing an economic collapse.
Anyway, I tend to be on that side too so it’s refreshing to hear people on this side (instead of the Fed bashers which seem to be the majority these days).
Ever since the financial crisis (and actually from before then, but a lot more since then), a major pet peeve of mine has been what I think is a big macro-forecasting bubble. Reading letters from value investors, I got so tired of reading about the macro. Many equity fund letters spend so much time talking about the debt, the crisis, the coming depression if politicians don’t get their act together etc.
Others blamed their poor performance on the macro environment, saying that their mistake was ignoring the macro environment.
I have always thought that the equity funds that lost a lot of money lost money on poor securities analysis; Buffett’s portfolio didn’t blow up despite being heavy into financials and Buffett didn’t sell down his stocks, buy puts, hedge or anything like that at all. He just stuck to strong balance sheets and he did just fine, thank you.
Others jumped into AIG, MER, BSC, LEH, FNM, FRE and suffered permanent loss of capital.
I would call that a securities analysis error, not a macro forecasting error.
But I still keep hearing stock experts spending so much time on the macro.
There’s a difference between buying into risky, leveraged institutions and hoping that a recession won’t get too bad, or just buying the strongest companies and not worrying about how bad a recession can get secure in the knowledge that the company you own can cope with everything but maybe the moon crashing into the earth (this is a Jamie Dimon scenario when asked if JPM can lose $50 billion or whatever it was during the congressional hearings).
Buffett has said over and over that he doesn’t pay attention to the macro when evaluating investments. If he likes the business and the price, he doesn’t check to see if the economic forecast is going to be OK. He doesn’t worry about what will happen in Europe. He said he has never *not* done a deal or bought a stock due to macro concerns.
Marks on Macro
So anyway, it was very refreshing to hear Marks talk about the macro. He was asked about how macro is getting to be more important in investing in these volatile times. He said that most people think macro will determine investment results (so they pay a lot of attention to it). But he points out that in investing, there is always another side to it.
Of course, it’s desirable to be able to forecast the macro to improve your investment results, but the big question is can you do it? Can it be done? Marks said that he personally doesn’t believe that you can be consistently superior in macro judgements. The two key words are consistently superior.
He also noted that the smartest investors from Buffett on down don’t make macro judgements; they find great values to invest in.
He was asked what he thought will happen in Europe (just after telling them that forecasting macro can’t be done consistently). He said that it is a complex situation but he is sure of three things:
1. He doesn’t know what will happen in Europe
2. Nobody knows what will happen in Europe
3. If you ask an expert what they think and take their advice, you’re making a mistake.
He quoted Mark Twain: “It’s not what you don’t know that gets you into trouble, it’s what you know for certain that just ain’t true”.
Can you know more than others? That’s the real question.
Julian Robertson on Macro
Interestingly, Julian Robertson too was on Bloomberg TV in June and it was really interesting to hear him say something similar to Marks. Someone asked him about the Europe situation and the macro environment and Robertson said that the macro situation is always tough to call. And he said that the problem with hedge fund performance has been stock selection and not macro.
If you look at the performance of hedge funds and stock funds over the past few years, I would bet that the performance has been much more influenced by stock selection than market-timing. Guys like Bill Ackman and Buffett’s recent hires have done very well in the recent past while other value funds have done horribly and it’s not due to one of them getting out of stocks before the crisis and getting back in right at the low. They didn’t do better because of their macro insight.
Of course, there are guys out there that specialize in macro. One big fund these days is Bridgewater Associates that pretty much make all of their money on macro. I suppose Bill Gross at Pimco is like that too. George Soros is another that has made a lot of money over the years doing macro trading/investing.
But these people do macro full time and it’s their specialty. This is a lot different than a value investor who raises cash due to economic uncertainty and trying to enhance their returns through this macro ‘insight’.
Marks on Best Opportunities Now
Marks was asked where he sees the best opportunities now and he said real estate and real estate debt. He said that people are staying away from the area and in terms of deal flow he sees a lot of opportunity there.
Like other value managers, he also likes residential real estate. He said it’s a good idea to buy housing and housing related investments when the market is assuming that housing will never recover.
Most Important Point of Marks’ Book
At the end of the interview, he was asked what is the most important point that he wants his readers to understand about investing. He said that he wants people to understand that it’s not easy. He said that when he talked to Munger, Munger told him that none of this stuff is meant to be easy and anyone who thinks it is is stupid.