Howard Mark’s latest investor letter is out, and its called: “How quickly they forget.”
It’s all about how quickly things change in the investing world, and how the world of finance is constantly guilty of having a short term memory that dismisses past events when the lessons from those events, are most important.
We’ll get to that later, but one of the best parts of his letter was a piece of practical advice: what’s the one question you should ask about an individual security, asset class or market?
According to Marks that question is it is: “Is it cheap?”
He said, “Oaktree’s investment professionals try to ask it, in different ways, every day.” He said cheapness is the “single key to consistently successful investing.”
Bigger picture-wise, Howard emphasised why investors need to constantly remind themselves about the problems of the past, and that now is the time to exercise caution.
(Reasons for his caution include a slow recovery; the debt ceiling dilemma; potential inflation and rising interest rates; a volatile dollar, euro and sterling; instability in the Middle East and what that means for oil).
He said there is “nothing more risky than a widespread belief that there’s no risk.”
If investors remembered past bubbles and busts and their causes, and learned from them, the swings would moderate. But, in short, they don’t. And they may be forgetting again.
Past patterns tend to recur. If you ignore that fact, you’re likely to fall prey to those patterns rather than benefit from them. But when markets get cooking, the lessons of the past are readily dismissed. These are nothing short of eternal verities, and their collective message is indispensable.
Marks emphasised he doesn’t think security prices are at their pre-crisis, 2006/07 peaks. Rather, they’re: “Falling somewhere between fair and full. Not necessarily bubbly, but also not cheap.”