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When I was a boy, there was a popular saying: Don’t just sit there; do something. But for investing, I’d invert it: Don’t just do something; sit there. ~Howard Marks
Direct from the consistently awesome Howard Marks' latest note: What Matters Most
We won't cover the whole note here, even though this part needs to be shouted from the rooftops... 👇
Develop the mindset that you don’t make money on what you buy and sell; you make money (hopefully) on what you hold.
Think more. Trade less. Make fewer, but more consequential, trades. Over-diversification reduces the importance of each trade; thus it can allow investors to take actions without adequate investigation or great conviction. I think most portfolios are overdiversified and over-traded.
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Over-traded: While much of Marks' advice is aimed at portfolio investors, it also applies to individual traders. There's a whole bunch of studies that show how variable trading costs for retail traders can swallow up profitability.
There's always a cost of doing business. That's expected. The problem for many is that the costs of doing bad business (taking poor quality trades) erode the income from making higher quality trades.
Throw in the usual variance (even 'good' trades often lose money), and many traders are stacking the deck against themselves simply by betting too frequently.
“But you have to take a position [on short-run events], don’t you?”
HM: “No, not if you don’t have an advantage when doing so. Why would you bet on the outcome of a coin toss, especially if it costs money to play?”
Pay to play makes trading a negative sum game from the outset, which is why it's so important to aim for quality above all else.
- Step 1: Ignore the urge to do something
- Step 2: Just sit there until an asymmetrical opportunity presents itself
- Step 3: Profit
- Step 4: Add disclaimer to Step 3... (hopefully)
Or just live in a land of make believe and never mark your losses to market...
Private investment funds are 'hiding' losses
You may have heard about this already, but private equity has a big advantage over public markets.
Privately held businesses aren’t required to report their performance publicly each quarter, shielding them from the large swings in valuation that listed companies face.
And portfolio companies aren’t as exposed to headline risk the way public companies are. Which means...
"It's worth whatever we say it is"
Valuations usually track the S&P500 as this chart shows 👇
Yet so far this year, private equity has largely avoided the big revaluation that's been seen in the S&P 500 and other public markets.
Marks has questions 👇
Mightn’t it be fair for GPs to decline to mark down private investments in companies that have experienced short-term weakness but whose long-term prospects remain bright?
A good point. But life isn't fair Howard. And if they've marked them up when valuations were stratospheric, why wait to mark them down again now...?
And while private investments might not have been marked down enough this year, isn’t it true that the prices of public securities are more volatile than they should be, overstating the changes in long-term value?
I certainly think public security prices reflect psychological swings that are often excessive. Should the prices of private investments emulate this?
A good point. It's definitely true that public markets are (excessively?) volatile, driven by the whim of investor emotions on a given day or week.
However, Marks' argument only works if private equity can resist the urge to mark up these investments in line with excessive upside psychological swings.
Which, let's be honest. It's hard to see anyone doing.
Electric Vehicles - End of the road
Taking a look at the EV space, a lot of the new breed are in big trouble. Some are already failing...
Darwin’s law is coming to the fore. Survival of the fittest. The strongest balance sheets, established production lines and the simple ability to scale and turn a profit are likely to be defining factors.
Higher interest rates and a saturated, highly competitive market are huge hurdles to overcome for the new generation. Patience is running out. Many are simply not going to make it.
Have a read here 👇
And if you've ever wondered what a central bank actually does,