STREET DOGS

Extracts from Yet Again? Howard Marks’s latest memo to Oaktree Clients: The amount you have invested, your allocation of capital among the various possibilities and the riskiness of the things you own all should be calibrated along a continuum that runs from aggressive to defensive.

What matters is “the level that securities are trading at and the emotion that is embodied in prices”. Investors’ actions should be governed by the relationship between each asset’s price and its intrinsic value. “It’s not what’s going on; it’s how it’s priced. When we’re getting value cheap, we should be aggressive; when we’re getting value expensive, we should pull back.”

All I’m saying is that prices are elevated; prospective returns are low; risks are high … it seems to me that this is a time for increased caution … arguing that it’s too early to sell even if the market is expensive [is] either (a) absolutely illogical or (b) signs of the investor error and lack of discipline that are typical in bull markets.

I feel strongly that it’s possible to improve investment results by adjusting your positioning to fit the market … on the basis of reasoned judgments concerning: how markets have been acting, the level of valuations, the ease of executing risky financings, the status of investor psychology and behaviour, the presence of greed versus fear and where the markets stand in their usual cycle.

Importantly, assessing these things only requires observations regarding the present, not a single forecast. As I say regularly, “We may not know where we’re going, but we sure as heck ought to know where we stand.” Observations regarding valuation and investor behaviour can’t tell you what’ll happen tomorrow … they can tell you whether to be more aggressive or more defensive; they can’t be expected to always be correct, and certainly not correct right away.