Quoted from Mr. Howard Marks – Oaktree Capital Management Chairman – memo September 2018: “The Seven Worst Words in the World”
Contact to invest with Golden River – Vietnamese rare value investment manager: http://goldenriverinvestment.com/contact/
@Mr. Howard Marks: “One of my favorite memos ever is The Race to the Bottom, February 2007. This episode begins with me explaining that the financial market is like a giant auction house where thousands of people compete against an item, but only the highest bidder wins it; but ironically, they are also the one who accepts the worst rate of return with their own money. It is the same in the investment field, where opportunity to buy a stock or lend to a business (buy bonds), comes to the guy who is willing to pay the most – that means he is willing to receive the lowest return, and burden the highest risks on his shoulder if something unfortunate happens.
– Similar to any auction, if the number of participants is extremely rare, no one will bother at all, the price offering will be extremely cheap, and whoever snaps that chance will have a huge probability of winning.
– But when there are too many participants with excitement and large pockets of money ready to “spend heavily”, the price will exceed all reasonable thresholds; thus, those who “wildly” pay high prices, will in turn receive low profits, and great potential risks.
And that’s the idea for my title in today memo – a maxim about the 7 worst words in the world: too much money chasing too few stocks.
In 2005-2006, Oaktree moved into a high level of “defensive” action. We sell a lot of assets in our portfolio; dissolve distressed debt funds into smaller funds; avoid high-yield bonds of units acquired by leveraged buy-outs (LBO); and we generally raise the safety standard for our investments. Most important of all, while our distressed fund size was up $2 billion at a time, by early 2007, our “storm-awaiting” reserves accumulated to more or less 11 billion USD (!)
What makes us so negative with our surroundings? The economy is still doing well. Stocks are not necessarily overvalued. And I can confess to you that we did not know that the global financial crisis will ensue from instruments such as mortgage-backed-securities (MBS) or collateralized-debt-obligations (CDO). Instead, our reason is very simple: with the Fed cutting interest rates during the early 2000s, investors were too eager to put their cheap capital to into high-risk places, with unreal expectation of receiving extraordinary returns.
So every day when we see deals completed that we believe cannot be justified in a normal, prudent, risk-averse market, we know that there is a big problem coming. As Mr. Warren Buffett once said, “The more careless others do their jobs, the more careful we have to be with our own” The careless, irrational deals made in 2005, 2006 by countless excited investors have made us so rightfully cautious!”
(quoted & translated from The Golden Newsletter Vietnam: https://newslettervietnam.com/cham-ngon-dau-tu-7-tu-te-nhat-tren-ttck-ngai-howard-marks/)