Graham And Doddsville

Aside from the obvious Buffett & Munger, there are two investors I can never seem to get enough of. The first is Howard Marks – who thankfully puts out his regular memos from Oaktree. The second is Legg Mason Strategist and Columbia Business School Professor Michael Mauboussin who was recently interviewed on Consuelo Mack’s WealthTrack.

If you can’t see the video click here.

Read Professor Mauboussin’s new book The Success Equation:Untangling Skill and Luck in Business, Sports, and Investing which was recently released.

Howard Marks’ latest memo, A Fresh Start (Hopefully), is now available on the Oaktree website.

Marks’ memos are a must read. If you have what Seth Klarman believes to be the ‘value investing gene’ – you are likely to find yourself nodding yes as you read along.

A compilation of Marks’ memos were recently published in a book called The Most Important Thing. You can also read the originals, which can be found here.

Over the coming days, I will post some older articles by Howard Marks to the SuperInvestor Resources page.  In general, Marks’ clarity makes him a very ‘quotable’ investor.  One of my all-time favorite quotes is:

Certain common threads run through the best investments I’ve witnessed. They’re usually contrarian, challenging and uncomfortable— although the experienced contrarian takes comfort from his or her position outside the herd. Whenever the debt market collapses, for example, most people say, “We’re not going to try to catch a falling knife; it’s too dangerous.” They usually add, “We’re going to wait until the dust settles and the uncertainty is resolved.” What they mean, of course, is that they’re frightened and unsure of what to do.

The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left . When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain. Thus, a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.

It’s our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling—and if our view turns out to be right— that’s the route to the greatest rewards earned with the least risk.”

Have a wonderful Thanksgiving!

Click here for more on Howard Marks.

Prior to 2008, it was normal for a value investor to have no particular “view on the economy.”   As Ben Graham said “Analysis should be penetrating not prophetic.”  In The Little Book of Behavioral Investing James Montier explains that “All Investors should devote themselves to understanding the nature of the business and its intrinsic worth, rather than wasting their time trying to guess the unknowable future.”

After 2008, several highly regarded value investors began to argue that while they still might not attempt a detailed economic forecast, they now found it more important to be aware of the economic environment and macro outlook.

As usual, my view is not as black and white.  Whether or not a value investor should have a “view on the economy” is still up for debate.  However, there is no doubt that investors must understand the the impact different economic outcomes can have on the intrinsic value of each stock they own.  Montier goes on to quote Howard Marks of Oaktree Capital who in 2001 wrote:

There are a few things I dismiss and a few I believe in thoroughly. The former include economic forecasts, which I think don’t add value, and the list of the latter starts with cycles and the need to prepare for them.

“Hey, ” you might say, “that’s contradictory. The best way to prepare for cycles is to predict them, and you just said it can’t be done.” That ’s absolutely true, but in my opinion by no means debilitating. All of investing consists of dealing  with the future .

. . and the future is something we can’t know much about. But the limits on our foreknowledge needn’t doom us to failure as long as we acknowledge them and act accordingly.

In my opinion, the key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you ’re going. Knowing where you are in a cycle and what that implies for the future is different from predicting the  timing, extent and shape of the cyclical move.

As usual, I completely agree with Marks.  So how do we know where we are and how do we analyze the effect of a range of economic conditions on the intrinsic value of an investment?  I believe that the best way is to study the only thing we know for certain – the past.  I know, things change, the world is different, we have globalization, a major worldwide debt crisis, a housing market the likes of which we have not seen since the 1930s, and the list goes on…  That being said, we must start somewhere.

One of the important steps in my investment process is what I call “Exploratory Research.” In this phase, I try to arrange all of the data I gathered to analyze how it relates to both each other and also many different variables.  The goal of this exercise is to get as creative as possible, with the hope of developing an analytical edge.  At the very least, this analysis will help me to understand how a business might react considering a range of economic scenarios.

I used to find economic data on Bloomberg, Capital IQ, or dozens of different websites.   However, I recently discovered an incredible Add-In for Microsoft Excel.   It is called the “FRED Add-in” and is provided by the Federal Reserve Bank of St. Louis.  As described on their website:

The Federal Reserve Bank of St. Louis Economic Data (FRED) Add-In is free software that will significantly reduce the amount of time spent collecting and organizing macroeconomic data. The FRED add-in provides free access to over 30,000 data series from various sources (e.g., BEA, BLS, Census, and OECD) directly through Microsoft Excel.

Key Features:

• One-click instant download of economic time series.
• Browse the most popular data and search the FRED database.
• Quick and easy data frequency conversion and growth rate calculations.
• Instantly refresh and update spreadsheets with newly released data.
• Create graphs with NBER recession shading and an auto update feature.

The best part is that the Add-In is free!  It is an amazing and powerful tool that you can download here.

A second resource I recently stumbled upon is Insidertrading.org which can be found here:  http://insidertrading.org/ .  It is another fantastic FREE resource to track insider buys and sells.  While I have found several websites in the past that provide insider buying/selling summaries, insidertrading.org seems to be the most comprehensive free site.  As value investors know, insider transactions can be a great place to find new investment ideas or raise questions about existing holdings.