Howard Marks: Fixed Income Returns Not Worth The Risk (Latest Memo) ~ market folly

Wednesday, January 9, 2013

Howard Marks: Fixed Income Returns Not Worth The Risk (Latest Memo)

Longtime readers will know we're big fans of Howard Marks' commentary mainly because he often tackles investment process and other key concepts of investing.  The latest memo from the Oaktree Capital chairman is entitled "Ditto" outlines how history doesn't repeat itself but it does rhyme and he outlines some of these repeating themes in financial markets:

- Importance of risk and risk control
- Repetitiveness of behavior patterns and mistakes
- Role of cycles and pendulums
- Volatility of credit market conditions
- Brevity of financial memory
- Errors of the herd
- Importance of gauging investor psychology
- Desirability of contrarianism and counter-cyclicality (we've highlighted an excerpt from Marks' book on contrarianism in the past)
- futility of macro forecasting

As you'll notice, many of the above are related to behavior/emotion (see recommended reading on the topic here).  Because while fundamentals, technicals, or whatever metrics you follow matter, you also have to worry about the two factors that seemingly move markets the most: greed and fear.

He goes on to write, "The good news is that today's investors are painfully aware of the many uncertainties.  The bad news is that, regardless, they're being forced by the low interest rates to bear substantial risk at returns that have been bid down.  Their scramble for return has brought elements of pre-crisis behavior very much back to life."

The key here, is that he's referring mainly to fixed income securities.  After the financial crisis, everyone was looking for "safety."  And then during the low interest rate years, everyone began to stretch for yield.

Marks reiterates something he said in 2004 by saying that, "there are times for aggressiveness.  I think this is a time for caution.  Here as 2013 begins, I have only one word to add: ditto."

Marks' latest memo "Ditto" is embedded below:

You can download a .pdf copy here.

For more wisdom from this manager, be sure to check out Marks' previous letter.

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