<b>[Abstract]:</b> It is much better to be alert early than to realize the risk very late, because when the decline begins, it is difficult for us to digest the risk, exit in time and reduce losses.
For some of the memos I've written before, I'm most pleased that they were written by the time the bull market had been going on for a long time, people had become less and less likely to avoid risk, and the bubble was rising. The first and best example is perhaps the bubble.com, which questioned Internet and e-commerce stocks in the early 2000s. As I said, although my memo didn't get any attention for the decade before 2000, this article (bubble.com) made me famous.
Another example is The Race to the Bottom (February 2007), a memorandum that discusses the risks that arise when investors are desperate to enter the market with their coins. Both of these memoranda questioned investment trends that would later prove to be huge mistakes, but were firmly believed at the time.
These are just two of the many careful reflection memoranda I've written over the years. In the last cycle, the memos began with "Race to the Bottom" two years before the crisis, including "There They Go Again" (which was also the inspiration for this memo), "Hindsight First, Please", "Everyone Knows" and "It's All Good". When I wrote these memos, they all seemed wrong at the time. But after a while they will show correctness, but they are written a little earlier.
Those memos that raise the little yellow flag for the cycle that is currently on the uptrend include: "How Quickly They Forget", "On Uncertain Ground", "Ditto", "The Race Is On", which were released prematurely without exception and have so far remained unverified (in fact, If 6 years or more ago, you don't even know if these articles will be verified in the future). Because I've written too many cautious memos, you may conclude that I'm a naturally worried person and that I'll always be proven to be ultimately right as long as the cycle exists. I absolutely cannot disagree with this interpretation. I would say that when market sentiment (and market trading behavior) goes into an overbearing state, it is necessary to take some notes, even though we know that this upward trend may continue for some time, so some of the warnings and reminders at that time are often precocious. I think it's much better to wake up early (and maybe lead to poor performance in a short period of time) than to realize the risk later, because when the decline starts, it's hard to digest the risk, exit in time and reduce losses.
Because I'm already convinced that "they" are now coming again – excessive voluntary risk-taking, funding high-risk trading and creating a high-risk market environment – it's time to be another reminder of risk and stay alert. Too early? I hope so. Everyone wants the bubble to continue so that we can continue to make money for our customers for the next year or two, rather than seeing the bubble burst in a vacuum (although we all expect cheap assets through the bubble burst, but no one wants to bear the price of falling prices). Although we have no way of knowing when high-risk trading will lead to a correction in the market, I would prefer to send an early warning signal now rather than wait until the real arrival.
I'm preparing another of my new books, which talk about an important topic I mentioned in my last book, The Most Important Things about Investing: cycles, their causes, and how we should deal with them. The book may not be published until next year, but one of the most important cyclical phenomena will be presented to you through this memorandum.
Before I begin, I apologize for the length of this memo, which is twice as long as usual. First of all, the topic of discussion was so broad—so broad that I was startled when I sat down to write. Second, my recent sabbatical has given me time to write enough. Believe it or not, I've cut this article as much as I can. I think all that remains is the essence.
<b>First, today's investment environment </b>
Because I don't want to write this memo as a "macro memo" that covers a holistic review of the economic and market environment. I'm just briefly hinting at the four most noteworthy parts of the current market environment:
Uncertainty about volume, scale, and incompatibilities has reached extraordinary levels, and these areas include stagnant economic growth, the policy implications of central banks, the level of interest rates and inflation, political failures, geopolitical conflicts, and the long-term impact of technology.
For most asset classes, expected returns hit all-time lows.
Asset prices are generally high worldwide. Basically all assets are difficult to buy at a price lower than their intrinsic value, and the volume is very small. The best thing we can do now is look at opportunities where the premium is lower than other assets.
Risk-catering investment behavior abounds. Most investors embrace rising risk in order to achieve the return on investment they need or want.
<b>Second, repetition </b>
In January 2013, I wrote a memo titled "Repetition." The gist of it is that (1) history tends to repeat itself, (2) so my memos often discuss the same topic, and (3) if my past memos are well written well enough, to avoid duplication of effort, there is a good chance that I will borrow what I have written before. Therefore, this is "repetition".
The following four topics are the most easily repeated:
(1) Cyclical fluctuations in the fundamentals of investment;
(2) Excessive reaction of investors to the cycle;
(3) The level of risk aversion that accompanies fluctuations in investor behavior oscillates between extreme preference and extreme inadequacy;
(4) The market environment has changed from recession to expansion.
On this topic, I wrote in "Repeating the Mistakes of the Past":
Given the current lack of opportunities for substantial investment returns at low risk and the excessive blow-up of risky assets, many investors are starting to invest in riskier assets. But:
(1) Investors are investing in risky assets that are at an all-time low in their expected return on investment.
(2) The small amount of excess returns they receive compared to the risks they take on has also reached an all-time low.
(3) Investors are investing in assets that they were reluctant to invest in the past or rarely invested in, and the return on investment in these assets was still considerable at that time. It is extremely unwise to take on greater risks at this point in time in pursuit of higher returns. The risks you take are what others abandon, not what they share with you.
Do you see any difference between then and now? Is it necessary to write it again? It is not necessary for me, I think "repetition" is enough. I would simply like to borrow the conclusions from Bottom race (February 2007):
Today's financial markets can easily be summed up: global liquidity is flooded, spreads on trading investments are minimal, few people care about risk, and meager expected returns are everywhere. As a result, investors will quickly accept asset prices that generate potentially suitable (but much lower than historical) investment returns, while taking on significant risk through very high leverage, untested derivatives, and very weak trading structures. The current cycle is not much different in form, only in scope. There is no suspense about the final outcome, but for the time being that may be the best for optimists.
<b>Third, the seeds of prosperity </b>
My son Andrew was nervously busy with this memo. We thoroughly enjoy the process of putting together a list of the fundamental elements that make up bull markets, booms and bubbles. We believe that the following elements are required. If only some of them are available, then we can get a bull market. If all the elements are available, then there will be prosperity or bubbles:
A good environment – good outcomes will make investors complacent, which will make them accustomed to maintaining positive investment return expectations. Recent returns on investment will encourage people to pursue more returns in the future (past returns do not suggest that these returns may have come from the future).
Some truths – the stories that underpin prosperity – don't come entirely out of castles in the sky; they're generally tied to something that actually happened. The basis of a bull market is generally not an illusion of investors, but it is easy to be overvalued.
Early success – "early smart people" generally enjoy good results, and those who discover and grasp the truth first usually attract those who come later to take over.
There is more money than ideas – when capital is oversupplied, there is inevitably a loss of risk aversion, ambitious expansion and relaxation of investment standards.
Rejection of the value bar – we often hear, "This asset is particularly good, not yet at the top"— buying regardless of price is definitely a typical sign of a bubble.
The pursuit of the new – the products of the old era performed worst during the boom period, the returns on investment were very unevenly distributed, and those things that did not rely on past experience paid off very well, and most people went to buy new things.
Virtuous circle – No one can predict the underlying truth or how high the price of the underlying asset will be. The generally accepted story is that the tree can grow up to the heavens: "It can grow all the way up, and no one can stop it." "Of course, no one can imagine what the opposite picture looks like.
Worry about missing out – When all the phenomena mentioned above are prevalent, optimism spreads and no one imagines a failure. This leads most people to conclude that the biggest potential misstep is not being able to participate in the market today.
Many of the things mentioned above are already emerging today. The market is currently doing well – a small surprise, a very quick correction – starting in 2009 (and has been over 8 years so far). There is more money in the market now than there were high-yield opportunities. "New ideas" are quickly accepted, and some things can be considered to embody a cycle of goodwill.
On the other hand, some of the usual factors that make up bubbles do not appear. Most people (1) are still sober about the uncertainties described above, (2) recognize that the expected return on investment is already very narrow, and (3) acknowledge that things can't always be good. These are all good signs of health.
But in the third aspect, most people can't imagine what will cause trouble for the future. But it is precisely when people do not know what will cause the future turn that the risk is the highest, because at this time, people do not consider the invisible risk into the price. When the negatives are so hidden and the return on cash is too low, people are more likely to worry about overly cautious investments and taking too little risk (resulting in poor gains in a good market) rather than suffering losses.
The combination of these factors has led to the current investor being placed in a highly challenging environment, with the result that the world is in an environment where assets are already significantly overvalued and risk aversion is scarce, and there is a consensus that investors will be questioned if they are too vigilant.
Much of what follows in the memo is about what's going on in the market right now. As usual, accounts of these facts are illuminating, not complete or scientific. Think about how much of the things mentioned above will see in the next example.
<b>4. U.S. Stocks </b>
The good news is that the U.S. economy is the envy of the world, with the fastest economic growth rate in the developed world, and it is difficult to see a decline in the short term. The bad news is that this state of affairs has created demand for U.S. stocks, causing the price of U.S. stocks to rise to a very high level.
S&P 500 shares were sold at a price-to-earnings level of 25 times, compared to a long-term median level of 15 times.
The ratio of Shiller Cyclically Adjusted PE is close to a high of 30, while the historical median level is 16. The index was only surpassed in 1929 and 2000, both times on the eve of the bubble.
From the perspective of the price-to-earnings ratio indicator, the stock price is already very high, and the profit level of listed companies has inflated due to cost savings, stock repurchases and mergers and acquisitions. The actual valuation is higher relative to the actual potential profit than the public market valuation that currently appears to be high
The Buffett Scale, a relative of the level of capitalization of the U.S. stock market to GDP, is immune to accounting events at the corporate level, despite their poor performance. This indicator has already reached an all-time high of 145 last month, corresponding to an average of around 60 in 1970-95 and a median level of about 100 in 1995-2017.
Finally, the results of using traditional valuation methods may be debatable, after all, economic growth in the next few years will be much lower than after World War II, which was produced by these methods.
One of the most obvious things is that valuation levels have been high as the Fed's short-term benchmark rate has remained low for a long time. When the yields of fixed income assets are so low, the low returns of equity assets seem normal. As Buffett said in February, "Measured by the level of interest rates, stock prices are actually in the cheap range compared to historical valuation levels." ”
But he went on to say, "... The risk always comes from a lot of rising interest rates, which can lead to a drop in the stock price. "Will you happily continue to count on low interest rates to keep your investments safe?" Especially at a point when the Fed has clearly begun a series of interest rate-raising measures? If interest rate levels continue to remain low for many years to come, does that mean there is actually a lack of dynamism in the economy, leading to a slowdown in real earnings growth?
<b>V. VIX </b>
The price of an option contract is largely a function of the volatility of the underlying price. For example, the holder of a buy-right has the right but not the obligation to buy the asset at a certain price. Therefore, he should expect the price of the asset to fluctuate: if the price of the asset rises quickly, he will be able to buy at the agreed price and thus sell at a new higher price, locking in profits. If the price falls, it doesn't matter, he is not obligated to buy.
The expected volatility of the underlying asset is therefore a key factor in the reasonable pricing of options. For example, if everyone is equal, the greater the volatility of an asset, the more people will subscribe to the right to buy (thinking that he will only participate when he is profiting and not entering when he is damaged), and there will be more sellers of buy rights who will raise the asking price (because he has given up potential upward returns but still takes the risk of decline). The above pricing principles can be derived from Black-Scholes' model.
The above formula can also be used in reverse, starting from the price of the option, you can find out what level of volatility buyers and sellers are trading at. So, beginning in 1990, the Chicago Mercantile Exchange launched the CBOE Volatility Index, also known as THE VIX, to represent the level of volatility that investors expect from S&P500 stocks over the next 30 days. In recent years, there has been a growing focus on VIX, an indicator known as the "Complacency Index" or the "Investor Fear Measure." When the VIX indicator is very low, it means that investors are in a stable and stable market, and when the indicator is very high, it means that the market is experiencing ups and downs.
The VIX reached a 27-year low last week, a level never seen before. The last time this indicator reached such a low level occurred when Clinton was elected president in 1993, when the world was still peaceful, the economy was growing fast, and the deficit was still small. Can people really be so confident that we're still the same now as we were then?
What is the importance of VIX? Most importantly, it does not predict how much volatility will be in the future, but rather reflects how much volatility investors think it should be. So this can be said to be an indicator of investor sentiment. In the "Expert Opinion" memo, I quoted Buffett as saying, "Predictions generally tell us more about what the forecasters are like than the future itself." Similarly, VIX can tell us what investor sentiment is like today rather than what the volatility will be tomorrow.
What we really know is that current expectations for implied volatility are so low. Combined with the most important things in other investments, VIX is able to have multiple explanations, as Business Insider wrote on July 18:
While the warnings see the low level of VIX as a negative signal – a sign that investors are fairly confident and vulnerable to future unseen shocks – many simply see it as a by-product of an idealized stock trading environment, and stocks will continue to soar to highs.
I would also like to add a little: people keep pushing out. So when volatility levels are already low, they tend to think that they will continue to be low in the future and estimate the price of options and assets under this assumption. However, the present and the future are not the same.
<b>6. Super Stocks </b>
Bull markets often tout a small subset of stocks as the "greatest" and most attractive legends, and use this small subset of stocks to support the bull market. When this phenomenon inevitably goes to extremes, it will satisfy several elements of prosperity mentioned on page four, including:
Blindly believing in a virtuous circle without being able to discern;
Acknowledging that building on the fundamental health of these companies, their share prices do not have a top;
Investors voluntarily ended their suspicions about the bull market, blindly holding optimistic sentiment to guide forever.
In the current context, this small group of stocks is some tech companies, or companies that have been reduced to "FAANGs": Facebook, Amazon, Apple, Netflix and Google (now called Alphabet). They are considered to represent the greatest business models and unchallenged leadership for the markets in which they operate. What's more, they are considered to have seized the future and will certainly be winners in the future.
So when we look back in history, we can see that there were beautiful 50s in the 1960s, oil stocks in the 70s, disk-driven companies in the 80s, and technology/media/telecommunications stocks in the 90s. But all these examples:
The environment will change in unexpected ways;
The new business model proves to have hidden flaws;
Increasing competition;
Advanced concepts lead to backwardness in implementation;
It also proves that even the best fundamentals can be overvalued and lead to huge losses.
FAANGS is truly a great company, growing rapidly and eliminating competition. But some companies are involved in unprofitable businesses, and others have seen slower profit growth compared to revenue growth. Some of them will undoubtedly be the great companies of the future, but will they all be? Are they really invincible? Is their success really unstoppable?
The price an investor pays for a stock generally represents the company's current profits for thirty or more years. It would certainly be a surprise if the stock rises in the short term, but what about the persistence of these earnings in the long term? The vast majority of the value of stocks lies precisely in the long term. Andrew points out that the iPhone has only been around for a decade, and twenty years ago there wasn't even a massive use of the internet. So the question is, can investors in the technology field really see the future? If we can see the future, investors will be very happy when they invest in companies that have a huge long-term profit expectation assumption. Of course, if they do, they may only make the young startups happy.
Here is a letter from a company to shareholders in 1997:
We have long-standing relationships with many key strategic partners, including AOL, Yahoo, Excite search engine[1], Netscape[2], GeoCities[3], AltaVista[4], @Home, Prodigy.
How many of these "important partners" have so far been relevant (not to mention their importance)? The answer is zero, and unless you think Yahoo barely meets the criteria, then the answer is one. The source of this citation is Amazon's 1997 annual report. I would say that the future is unpredictable, and no one without a company can predict the future without making mistakes.
The super-stocks that lead the bull market are inevitably priced too perfectly by investors. In many cases, these "perfections" will eventually be found to be just a fleeting illusion. The "Pretty 50" companies that were once thought impossible to beat were eventually destroyed by drastic market changes, such as Kodak, Polaroid, Sears[5], Simplicity Pattern[6] (do people really sew their own clothes now?). ）。 Not only are investors' money poured into these so-called "perfect companies" gone, but the stock prices of those companies that are still successful will still return to normal levels after soaring, causing investors to outperform the benchmark.
The small number of companies that lead the bull market and have huge stock prices will eventually repair to normal levels, accompanied by huge losses. But when market sentiment is generally optimistic that everything looks good, that possibility is often overlooked by investors.
Finally, when investors go after the stocks that led the bull market, many people are convinced that this situation will continue and defend it. As investors summed up during the dot-com bubble of the late '90s:
Stock prices will certainly perform well because they will continue to attract capital;
Because tech companies perform best, they will inevitably attract new money disproportionately;
The excellent performance of these technology stocks will attract more capital to the market;
The excellent performance of these technology stocks will allow passive index investors to increase their investment in technology stocks;
In order to keep up with the returns of these technology stocks and not outperform the index, active investment fund managers also need to increase their positions in technology stocks;
In this way, it seems that technology stocks are unlikely to fall and will continue to outperform the market.
You might call this a "virtuous circle" or a "perpetual motion machine." This kind of stuff tends to ignite investor sentiment in a bull market. But logic tells us that this kind of thing is unsustainable, and that stock prices will be crushed by their own gravity, just like in 2000.
Many of the most important investment ideas tend to be counterintuitive. One of them is to understand that no single stock, market, or investment variety can ever outperform other investment targets. Because of human nature, the "best" stuff tends to be overestimated. Even if they're really, really, very good, their value is barely worthy of the super-high pricing of these stocks. And once it is found that these stocks are not at the "best", or have made some mistakes, the foundation of the stock price will collapse.
I'm not saying that FAANG isn't great or that their stock price will eventually collapse. Suffice it to say that we need to pay more attention, because their rise today signals an optimism among investors.
<b>6. Passive Investment/ETF </b>
Fifty years ago, after arriving at the University of Chicago for graduate school, my teacher told me that because of the validity of the market, assets are often given a reasonable risk-reward ratio, and no one can continue to earn excess returns. In other words, you can't beat the market. My professor went even further, arguing that buying a little bit of every stock was a no-fail, low-cost means, enough to beat active investors.
John Bogle put this idea into practice. A year before founding vanguard group, he founded the First Index Investment Trust in 1975, the first index fund to reach commercial scale. As a fund that copied the S&P 500, it was later named the Vanguard 500 Index Fund.
The philosophy of indexed investing, passive investing, grew over the next four decades, until 20% of hedge fund assets were indexed until 2014. Because active investment fund managers continue to outperform indices, coupled with the invention of ETFs, it makes index investing much simpler. This shift from active to passive investing is beginning to accelerate. At present, 37% of the fund's assets are already indexed passive investments. Over the past decade, $1.4 trillion has entered index hedge funds and ETFs, and $1.2 trillion has flowed out of actively managed funds.
Like other investment trends, passive investing is popular mainly due to the following advantages:
Passive combinations have consistently outperformed active combinations over the past few decades;
Passive investing guarantees that you will not outperform the index;
Lower management fees are a huge permanent advantage of passive investing over active investing, but does passive investing really not fail? Of course not:
First passive investment gives up the possibility of excess returns;
Recently, the performance of some active investors has begun to surpass that of passive investors, and the two investment methods are more like a cyclical rather than a permanent trend;
ETFs have a short history, and the high liquidity it assures investors has not yet been tested by a bear market, especially in the area of high-yield bonds.
Here are a few other points to consider:
Remember, the theory of passive investing stems from the belief that products in the market are being priced reasonably with the efforts of active investors, which is why there are no excess returns in the market. But what happens when most investors turn to passive investing? In this way, the pricing of the market will no longer be reasonable, and excess returns will become more and more common. This is not to say that active investment managers will necessarily succeed, but their strategies will become more and more effective.
One of my clients, a CIO of a pension fund, told me that his client had proposed that he fire all active investment managers and switch to index funds and ETFs. My answer was simple, ask him how much money would you like to put into a fund that doesn't have anyone analyzing research?
As Horizon Kinetics' Steven Bregman said, "Investing in a stock basket is like managing trillions of dollars with your eyes closed." ETFs don't have any researchers, they never question valuations, they don't contribute anything to price discovery. The problem is not only that the number of active investment managers decreases as a large amount of money shifts to passive investment, we must also think about who in this case is deciding the composition of the passive portfolio.
Low management fees make passive investing more attractive, but it also means that passively invested fund managers must pay more attention to the size of the assets under management. In order to earn more management fees than index fund managers and reach a level that can be profitable, ETF managers need to become more "smart" and not just be a passive investment channel. As a result, there have been SOME ETFs that cater specifically to the needs of some funds for certain specific areas, such as the investment demand for different types of stocks (value or growth), the investment demand for stocks with different characteristics (low volatility or high quality), the demand for stocks in different regions, and the demand for stocks in different industries. This situation has reached its limit, and investors can even choose passive investment funds that specialize in "companies with balanced management ratios", passive funds that specialize in "faith-believing companies", passive funds that specialize in "companies that solve medical marijuana/obesity problems", passive funds that specialize in "millennial-related companies", and so on.
But when the investment scope of a passive investment fund is so narrow, is it still a real "passive fund"? Every portfolio that is different from the overall stock market portfolio will certainly introduce a non-passive component and have subjective considerations. These passive funds that focus on certain special kinds of stocks are called "smart-beta funds." But who would say that these smart-beta fund managers who set criteria for stock screening are smarter than the much-despised active investment managers. Bregman calls this kind of investment "semantic investing," meaning that they are based entirely on the linguistic labels of these stocks, rather than quantitative analysis. There is no absolute standard to ensure that the stock you choose matches the characteristics of the company you are asking for.
Importantly, managers want their "smart" products to reach commercial scale, but this requires them to rely heavily on stocks with high market capitalization and good liquidity. For example, only if your ETF includes stocks like Apple can you make the market cap very large. At present, only Apple is selected as one ETF focusing on "growth", "technology", "value", "pillar", "high market value", "high quality", "low volatility" and "high dividend".
Here's what Barron said earlier this month:
For those market value-weighted indexes, index investors actually have no choice, all crowded on stocks that are already overweight (often too expensive at the same time), and ignore those stocks that have long been undervalued. This is the complete opposite of the principle of buying low and selling high.
The large number of positions occupied by the best-performing companies recently also means that when ETFs attract money, they are also forced to continue to buy these best-performing stocks, further fueling the rise in their stock prices. Therefore, in the current upward cycle, stocks with excessive weight, good liquidity and large market capitalization have made huge gains from the forced purchase behavior of passive investment funds. At present, if the price of a stock has been overvalued, there is no way to stop this trend.
Like tech stocks in 2000, this seemingly completely unstoppable perpetual motion machine won't work forever. If money starts to flow out of the ETF, a disproportionate buying of the ETF will also become a completely disproportionate sale. If there is a run, it is not known where these ETFs will go to find someone to take over their largely overvalued weighted stocks. In this way, the rise in stock prices, supported by passive purchases, looks like it will eventually become a cycle rather than a monotonous rise.
Finally, the systemic risk of the stock market also needs to be considered. Bregman says "an index is a huge crowded investment of momentum". A handful of stocks, such as FANNGS and a handful of other stocks, are making a growing share of the S&P 500. The overall health of the stock market can be overvalued by us.
All of the above questions make us wonder: What is the effectiveness of passive investment instruments? Especially those smart-beta ETFs.
Is Apple a safe stock, or is it a stock that will consistently perform very well in the long run? Has anyone thought about the difference?
Do investors who invest in passive investment vehicles with different expressions really achieve the goals they want to diversify risk, improve liquidity, and improve safety?
Shouldn't we think about whether investors really want to hand over their money to an investment process that doesn't have any portfolio construction, stock selection, analyst involvement, or investment decisions? And in the process, they buy stocks without even considering the price of the stocks?
<b>7. Credit </b>
Compared to the stock market, in the corporate debt instrument market, it is easy to see the arrival of a bull market, because we can easily determine the expected return of bonds. We know that, as stated in the book Race to the Bottom, in an overcrowded market, providers of credit tend to offer assets and loans with low rates of return, fragile structures, and small margins of safety.
Regardless of the size of the credit risk, sometimes the willingness of the market to take on this risk will be very low, sometimes very high. Maybe my approach is too simplistic, but sometimes we can make investment decisions based solely on the risks that exist in the market and the willingness of investors to take risks.
As I'll say in a few new books later, knowing where we are in the balance of "risk and willingness to take risk" is important for investing. The book "Bottom race" was inspired by an article in the Financial Times about the willingness of British banks to take the initiative to leverage in order to compete in the lending business. Early this month. Ironically, I read another article in the Daily Mail, another London newspaper:
In the shadow of the aftermath of the 2007 financial tsunami, auto finance companies packaged and sold £5.5 billion in venture loans to investors last year, almost double last year
This desire for low-quality loans is a hallmark of a rising, over-financialized, and riskier credit market. During the financial tsunami trough of late 2008, high-yield bonds and leveraged loans yielded more than 2,000 bps of Treasuries, meaning that no one who bought and held these bonds would lose money. Immediately after, as investors and the market regained balance, bond prices rose and spreads began to narrow. Now the spread is probably at the historical average, a few hundred bps or so. The yields of these bonds will certainly continue to be higher than those of treasuries, but capital appreciation can only be obtained through further shortening of spreads, which is obviously unreliable.
Today's credit investors are obviously not as popular as during the financial tsunami, and will not let go of any excess returns and excess returns. At best, the relative returns on these investments have been reasonably priced, and the absolute returns have been fully priced (as low as other assets).
I would use a simple example to illustrate that low-rated credit instruments have been fully accepted by the market. In May, Netflix issued 1.3 billion eurobonds, the lowest-cost bond in the company's history. The interest rate is 3.625%, with few additional terms and a rating of B. Netflix's GAAP revenue is about $200 million per quarter, but according to Grant Rate Watcher, Netflix had burned $1.8 billion in free cash flow in the last quarter. It's a great company, but as Grant Rate Watcher reminds readers, bond investors can't get excess returns from companies, they just have to take on excess losses. It is precisely because of the asymmetry of bond gains and losses that any bond issuance must be based on solid returns, not the charm of its issuer.
Is it a prudent decision to invest in such a company? Will Amazon and Google poach Netflix's subscriber base? Wouldn't it be wise to buy a company based on technology that can be replaced? Optimistic investors have raised the company's valuation to $70 billion. If one day people start to worry that the company will be subject to strong competition, what will happen to the price of its bonds? Should you go and take such a big risk for less than 4% profit? In OakTree Capital's view, this is not a secure bond investment at all, it is an investment linked to equity interests, based on online digital content, without excess returns, and is not suitable for us. Such a deal can be closed quickly, and you should be able to understand what kind of atmosphere it is in the market right now.
Finally, let's consider whether risk tolerance and irresponsible investment are isolated or widespread in today's credit markets. Here are some excerpts from Lisa Abramowicz's article on Bloomberg on July 14:
Over the past 80 years, junk bonds have gradually gone from a secondary asset to a major asset for fixed income investors. As junk debt becomes more popular, the attractiveness of these risk assets is rapidly declining (yields). The protection clause for investors guarantees that investors can also obtain a part of the income after the collapse of the company in the form of a contract.
Moody's Investor Services reported a record 26.9 billion junk bonds issued last month, a record share of the market, but investor protection is very weak. According to Moody's, 60 percent of U.S. venture corporate bonds were sold without a protective clause. After record issuances in the leveraged loan market in the last three years, 75% of credits have only "streamlined" contracts.
Investors have become so confident in this endless feast of corporate debt that many people don't care about the risk of these companies going bankrupt. After all, these investor protection clauses are always irrelevant until something really goes wrong.
It's a standard cycle: prudent investments achieve better returns in favorable market conditions, and then investments start to become less cautious... Until the market environment turned unfavorable, bringing poor performance to investors. This is part of what I call the "bottoming race" when I assessed the 2008 crisis.
<b>Debt of emerging market countries </b>
Another place where investor views fluctuate significantly and significantly is in emerging market countries. "Everyone knows" that emerging-market countries have greater development potential than developed countries, but attitudes about the realizability of this potential (and the costs to pay for it) change dramatically over time.
I described this phenomenon in The Role of Faith (August 2013). When market confidence is high, emerging-market countries are seen as equivalent to developed markets, with only rapid growth, which means that it is reasonable for emerging-market countries' securities to be sold at the level of developed country yields and price-to-earnings ratios. But when market confidence declines, it's easy to spot risks exposed by emerging-market countries that developed countries don't have: coups, institutionalized corruption, maximum devaluations, and refusal to pay their debts, so significant valuation discounts come in an orderly manner. Just like the problem of corporate credit, let's think about what kind of situation this is? Is it that investors are appropriately sensitive to risk and apply reasonable discounts, or are investors ignoring risk and willing to pay for it (market exposure)? There's a lot of things you need to know.
To answer this question, I will refer to the $2.75 billion bond issued by the Argentine government in mid-June this year. The Argentine government issues bonds of the century with a maturity of up to 100 years and a coupon rate of 8%.
You might think that selling the bond will not be easy for Argentina. After all, in its 200-year history, the Argentine government has defaulted eight times, and no less than five times in the past century. The most recent default was a legal dispute with Elliott hedge funds in 2014.
But investors don't seem to care: the $9.775 billion bid is proof. Argentina's issuance of government bonds is not the only particular event in the bond market this month. For example, Côte d'Ivoire, a West African country, has erupted in another military conflict in recent weeks, but this has not prevented the Ivorian government from issuing bonds with a maturity of 16 years and a coupon rate of 6.25 per cent, which have also been oversubscribed. Demand for debt from countries such as Senegal and Egypt is also high. (From the Financial Times, June 27)
All in all, I have to quote (a little too politely) the words of an unnamed broker/investment bank head of research and strategy:
Ms X said, "It is shocking that the Argentine government was able to issue the Bonds of the Century without being affected by the default event.". Still, she advises her clients to buy the bonds, as they can be held at least for the short term.
In short, it was inconceivable that the Argentine government would be able to issue such bonds, but at the time it seemed to be a relatively good target for purchase. This incident illustrates a strange picture that exists in this era: (investors think) some things may go wrong, but they may not be exposed so quickly. For this, I prefer Buffett's point of view: "If you don't want to own a stock for ten years, then don't consider owning it for ten minutes."
This is the third time in history that emerging-market bond yields are lower than those of U.S. high-yield bonds. Can a country like Argentina, which has defaulted five times in the last hundred years (once in the last five years), successfully survive the next hundred years without any default?
The basic takeaway from all investments is simple: Is the risk premium at least enough? Can we give a definitive answer to today's emerging-market debt problem?
<b>9. Private Equity </b>
Against the backdrop of low interest rates, institutional investors with a target annualized yield of 7%-8% will hardly achieve their targets with Treasuries with yields of only 1%-2% (3%-4% at a higher level), or mainstream stocks with a yield of 5%-6% that most people expect. Heck, you don't even have to pin your hopes on Ivorian bonds. So where do you get 7%-8% of the gains?
The good news for a company like Oak is that the most likely answer to the above question is "alternative investment" (there wasn't any collective jargon for this when my partner and I started my business 30 years ago). Since virtually all overt "beta strategies" fail to meet the needs of institutional investors, many people turn to so-called "alpha strategies," which means that experienced, aggressive managers have the potential to earn excess returns to meet their earnings needs.
But one of the biggest alternatives, hedge funds, has largely been discredited by the negligible average returns of the past decade or so. Alternatives like venture capital are, on the one hand, more difficult to obtain, and too small to absorb large amounts of capital. These situations have led investors to set their sights on real estate, distressed debt and, especially private equity.
Private equity firms have a record of double-digit returns, and even funds that ran at the top of the market from 2005 to 2007 are now making significant gains. As a result, private equity is attracting capital faster than ever before.
According to Preqin, private equity is in the best funding period of all these years — perhaps forever. In the first half of this year, 224 North American-based funds were closed, raising a total of $133. Globally, however, 412 private equity funds have closed their doors, raising a total of $221.4 billion, slightly higher than the record of $220.8 billion set in 2008. (Mergers and Acquisitions Newsletter)
The total capital of private equity funds in recent years has grown to tens of billions of dollars, and its size is even before the latest large funds, and they already have hundreds of billions of "dry powders". What's more, private equity fund managers are primarily engaged in leveraged buyouts, so the total size of private equity funds must be calculated from the total capital that can be generated at the leveraged end.
As a result, these PE companies are likely to add more than a trillion dollars in purchasing power this year. When there are few cheap assets to buy, where should a large amount of PE funds be invested? Against the backdrop of low interest rates, sellers of private companies are also comparing the value of various forms of cash flow to the market to inquire about it.
I'm not denying that private equity can be a solution, or even the best, solution, but its record fundraising scale still shows investors' willingness to trust the future.
<b>10. SoftBank Vision Fund </b>
Perhaps the final sign of confidence in fund managers is the recent appreciation of the SoftBank Vision Fund for technology investments of $93 billion — about $100 billion or so. SoftBank, a Japanese telecommunications company whose investments span chip manufacturing, ride-hailing and telecommunications, has averaged 44% annual returns over the past 18 years. But I still see some problems:
First, SoftBank's investment success depends heavily on an important investment: In 2000, SoftBank invested $20 million in Alibaba, and the value of that investment has now grown to $50 billion. It's by technology, luck? Or do you rely on the power of speculation?
Second, the issue of scale. In the mid-1990s, trillion-dollar funds were so successful that venture capital funds joined in and invested $1-2 billion, but it also got into trouble in 1999-2000: The Vision Fund wasn't investing in startups, but in that case, could you still invest $100 billion wisely in technology?
Third, SoftBank had never managed third-party assets before, and this was the first attempt to establish the largest Vision Fund in history. Can their experience be learned? In response to all these issues, I think the Vision Fund has shown a high level of positivity and a low level of skepticism.
Fourth, and perhaps more important to me, and more willing to take the time to illustrate, is the structure of the Foundation. For every 38 cents of SoftBank's equity increased to the fund, outside investors would need to subscribe for 62 cents of preferred shares. In other words, SoftBank itself invested $28 billion in equity, but without any preferential share.
This means that when the size of the fund reaches $100 billion, SoftBank will only have a 28% share of the capital, but will have a 50% interest. After taking into account management expenses and carried interest, a 28% share of capital held by SoftBank could yield 60-70% of its gains.
Even private companies willing to take risks have traditionally avoided investing in tech companies (though not recently), but SoftBank has not hesitated to invest in technology.
The preferred share will pay an annual interest rate of 7%. Clearly, borrowing to technology funds at such a modest interest rate suggests that SoftBank's limited partners want to take the opportunity to invest in equity in these funds. I can imagine how fortunate SoftBank's limited partners feel to have the opportunity to leverage their investments, but I'm not convinced.
Finally, as the Financial Times wrote on June 11:
While preferred share holders will eventually recover the principal (with an additional 7% annual return), they will only receive a return (equity) corresponding to their equity share. For all outside investors, a gain of 62 cents is received in each preferred unit, with the rest received in the equity portion. This allows them to still reap substantial benefits while mitigating downside risks.
That sounds good. But to what extent will investors' preferred share of capital reduce downside risk? The Ft. said the preferred share of investors "will eventually recoup their principal", is this "will", "maybe" or "hopeful"? Will the $100 million investment in the fund only expose part of the $38 million equity, or will the preferred share also be exposed? I don't think the priority unit is as rock solid as the Financial Times claims. Aren't they more like Netflix bonds: the technology chain is down, there's no room for growth? Would a normal lender lend to a limited partner at a rate of 7%, thereby magnifying the leverage of his equity to 1.6 times?
Investors investing in a large, shockingly structured large fund in order to take advantage of leveraged techniques is further indication that the current market is a thriving, skeptical one.
<b>11. Digital Currency </b>
Discussions about innovative investing bring me to Bitcoin, Ethereum, and other digital currencies. My guess is that these digital currencies are based on the intersection of (1) concerns about financial security (including the value of the national currency) derived from the financial crisis, and (2) the comfort that all virtual items have brought for thousands of years. But they are not real.
Some businesses accept Bitcoin as a method of payment. Some buyers want to own Ether because it can be used to pay for the computing capabilities of Ethernet. Some people are eager to make a profit by speculating on digital currencies, while others want to invest a small amount in these recently profitable projects, rather than missing out on opportunities in vain. But they're not real!
Some people think that digital currencies are robust because (1) they are safe and can prevent hacking and counterfeiting, and (2) the amount of software used to generate them is strictly limited. But they're not real!!!!! No one can convince me to agree with the meaning of this digital currency. Here are some passages about Ethereum reported by The New York Times on June 19:
The sudden rise of Ether highlights how volatile the confusing world in which virtual currencies live, where a few lines of code can translate into billions of dollars in a matter of months...
Ethereum was created in 2015 by Vitalik Buterin, a 21-year-old college dropout. Mr. Buterin was inspired to create Ethereum by Bitcoin, and some of Ethereum's software also shares some of the same properties as Bitcoin. Both Ether and Bitcoin are owned and maintained by volunteers around the world, who are rewarded with new digital tokens that can be released to the network every day.
Since these virtual currencies are held and maintained by network users, there are no government agencies or corporate organizations that manage them. Both the price of Bitcoin and Ether is determined in the form of private transactions, so that people can sell their digital tokens during periods of rising market prices.
Many (new currency) users in Ethereum are also using Ethereum to raise funds, known as the "initial coin offering," which is how ipos (initial public offerings) are played.
Startups that follow this path typically collect Ethereum from investors and exchange it for exclusive virtual currency units that convert Ethereum into U.S. dollars and pay for operating costs.
The surge in the number of virtual currencies in recent months has spurred demand for Ethereum. Just last week, investors contributed $150 million worth of Ether to startup Bancor to help make it easier to launch virtual currency operations.
Bottom line: You can use virtual Ether to buy other virtual currencies, or invest in businesses that can generate new currencies. In bubble.com, I used old jokes my father told about how to make money to highlight the discordant logic in electronic money. Here's another joke that seems perfectly suited to digital currencies:
Two lads, Joe and Bob, met on the street. Joe told Bob about the hamsters he sold: skilled and highly intelligent. Bob said he wanted to buy a hamster for his child: "How much?" Joe replied, "Half a million," and Bob said Joe was crazy.
The next day they met again. "What happened to your hamster," Bob asked. "Sold," Joe said. "Sold for half a million?" Bob asked. "Yes," Joe said. "Cash?" "No," Joe replied, "I took two canaries for $250,000. ”
One of my favorite quotes about market flaws is quoted from John Kenneth Galbraith, who said in that happy age that "past experience, as long as it becomes entirely part of memory, can be abandoned as a primitive refuge for that part of the population who has no insight to appreciate the incredible wonders of the present." ”
Maybe I'm just a dinosaur, too technologically backward to appreciate the greatness of digital currencies. But I firmly believe that the recognition of these digital currencies only proves more evidence of today's prevalence of financial naivety, as well as a willingness to take risks and wishful thinking.
In my opinion, digital currencies are nothing more than a baseless fad (or even a pyramid scheme) based on attributing valuations to things of little or no value that make people pay for it. But this is not the first time. The same events can be applied to the peak of tulip fanaticism reached in 1637, the South Sea Bubble (1720) and the Internet Bubble (1999-2000).
Rigorous investment takes into account the attractiveness of an item's pricing relative to its intrinsic value. Or, on the other hand, when people simply consider that others will pay a higher price for these things, these people will ignore the potential value or proper value of these things and choose to buy.
According to the agreement between the two parties, it is not irrational for people to use Bitcoin to pay or receive money with Bitcoin, and barter transactions occur at all times. But does this make it a "currency"?
Bitcoin's price has doubled since the beginning of the year. Can it really be considered a "medium of exchange" or a "store of value" rather than the subject of manic speculation? Maybe not. But Bitcoin has performed more steadily compared to Ether: it has appreciated by 4,500% this year. Superior Ether is now 82% higher than all Bitcoin in the world, up from 5% at the beginning of the year.
Meanwhile, The New York Times notes that quality Bitcoin and Ethereum are worth more than PayPal, even on par with Goldman Sachs. Would you rather have either of these digital currencies or one of them? In other words, is the value of these currencies real? As long as optimism exists, they may continue to work, but their performance in bad times is rather unreliable. If people prefer to hold dollars (or gold), what impact will this have on the value and liquidity of Bitcoin?
<b>Xii. We agree, but... </b>
My son Andrew informed me about his recent conversations with some fund managers, in which he also touched on a lot of the topics I discussed here. In today's environment, their answers are starting to fall into clichés, "We agree with that, but..."
We hear a lot of statements like this these days:
We agree, but what we do can provide higher returns than others.
We agree, but cash is not a good option because cash has little to offer.
We agree, but we cannot afford to risk being expelled from the market.
We agree, but there is really no other option.
Investors should choose their risk attitude based on assessing what kind of absolute return, absolute risk, and absolute risk-adjusted return an investment provides. But today, on the contrary, investors often can't do as they used to. Enjoy the luxury of investing for absolute return and security.
Many of the investments I've highlighted above offer better yields and risk premiums than Treasuries and high-grade bonds. But (1) low interest rates may be – and are generally expected to be – a short-term phenomenon, and (2) it may be wiser to measure returns from an absolute standpoint. While the price and expected return of many assets are currently normal compared to other investments, you may not necessarily receive this relative return.
Everyone is making relative investments, and they have no way. It reminds me of former Citi president Chuck Prince, who rose to fame for his remarks about leveraged lending practices in banks in the months leading up to the global financial crisis, "When music stops, things get pretty complicated because of liquidity issues." But as long as the music continues, we have to get up and dance. We are still dancing. "I think a lot of investors are like Prince now, clearly aware that the good days will end one day, but at the moment they think they have no choice but to dance.
And these days we hear another thing over and over again:
We all know that things can't go well forever – we agree that the cycle is extended, prices are up, and uncertainty is high – but we haven't seen any signs of the end of the bull market in the near term.
In other words, there are certainly periods of caution, but not now. In this regard, Andrew reminds me of a quote from Saint Augustine, who said, "Give me chastity and self-control, but not now." "What could be more rewarding to people today than the punitive rewards of risk-free assets?
<b>XIII. Observation and Revelation </b>
As I said, most of the phenomena I have described above seem reasonable as the current financial and economic environment continues. But taking a step back and putting them together, what do we see?
Some of the highest stock valuations in history;
The so-called complacency index hit an all-time high;
"Impossible to outperform" the heavy position of the stock portfolio;
More than a trillion dollars into passive investments whose investment value is unknowable;
Low-rated bonds and loans hit record low yields in history;
Emerging market bond yields remain lower;
Private equity fund raising hits record highs;
The largest fund in history (SoftBank) is frantically leveraging in the tech space;
The value of billions of dollars in digital currencies has increased dramatically.
I'm by no means saying that stock prices are too high, FAANGs will waver, credit investments are risky, digital currencies will end up worthless, private equity return promises won't necessarily be delivered, etc. All I'm saying is that all of the above assets are becoming more popular and attracting so much capital, credulity is rising, and risk aversion is weakening. It's not that they're doomed to this, it's just that their gains may not cover their risks. And more importantly, they show that the market is heating up, not necessarily a crazy bubble, just a high price so the risk is high.
Think about the factors that can make today's markets unbalanced, such as the unexpected increase in inflation, the sharp slowdown in economic growth, the loss of control by central banks, or the trouble of large tech companies. The good news is that none of this seems likely to happen. The bad news is that their impossibility makes all these concerns disappear, which in turn makes the market quite sensitive when any of these factors erupt. This means that in the market, risk is tolerated, even ignored, and investors in the market are very willing to take risks that they should not be.
furthermore:
My observations are indicative, not predictive. The general consequences of the conditions I have described, such as the eventual increase in risk aversion, should occur, but they do not necessarily occur.
And they certainly don't have to happen anytime soon. No one knows the time point. Some of the consequences are still hidden, so even if they happened, we wouldn't know. It's like, even though we're in the eighth inning, we don't know how long the game will last.
I can't be sure my market watch is correct. As you can see in my new book, I firmly believe that where we are in the cycle illustrates many possible trends in market development, but I have never expressed a highly confident opinion on this issue.
As a person who is born troubled, I tend to be wary prematurely, as described on the first page.
Finally, while my observations are not necessarily exact and require a certain amount of skepticism, I can be sure of valuations and market upswing, and that this cycle has created opportunities for "easy money."
<b>14. What to do </b>
For me, the four components of the current environment listed on pages 2 and 3 – high uncertainty, low expected returns, high prices and risk appetite behavior – are indisputable. The question is whether you agree or not. If you agree, I'm sure you'll admit that their combination is more troublesome. Markets typically respond to rising uncertainty with lower asset prices and higher compensatory returns. But this is not the case today, we live in a low-reward, high-risk environment.
In this way, it seems like a good time to discourage investment, or at least the assumption of risk. However, for institutions that make investment an important part of their business models, such as pension funds, insurance companies, endowments, and sovereign wealth funds, there is generally no option not to invest. This is especially true when cash returns are as low as they are today.
As you can see from the analysis above, you should be holding cash now, but if you did this a few years ago, you would have missed out on the rising gains of risky assets. OakTree Capital's investment philosophy generally avoids the option of increasing and lowering the cash ratio. In exceptional cases, we may make exceptions, but it does not seem to be the case at this time. Instead, OakTree Capital will continue to follow its 2012 purpose: "Go forward, but be cautious" and, given the current environment, even more cautious than ever. If you want to invest at such times, investing professionally – knowing that taking risks wisely and pursuing returns – is absolutely a must while being vigilant about potential adverse consequences.
Today's environment reminds me of some of the applicable truths that Sid Cottle told me more than 40 years ago, as editor of later issues of Graham and Dodd's Securities Analysis, who said that "investing is the training of relative choice." I interpret this as having to choose among the options available based on comparative advantage.
Written in May 2005, The Memo is the closest in a series of cautionary memos to the peak of the previous cycle. It's the first time I've explicitly raised the issue early as usual – how we should invest in a low-return environment. I went on to list several possible answers, none of which worked, but one thing I was quite sure of:
...... There is no easy solution to the problem of insufficient expected returns and risk spillovers faced by investors, but there is one action – a classic mistake – that I strongly believe is wrong, and that is the pursuit of returns.
Events in 2007 and 2008 show that this observation is prudent and appropriate. Given the similarity today with the previous cycle, I think it applies again.
In a 2010 Berkshire Hathaway letter to shareholders, there was a good point on the issue:
We agree with investment writer Ray DeVoe's comment, "More money is lost in the pursuit of profit than at gunpoint." ”
Or, as Peter Bernstein puts it, "The market is not a shelter, and it doesn't give you high returns just because you need them."
The key decision in anyone's investment strategy is to choose aggressive or defensive at a given point in time. In other words, should we be more worried about losing money today or more worried about missing out on opportunities? This answer always depends on what is available in the current investment climate.
I have no doubt that the highs at the onset of the global financial crisis were driven by risk appetite in a low-return environment of 2004-2007. In other words, excessive risk tolerance and the resulting rash behavior have led to huge losses for falling from peak to trough.
At the trough of late 2008 and early 2009, I also had no doubt that most investors were saying, "I don't care if I can make an extra penny in the market; I just don't want to lose any more money." Let me out! "And their excessive risk aversion creates huge rewards during recovery."
Where are we now? As I said earlier, the risk is high, the expected return is low, and the low expected return on safe investing pushes people to take on the risk further, even though the return on doing so is low at this point.
Assuming my view of the environment is correct, the only reason for aggressive investing today is the low expected return on defensive investments. But the question is whether pursuing high expected returns through aggressive investing will pay off. If the answer is no, then I believe this is a time to be vigilant.
This doesn't mean you have to invest in a portfolio with low returns. If you need to get a higher return on the low-risk side than the market-available beta returns, it makes sense to enter a riskier asset class. But for every asset class, there are both high-risk and low-risk investment approaches. If the market is rational, low-risk investments always offer lower expected returns than high-risk investments. However, in difficult times, the former is less likely to bring losses than the latter. So I think they're more amenable to the moment.
Perhaps Mark Twain's great statement is the best way to understand the investment cycle, he said: "History doesn't repeat itself, but it does rhyme." The duration, speed, amplitude and detail of each investment cycle are different than before, but the themes and keys are often familiar. Twain called it "rhyming history," and I describe it as a "common thread."
The theme or thread I will use to repeatedly describe the overheating market is listed on page 4. While they don't necessarily all appear at the top, bull market, or boom, (1) usually most of them do, and (2) without them, a noisy bubble is difficult to sustain. So they are indeed raw materials that are overheated in the market.
On the other hand, there are also keys to avoiding classic mistakes, which I list in Repeating the Mistakes:
Maintain a sense of history;
Faith cycles rather than persistent one-way tendencies;
Remain skeptical about the free lunch;
Stick to buying at a low price to provide more margin of safety for mistakes.
Sticking to all the criteria of defensive investing will undoubtedly make you miss out on the most exciting parts of a bull market, especially when the trend reaches irrational extremes and the price is excessively biased to intrinsic value. But they will also make you a long-term survivor. I can't help but think that this is a prerequisite for a successful investment.
It's easy to check the robustness and safety of the market, and the answers to the following questions will tell you what to do:
Is the expected return high enough?
Is risk aversion appropriate for investors?
Do investors remain skeptical and disciplined?
Are investors demanding a sufficient risk premium?
Are these valuations reasonable by historical standards?
Is the deal structure fair to investors?
Have investors rejected any new deals?
Is there a limit to confidence in the future?
The ultimate basic proposition is simple: When investors do things that others don't want to do, they make the most and the safest amount of money. But when investors are not afraid and happy to do venture capital (or when they still choose venture capital because the attractiveness of low-risk investment is too low, despite concerns), the asset price will be high, the risk premium will be low, and the market is dangerous. That's what happens when there's too much money and too little fear.
I'll conclude with a similar point from the book Race to the Bottom 10 years ago:
If you refuse to enter a seemingly unashamed market like today, it is likely that in the short term, you will (1) lag behind others in returns, and (2) look like an old man. But the cost of both is really not high compared to survival (maintaining capital). From my experience, repeated sluggishness is eventually corrected by the punishment imposed on it. It may not happen this time, but I'm willing to take that risk. At the same time, Oaktree Capital and its employees will continue to uphold the investment principles that have benefited us over the past three decades.
Written by Howard Marks
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