Saturday, June 3, 2017

What Howard Marks taught me about macro-economics


Why is it that every time you pick up a newspaper or switch on the finance channel, some talking head is making a prediction on what’s likely to occur with macro-economic events like interest rates, currency rates, or movements in the stock market.
The simple truth is, no one can predict the future!
More importantly, investors would be better served focusing on micro-economic events specific to the companies they’re interested in, or already holding, rather than wasting time on macro-economic forecasts.
That’s why every time I hear someone speaking or writing about macro economic forecasts, I refer back to one of my favorite Howard Marks memos, The Value of Predictions II (or “Give That Man a Cigar”).
Howard Marks is co-chairman of Oaktree Capital Management, the world’s biggest distressed-debt investor. He has been running the firm with Bruce Karsh since they founded it in 1995. He’s known in the investment community for his “Oaktree memos” to clients which detail investment strategies and insight into the economy, and in 2011 he published the book The Most Important Thing: Uncommon Sense for the Thoughtful Investor.
Rather than trying to predict macro-economic trends, I simply use the screens here at The Acquirer’s Multiple. The screens use a simple formula to calculate the best deep value opportunities:
Enterprise Value / Operating Earnings*
*The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
The formula is based on tons of research outlined in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations.
Oh, and just in case you’re still not convinced about macro economic predictions, here are some thoughts from some other really smart investors:
“We need to stop pretending that we can divine the future, and instead concentrate on understanding the present, and preparing for the unknown. There is a simple, although not easy alternative [to forecasting]… Buy when an asset is cheap, and sell when an asset gets expensive…. Valuation is the primary determinant of long-term returns, and the closest thing we have to a law of gravity in finance.” James Montier. 
“The last time I made any market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter based on the fact that I had one month’s experience.  Since then I have given up making predictions.” Ben Graham.
“Charlie and I don’t pay attention to macro forecasts. We’ve worked together now for 54 years, and I can’t think of a time when we made a decision on a stock or on a company.” Warren Buffett.1
“Nobody can predict interest rates, the future direction of the economy, or the stock market.  Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.” Peter Lynch.

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