These Weekly Summaries normally go out to paid subscribers on Friday mornings. For those free subscribers that haven’t seen one yet and are interested, here is the version that went out yesterday.
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For those busy subscribers that didn’t have much time to read, watch, or listen during the week, and that like to catch up on the weekend, here are a few (~3-6) of the links from this week that stood out to me, in case you don’t have the time to go through all of the weekly posts.
Mohnish Pabrai’s talk on The Methods of Value Investing was full of his usual insight.
I have enjoyed Vitaliy Katsenelson’s new book Soul in the Game, which is more about his personal story, life, and Stoicism—with very little about investing. He was on the This Week in Intelligent Investing Podcast discussing the book.
Howard Marks’ Talks at Goldman Sachs appearance was worthwhile. We posted a quote from that talk worth thinking about in these markets:
“I really don't [think that there's value in using quantitative tools to measure and manage risk]. We don't do it at all. First of all, what is risk? It's the probability of a negative event in the future. What do we know about that? What does the past tell us about that? The past has relevance, but it's not absolute…. I don't think risk can be measured. I don't think the past is absolutely applicable. In fact, the big money is lost at the juncture when the past stops being applicable, which happens eventually. And I don't think that the possibilities in the future can be synthesized into inputs that are sufficient to let a computer decide what's risky or not.”
We also posted a related quote to the above Marks quote from James Montier, which Montier wrote during the depths of the Global Financial Crisis in January of 2009:
“Despite risk appearing to be one of finance’s favourite four-letter words, it remains finance’s most misunderstood concept. Risk isn’t a number, it is a concept or a notion. From my perspective, risk equates to what Ben Graham called a ‘permanent loss of capital’. Three primary (although interrelated) sources of such danger can be identified: valuation risk, business/earnings risk, and balance sheet/financial risk. Rather than running around obsessing on the pseudoscience of risk management, investors should concentrate on understanding the nature of this trinity of risks.”
I didn’t link to John Hussman’s latest piece this week, but I did notice that he again quoted one of the Graham & Dodd quotes from Security Analysis in 1934 that is relevant to the last couple of years, worth reading over and over again, and also along the same lines as the quotes above:
During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… Why did the investing public turn its attention from dividends, from asset values, and from average earnings to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.
Along with this idea as to what constituted the basis for common-stock selection emerged a companion theory that common stocks represented the most profitable and therefore the most desirable media for long-term investment. This gospel was based on a certain amount of research, showing that diversified lists of common stocks had regularly increased in value over stated intervals of time for many years past.
These statements sound innocent and plausible. Yet they concealed two theoretical weaknesses that could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinctions between investment and speculation. The second was that they ignored the price of a stock in determining whether or not it was a desirable purchase.
The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.
The July Absolute Return Letter, “The End of Indexing,” is worth reading. It has also driven me to finally start reading Jensen’s book by the same title, which has been sitting on my bookshelf for a while. I think I’ll agree with a lot of the book as Jensen put in the work to get good data. But I also think it’s hard to implement thematic investing strategies in a practical and durable way most of the time. When it comes to the macro, I like to take the approach of being a risk-identifier—as opposed to being a forecaster—and so listening to people who are intelligent and spend way more time on certain macro things than I do helps me get a sense for whether or not I might be missing something big. So things like Jensen’s book, or Peter Zeihan’s new book, help me try and improve the risk-management process implied by the quotes from Marks and Montier above.
And on the topic of being a risk-identifier, here are two more quotes from this week— one of which is another from the same Howard Marks appearance earlier—related to the topic:
“I believe it's hard to predict the future. It's not that hard to predict the present. In other words, it's not that hard to understand what's going on today. So, I do something I call take the temperature of the market. Try to figure out whether the market is heated or frigid—because you want to buy when other people are pessimistic and when the climate is cold. You don't want to buy when the market is overheated and everybody's optimistic.” —Howard Marks
“The future is uncertain and companies are hard to value, but hey, you gotta take a stab. I kind of feel sorry for people who have no idea of the value of what they invest in. It must be scary. Or maybe it's only scary for the subset who realize it's something you should know. An even scarier thought. The highway is full of drivers who don't look out the windshield, and haven't figured out that it's something you should try. No matter how muddy it is.” —“mungofitch” (Source)