At a time when inflation and rate hikes rule the investor mind, Oaktree Capital Management’s Howard Marks has written a note about the futility of trying to predict the macro and on the importance of studying the micro “like mad”.
The co-founder of Oaktree wrote that inflation, rate hikes and the possibility and length of the recession are short-term events, and predicting short-term events is hard and acting on these opinions/ predictions is unlikely. Even if an investor does make changes to his or her portfolio based on opinions of these short-term events, the changes are unlikely to be consistently right. “Thus, these aren’t the things that matter,” he wrote in the note titled, What Really Matters?
Also read: Why forecasts rarely help investors
“I think most people would be more successful if they focused less on the short run or macro trends and instead worked hard to gain superior insight concerning the outlook for fundamentals over multi-year periods in the future,” he wrote.
He also pointed to the importance of participating in the secular growth of economies and companies, and of profiting from the wonder of compounding. “Think about the 10.5 percent yearly return of the S&P 500 Index (or its predecessors) since 1926 and the fact that this would have turned $1 into over $13,000 by now, even though the period witnessed 16 recessions, one Great Depression, several wars, one World War, a global pandemic, and many instances of geopolitical turmoil,” he wrote.
Besides short-term events, the other things that don’t really matter according to him are the trading mentality, short-term performance, volatility and hyper activity.
The right attitude
Marks advised investors to do four things. One, to study companies and securities, assessing things such as their earnings potential. Two, buy the ones that can be purchased at attractive prices relative to their potential. Three, hold onto them as long as the company’s earnings outlook and the attractiveness of the price remain intact. Finally, four, make changes only when those things can’t be reconfirmed, or when something better comes along.
He called for an attitude to investing that is the reverse of active fund managers’ approach. “Think of participating in the long-term performance of the average as the main event and the active efforts to improve on it as ‘embroidery around the edges’… Improving results through over- and underweighting, short-term trading, market timing, and other active measures isn’t easy. Believing you can do these things successfully requires the assumption that you’re smarter than a bunch of very smart people. Think twice before proceeding, as the requirements for success are high,” he wrote.
Also read: How can investors get recession ready?
He added that investors shouldn’t make the mistake of overtrading, and that they should look at buying and selling as an expense item and not a profit centre. “I love the idea of the automated factory of the future, with its one man and one dog; The dog’s job is to keep the man from touching the machinery, and the man’s job is to feed the dog. Investors should find a way to keep their hands off their portfolios most of the time,” he wrote.
In the end, what really matters, according to him is the performance of an investor’s holdings over the next five or ten years (or more) and how the value at the end of the period compares to the amount invested and to the investor’s needs.
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