Earlier this year, Howard Marks and Joel Greenblatt came face to face at the inaugural Forbes and Shook Research Top Financial Advisor Summit in Las Vegas where it became apparent that their worldview is nearly identical. When speaking about the current market conditions the pair said, “Most people, including most people in the investment business, don’t have the ability to take advantage of market opportunities. We get excited when prices are high and we get depressed when prices are low,’ said Marks, before Greenblatt interjected, “I think you and I would agree that people are nuts.” Time favors the rational.
Here’s an excerpt from that interview:
Oaktree Capital’s Howard Marks is a master of the fixed income investing world and Gotham Asset Management’s Joel Greenblatt is one of the most skilled bottoms-up investors when it comes to identifying cheap stocks and those that are overvalued. Though the two are on opposite ends of the investing spectrum, their worldview is nearly identical.
At the inaugural Forbes and Shook Research Top Financial Advisor Summit in Las Vegas, Marks and Greenblatt presented to a group of hundreds of America’s best financial advisors, who collectively manage over $1 trillion in assets, and offered a way to navigate markets that are expensive on almost every measure.
“The greatest challenge that everyone in this room faces is we are in a low return world,” Marks said. “All assets have appreciated thanks to the Federal Reserve’s cheap money regime. All assets should be expected to offer lower returns going forward,” Marks added. Greenblatt, who does a bottoms-up analysis of the S&P 500 Index and Russell 2000 Index, said equity markets are in 80th percentile and 90th percentile of expensiveness. Stock market returns in the next year are likely to be well below historical averages.
But both investors aren’t fretting a market that doesn’t offer too many fat pitches because over the long-term manias of over-exuberance or unnecessary depression always play into the hands of rational and calculating investors. When the fat pitches return is impossible to predict, but the Oaktree’s and Gotham’s stand ready to take their cuts. “People ask me all the time are we in a high yield bond bubble. I say no we are in a bond bubble,” Marks said.
“I spend most of my time trying to figure out what the temperature of the market today says about investor discipline. Without guessing about the future, I think you can adjust the offensiveness or defensiveness of a portfolio based on what you see in the marketplace. Warren Buffett says the less prudent others are, the more prudent you should be. I agree,” he said.
Right now, public debt securities yield low-to-mid single digits and private credit yields high single digits to the low-teens, Marks said. These returns are fine so long as a manager is expecting 5% from public credit, and not 8% or 10% as has happened in amid global central bank easing. Presently, Oaktree is building its assets in European high yield, U.S. collateralized loan obligation and emerging market debt – parts of the bond market where value remains despite years of low-rate policy from the Federal Reserve.
Greenblatt tilted his comments toward investor psychology. “The market is throwing us pitches all of the time,” he said of changing market tides, where investors abandon their analysis. By contrast, Greenblatt’s strategy is to conduct a fundamental analysis of the stocks that comprise major market indices, betting on value stocks and shorting over-priced companies. When markets don’t cooperate with Gotham’s portfolio’s, Greenblatt’s reaction is to stick with his guns.
“The important thing is to not get caught up in emotions — knowing emotions exist but not getting caught up and being cold, hard and calculating on valuation — that is the secret,” Greenblatt said. “Right now patience is in short supply. You used to get a quarterly statement and throw it in the garbage; now you can check your stock price thirty times a minute,” he added. “The last man standing is going to be time arbitrage.” In other words, human emotion clouds smart investment decisions.
But sitting and waiting in the weeds are investors like Greenblatt and Marks who derive much of their performance from capitalizing on the emotions of the market.
“Most people, including most people in the investment business, don’t have the ability to take advantage of market opportunities. We get excited when prices are high and we get depressed when prices are low,’ said Marks, before Greenblatt interjected, “I think you and I would agree that people are nuts.”
Time favors the rational.
You can read the original article at Forbes here.
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