Howard Marks: At Oaktree We Say, “Well Bought Is Half Sold.”

Johnny HopkinsHoward Marks, Investing StrategyLeave a Comment

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One of our favorite books from our list of 50 Of The Best Investing Books Of All Time is – The Most Important Thing: Uncommon Sense for the Thoughtful Investor, by Howard Marks. There’s one passage in particular in which Marks highlights the importance of buying at the right price without consideration for the sell-side saying:

“At Oaktree we say, “Well bought is half sold.” By this we mean we don’t spend a lot of time thinking about what price we’re going to be able to sell a holding for, or when, or to whom, or through what mechanism. If you’ve bought it cheap, eventually those questions will answer themselves. If your estimate of intrinsic value is correct, over time an asset’s price should converge with its value.”

Here’s an excerpt from the book:

It’s a fundamental premise of the efficient market hypothesis—and it makes perfect sense—that if you buy something for its fair value, you can expect a return that is fair given the risk. But active investors aren’t in it for fair risk-adjusted returns; they want superior returns. (If you’ll be satisfied with fair returns, why not invest passively in an index fund and save a lot of trouble?)

So buying something at its intrinsic value is no great shakes. And paying more than something’s worth is clearly a mistake; it takes a lot of hard work or a lot of luck to turn something bought at a too-high price into a successful investment.

Remember the Nifty Fifty investing I described in the last chapter? At their highs, many of those stalwart companies sported price/earnings ratios (the ratio of the stock’s price to the earnings behind each share) between 80 and 90. (For comparison, the postwar average price/earnings ratio for stocks in general has been in the midteens.) None of their partisans appeared to be worried about those elevated valuations.

Then, in just a few years, everything changed. In the early 1970s, the stock market cooled off, exogenous factors like the oil embargo and rising inflation clouded the picture and the Nifty Fifty stocks collapsed. Within a few years, those price/earnings ratios of 80 or 90 had fallen to 8 or 9, meaning investors in America’s best companies had lost 90 percent of their money.

People may have bought into great companies, but they paid the wrong price.

At Oaktree we say, “Well bought is half sold.” By this we mean we don’t spend a lot of time thinking about what price we’re going to be able to sell a holding for, or when, or to whom, or through what mechanism. If you’ve bought it cheap, eventually those questions will answer themselves. If your estimate of intrinsic value is correct, over time an asset’s price should converge with its value.

What are the companies worth? Eventually, this is what it comes down to. It’s not enough to buy a share in a good idea, or even a good business. You must buy it at a reasonable (or, hopefully, a bargain) price.

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