Worth Reading

 Two of my favorite writers on markets and investing have new pieces out that are well worth your time. Howard Marks is the chairman of OakTree Capital Management and has put out a terrific book recently that collects his investment commentaries over the years. The book is The Most Important Thing: Uncommon Sense for the Thoughtful Investor.  In his most recent piece, Marks looks at history and why “this time” usually isn’t different (despite what firms like Goldman and Citigroup are saying).  Some highlights:

  • “The tendency of investors to overlook or forget the past is noteworthy.  So is their habit of succumbing to emotion and swallowing tall (but potentially lucrative) tales.  In particular, people tend to forget the cyclical nature of things, extrapolate past trends to excess, and ignore the likelihood of regression to the mean.”
  • “Common sense isn’t common.  The crowd is invariably wrong at the extremes.  In the investing world, everything that’s intuitively obvious is questionable and everything that’s important is counter-intuitive.  And investors prove repeatedly that they can be less logical than Yogi.”

His conclusion is pretty positive for stocks on account of current P/E levels.  He also focuses a good bit of attention on two articles that you might want to read for yourself:

James Montier of GMO has written a new article examining the sustainability (or not) of record high corporate profit margins. He argues that if you want to understand where the market is headed you need to have some grip on whether and for how long the current (very high) profit margins can be sustained.  Montier concludes:

To us, the macro profits equation is a simple but powerful tool for understanding the drivers of profits, and helps us assess their sustainability.  It is a useful organizing framework for thinking about the possibility of a structural break in profit margins.  When we look at the drivers of today’s high profit margins, we find fiscal deficits behind the high profit margins of many countries.  There is nothing “wrong” with this per se, but it does suggest that moves toward fiscal retrenchment will bring margins back toward more normal levels.  It seems unlikely that “this time is different” when it comes to mean reversion in margins: what goes up must come down.

One can readily infer from Montier’s profit margin expectations that he is not nearly as positive on stocks as Marks is. For what it’s worth, I agree with Marks generally but not specifically because (like Montier) I see good valuation as including more than simple P/E (Barry Ritholtz adds some helpful insight here).

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