Author Topic: Dare to Be Great  (Read 2786 times)

innerscorecard

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Dare to Be Great
« on: April 08, 2014, 11:44:41 PM »
Two lines from hedge fund manager Howard Marks' new memo (which quotes an earlier memo):

"This just in: you can't take the same actions as everyone else and expect to outperform.”

...

"Passive investors, benchmark huggers and herd followers have a high probability of achieving average performance and little risk of falling far short. But in exchange for safety from being much below average, they surrender their chance of being much above average. All investors have to decide whether that’s okay. And, if not, what they’ll do about it."

http://www.oaktreecapital.com/MemoTree/Dare%20to%20Be%20Great%20II.pdf

As an active investor managing institutional money, the way in which Marks attempts to beat the market, which he admits is largely efficient, is by investing in the more inefficient parts of the market (distressed debt and other more illiquid markets rather than large-cap equities generally). But he must take on risk in doing so, and runs a risk of underperformance.

On the other hand, for us as individual investors managing our own money (which will generally be small amounts), the easiest step we can take that will improve our outcomes is not to try to increase our returns, but to:

1. Save more money (The first Mr. Money Mustache thesis);
2. Allocate the money intelligently to a low-cost asset allocation you will stick with (the Bogleheads thesis);
3. Stick with it.

So the way that we dare to be great is, as MMM has said, by beating everyone else in savings and discipline, which is a rather easy task, as compared to beating everyone else in return, which is a very hard task.*

* The task is hard but in contrast to what some may say out of dogma, not impossible, especially for small investors. If you are small, it is actually easier (but NOT easy) to beat the market, because your small size allows you to invest in illiquid markets. But this doesn't mean that everyone can do this on just a few hours a week. Beating the market consistently is very, very hard, and it takes advancing accounting, financial, AND often specialized industry knowledge. I think a good mindset is to be very skeptical of claims of beating the market unless given sufficient evidence otherwise (this is not the same as blanket denials that anyone ever has ever had investment skill, which some on this forum like to make).

steveo

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Re: Dare to Be Great
« Reply #1 on: April 09, 2014, 01:12:57 AM »
So the way that we dare to be great is, as MMM has said, by beating everyone else in savings and discipline, which is a rather easy task, as compared to beating everyone else in return, which is a very hard task.

I agree with this completely.

We can beat most people in our situations or better situations simply via spending less and investing it wisely. Everyone can of course do this as well but they won't.

innerscorecard

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Re: Dare to Be Great
« Reply #2 on: April 09, 2014, 01:27:45 AM »
The MMM philosophy is really a synthesis of several ideas;

- the hedonic treadmill / hedonic adaptation
- middle class and even working class incomes can generate substantial wealth if invested efficiently and with discipline;
- the cost matters hypothesis (you don't know what you need to do to generate additional market-beating return, but you DO know that costs are a drag on performance)

and others I may have missed.

Obviously, it would be best to both maximize savings AND maximize returns. I have no doubt there are some people, even conceivably among this forum, who could possibly do this. But this takes at the very minimum deep financial knowledge and probably experience. And it is probably better from a behavioral practical point of view just to parrot the line that it is literally impossible. Because it functionally is (what percentage of the population can even read a financial statement, much less do a valuation of a company's intrinsic value, or even harder, make investment decisions based on the ramifications of that information?).

nereo

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Re: Dare to Be Great
« Reply #3 on: April 09, 2014, 05:52:16 AM »
"This just in: you can't take the same actions as everyone else and expect to outperform.”
...
"Passive investors, benchmark huggers and herd followers have a high probability of achieving average performance and little risk of falling far short. But in exchange for safety from being much below average, they surrender their chance of being much above average. All investors have to decide whether that’s okay. And, if not, what they’ll do about it."

As an active investor managing institutional money, the way in which Marks attempts to beat the market, which he admits is largely efficient, is by investing in the more inefficient parts of the market (distressed debt and other more illiquid markets rather than large-cap equities generally). But he must take on risk in doing so, and runs a risk of underperformance.

I agree with what innerscorecard said about the MMM philosophy.

Also, what Marks said is just a mix of Bravado and marketing.  Be definition matching a benchmark will mean you don't outperform (the benchmark), in fact you will trail it by your annual fees (0.05% for Vangaurd) - but you will outperform about 80% of actively managed funds over longer time periods.

And the line about how he seeks to beat the market by "investing in the more inefficient parts of the market (distressed debt and other more illiquid markets rather than large-cap equities generally)" sounds great, but keep in mind EVERY hedge fund manager is seeking out these same inefficiencies.  When markets operate with perfect efficiency, higher risk has the potential for higher reward but a greater chance of loss, too, so of course he "must take on risk in doing so, and runs a risk of underperformance."

innerscorecard

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Re: Dare to Be Great
« Reply #4 on: April 09, 2014, 06:55:03 AM »
"This just in: you can't take the same actions as everyone else and expect to outperform.”
...
"Passive investors, benchmark huggers and herd followers have a high probability of achieving average performance and little risk of falling far short. But in exchange for safety from being much below average, they surrender their chance of being much above average. All investors have to decide whether that’s okay. And, if not, what they’ll do about it."

As an active investor managing institutional money, the way in which Marks attempts to beat the market, which he admits is largely efficient, is by investing in the more inefficient parts of the market (distressed debt and other more illiquid markets rather than large-cap equities generally). But he must take on risk in doing so, and runs a risk of underperformance.

I agree with what innerscorecard said about the MMM philosophy.

Also, what Marks said is just a mix of Bravado and marketing.  Be definition matching a benchmark will mean you don't outperform (the benchmark), in fact you will trail it by your annual fees (0.05% for Vangaurd) - but you will outperform about 80% of actively managed funds over longer time periods.

And the line about how he seeks to beat the market by "investing in the more inefficient parts of the market (distressed debt and other more illiquid markets rather than large-cap equities generally)" sounds great, but keep in mind EVERY hedge fund manager is seeking out these same inefficiencies.  When markets operate with perfect efficiency, higher risk has the potential for higher reward but a greater chance of loss, too, so of course he "must take on risk in doing so, and runs a risk of underperformance."

Yes, good point. Marks' REAL audience for these letters is after all institutional money clients (curious individuals such as us are just secondary readers).