Howard Marks of Oaktree Capital Management says short-term trading is a waste of time, or worse. In his latest memo to its Oaktree clients, Marks said the ups and downs of prices are influenced far more by swings in investor psychology than by changes in companies’ long-term prospects.
“Because swings in psychology matter more in the near term than changes in fundamentals – and are so hard to predict – most short-term trading is a waste of time . . . or worse,” the co-founder of the hedge fund said on November 22.
What should not matter to investors, he said, is short-term events, the trading mentality, short term performance, volatility, hyper-activity. Study the ‘micro like mad’ in order to know your subject better than others, he said, adding that buy debt when you like the yield, not for trading purposes.
Marks said if one asks Warren Buffett to describe the foundation of his approach to investing, he would probably start by insisting that stocks should be thought of as ownership interests in companies. Most people, Marks said, buy stocks with the goal of selling them at a higher price, thinking they are for trading, not for owning.
This means they abandon the owner mentality and instead act like gamblers or speculators who bet on stock price moves,” he said adding that “The results are often unpleasant.”
A popular saying goes: Don’t just sit there; do something. But for investing, Marks ask investors to “Don’t just do something, sit there.” Marks said one should develop the mindset that s/he does not make money on what one buys and sells, but on what one holds.
Marks said no one should attach much significance to returns in one quarter or year. Investment performance is simply one result drawn from the full range of returns that could have materialised, he said. “In the short term, it can be heavily influenced by random events. A single quarter’s return is likely to be a very weak indicator of an investor’s ability,” he said.
Marks said most people can’t predict the future well enough to repeatably produce superior performance, as it is difficult to know which expectations regarding events are already incorporated in security prices.
“One of the critical mistakes people are guilty of – we see it all the time in the media – is believing that changes in security prices are the result of events: that favourable events lead to rising prices and negative events lead to falling prices. I think that’s what most people believe – especially first-level thinkers – but that’s not right. Security prices are determined by events and how investors react to those events, which is largely a function of how the events stack up against investors’ expectations,” he said.
Marks said security prices are highly susceptible to random and exogenous events in the short term, that can swamp the impact of fundamental events. Macro events and the ups and downs of companies’ near-term fortunes are unpredictable and not necessarily indicative of – or relevant to – companies’ long-term prospects, he said, adding that little attention should be paid to them.
Marks said people in many cases accord volatility far more importance than they should. It is essential to recognise that protection from volatility generally isn’t a free good, he said.
Reducing volatility for its own sake is a sub-optimising strategy, Marks said adding that it should be presumed that favouring lower-volatility assets and approaches will – all things being equal – lead to lower returns.
Marks said of critical importance, equity investors should make a goal to participate in the secular growth of economies and companies and benefit from the wonder of compounding.
“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.” he said.
Marks said believing an investor can do these things successfully requires the assumption that s/he is smarter than a bunch of very smart people. “Think twice before proceeding, as the requirements for success are high,” he said.
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