Covid-19

[Curiousparty]

https://www.facebook.com/20446254070/pos...64071/?d=n

BOA said stock is the way to go ..


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[Shiyi]

Is market overly complacent?
Reminds me what Lord Keynes said. In a beauty contest, it's not what we think beauty matters.
It's what all the others think matter.

[Curiousparty]

https://on.mktw.net/3gpjQBl Check out this article from MarketWatch - Dow futures climb 500 points on recovery hopes and vaccine news


The gap at 25k to 26k dows will be filled soon


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[weijian]

Howard Marks has had 7 memos (including the latest below) for the last 3 months since Covid-19 hit the equity markets - Contrast this to an average of 4 - 5 memos per year in the last 5 years (2015 to early 2020).

In addition to witnessing how fast fear (fear of losing money and fear of missing out) can respond in the current covid-19 crisis, I have also managed to glimpse into how we tend to deal with uncertainty - from needing an authority to give direction (halo effects), agreeing with people with agree with us (confirmation basis) and the random acts of xenophobia (the need to find someone else to blame to prevent cognitive dissonance)

While managing to earn some money in this crisis (thus far), the lessons are probably more memorable than any.

Uncertainty II

When things are truly important, we prefer to be wrong than to believe nothing at all. . .

https://www.oaktreecapital.com/docs/defa...nty-ii.pdf

All his memos: https://www.oaktreecapital.com/insights/...arks-memos

[Shiyi]

I enjoyed reading the memos of Howard Marks. But the more I read, the more I get confused. Is he an agnostic?

If the future is unknown or the fluid outcome of collective efforts, as Howard Marks seems to suggest, then how does the market price the risk? How does the investor prepare for it?

[weijian]

I enjoyed reading the memos of Howard Marks. But the more I read, the more I get confused. Is he an agnostic?

If the future is unknown or the fluid outcome of collective efforts, as Howard Marks seems to suggest, then how does the market price the risk? How does the investor prepare for it?

hi shiyi,
I do not think he is at that extreme end of the spectrum (been agnostic). Nonetheless, we humans tend to get to the other end of the spectrum by being over confident and also falling for biases like confirmation bias and seeking social proof for reinforcement. I think this is what he is talking about.

We can't really deal with unknown. But rather than frame the future as an unknown, the future is being framed as been complex. Now, we could probably work out a framework to deal with complexity. And this complexity has to be understood in terms of probabilities. We personally have to get comfortable with uncertainty and uncomfortable with "certainty" in the markets. This is probably part of the pendulum swing that we read often from Howard Marks' books and memos.

And finally, I thought the tenets of value investing is really a good framework for us to deal with complexity. I thought everything all goes back to this little book called "The Intelligent Investor". For example, why do we need to really understand how the market price the risk?  - Do not we have this "Mr Market and me" sort of personification that the book described so vividly? Also, if we did our homework and bought with a margin of safety, aren't we prepared for this "unknown future" that you talked about?

[Shiyi]

Thank you for your insight.

Given the many unknowns, I often wonder how we can say for sure the intrinsic value and thus the margin of safety.
Using the discounted cash flow model, for example, a lot of assumption about the future has to be made. Or else, the model just won't work.

I have been a keen follower of value investing. But increasingly, I find that market is the aggregated reflection of investor sentiment. And chart reading becomes a useful tool to understand the market.

[specuvestor]

Chart reading helps understand psychology and catalysts of the market

Use the principle of roughly right rather than precisely wrong. It’s a range not precise science. If you assumptions are conservative enough it will do ok

[karlmarx]

Given the many unknowns, I often wonder how we can say for sure the intrinsic value and thus the margin of safety.
Using the discounted cash flow model, for example, a lot of assumption about the future has to be made. Or else, the model just won't work.

If you have a bearish model of the future, you will assign a lower value to your investment (say $1), and hence, the price you are willing to pay for it will also be lower (say $0.50).

If you have a bullish model of the future, you will assign a higher value to your investment (say, $2), and hence, the price you are willing to pay may also be higher (say $1). 

So depending on the assumptions you use in modelling the future, you will buy between a range of $0.50 and $1.

Of course, you will always want to buy cheaper. But you may never get that price. The future could indeed be bullish. And you would have missed out if you were holding out for a cheaper price.

But if the future turns out to be more bearish than you assumed, you will likely suffer losses from paying too high a price.

If you're too bearish, you miss gains. If you're too bullish, you suffer losses.

I prefer to miss gains than suffer losses, but everyone has their own preference towards the game.

My personal perception is that the market tends to be more optimistic (or bullish) most all of the time. Recall that SATS was still trading at $4 (20x trailing p/e) after the pandemic hit China pretty badly, was only beginning in Europe, and was known to be highly contagious.

So there is no "for sure." A lot of things happen beyond people's expectations. 

The kind of upward revenue/profit trajectory projected in analyst reports are often very optimistic scenarios, in a world where the company in question has everything going for it.

[Wildreamz]

Thank you for your insight.

Given the many unknowns, I often wonder how we can say for sure the intrinsic value and thus the margin of safety.
Using the discounted cash flow model, for example, a lot of assumption about the future has to be made. Or else, the model just won't work.

I have been a keen follower of value investing. But increasingly, I find that market is the aggregated reflection of investor sentiment. And chart reading becomes a useful tool to understand the market.

To precisely determine intrinsic value, the only way is to know the exact free cash flow of a company, and discount it ad infinitum (i.e. DCF formula). To use DCF, you will need to know the future earnings, as well as things like future inflation rate, future interest rates etc.

Since it is impossible to know the future for sure. It's impossible to know intrinsic value for sure.

Warren Buffett doesn't use a spread sheet, he makes reasonable assumptions/predictions of the future; he invests when the potential returns of an investment far outweigh the risks. Also, allocating assets appropriately (cash, equity, bonds etc.)