Everyone’s opinion is really just a guess.

I have summarised it for your convenience as well some my own opinions (mind the irony) that are relevant to our current strategy.

The common theme of the article is that we can all debate facts, but at the end of the day — nobody knows for certain.

Marks uses this citation from a previous memo.

“An expert in any field will have an advantage over a rookie. But neither the veteran nor the rookie can be sure what the next flip will look like. The veteran will just have a better guess.”

Howard Marks

Marks notes that people ask his opinion as one of the world’s best ever investors. In most fields (e.g. a health pandemic) he is out of his depth, and so any opinion from him or any other non-scientist is merely a guess. It could also be be said that a scientist’s opinion is merely an informed guess and should be treated as such.

Marks cites a number of facts we know about COVID-19 and makes the point that nothing of what we know for sure gives us any certainty of how it will progress from here. In my view, making a specific prediction is a low-value game, instead we will continue to focus on the variables we have control over.

Where are we now?

“In the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot.’ But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless’.”

Howard Marks

One month ago, everything looked rosy.

The market was at all time highs, value investors had ‘lost their touch’ and I was ridiculed for even questioning the merits of a lay-buy system trading on a PE of +100x.

The cyclically adjusted PE of the US market implied approx. 50% overvaluation and we struggled to find good opportunities.

The US market is down approximately 30% from its highs.

The level of volatility from night-to-night is extreme. The sell-off is more severe than that of the 2000 Dot-com crash and the 2007–08 Global Financial Crisis. Perhaps that is a sign the recovery will be just a fast? We will see.

The market valuation multiples are still above average but ‘Mr Market’s’ manic depression has well and truly set in. There are very compelling opportunities for the long-term and rational investor which we have been taking advantage of. We are also ready should more present themselves.

Marks points out that the bottom is usually found at the point where panic is prevalent and optimism nowhere to be found. We can never be certain where it is which is why it is the wrong question to be asking.

Our mindset

The only rational mindset is to like stocks more at these levels than we did in January this year.

Buffett’s famous quote rings true particularly in these times:

“In the short term the stock market is a weighing machine (read: emotional), and in the long-term it is a voting machine (read: value is eventually appreciated).”

Warren Buffett

Will stocks continue to decline? The answer relies largely on investor psychology and so it is nearly impossible to answer.

In the absence of making short-term predictions, we must focus on what is within our control. Good valuation work is doable. Partnering with high quality managers who do the same. Short-term market predictions are not.

Seth Klarman believes that the single biggest advantage an investor can have is a long-term orientation. This is key, if not the most important tenet to our investment philosophy.

I think it is perfectly reasonable to expect the over the next 3–5 years we can expect more normal economic conditions for our investments to be operating in and likely more rational prices for those businesses.

The virus has caused an unprecedented interruption in economic activity and no one can be sure of when things will return back to normal. But, extreme uncertainty makes for very fertile ground for sound investing. I’ve mentioned in a previous article that low risk coupled with high uncertainty makes for the perfect combination if you’re willing to be patient.

“Low risk and high uncertainty are a wonderful combination. Risk is the potential for capital loss, while uncertainty is a wide range of possible outcomes. When ‘The Street’ gets confused between risk and uncertainty, it is time to profit handsomely from that confusion.”

Mohnish Pabrai

In closing

This period in a social context will prove extremely tough on our society. We are doing our part to support those close to us who are being most impacted.

This period in financial markets will almost certainly be reflected on as a significant opportunity for sound investment and should be taken advantage of.

Throughout history, humans have survived many great difficulties and I’m confident we will get through this.

Credits: Warren Buffett, Howard Marks, Seth Klarman, Mohnish Pabrai.