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Owen Bernard
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  • Always Yield To Individual Opportunities 0 comments
    Mar 23, 2013 9:47 PM | about stocks: LPS

    In Howard Marks most recent Chairman memo, he remarks intensively about his disdain for investment generalizations. He certainly is not wrong in his thinking because some of the biggest hazards (e.g. Long-Term Capital Management and the usual concepts behind most quant funds) come from generalizations.

    There's little I hate more than investment generaliztions. For years, for example, self-styled authorities on the high yield bond market would say "bond defaults typically tae place 2-3 years after issuance." That always set my teeth on edge.

    As he explains his viewpoints, the equity risk premium, brought up by FierceFinance that sparked the memo, gets the full brunt of what he believes is wrong with how the equity risk premium is used. It may seem petty to harp on the article's present-tense use of the term, as written in the corresponding online article in Pensions & Investments:

    The long-term equity risk premium is typically between 4.5% and 5%.

    How does one sentence gain such attention to spark a nine page assault?

    The memo is a great read to gain better perspective in thinking about markets going forward. He brings a far more appropriate line of thinking in assessing markets by using earnings yield or the inverse property of the infamous price to earnings ratio, P/E.

    I have tried to use it in a similar fashion when assessing Lender Process Services Inc., LPS, when it seemed to be destined for failure and written off by most. Howard Mark's memo has been a good reminder of what perspectives to hold when valuations, broadly speaking, gradually become richer with the passage of time.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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