One of the recurring topics that is discussed in many of Howard Mark’s famous memos is the concept of risk and reward. In his 2020 memo to clients entitled, “Calibrating,” Marks provides some interesting insight into how investors can ascertain risk in the current coronavirus environment that is fraught with risk and uncertainty about the future.
Marks addresses some of the issues raised related to trying to remain on the sidelines auspiciously, until one has perfectly timed the market bottom and thus can be assured that he has eliminated all risk in connection with the purchase.
Should those who bought Target (TGT), for $97 on March 20th waited until April 3d, when it could have been had for $92? Or, bought Chevron (NYSE:CVX), for $70 on March 17th, when it could have been bought a week later for $54? Bank of America (BOAC), for $22 on March 6th vs. $17 on March 23rd?
Shouldn’t an investor have waited for a more propitious opportunity in light of the panic selloff and continuing bad news?
For Marks, the “answer clearly is no.”
In his memo entitled, “Which Way Now?,” the guru was characteristically humble in terms of how much he doesn’t know. His point is those who think they are good at divining the future are playing a fool’s errand. Marks wrote:
“The bottom” is the day before the recovery begins.Thus it’s absolutely impossible to know when the bottom has been reached … ever”
Then what are the criteria that should inform our investing? Marks responds by noting, that for purposes of value investing, trying to time the bottom is irrelevant and unnecessary.
“What I would do, is is figure out how much you’ll want to have invested by the time the bottom is reached — whenever the tis — and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds.”
“But no one can tell you this is the time to buy. Nobody knows.”
Marks discusses timing decisions in the context of his notion of how risk should be assessed. He believes any informed investment decision must weigh:
“’Twin risks’ investors face everyday:the risk of losing money and the risk of missing opportunity. At least in theory, you can eliminate either one but not both. Moreover, eliminating one exposes you entirely to the other. Thus we tend to compromise or balance the two risks, and every individual investor or institution should develop a view as to what their normal balance between the two should be.”
Then Marks summarizes how investment risk should be determined when he says: “The investor’s goal should be to make a large number of good buys, not just a few perfect ones.”
Marks notes that waiting for the bottom is, in a sense, anathema