원문 보기
How are return high returns achieved? What most people would say, in my opinion, is two things. Number one, riskier assets have higher returns. And number two, if you want to make more money, the way to do it is to take more risk. Everybody agree? I don't get any agreement? Okay. And I think that both of those are terrible formulations.
For the simple reason that if riskier assets could be counted on for higher returns, by definition they wouldn't be riskier. So, that's a fallacy. And if you are guilty of that fallacy or have been consciously or unconsciously guilty of that fallacy, I think you should check your reasoning. Riskier assets cannot be counted on for higher returns.
In my opinion, what this relationship means is different. What it means is that assets that appear riskier have to appear to offer higher returns. They don't have to deliver. So, the important thing is to keep that distinction in mind. But anyway, most of the time the market does look like this. The you know, longer bonds have higher yields than shorter bonds, low quality bonds have higher yields than safe bonds.
Uh stocks have higher expected returns than high quality bonds and alternative investments offer higher returns than equities. They merely don't have to deliver. So, we get a a a dialogue and it goes like this. And let's go back 20 years to 1999. I wrote a memo about this back in '04. I'm still quoting from it.
I've gotten a lot of mileage from it. It's called Risk and Return Today. And what I observed in '04 is back in in force today, I believe. So, people would say, well, I can get 4% with no risk in T-bills. If I'm going to buy the 5-year Treasury and tie up my money for 5 years, I need 5%. If I'm going to buy the 10-year, I need 6%.
If I can get 6% with no risk in a 10-year Treasury, I need 100 basis points more to buy corporates with credit risk, so that's seven. If I can get six in 10-year Treasuries, I need I'm not going to go into high yield unless I can get 11. And that's the fixed income world. And if I can get those kind of returns on fixed income, I'm not going to buy quality stocks unless I think they'll return nine.
Nasdaq, I need 10. And by the way, if I can get those returns from public securities, I'm not going to buy I'm not going to develop real estate unless I think I can get make 14 or go into public private equity unless I think I can make 20 or venture capital unless I think I can make 30. So, all along the line you get people saying, in order to take incremental risk, I need the expectation of incremental return.
Nothing could make more sense. And that is the way the world was back in 1999. Then we had this thing called the global financial crisis and the central banks pulled down the risk-free rate from four in '99 to about zero. In some countries, of course, short-term rates went negative. In order to stimulate economies, recapitalize financial institutions.
And when the risk-free rate was pulled down to zero, everything else followed. And now it goes like, well, if I if the return on cash is zero, I'm not going to tie my money my money up for 5 years unless I can get one. 10 years, I got to have one and a half. And so forth. I'm not going to I wouldn't buy high grades unless they paid three.
I wouldn't buy high yield unless it paid six. And so forth. So, you can see that the demanded returns all all investing is relative. The decisions are relative decisions. And so, all of decisions are still sane in relative terms, but taking place at lower levels in terms of prospective returns. So, this is the the reason why prospective returns are low today.
And this is, of course, as I say, I think the most important single characteristic of the financial environment over the last decade. Investors in many markets have taken on increased risk in order to access returns above those on safe assets. So, the person who used to like me, all the money I had in '06, '07, I was concerned about the environment, so I took all the money that I had outside of Oaktree and I put it into Treasuries.
1 2 3 4 5 6-year Treasuries. It's called the laddered portfolio for those of you who are in the bond business. And it is the dumbest form of investing known to man. You have this progression of year of of maturities. The The closest in one matures, it goes to the back of the line. You always have a portfolio which has 1 2 3 4 5 6-year maturities.
You always have some money coming due within a few months. And you know, you can't make much, but you can't lose. '07, February '07, I wrote a memo called The Race to the Bottom. And I talked I said in there that the the market for for buying investments or making loans is like an auction house. And when something when an opportunity goes up at an auction house, it goes to the person the highest bidder.
The highest bidder is by definition the person who is willing to accept the least for his money. And the same is true of the securities markets. I want to buy some stock. I want to pay 32. Josh says he'll buy it at 32 and a quarter. And and Tom says he'll pay 32 and a half. I don't get any. Tom gets the stock.
He's the highest bidder. But of course, he gets a worse deal than I would have got at 32, but he makes the investment. The trouble is that when there's a lot of money in investors' hands and they're hot to trot to put it to work, then the bidding maybe goes too far. And in the credit markets, people bid up the price, which means they bid down the yield and they bid down the safety.
That's the way the auction goes. And I believe that the race to the bottom has been underway in the credit markets. And that is to say, investors are competing for the limited opportunities in the risk markets by volunteering for low returns, weak structures, and high risk. Again, next question. Do you agree or do you not agree?
That's as we go along, that's that's the question that you should all be asking. How are return high returns achieved? High risk-adjusted returns. How do you get high returns with low risk? The answer in my experience is investors make money most safely and most easily when they do things that other people are unwilling to do.
That's the history of my career. I started Citibank's high yield bond portfolios in 1978 when nobody else would do it and it was considered unfiduciary and imprudent to buy an investment grade bond. We started the distressed debt fund at at the TCW 1988 when people said, are you crazy? You're going to buy the debt of bankrupt companies?
How can that end? Nobody else would do it. That's how you get bargains. When investors are unworried and glad to make risky investments or worried but investing anyway because the low risk alternatives are unappealing, which is more descriptive of the last 10 years, asset prices will be high, risk premiums will be low, and markets will be risky.
That's the result of too much money and and investors who are too eager. Howard Marks challenges the popular idea that higher risk automatically means higher returns. Think about it. Would you invest in a low quality stock just because it might give you higher returns? That same risk can easily wipe out your capital, isn't it?
In reality, chasing risk often magnifies downside more than upside. The true wealth isn't built by gambling on weak businesses, but by spotting opportunities others ignore. The best returns usually come from identifying something undervalued today that has strong future potential without taking unnecessary risk.
Smart investing isn't about taking more risk. It's about understanding risk better and controlling it.
Comments 0