Howard Marks Tips on High Risk Investment Examples. Get Smarter About Money. Quantum Wealth

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01. theme of the memo is that there needn't be a firm schism or dividing line between value investing and growth investing as you know uh i my son has and his family have lived with us for a lot of the last year due to the pandemic and he's a he's a very thoughtful investor we've had a lot of discussions on lots of subjects including this one and he laid out criteria for value investing based on the understanding of securities at stakes in actual businesses focus on their true worth as opposed to their price the use of fundamentals to calculate intrinsic value the recognition that attractive investments come when price diverges from value and the emotional discipline to act when such an opportunity is presented and not otherwise and it seems to me that number one there's no reason that you can't do so-called investing in growth companies on that on that basis and number two there's nothing in there about low p e ratios or or anything like that so it should be the point is that the investors mentality should be eclectic and you shouldn't decline to invest in companies just because they're fast growing and and and and carry high p e ratios is that you have to really know a company well before you know it's overvalued if you say if you say well let's screen for on the market for attractive investments and uh we'll say that any pe over 25 is is uh is uh discarded well there are companies that are worth pes over 25.

02. i would say it's not easy fair and it's not something everybody can do but i don't think it's something nobody can do there are people who have great records and those records include investing in so-called growth companies you know i i mentioned in the memo that i had there was a very famous value investor who made good money in some of the tech leaders and i said well how could you how could a value guy invest in high growth tech companies he says well they look like value to me and you know this is a this is an avowed value investor with a long record a great long record and the point is that he was open-minded and you shouldn't dismiss the point that one of the points that's important is just because something has a high p e ratio doesn't mean it's overvalued and just because something has a low p e ratio doesn't mean it's cheap well first of all of course in the short term the market certainly can uh uh depart from irrationality secondly i think you're implying that we're in a bubble uh and and certainly uh you know the greater question is well why is the market making new highs every day if we have this these problems the the the political division in the country is a terrific one but the greatest one of course is the pandemic but i think i really think that it in large part and this doesn't apply uh account for any one day's action i think that the the uh the fed and treasury actions and specifically the reduction of the fed funds rate to zero has had a very coercive effect on the market it has required people to invest because they don't want to sit around with their with cash money market fund bank deposits all learning zero they don't want treasuries at less than one or uh higher grade bonds at two and so they've had to push out into risk assets stocks uh non-gilt-edge bonds these are uh private equity and and so forth these are and venture capital these are risk assets first of all there's no disputing the fact that growth stocks have outperformed value stocks the other hand on the other hand i think there's no disputing the fact that what are called growth stocks have a better future than what are called value stocks and and of course the the the the ones that where the value is questionable have not been heavily represented in the s p uh the ones that are that have been in the s p for the last 10 years are uh the great tech leaders uh that have been in the s p for the last 10 years have probably been the acknowledged winners uh but look there's no there's when when one group outperforms another group for a long period of time and to the extent you described there's no question that it's possible that they're overvalued the argument the argument in the memo is it doesn't prove it's overvalued because these are companies that are that have gotten better and better that that improve as they get larger and get stronger as they get larger not bureaucratic and slow moving but larger and tesla is an extreme case there's an argument to be made that it's too high the people who are buying it you know you can't say that they're all nuts uh they may have there there may be people who have a view that it's attractive by the way people said it was too high two years ago true and and so it has all the has all the uh appreciations in the last two years been fallacious you know who are we to say uh you can make judgments and and certainly if if you describe an individual not of great means uh he should take some take some profits he probably has he if he put if he bought tesla two years ago he probably has a huge gain it's probably a very disproportionate amount of his financial net worth yes he should absolutely cut back unless you know unless he really wants to try to hit the long ball power to do that to do that he should have a high growth a high pain uh so i you