저자: Investing Wisdom · 외국인
다듬은 글
The cyclical ups and downs do not go on forever. Usually they feel like they will. They feel like there's either a virtuous circle that will make things go well forever or a harmful circle that will make them go badly forever. But usually that's not the case. Usually we have ups and downs. And 45 years ago, somebody did me the favor of explaining to me gave me the the greatest gift the greatest regalo, the three stages of the bull market.
And if you understand this, you you're almost ready to become a professional. The first stage, when only a few exceptionally bright people understand that there could be improvement. The second stage, when most people understand that improvement is actually taking place. And the third stage, when everybody believes that things will get better forever.
So if you buy in the first stage when most people don't see a better future when there's very little optimism included in asset prices you get a bargain and you can make a lot of money. If you do it in if you buy in the second stage when everybody understands that improvement is taking place. You don't get a bargain.
You do okay. You follow the cycle. You buy in at a fair level. But if you buy in the third stage, when everybody thinks things will get better forever and when asset prices reflect a great deal of optimism, you pay high prices which set you up for substantial losses. So it it the interesting thing about investing is it's not what you do, it's when you do it.
It's not what you buy, it's when you buy it. under what conditions and at what prices. So the key to investing is not buying good things, it's buying things. Well, you have to understand the difference between bueno and bien. And it's buying Ben that makes for success. When I started at City Bank, which was uh uh 50 years ago this month, the bank bought the stocks of what were called the nifty50, the 50 best and fastest growing companies in America.
Companies that were so terrific that it didn't matter what price you paid. That was the official theory. And they were selling at very high prices because they were such wonderful companies. And if you came in and you held them for five years, my first five years in the business, you lost almost all your money investing in the best companies in America.
So buying highquality assets is not the key because they were buying in the third stage. The key is to understand where you are and to buy assets in the first stage and be careful in the third stage. That's a big part of today's message. So it's important to practice what is called contrarian behavior and to do the opposite of what others do at the extremes because the others are primarily wrong.
Uh and there's a belief that things are safe when things are going well. Actually that's the riskiest thing. The riskiest thing in the world is the belief that there's no risk since this makes prices very high and sets the stage for bad experiences. We must sell when others are buying most aggressively and buy when they're selling most aggressively.
And Buffett says it great as usual. He says the less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. When other people are unafraid and forcing prices high, we must be cautious. When other people are terrified and selling and pushing prices down, we should turn aggressive.
And it's it's it's that that's the bottom line. Uh, of course, if only it was that simple. Now, the second part of this presentation comes from one called mastering the market cycle. getting the odds on your Side. And that's the name of uh my new book, which came out in October in the States and is now available here in Spanish.
And I must say that both of my books have been translated into Spanish. And you can only imagine how frustrating it is because I have no idea what it says. I have I have no idea the quality of the translation. And uh you know I I'd like to believe that my ideas are portrayed accurately but Kianabi so and I believe that there are cycles and that they're extremely important to understand.
I believe there always will be cycles. I have followed cycles for 50 years. I've think I've been able to help our clients by dealing with the cycles. And halfway through writing the book, a thought occurred to me. Why are there cycles? That's really an important question. Why do cycles occur if the US GDP grows about 2% a year on average?
Well, why doesn't it just grow 2% every year? Why sometimes three and sometimes one and sometimes four and sometimes negative in a recession? The S&P average of stocks a returns about 50% uh 10% a year on average and it has done so now for about 90 years almost 10% a year. Why doesn't it just give 10% every year?
And in fact if you look at the history rarely is the return between 8 and 12. It's usually much better than 12 or much worse than eight. So why is the average not the norm? And uh this is a very important question to understand because of in order to deal with cycles and the answer is simple that the positive trends in the economy or the market eventually go to excess.
remember the third stage and those excesses correct on their own or are corrected and that's the most of what I'm going to talk about for the rest of this section and so rather than thinking of the cycle in terms of ups and downs which I always did and most people do I think it's better to think of excesses and corrections excesses when things go too strong and corrections when they go too weak So and why do we have excesses?
Because of the involvement of people. This is not mechanics. This is not physics. This this is an area where people have a very strong impact. And Richard Feinman who was a great physicist said physics would be much harder if electrons had feelings. We walk in this room, we turn on the light switch, and the lights go on every time.
Why? Because the electrons flow from the light switch to the light fixture every time. The electrons never say, "Not today. I'm tired." The story can. They never go in the wrong direction. They never go on strike and they always do what they're supposed to do. But people rarely in my opinion do uh what they're supposed to do and especially not at the extremes and because economies and markets are made up of people and people have feelings we get cycles.
So for example, positive feelings can make the directors of a company anticipate big demand and build a factory and hire workers and bu and and produce for inventory. And if they all do it at the same time, then we get a period of above average growth from the factory building and the inventory producing.
and then that we have an what's called a an upcycle in the market. Positive investor psychology causes stock prices to grow faster than the value of companies is growing. The value of companies may grow 6 8 10% a year on average. But in the 1990s for example stocks in the US the S&P 500 appreciated 20% a year.
So the value of companies was growing like this. The the price of stocks was growing like this. That's dangerous because that creates an excess and then eventually the excesses can be corrected. So if every factory management builds a new factory and hires workers and produces for inventory in anticipation of strong demand, we may get to a point where there are too many factories and too much in inventory and earnings are disappointing and then they close the factories.
They lay off the workers. they sell from inventory rather than produce and we have a period of below average economic growth or maybe negative economic growth which becomes a recession. Likewise, if prices outstrip the value of companies for long enough and become too high, they can't stay up, they can't go up further, they have to flatten out or decline.
That's a period of correction. So bullish periods are followed by bearish periods. So it's the creation of excesses and corrections. And I think it's better to think of cycles that way than ups and downs. Now the next question that's important is the cycles that I've been talking about. Are they dependable or not?
And the best way to understand the answer to that question is another quote from our friend Mark Twain who said that history does not repeat but it does rhyme. Very important. This is a theme that runs through my book. The details of cycles are always different from one to the next. the the amplitude of the fluctuations, the length of the cycle and the speed of the fluctuations always different.
And also different are the causes of the cycles and the effects of the cycles, the ups and downs. And people nowadays say to me, well, this cycle, which cycle from the past is it like? And it has some characteristics of others, but it's never quite the same. History does not repeat, but there are certain underlying themes that do repeat or do re do rhyme from one cycle to the other.
And if we can learn about them and recognize them, then we can be ahead of the game. So, for example, in my period in this business, I've lived through about a half a dozen uh important bull markets. And in general, they have certain themes that that do repeat. And here they are. Too much optimism, too little risk aversion, and too much capital availability.
And if you if you look at those and you think about those, those three things in themselves are a pretty good recipe for a bull market. And it's pretty hard to imagine having a bull market without them. So these are the themes that we should associate with a bull market which is to say a period of appreciation to excess.
Now let's talk about the three. First of all, optimism. Most people think or many people think that that asset price rises are produced by good events. But the the connection is not just between events and prices. It's events and psychology. It's events and how they are perceived that produce changes in asset prices.
And the role of perception or psychology in the setting of asset prices is extremely important. All things being equal, a high level of optimism will cause things to be priced high relative to their fair value or what we call the intrinsic value. So it's the job of the professional in my opinion to figure out for each stock, company or building what is the intrinsic value and I'd like to buy when the price is below the intrinsic value and sell when it's above.
I think that's a simple recipe for how an investor should behave. So we have to figure out the intrinsic value. But clearly in a period of great optimism regarding the future prices will tend to be high relative to the intrinsic value. We want to know that and the higher the optimism most of the times the higher the price.
And as I say here, if I could know only one thing about every investment that I was considering, it might be how much optimism is priced into the shares. And that's an important element in considering every bull market. Secondly, risk aversion. Risk aversion is not a concept that most people think about every day, but it's extremely important.
And most people are afraid of losses. That is to say, they are riskaverse. And uh for most people, if they make a,000 euros, they're okay. But if they lose a,000 euros, they feel terrible. So the losses count more than the gains for most people. So most people are biased towards risk aversion. And risk aversion is a very very important ingredient in the markets.
When people are risk averse as they should be then what happens? If they consider an investment they study it thoroughly. They make only conservative assumptions. They are rigorous in their analysis. They demand a margin what we call a margin of safety. I want to be sure that if things go poorly, I'll be okay.
And they demand risk compensation. If they're going to do something which is risky, they demand an exceptional return as a potential reward. So when we have risk aversion and we have conservatism and caution and diligence and and demands for uh risk premiums, then we can say that the market is safe and sane.
But when people get excited about the future and they get excited about what's been going on, they forget to be risk averse, they become risk tolerant. They become accepting of risk. And when they do, what happens? They say, "Well, it's not so important to do due diligence and to make conservative assumptions because if I'm too careful, then I will miss something and my friend will get it." And you know there there there was a there's a book by a man named Kindleberger who says there is nothing worse for your mental condition than to watch a friend get rich and eventually in the market fear of missing out takes over from fear of losing money and then people do bad things.
So we have to understand whether the market is based on risk aversion or on risk tolerance and when it's risk tolerance because people are excited then we have to understand that the market can be a dangerous place. Number three the impact of capital availability. The market is an auction place especially for a good way to think of it is the loan market.
you know, you you want to borrow some money, you go to some banks. Each one bank tells you what they'll do to provide you money. But if there's too much capital in the hands of people and they're too eager to get to put it to work because they're afraid of missing something, then the bidding goes too high and the price becomes excessive, at which point the perspective return is low and the risk is high.
And we want to know that when there's too much money chasing too few deals, those are the seven worst words in the world. Too much money chasing too few deals. And it happens from time to time. And I wrote I wrote a a memo in I write memos to the clients and uh the people from the bank can help you get them if you're interested.
And I wrote one in February '07 before the global crisis entitled the race to the bottom because the bidding was too strong which meant that the winners of the auction were winning the opportunity to make bad loans and buy overpriced securities. We can figure out when that's the case if we have exceptional judgment and we can act accordingly.
So, I'm going to sum up on the subject of cycles by taking you through a typical one. And I hope this is helpful. On the way up, let's say, so we start off and there's been a bad experience and we're at a low point. And then things start to head up. And on the way up, economic fundamentals are improving and earnings are increasing and beating expectations.
And the media are reporting only good news because that's what they do. And as a result, investor expectations for the future rise. Psychology gets stronger. People perceive only favorable developments. Capital is readily available. Asset prices rise. The holders of assets are happy and want to buy more.
And the people who haven't been in the market are unhappy because of jealousy and begin to buy. Everybody wants to buy. Nobody wants to sell. Risk aversion evaporates. And what do people say? They say risk is my friend. The more risk I take, the more money I make. and any anyway I don't see much to worry about and when that becomes the case then prices go too high and eventually we reach something that investors professionals call a top the top the maximum the price beyond which the market will not go and at the top asset prices are high prospective returns are low or negative and risk is high this is the time for caution.
But most people are unable to be cautious at the top since the high in prices corresponds with the high in emotion. No one's willing to bear the risk of selling and missing out on the future gains. And that's human nature. Eventually, the top is passed and now we're on the way down. Excuse me. And on the way down, economic fundamentals deteriorate, earnings decline and fall short of expectations, and the media report now only bad news.
And as a result, investors expectations decline. Psychology gets weaker. People see only undesirable invest uh developments. Asset prices fall. Holders of assets are shag grinned and sell. And the people who haven't held assets pat themselves on the back for their wisdom, but of course refuse to buy.
Now risk aversion grows and investors flee from risk saying bearing risk is just another way to lose money. I don't care if I ever make a euro in the market again. I just don't want to lose anymore. Get me out. And the worse things go and the lower prices go the more people want to sell. And that's human nature.
All you have to do is understand human nature. And at the bottom, asset prices are low and prospective returns are ultra high and risk is low. This is the time to be aggressive in the market. But most people are terrified at this point because the low in prices corresponds with the low in psychology and they just can't move ahead because they're depressed and they're cautious.
So that's a cycle and you can see how the events conspire to cause people to do it wrong. There's nothing that says sell at the top other than your own mentality and there's nothing that says buy at the bottom. And we see this all the time, but this is human nature and it'll never change. Now the subtitle of the book is getting the odds on your side and that's very important.
We never know what the future holds. Remember what I said. You can't do anything which is sure to be right or or or anything close to certainty. All you can do is get the odds of a favorable future on your side. So the way I think of this and this is described in the book at length because I think it's important is the future is like a lottery.
There's a bowl and it's full of lottery tickets and the lottery tickets are the possible future outcomes and there are many of them and it's because there are many possible future outcomes that the world is uncertain and investing is risky and something fate or whatever you want to call it reaches into the bowl and pulls one ticket.
All the tickets in the bowl are the possible outcomes and the one that is selected is the actual outcome and we never know which one it's going to be. You reach in the bowl, you get a ticket. It could be any of the tickets in the bowl and there are many. Now, does that mean that we can't know anything about the future?
That we can't deal intelligently with the future? And no, it doesn't mean that. What we can know is the mix, the character of the tickets in the bowl. Sometimes there are a lot of good tickets and not too many bad ones, and sometimes there are a lot of bad tickets and not too many good ones. So, you want to invest when the odds are in your favor.
When are the tickets in the bowl most favorable? When are the odds in your favor? when we're at a low, when are the tickets in the bowl unfavorable? When are the odds against you? When we're at a high. So, the question is, can we figure out the difference? So, when are the odds against you? When are there more losing tickets in the bowl than winners?
And the answer is, if you put all the things together that I've said so far, when there's a high level of investor optimism, when investors are spurred on by greed and excitement and jealousy of other people's good results, when there have been good results in the market to date because that reassures people.
When investors are happy with their gains or jealous of the gains of others. When there is unwise risk tolerance and when there's eagerness to supply capital and when are these things seen at cyclical highs. You can't see these things at lows. There's no optimism. There's no greed. There's no willingness to provide capital at lows.
If if those things existed, we wouldn't be at a low. These things are the fear uh the greed and so forth. They're seen at highs. And when are the odds in your favor? What causes there to be more winning tickets in the bowl than losers? The answer is when there's a lack of optimism, a high level of fear, poor recent market performance, widespread losses, excessive risk aversion, and reluctance to supply capital.
And if you see these things, then clearly people are going to be upset and fearful. And as a result, prices are going to be low. And when are these things seen? at cyclical lows. Now, where are we now? Well, I thought you'd never ask. The the line moving through the chart is the fair value, the intrinsic value, the central value, the norm, the right value, whatever you want to call it.
And then of course with market fluctuates around it excesses and corrections. So as depicted here I think that we're somewhat above the intrinsic value. It's hard to say exactly where we're where we are but I think we're above intrinsic value and uh you know this I'll talk a minute more uh about the where we are but that's how I would sum up.
Now, what's going to happen tomorrow? Let's assume that I'm correct. Let's assume that that the market really is somewhat above the intrinsic value. What does that imply for performance tomorrow? By which I don't mean tomorrow. I mean over the next year. And the answer is who knows? The fact that something is overpriced does not mean that it's going to go down.
Because if you could if you look back at the last uh the if you look back at the last cycle, the last time we were at the same place, you can see that it went much higher. So the fact that we're in a little bit overpriced doesn't mean we're not becoming more overpriced. These trends continue until they stop.
But the question is what's the where are the odds and it is true that from this point in the cycle we can have up or flat or down all three are possible. Does that mean that they're equally possible? And the answer is no. We're more likely to have a decline than a gain. The odds are against us when the price is uh above the intrinsic value but not to the point where we should have certainty.
Knowing where we stand in the cycle and knowing the odds of success can deliver one of the greatest advantages in investors world.
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