Resounding clarity

One of the best investment books I have ever read is Howard Marks’ The Most Important Thing. A book so filled with no-nonsense common sense and written with clarity, a wry sense of humour but deep experience of financial markets that I recommend it to any one starting out in this industry. I was therefore delighted to hear that his new book will be published later on in the year. Indeed you can pre-order it on Amazon (https://www.amazon.co.uk/Mastering-Market-Cycle-Getting-odds/dp/1473680379/ref=sr_1_1?s=books&ie=UTF8&qid=1529920802&sr=1-1&keywords=howard+marks). I very much look forward to receiving my copy.

Meanwhile Howard still produces periodic investment letters. His latest epistle entitled ‘Investing Without People’ is another brilliantly helpful review of the use of AI, quantitative techniques and algorithmic investing and how they relate to passive funds. I hope he will forgive me for unreservedly recommending it and adding my own tuppence (n.b. I am in full knowledge of my limited capabilities compared to his). You can sign up to the Oaktree website here to gain access to Howard’s letters. 

Whilst he recognises that technology will continue have an important influence on our future development, he concludes with the contention (that he describes as a hope) that ‘humans with superior insight’ will be route to delivering superior performance. Earlier on in the note, he points to areas of analysis where it will be tough - at least for the time being - for computers to outwit people, specifically in qualitative and subjective parts of the investment process.

Simplistically, I observe that the introduction of computer generated transactions has led to a race-to-zero focused around increased levels of stock turnover, shortening the physical distance between fund managers and exchanges and the parsing of huge amounts of data. Michael Lewis described this in his book Flash Boys.

This contrasts with high conviction, long-term managers who remain true to their processes through good times and bad. I can’t overstate how tough it is for a fund manager to remain true to their process when their investment style is out of fashion, especially as they will be feeling the (commercial) pressure from potential client redemptions. Sadly some crack – they start trading more in an attempt to claw back losses or they begin to buy different stocks just because they are in vogue.

At the same time those that don’t change face the accusation of becoming dinosaur and has-beens. Yet, for the manager who truly has skill and where - and this is critical - the investment edge that they possess is still sharp, then clients are distinctly better served by holding on and not redeeming. 

Nevertheless all this would be simple if investment choices were ‘black and white’ answers and there was a greater certainty of drawing the correct conclusion. I feel very fortunate to participate in Investment Committee discussions where very experienced colleagues apply collective engagement to attempt to gain some clarity. And these decisions are big and complex.

So we do need clarity but of purpose, discipline and execution. And we need to remember the wise words of seasoned investors like Howard Marks and seek to develop of learning and understanding.