Redwing this is for you:
http://www.oaktreecapital.com/MemoTree/Pigweed 12_07_06.pdf
I am a big fan of Howard Marks. Now the above is long and detailed article. but like most his articles (together with Warren Buffett) there are pearls of wisdom.
I have copy and pasted some highlights below. But to get the full flavour you need to read the full article.
one thing stood out: the repeated use of the words “trade” and,
especially, “bet.” Nothing about “invest” or “own.” And certainly no reference to “value.” The
pattern really is striking.
Of course, part of this change in attitude could be attributable to the defrocking described above.
Six months ago, the articles might have described Amaranth as an astute energy investor, rather
than the reckless gambler it’s considered today. But certainly the new nomenclature is
everywhere, and I find it appropriate.
What’s the distinction? Investors want to own things for the long run, under the belief they’ll
grow and strengthen over time (or that today’s values will come to be better appreciated
Traders buy and sell, usually in short order, to take advantage of momentary phenomena. I
usually think of them as betting on the direction of the next price move. Certainly we can say
their timeframe is hours or days, or maybe weeks, but rarely months and never years.
And what is a “bet”? That’s one of those words we all know the meaning of but would be hardpressed
to define without using the synonym “wager” or the word “bet” itself. I consulted The
Random House Dictionary of the English Language and found a very useful definition: a bet is
“a pledge of a forfeit risked on some uncertain outcome.” In other words, you attempt to profit
from an uncertain event, and if it doesn’t go as you hope, you forfeit something of value. Well
then, Amaranth certainly was a bettor.
One question: If it’s so obvious today that Amaranth was “betting,” were people equally aware
of that fact a few months ago? I don’t think so. Gains are often presumed to be the result of
carefully considered investments, while it’s usually losing ventures that are described as
having been bets.
In the investment business, clients love high returns and hate low returns. That makes sense.
And when the market’s up 10% and their manager is up 20%, clients are really happy. But that’s
my pet peeve. Rarely does anyone say, “Whoa. That return’s too high. How did it happen?
How much risk did my manager take in order to generate that?” No, in the investment world
few people find high returns worrisome.
TEveryone talks about beta, (which I’m tempted to pronounce “bee-tah” now that I’ve spent six
weeks in London), but few people dwell on it when returns are soaring. Credulous investors
think the manager who generated 20% in an up-10% market contributed alpha of 10%. But
maybe he had zero alpha and a beta of 2 instead . . . or maybe negative alpha of 20% and a beta
of 4. Regardless, I almost never hear people talk about returns being so high that they’re suspect.
But does betting on a long shot and profiting from a freak occurrence make someone a
skilled investor, or just the “lucky idiot” that Nassim Nicholas Taleb describes in “Fooled
by Randomness”?
http://www.oaktreecapital.com/MemoTree/Pigweed 12_07_06.pdf
I am a big fan of Howard Marks. Now the above is long and detailed article. but like most his articles (together with Warren Buffett) there are pearls of wisdom.
I have copy and pasted some highlights below. But to get the full flavour you need to read the full article.
one thing stood out: the repeated use of the words “trade” and,
especially, “bet.” Nothing about “invest” or “own.” And certainly no reference to “value.” The
pattern really is striking.
Of course, part of this change in attitude could be attributable to the defrocking described above.
Six months ago, the articles might have described Amaranth as an astute energy investor, rather
than the reckless gambler it’s considered today. But certainly the new nomenclature is
everywhere, and I find it appropriate.
What’s the distinction? Investors want to own things for the long run, under the belief they’ll
grow and strengthen over time (or that today’s values will come to be better appreciated
Traders buy and sell, usually in short order, to take advantage of momentary phenomena. I
usually think of them as betting on the direction of the next price move. Certainly we can say
their timeframe is hours or days, or maybe weeks, but rarely months and never years.
And what is a “bet”? That’s one of those words we all know the meaning of but would be hardpressed
to define without using the synonym “wager” or the word “bet” itself. I consulted The
Random House Dictionary of the English Language and found a very useful definition: a bet is
“a pledge of a forfeit risked on some uncertain outcome.” In other words, you attempt to profit
from an uncertain event, and if it doesn’t go as you hope, you forfeit something of value. Well
then, Amaranth certainly was a bettor.
One question: If it’s so obvious today that Amaranth was “betting,” were people equally aware
of that fact a few months ago? I don’t think so. Gains are often presumed to be the result of
carefully considered investments, while it’s usually losing ventures that are described as
having been bets.
In the investment business, clients love high returns and hate low returns. That makes sense.
And when the market’s up 10% and their manager is up 20%, clients are really happy. But that’s
my pet peeve. Rarely does anyone say, “Whoa. That return’s too high. How did it happen?
How much risk did my manager take in order to generate that?” No, in the investment world
few people find high returns worrisome.
TEveryone talks about beta, (which I’m tempted to pronounce “bee-tah” now that I’ve spent six
weeks in London), but few people dwell on it when returns are soaring. Credulous investors
think the manager who generated 20% in an up-10% market contributed alpha of 10%. But
maybe he had zero alpha and a beta of 2 instead . . . or maybe negative alpha of 20% and a beta
of 4. Regardless, I almost never hear people talk about returns being so high that they’re suspect.
But does betting on a long shot and profiting from a freak occurrence make someone a
skilled investor, or just the “lucky idiot” that Nassim Nicholas Taleb describes in “Fooled
by Randomness”?
)
