Howard Marks writes that there is lots of complacency and risk-taking going on in the markets. Investors are accepting lower yields on bonds, lower cap rates on real estate, and worse covenants. Everyone’s paying a bit more to earn a bit less. But then Marks ends with a thud, saying we’re not at the extreme risk point yet.
Perhaps he’s correct, but how likely is he or anyone else to know when we’re at the maximum risk point? What’s the practical advice one can gain from this letter? That it’s still okay to pick up pennies off of train tracks?
Sometimes, when you get to be as big as Marks, you have to say something — anything. You have to play this cute game of predicting precisely where we are at every point in the pendulum’s swing away from or towards fair value. Getting big in terms of assets and in terms of reputation forces you to abandon a margin of safety in favor of false precision.
Seth Klarman, by contrast, is just giving money back to his limited partners due to a dearth of investment opportunities. There’s no “margin of safety” (the title of Klarman’s book), and that should be a good enough warning for a sound value investment strategy.