• For a value investor, price has to be the starting point.
  • It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.
  • No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right.
  • During the course of my 35 years in this business, investors’ biggest losses have come when they bought securities of what they thought were perfect companies – where nothing could go wrong – at prices assuming that degree of perfection . . . and more. They forgot that “good company” isn’t synonymous with “good investment.” Bottom line: there’s no such thing as a good idea regardless of price!
  • Thus intelligent investing has to be built on estimates of intrinsic value. Those estimates must be derived rigorously, based on all of the available information. And the level of belief in estimates of intrinsic value has to be high. Only if the estimate is strongly held will a manager be able to do the right thing.
  • If there’s no conviction, a drop in the price of a holding can weaken the investor’s faith in the estimate and make him fail to buy more, or maybe even sell, just when a lower price should lead him to increase his position. [Conviction comes from effort/work put into understanding the business/company]
  • As expressed by David Swensen of Yale, “. . . investment success requires sticking with positions made uncomfortable by their variance with popular opinion. Casual commitments invite casual reversal, exposing portfolio managers to the damaging whipsaw of buying high and selling low.”
  • most profitable investments are unconventional, and maintaining unconventional positions can be lonely.

  • When you buy something you think is cheap and then see its price fall, it takes a strong ego to conclude it’s you who’s right, not the market. So ego strength is necessary if a manager is going to be able to make correct decisions despite Swensen’s “variance from popular opinion.”.

  • Oaktree follows a clearly defined route that it trusts will bring investment success: If we avoid the losers, the winners will take care of themselves.
  • Investing defensively can cause you to miss out on things that are hot … You may hit fewer home runs … but you’re also likely to have fewer strikeouts.
  • The ingredients in defensive investing include
    • insistence on solid, identifiable value at a bargain price,
    • diversification rather than concentration, and
    • avoidance of reliance on macro-forecasts and market timing.
  • Warren Buffett constantly stresses “margin of safety.” In other words, you shouldn’t pay prices so high that they presuppose (and are reliant on) things going right. Instead, prices should be so low that you can profit – or at least avoid loss – even if things go wrong. Purchase prices below intrinsic value will, in and of themselves, result in larger gains, smaller losses, and easier exits.
  • “Defensive investing” sounds very erudite, but I can simplify it: Invest scared! Worry about the possibility of loss. Worry that there’s something you don’t know. Worry that you can make high quality decisions but still be hit by bad luck or surprise events. Investing scared will prevent hubris; will keep your guard up and your mental adrenaline flowing; will make you insist on adequate margin of safety; and will increase the chances that your portfolio is prepared for things going wrong. And if nothing does go wrong, surely the winners will take care of themselves.
  • Preparing for bad times is akin to attempting to avoid individual losers, and equally important. Thus time is well spent making sure the downside risk of our portfolios is limited. There’s no need to prepare for good times; like winning investments, they’ll take care of themselves.
  • Keeping up with the market while bearing less risk is at least as great an accomplishment, although few people talk about it in the same glowing terms.
  • At Oaktree we believe strongly that in the good times, it’s good enough to be average … There is a time when it’s essential that we beat the market, and that’s in bad times.

  • Oaktree and its clients don’t want to succumb to market forces in bad times and participate fully in the losses. And because we don’t know when the bad years will come, we insist on investing defensively all of the time.
  • Investing means dealing with the future – anticipating future developments and buying assets that will do well if those developments occur. Thus it would be nice to be able to see into the future of economies and markets, and most investors act as if they can.
  • If you know what lies ahead, you’ll feel free to invest aggressively, to concentrate positions in the assets you think will do best, and to actively time the market, moving in and out of asset classes as your opinion of their prospects waxes and wanes.
  • If you feel the future isn’t knowable, on the other hand, you’ll invest defensively, acting to avoid losses rather than maximize gains, diversifying more thoroughly, and eschewing efforts at adroit timing.
  • Of course, I feel strongly that the latter course is the right one. I don’t think many people know more than the consensus about the future of economies and markets. I don’t think markets will ever cease to surprise, or thus that they can be timed. And I think avoiding losses is much more important than pursuing major gains if one is to achieve the absolute prerequisite for investment success: survival.
  • Because of the fluctuation of both fundamental developments and investor behavior, assets are sometimes offered for sale at bargain prices and at other times at prices that are too high. A technique that works most dependably is putting money into things that are out of favor.
  • Although investors often seem not to grasp it, it shouldn’t be hard to understand: only unpopular assets can be truly cheap. And those that are in favor are likely to be dear.
  • The momentum player buys what’s up and bets that it’ll keep going up. The style devotee buys one thing whether it’s up or down. But the contrarian, or value investor, buys something that other people aren’t interested in, in the belief that it’s cheap and will become less cheap someday.
  • As Sir John Templeton put it, “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage but provides the greatest profit.”

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