Oaktree's Marks: Efficient Market Hypothesis Is Erroneous

(June 22, 2012) — The efficient market hypothesis is erroneous because it ignores the presence of mistakes that allow investors to beat the market, according to a memo from Oaktree Principal and Chairman Howard Marks.

The efficient market hypothesis concludes that efforts of motivated, intelligent, objective, and rational investors combine to cause assets to be priced at their intrinsic value, Marks writes in a memo to clients. It asserts that you can’t beat the market. “The truth is that while all investors are motivated to make money (otherwise, they wouldn’t be investing), (a) far from all of them are intelligent and (b) it seems almost none are consistently objective and rational,” Marks concludes. “Mistakes are all that superior investing is about.”

These are the elements that create what the industry refers to as “inefficiencies,” or, as Marks puts it, “academics’ highfalutin word for ‘mistakes.’”

In other words, he says that the only way that one side of a transaction can turn out to be a major success is to have the other side to have been a big mistake.

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He writes: “There’s an old saying in poker that there’s a ‘fish’ (a sucker, or an unskilled player who’s likely to lose) in every game, and if you’ve played for an hour without having figured out who the fish is, then it’s you. Likewise, in every investment transaction you’re part of, it’s likely that someone’s making a mistake. The key to success is to not have it be you.”

According to Oaktree’s chairman, it is imperative to focus on the topic of investing mistakes because it serves as a reminder that the potential for error is ever-present. Thus, the individual investor is reminded that the importance of mistake minimization is a key goal. “If one side of every transaction is wrong, we have to ponder why we should think it’s not us,” Marks writes.

Furthermore, the memo indicates that most investment error can be distilled to the following failures.

1) Bias or closed-mindedness

2) Capital rigidity

3) Psychological excesses

4) Herd behavior

Those investors who position themselves to consistently take advantage of mistakes, such as the ones outlined above, are superior investors, Marks says.

Read the full memo by Oaktree’s Howard Marks here.

Institutional investors should be called upon to support growth in the UK economy, experts say, as Moody’s downgrades banks that should be providing financial backing.

(June 22, 2012) — Politicians and business heads have urged the Bank of England to avoid stymieing domestic growth by finding alternatives to current lending and Quantitative Easing (QE) practices – which could include tapping institutional investors.

John Cridland, the Director General of the Confederation of British Industry (CBI), told an audience of business leaders last night that new approaches to funding growth and injecting liquidity into the economy were needed in the UK to make sustainable economic progress.

“The fact is we need to raise levels of finance in the economy to support our growth aspirations. The announcements by the Chancellor and Bank of England Governor at the Mansion House signalled fresh action to strengthen our defences against shockwaves from the Eurozone and get more money flowing into the economy. We need an action-this-day approach, and the lesson so far is that we must not allow good intentions to be lost to poor implementation. I want to see urgency to stop the recovery being choked off by a lack of finance.”

Cridland said alternative sources of funding should be sought if banks were unwilling or unable to produce investment. This could mean the UK government adjusting European Union regulation when it was implemented into national law, rather than ‘gold-plating’ it in the original form.

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“Reforms mustn’t stop new types of financing taking root. The European Commission must change its approach to the Solvency II Directive – it has to make commercial sense for insurance firms to invest in infrastructure. We must give active support to those parts of the economy where bank lending has dried up the most.”

Cridland also urged the Bank of England to engage in alternative methods of QE, which could see the purchase of corporate loans and bank debt. The current practice of buying gilts has served to push down yields and hike up pension fund liabilities that are measured against them.

Elsewhere, Vince Cable, Business Secretary in the UK Government, echoed these sentiments on a push for growth and threw support behind alternative QE.

In a speech to think tank Centreforum last night he said: “Aggressive monetary policy, enhanced by QE, has now been operating for four years. And the IMF has recently argued strongly for a reinforcement of supportive monetary policy through the liberal provision of liquidity to the banking system – as announced on Thursday, QE with a wider range of assets, and more aggressive interest rate policies. I would supplement these useful moves with an observation about how monetary policy is communicated.”

These calls coincided with moves by ratings agency Moody’s to downgrade 15 financial institutions with capital market units. Fifteen banks based in the UK and United States saw their credit ratings cut by at least one point. Four of them had their short-term credit ratings downgraded, leading commentators to speculate that this could mean higher funding costs and more reliance on central bank funds, adding further pressure to already strained governments.

Oaktree's Marks: Efficient Market Hypothesis Is Erroneous

Business Leaders Demand Growth as Downgrades Hit Banks

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