One of the best pieces of investment advice I've ever read.

We have extensively covered the wisdom and writings of Oaktree's Howard Marks on the blog. In his most recent commentary, Marks puts into words quite possibly the greatest piece of investment advice I have ever read:

"At What Price?

That question - at what price? - isn't just the right question to ask about bonds versus stocks today. It's the right question regarding every investment at every point in time.

I try every chance I get to convince people that in investing, there's no such thing as a good idea...or a bad idea. Anything can be a good idea at one price and time, and a bad one at another."
He continues with quotes from letters, reiterating the same 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."
Seth Klarman has made similar points:
"Risk is not inherent in an investment; it is always relative to price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty - such as in the Fall of 2008 - drive security prices to especially low levels, they often become less risk investments."
And Warren Buffett with his famous:
"The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values."
All three quotes lay out the same principle: Price is what matters.

When I hear friends talk about how terrible an investment idea is, I always pose the question: At what price would you buy this security?

In Howard Mark's aforementioned recent letter (found here) he discusses the current state of the credit markets. In a previous post on Distressed Debt Investing ("Credit Markets Quite Possibly Insane"), I talked about what was going on in the investment grade and high yield markets. Then things were getting nutty.

The last few days have convinced me credit investors have lost their minds (again).

On Bloomberg, their is a function - It is essentially what is going on in the new issue monitor in the credit space. The last three days have been the busiest I can remember in the primary space (across investment grade, high yield, and bank debt). Worse, all in yields are remarkably low and more and more dividend deals are getting announced. I do not think there is a second lien dividend deal out there (my indicator for "Sell Everything"), but I may have missed it given the enormity of the primary market.

Yes - I understand the argument - "Where else am I going to get yield?" But from the same people that asked the EXACT same question in February 2007. Dealers fuel the flame because when credit markets roar, bankers / traders / syndicate gets paid.

Maybe I have talked about this in past posts, but what really scares me is how fast the credit markets have changed from boom, bust, boom, bust this year. Yes, high yield is up 10%, but most of that is the curve tightening. The HY14 CDX Spread:

Look at that chart from January 1st, 2010. Spreads widen, spreads collapse, spreads wide, spreads collapse. Does this look like a healthy market to anyone? If investors started worrying more about price (spreads in credit land), versus chasing yield, this market would feel less insane. Alas, reach for yield continues, unabated - I hear the forward calendar continues to grow as CFO and treasurers RACE to beat the window of cheap debt issuance.

Who is going to be that last buyer who get's stuck holding the bag of the worst issuers? Tread carefully.


Ankit Gupta 9/16/2010  

Risk is not a function of volatility, beta, or anything of that sort - it is a function of price. The more you pay for something, the riskier it is. The less you pay, the more security you get in that security.

It does take a strong understanding of the situation and company to be able to invest like this, but it's really the only way I'm comfortable ever investing.

Another lesson I learned was to put the odds in my favor... that's the best we can do.

Anonymous,  9/16/2010  

Hunter, what BB function are you referring to?

Gabe 9/16/2010  

Regarding issuance, in the first week of September, corporations issued $33.7 billion in investment grade debt, the highest weekly amount since May 2008, according to an analysis conducted by Thomson Reuters. Thirty-five offerings were made, the most in about three years.  Despite last week's surge, year-to-date issuance is at the lowest level since 2005.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.