“Roughly ten years ago, everyone was gaga over real estate, especially residential. This was underpinned by some bits of “accepted wisdom” that seemed compelling, such as “you can always live in it,” “home prices always go up” and “real estate is a hedge against inflation.” Conservative debt investors…

…(rather than buyers of homes themselves) were persuaded to buy levered and tranched mortgage-backed securities by the fact that “there has never been a nationwide wave of mortgage defaults.” But in 2007 it turned out home prices can go down as well as up, and mortgage loans extended casually based on their flawless record can have flaws. Homes and mortgages, bought when everyone liked them, turned out to be terrible investments. The fact is, painful bubbles can’t come into existence if there isn’t an underlying grain of truth. The Nifty Fifty were generally terrific companies. Home prices do tend to rise over time and offset inflation. Mortgages generally are repaid or carry adequate collateral. The Internet would change the world. Oil at $147/barrel was indispensable and in short supply. But in each case the merits were too obvious; the investment idea became too popular; and asset prices consequently became dangerously high….Following the trends that are popular at a point in time certainly isn’t a formula for investment success, since popularity is likely to lead investors on a path that is comfortable but pointed in the wrong direction……One of the first things I learned at Wharton was that you can’t necessarily tell the quality of a decision from the outcome. Given the unpredictability of future events and, especially, the presence of randomness in the world, a lot of well-reasoned decisions produce losses, and plenty of poor decisions are profitable. Thus one good year or a few big winners may tell us nothing about an investor’s skill. We have to see a lot of outcomes and a long history….and especially a history that includes some tough years….before we can say whether an investor has skill or not.”, Howard Marks in his memo to Oaktree Clients, “It’s Not Easy”, September 9, 2015

Posted on September 15, 2015, in Postings. Bookmark the permalink. Leave a comment.

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