Investors need to have rules.  Without structure and order you are destined to fail.  I always say you should invest or trade like a robot – without emotion and always adherent to your rules.  I’ve attached some excellent rules on identifying investment opportunities by the always insightful Howard Marks at Oaktree Capital Management.  For more details from myself on investing rules please see here and here:

  • No group or sector in the investment world enjoys as its birthright the promise of consistent high returns. There is no asset class that will do well simply because of what it is.  An example of this is real estate.  People said, “You should buy real estate because it’s a hedge against inflation,” and “You should buy real estate because they’re not making any more.”  But done at the wrong time, real estate investing didn’t work.
  • What matters most is not what you invest in, but when and at what price. There is no such thing as a good or bad investment idea per se.  For example, the selection of good companies is certainly not enough to assure good results — see Xerox, Avon, Merck and the rest of the “nifty fifty” in 1974.

    Any investment can be good or bad depending on when it’s made and what price is paid.  It’s been said that “any bond can be triple-A at a price. “There is no security that is so good that it can’t be overpriced, or so bad that it can’t be underpriced.

  • The discipline which is most important in investing is not accounting or economics, but psychology. The key is who likes the investment now and who doesn’t.  Future prices changes will be determined by whether it comes to be liked by more people or fewer people in the future.Investing is a popularity contest, and  the most dangerous thing is to buy something at the peak of its popularity.  At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.

    The safest and most potentially profitable thing is to buy something when no one likes it.  Given time its popularity, and thus its price, can only go one way: up.Watch which asset classes they’re holding conferences for and how many people are attending.  Sold-out conferences are a danger sign.  You want to participate in auctions where there are only one or two buyers, not hundreds or thousands.You want to buy things either before they’ve been discovered or after there’s been a shake-out.

  • The bottom line is that it is best to act as a contrarian. An investment that “everyone” knows to be undervalued is an oxymoron.  If everyone knows it’s undervalued, why haven’t they bought it and driven up its price?  And if they have bought, how can the price still be low?

    Yogi Berra said, “nobody goes to that restaurant; it’s too popular.”  The equally oxy-moronic investment version is “Everybody likes that security because it’s so cheap.”

  • Book the bet that no one else will. If everyone likes the favorite in a football game and wants to bet on it, the point spread will grow so wide that the team — as good as it is — is unlikely to be able to cover the spread.  Take the other side of the bet — on the underdog. Likewise, if everyone is too scared of junk bonds to buy them, it will become possible for you to buy them at a yield spread which not only overcompensates for the actual credit risk, but sets the stage for their being the best performing fixed income sector in the world.  That was the case in late 1990. The bottom line is that one must try to be on the other side of the question from everyone else.  If everyone likes it, sell; if no one likes it, buy.
  • As Warren Buffet said, “the less care with which others conduct their affairs, the more care with which you should  conduct yours.”  When others are afraid, you needn’t be; when others are unafraid, you’d better be. It is usually said that the market runs on fear and greed.  I feel at any given point in time it runs on fear UorU greed.As 1991 began, everyone was petrified of high yield bonds.  Only the very best bonds could be issued, and thus buyers at  that time didn’t have to do any credit analysis — the market did it for them.  Its collective fear caused high standards to be imposed.  But when investors are unafraid, they’ll buy anything.  Thus the intelligent investor’s workload is much increased.
  • Gresham’s Law says “bad money drives out good.”  When paper money appeared, gold disappeared.  It works in investing too:  bad investors drive out good. When undemanding investors appear,  they’ll buy anything. Underwriting standards fall, and it gets hard for  demanding investors to find opportunities offering the return and risk balance they require, so they’re forced to the sidelines.Demanding investors must be willing to be inactive at times.

Source: Oaktree Capital Management


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    Great stuff. It sounds like marks is worth investing with just to get access to his insights.

  • http://www.getmoneyrich.com Investment

    A beautiful article. The thought so simple and straight. When the blogger said that “any bond can be triple-A at a price” was simply superb. Warren Buffett simply focuses on buying quality stocks at most attractive prices. Human psychology drives stock prices up and down. Investors like Warren Buffett waits for every such falls and puts their money to pick exceptional companies at discounted price.

  • LVG

    I’d love to be a contrarian right now, but the strategy seems pretty simple to me:

    Buy the morning dip every single day. It’s been working for well over a month on almost a daily basis.

  • SS

    The playbook for this market is simple:

    1) Buy any dip greater than 0.25%

    2) Go all-in on Friday afternoons in anticipation of the Monday rally.

    These two strategies alone have worked over 75% of the time in the last 3 months.

  • Octopus

    True. It will work until it won’t.

  • David


    One of your better posts. One of the reasons I can’t get behind the “short long US bonds” trade. Everybody is saying it’s a sure thing and that rates “have” to go higher. What if they don’t, and what if we’re Japan? I’m not going long either, I’m just sayin.

  • http://www.pragcap.com TPC

    As you likely know, I would tend to agree. It’s difficult to justify higher rates when inflation is still very low and US government default is out of the question. We are Japan. Except our corporations are in a little better condition than theirs were. Our consumer, however, is a mess and I am appalled that people continue to binge on iPads and other trinkets while at the same time mailing the keys to their home back to the bank. There is a massive wave of foreclosures in the pipeline, consumer credit is near its lows, and yet people are spending money on all sorts of garbage.

    I know we’re not the most financially savvy of consumers, but come on. Meanwhile, retail stocks are back at pre-recession highs. Talk about a disconnect. A true contrarian is shorting that move like its a gift from the gods….

  • SS

    The US consumer is borderline retarded. Just look at the iPad. It’s a big iPhone. Nothing more. Tablet PCs have always been a failure because they’re not functional. I have no idea why everyone wants to run out and buy an iPad.

    Good luck with your shorts TPC. I don’t like being on the opposite side of the trade, but I have to say that earnings are going to be great and I think could be a further reason to own stocks.

  • David

    Agreed on the US corps being in better shape, witht the exceptions of the financial sector. Once thing that trips me up on the Japanese comparison is the fact that their conglomerates held so much real estate on their books which in turn attributed to a nice 20 yr 80% face melter in the Nikkei. Our consumer is demonstrably worse then they were. It’s not apples for apples, but close in my humble opinion.

    I get so frustrated w/ people running out and buying all of this stupid sh@#t. Do you really need an ipad, you want to entertain yourself hang out w/ your family or your friends. The way the news wants to see consumer spending and credit higher makes me sick, we need to be paying off debts and be more prudent in order to move foward.

    I will say that when you see Morgan Stanley and Donald Trump walking away from multi billion dollar loans and still living it up and giving out huge bonuses, it’s not setting a good example for homeowners who are underwater on their mortgages.

  • In Banking

    One of my iObcessed friends was waiting like a fool on a ridiculous line for this iPad nonsense. He said he heard a few people saying how they were going to get the cheaper version because their weekly unemployment check almost fully covered the cost…..ugh

    Meanwhile, I read this morning (NY Times or maybe MSNBC) that 50% of Americans will not be paying Federal Income Tax this year. As if that weren’t bad enough, in some cases the multitude of tax credits, some “taxpayers” will actually be owed money as their credits exceed their tax liabilities. So the government will be PAYING the difference! What the hell is going on??? I feel like we’ve entered a new dimension or something.

  • chris

    i am short long term treasuries not because “everyone” says so, but because there has been an almost 30 year bull market in long bonds which, upon my analysis, is over. btw, there are plenty of people who present arguments, like tpc, that long term rates won’t rise. sometimes, you are being plenty contrarian to think that a 30 year run has run its course, whether or not other agree with you.

    i guess my point is that you can be contrarian to popular opinion, or contrarian to a long term trend.

  • Charles Lee

    …….and the natives “planted” the razor sharp blades in the snow and attached a small piece of bloody meat to them. When the wolves found the bait they lapped furiously at it and in so doing cut their tonges which provided more “free” food. They contiuned gorging on this “food” until they consumed themselves.

    My bet: we are not that much different than the wolfs.

    Charles Lee

  • http://www.pragcap.com TPC

    So you’re just riding a trend? Or are there any fundamental reasons for a short Tsy trade?

  • http://www.pragcap.com TPC

    This is a great study in how capitalism doesn’t work in a system where the losers never lose.

  • chris

    as i said, i am going against (not riding) a 30 year trend; to answer your question, my analysis is based upon fundamentals. those fundamentals do not include a MMT analysis.

  • chris

    you should take a look at the growth of the outstanding treasury debt over the last 10 years as compared to the growth of us gdp over that period

    the relationship of treasury debt outstanding today and projected over the next 10 years as compared to us gdp today and projected over the next 10 years

    the extent to which the us is not like japan in the sense that japan relies on domestic purchasers (largely households) to purchase its debt while the us relies on foreign entities and the fed to purchase its debt

    the effect that the fed’s announced intended dramatic decrease of its balance sheet on interest rates (likely over the next 5 years)

    the growth of EM sovereign debt as a suitable investment replacement for us debt (for this i look to bill gross’s analysis)

    the effect of commodity price inflation (V shaped recovery) on future inflation

    that will suffice for now, tpc, i don’t want you freeriding on me!

  • http://www.pragcap.com TPC

    Haha! You got me Chris. I was hoping you would disclose it all so I could pile my firm’s money into your ideas! Damn!

    Obviously, being benign on inflation I disagree. I am more inclined to believe that tsys are dead money for 5 years. We’re not seeing real inflation in commodities. Just more short-term malinvestment by money that has no other home. Just my 1 cent though…

  • chris

    “Just my 1 cent though”

    that’s ok, i just gave you my two cents

  • jt26

    The 30 year T bond may surprise. In 5 years the leading edge of the baby boomer will retire; keep an eye on annuity sales at MET. There may even be demand from Japan where they’re willing to add a little juice … to them 5% locked in looks pretty good. Global demographics will put a premium on these obligations.

  • http://www.pragcap.com TPC

    Well, I have no horse in that race so good luck with it. I’m just happy I didn’t take the other side of your bank trade….That would have been messy.

  • David

    Full disclosure, I’m neither long nor short currently. Interest rates can take a long time to bottom. I just don’t see this trade taking off like everybody seems to think. It could, but the yield curve has not been this steep before. If I were to play it now I would be more inclined to put on a bull flattener betting the curve is going to level out. Getting back to Japan, they are at 200% gov debt to GDP, so we have a ways to go. I just don’t think that everybody is going to start buying emerging market debt all at once. Bottoming processes in yields can take years to occur and we could be stuck in a range of 4-5.5 for the 30 yr for a few more years.

  • http://ourmaninnyc.blogspot.com/ Our Man in NYC

    Absolutely; the trend is your friend, until it hits a bend…

    However, I’ve never been trendy in any way..

  • http://ourmaninnyc.blogspot.com/ Our Man in NYC

    I’m long Treasuries…so I’ll happily stick up for them. Off the top of my head:

    1). I have less faith than most in a V-shaped recession and believe disinflation (and potentially deflation) are more likely than inflation. (As a sub-note, Commodity inflation has been present since 2003, Treasury yields have tightened since then).

    2). Psychology: Treasuries are the flight to quality instrument. I believe that’s too ingrained into investor psychology. I understand all the arguments for gold but surely one of the pre-requisites for something being a flight to quality instrument is that people don’t want to own it before the flight to quality.

    3). I’m skeptical over the Asian mercantilist model (in particular China). China already represents 2x of global exports vs. it’s share of Global GDP. They’re like the company at the end of any supply chain; they look great when things are going well, but when the tide rolls out…

    4) Optionality: I am being paid 4.5%+ a year to hold my Treasuries…thus even in the absence of tightening, that’s a profit.

    5). Debt Deleveraging: Yes, Treasury issuance is up…but the amount is small compared to the reduction of debt within the economy. I think deleveraging is a longer-term secular force, that we’re in the early innings of. Add to that that demographics (boomers hitting retirement) and that Households are overweight equities/real estate and underweight Treasuries. It won’t happen overnight, and I suspect it’ll take another fall in equity market for the equity culture to begin to dissipate (same with real estate).

  • Mako

    Capitalism isn’t the problem.
    It is the government intervention that is preventing capitalism from operating efficiently.
    And this is going to get worse with the increase in the size of the government and regulations!

  • Jeff

    Well, I’ve heard of these before.

    Imagine how much money you would have lost by being “contrarian” during the last few years of this multi-year rally.

    I like to paper trade and I believe everyone should paper trade before putting real money in securities. (there are a lot of options online)

    I lost a lot by following this “contrarian” basis. Good thing it was fake money. Now, would you be willing to put real hard earned money against the trend? Everyone hears about the contrarian that made boatloads on that one trade but we never hear about the many others who lose money every day by going against the trend. I’m not sure if it’s just ego (and there are some big egos in finance) but everyone wants to be the genius who proved everyone else wrong. (What is the success rate of hedge funds these days? I believe the number is only 1 out of 4 outperform)

    As an example, how would you have done if you were that guy who bought GM stock after word got out of its financial troubles? It could only go up, right?

    I like the intent but this is much too watered down. It is because of these “tips” and “rules” that make people think investing is easy.

    The only rule that is necessary in like 95% of cases is making protective stops. (Yes, there is a chance a stock might hit a stop price and then go back up but better safe than sorry)