One of the great things about investing these days is the breadth and depth of data and analysis available online and for free. Indeed it is one of the reasons why we note it is a great time to be an individual investor. One can get a great investment education online without ever having to crack a book. A great example frequently cited is the availability of Warren Buffett’s letters to Berkshire Hathaway shareholder. In and of themselves they make for a great investing education.
It just so happens that two of our favorite writers on investing happened to publish pieces in the last day or so. James Montier at GMO has an article up looking at the sustainability (or not) of record high corporate profit margins. In short, if you want to understand where the market is headed you need to have some grip on whether profit margins can stay this high for much longer. Montier concludes:
To us, the macro proﬁts equation is a simple but powerful tool for understanding the drivers of proﬁts, and helps us
assess their sustainability. It is a useful organizing framework for thinking about the possibility of a structural break in
proﬁt margins. When we look at the drivers of today’s high proﬁt margins, we ﬁnd ﬁscal deﬁcits behind the high proﬁt
margins of many countries. There is nothing “wrong” with this per se, but it does suggest that moves toward ﬁscal
retrenchment will bring margins back toward more normal levels. It seems unlikely that “this time is different” when
it comes to mean reversion in margins: what goes up must come down.
Howard Marks, chairman of OakTree Capital Management has been writing interesting commentary for years. So much so that he collected some of his work in a book. In fact David Merkel at the Aleph Blog just recently wrote a positive review of The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In his most recent piece Marks looks at why investors need to understand how markets cycling through periods of boom and bust affect market participants. He writes:
What’s the lesson here? Not that history always repeats, or that it never repeats. And not that stocks can only do well or only do poorly. But rather that the trends that lead up to a point in time have a profound effect on people’s thinking and on the environment, and thus on the trends that will occur thereafter. That price gains increase danger and price declines increase opportunity. And that most investors and observers tend to be too positive at the top and too negative at the bottom.
It is often said that you cannot understand the future without some knowledge of history. Markets are littered with investors who thought this time it really is different. Both of these articles provide you with some important market history and perspective on this idea. It behooves you to take advantage of this free education.
Items mentioned above:
There has never been a better time to be an individual investor. (Abnormal Returns)
What goes up must come down. (James Montier)
Deja vu all over again. (Howard Marks)
The Little Book of Behavior Investing by James Montier. (Amazon)
The Most Important Thing by Howard Marks. (Amazon)
Review of The Most Important Thing. (Aleph Blog)