This time it’s different.

In his book “The Most Impor­tant Thing”, bil­lion­aire val­ue investor Howard Marks from Oak­tree Cap­i­tal quotes from a book pub­lished in 1932 called “Oh Yeah?” by Edward Angly.  It’s a com­pi­la­tion of wis­dom from busi­ness and polit­i­cal lead­ers from just before the Crash of ’29.

There will be no inter­rup­tion of our present pros­per­i­ty. (Myron E. Forbes Pres­i­dent, Pierce Arrow Motor Car Co., Jan­u­ary 1, 1928)

The fun­da­men­tal busi­ness of the coun­try… is on a sound and pros­per­ous basis. (Pres­i­dent Her­bert Hoover, Octo­ber 25, 1929)

We are only at the begin­ning of a peri­od that will go down in his­to­ry as the gold­en age. (Irv­ing T. Bush, Pres­i­dent, Bush Ter­mi­nal Co., Novem­ber 15, 1928)

Howard goes on to say:

And yet, every decade or so, peo­ple decide cycli­cal­i­ty is over. They think either the good times will roll on with­out end or the neg­a­tive trends can’t be arrest­ed. At such times they talk about “vir­tu­ous cycles” or “vicious cycles” — self-feed­ing devel­op­ments that will go on for­ev­er in one direc­tion or the oth­er.

In our lat­est pod­cast, Tony again reit­er­ates that while he does­n’t pay a great deal of atten­tion to the where the mar­ket is in its cycle, he agrees with Howard. The mar­ket, like most things in life, goes in cycles. And, accord­ing to both Tony and Howard, it’s impos­si­ble to try to pre­dict the cycles, so don’t even try. Instead, pred­i­cate your invest­ment phi­los­o­phy on the inevitabil­i­ty that what goes up will one day come down and pre­pare accord­ing­ly. As Howard says, “there’s only one intel­li­gent form of invest­ing, and that is to fig­ure out what some­thing is worth and to try to buy it for less.” Val­ue invest­ing is the dis­ci­pline of work­ing out what equi­ties are worth and how much you should pay for them. Tony’s issue with invest­ing in growth stocks is that he has­n’t yet fig­ured out a sci­en­tif­ic way to work out what they are worth. Lots of peo­ple claim to have a sys­tem, but we haven’t seen one yet that makes sense to us.

Some investors might try to “rotate” their port­fo­lio through growth and val­ue stocks, like pro­fes­sion­al funds man­agers often do, depend­ing on the tim­ing of the mar­ket, but in doing so you are increas­ing your risk pro­file. Even most pro­fes­sion­al fund man­agers strug­gle to get the tim­ing right, as the long term per­for­mance of Aus­tralian funds demon­strates. Over the last ten years, the best per­form­ing Aus­tralian super fund only man­aged an aver­age 9.8% return.

The medi­an return for Bal­anced funds (41–60% growth assets) was 7.4% a year on aver­age over the past 10 years while Con­ser­v­a­tive funds (21–40% growth assets) returned 6.2%.

Tony is hap­py shoot­ing for his tra­di­tion­al ~20 per­cent com­pound­ing returns year after year while obey­ing War­ren Buf­fet­t’s Rule Num­ber One — “Nev­er lose mon­ey”. The QAV style of val­ue invest­ing involves accept­ing a return twice that of the top super fund with a rel­a­tive­ly low risk, while also requir­ing rel­a­tive­ly low lev­els of time and effort (out­side of report­ing peri­od, Kyno says he spends about an hour a day on his port­fo­lio).

Com­pare that ~20 per­cent with the 16.3 per­cent annu­al­ized return for growth stocks in the US over the last ten years and it seems even bet­ter.

As we keep say­ing, if val­ue investors aren’t get­ting good enough returns, it’s pos­si­ble they are just doing it wrong. As Char­lie Munger says:

“It’s not sup­posed to be easy. Any­one who finds it easy is stu­pid.”