November 30, 2013 Thankful

Risk/Reward Vol. 197

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"I'm thankful/For the blessing
And the lessons that I've learned/With you by my side."---lyrics from "Thankful" sung by Kelly Clarkson

"Now the race is on/And here comes Pride up the back stretch
Heartache is goin' to the inside/My Tears are holding back"---lyrics from "Race Is On" by The Grateful Dead

"Bend me/Shape me/Anyway you want me
You got the power/To turn on the light."---lyrics from "Bend Me, Shape Me" sung by American Breed

This is my favorite holiday; one dedicated to family, food, football (as a Packer fan, not so much)---and reflection on the blessings bestowed upon Barb and me, most recently the birth on November 19th of our sixth grandchild, John Frederick Roberts. Believe me when I say that "I'm thankful/For these blessings." I am also thankful that I live in a time of such marvelous technology. Think about it for a moment. We have access to more information sitting on our duffs than any person could have dreamed imaginable a few short years ago---even if that person were sitting at the Library of Congress. Moreover, by virtue of the internet, we are able to blog, tweet, post and otherwise communicate with so many so quickly. In that regard, I am thankful "for the lessons that I've learned/With you by my side." May the future bring us all many more blessings, and the wisdom to appreciate them as they unfold.

On Wednesday, Howard Marks about whom I wrote last week, published another memo; this one entitled "The Race Is On". (To access it, click on this link and then go to Memos from our chairman http://www.oaktreecapital.com/ ) I recommend it to your attention. In it he compares his current sense-of-the-times to that expressed in a previous memo also entitled "The Race Is On" which he wrote in February, 2007, before the mortgage meltdown and the ensuing crash. He draws many parallels and sides with Mark Twain concluding that while history does not actually repeat itself-- "it does rhyme." According to Marks, when prudence is abandoned for enhanced returns, and "Pride is coming up the back stretch", surely "Heartache is goin' to the inside." In words that struck too close to home, Marks noted that "Investors that used to get 6% from Treasurys have turned to high yield bonds for such a return." Marks does not believe that now is time for "tears" or for selling for that matter, but in his opinion, most asset classes are now fully priced and that deploying any new money into the markets at this stage should be done with great caution.

I translate Mark's words to mean that now more than ever I need to be nimble. My early warning signal remains the yield on the 10Year Treasury Bond, which has been volatile of late, and which closed the week at 2.74%. If and when that yield rises, fixed income assets (which I have already pared) will fall in value, and it is likely that soon thereafter most other financial assets will stumble . Although I have not matched the returns experienced by those that have simply riden the stock indices upward this year, I am thankful that I have been able to surpass my annual goals with what I perceive to be considerably less risk. Perhaps my biggest challenge this year has been resisting the temptation to chase the market especially with the knowledge, in hindsight, that had I done so I would have achieved much, much better returns. However, I can not and will not allow market chatter to "bend me/shape me/anyway it wants me." I "got the power" to "turn on the light" or to turn it off. I must use that power if and when necessary to minimize the risk of loss, which is my paramount responsibility at this stage in my life.

Holy Kelly Clarkson! I just re-read what I wrote above, and it reads like "Mr. Know It All" is depressed, on the "Dark Side", if you will. Sure, I am disappointed that my returns are only half of what the indices have achieved, but anyone who has been in the market at all this year objectively should rejoice in "Moments Like This." My angst is not about past performance, but about the future and whether to preserve my gains, I should be "Already Gone."