The chair at Oaktree Capital Management gave investors attending last week’s sixth annual University of Virginia Investing Conference a powerful but simple lesson in investing.
“We should be moderate. We should not be volatile. We should be reasonable,” said Howard Marks, chair of Oaktree and author of “The Most Important Thing: Uncommon Sense for the Thoughtful Investor.” “No asset is so high in quality it can’t be overpriced and no asset is so low in quality it can’t be underpriced.” That leaves smart investors with potential, he said.
In fact, he says, the stock market swings like a pendulum, “always in the direction of one extreme. It’s fear versus greed and optimism versus pessimism. It’s celebrating the positive or complaining about the negative. … All we really need to know about this business is that extremes are normal.”
Marks advises investors to “buy when there is little confidence and sell when there is too much confidence. Risk is when there’s too much confidence in the price of an asset,” he added.
Despite the stock market’s substantial gains this year, the mood of investors – especially retail investors – seems extraordinarily muted, perhaps in reaction to the overhang of a sluggish economy. Marks explained the mystery this way: “I think that people are not thinking bullish, but they are acting bullish. If they’re acting bullish, it doesn’t matter why.”
The annual conference – held Thursday and Friday at the Darden School of Business – brings in industry authorities from around the world who help investors find the best strategies to deliver positive returns while tempering risk. Investors and Darden students heard from a string of experts on emerging markets, energy, the U.S. economy and technology. The Darden Center for Asset Management hosted the event.
Technology stocks are riding high, but is the sector dancing on a bubble? Shelby Bonnie, moderator of the tech panel; Henry Ellenbogen, portfolio manager for T. Rowe Price; Scott Ferber, CEO of Videology; and Ned Hooper, a partner in Centerview Capital, don’t think so.
Hooper said, “It’s fundamentally hard to find growth in the marketplace right now. Investors are seeing growth in tech, and the market is paying high multiples for that growth.”
But in the wild world of tech, change can happen in months instead of years: “The consumer is one click away from going with another startup,” Ellenbogen said. “The only thing to know about technology is that changes happen fast.”
Good tech stocks to buy?
Google, even at this entry point, and Netflix, the three experts said.
Kyle Bass, moderator of the energy panel; Jody LaNasa, managing partner with Serengeti Asset Management; Wil Vanloh, president and CEO of Quantum Energy Partners; and Michael Watzky, managing partner of BP Capital Energy Advisors, touted the new developments in oil and natural gas in the United States and the resulting investment opportunities. New drilling technologies such as horizontal drilling and fracking are opening up large new sources of oil and natural gas in the U.S., which has increased its oil production by an astounding 50 percent in the past five years. Some analysts believe the country can be oil self-sufficient by 2020. The country is also shifting slowly to natural gas as a substitute for diesel and coal.
LaNasa urged investors to explore companies involved in building the infrastructure that will be necessary to transport all that oil and natural gas for both use and export.
Two good ones?
He touts Williams Co., which is building a gas pipeline in the northeast U.S. where huge pockets of gas have been found, and Kinder Morgan, one of the largest energy infrastructure companies in the world.
The conference also looked outside the U.S. Joyce Chang, head of emerging markets for JP Morgan Securities, says emerging markets “is no longer a dirty word.” In fact, emerging markets “account for 50 percent of the contribution to global growth.”
Investors who packed the first day of the conference learned that public equities are the top investment alternative for the average person in the current, wacky economic climate.
The stock market is bulling ahead, but “what’s interesting is nobody is all that happy about it. It’s like they’re waiting for an anvil to fall out of the sky,” said Jason Trennert, the managing partner of Strategas Research Partners and its chief investment strategist.
Having said that, Trennert added: “My view is that public equities have become the only alternative for investors.”
Trennert is bullish on the stock market for a number of reasons. One is that stocks are the last asset standing, with other investments, from bonds to real estate, delivering very little to nothing. Besides, “it’s the most accessible asset class for the average person,” he said.
The stock market crash that burned so many in 2008 has kept retail buyers wary. “But retail investors are slowly coming back to the stock market,” Trennert said. “But we have a long way to go before we’ve worked out the revulsion retail investors feel for equity markets. It’s going to take more economic optimism to get more stock market optimism.” And that’s with the S&P up almost 28 percent so far this year.
So how does the average investor pick out the right stock when so many have risen so high? Richard Chilton Jr., chair and chief executive officer of Chilton Investment Co., said market investors are always full of fear and anxiety. “But I believe we’re in a sweet spot and can use fear and anxiety to buy quality.”
Chilton said quality companies have pricing power – Tiffany never has sales, for example. Quality companies have high entry barriers, free cash flow and consistent revenue. They also have a unique boardroom DNA, which causes company leaders to consistently make the right decisions. Look for all those qualities, he said.
Chilton said investors should not be scared by market volatility. “Use the volatility as your friend,” he said. “You need enough confidence to be the owner of a stock, not a renter. Know your company.”
What’s the best unheralded stock in which to invest? “I knew you’d ask so I brought one,” he said. He offers up W.R. Grace & Co., which produces specialty chemicals and materials as an overlooked, quality company.
The conference included three endowment experts – Don Lindsey, chief investment officer for The George Washington University; Scott Malpass, chief investment officer for the University of Notre Dame; and Ellen Shuman, who handled endowments at Yale University and the Carnegie Corp. of New York. She has since founded her own investment firm, Edgehill Endowment Partners.
Shuman said the key to endowment success is to find good managers “who can find securities priced lower than they’re worth.” And don’t be afraid to go against the grain. “Swim against the tide,” she advised.
Malpass says to be patient in investing. “We do value-based investing and long-term thinking.”
Lindsey says to “keep it simple. Know what you own and you’ll be OK.”
The day concluded with the announcement that Columbia Business School won the Darden @ Virginia Investing Challenge, comprised of 15 top business schools, including Carnegie Mellon University (Tepper), Columbia Business School; Cornell University (Johnson); Duke University (Fuqua); Emory University (Goizueta); New York University (Stern); Northwestern University (Kellogg); University of California, Los Angeles (Anderson); University of Chicago (Booth); University of North Carolina (Kenan-Flagler); University of Notre Dame (Mendoza); University of Pennsylvania (Wharton); University of Virginia (Darden); Vanderbilt University (Owen);; and Yale School of Management
The second annual event invited top business students to pitch a stock to either buy or short, to a panel of investment management experts. The three Columbia students won a $3,000 cash prize.