There They Go Again…Again – Howard Marks Memo

Some of the memos I’m happiest about having written came at times when bullish trends went too far, risk aversion disappeared and bubbles inflated. The first and best example is probably “,” which raised questions about Internet and e-commerce stocks on the first business day of 2000. As I tell it, after ten years without a single response, that one made my memo writing an overnight success.

Another was “The Race to the Bottom” (February 2007), which talked about the mindless shouldering of risk that takes place when investors are eager to put money to work. Both of those memos raised doubts about investment trends that soon turned out to have been big mistakes.

howard marks

Those are only two of the many cautionary memos I’ve written over the years. In the last cycle, they started coming two years before “The Race to the Bottom” and included “There They Go Again” (the inspiration for this memo’s title), “Hindsight First, Please,” “Everyone Knows” and “It’s All Good.” When I wrote them, they appeared to be wrong for a while. It took time before they were shown to have been right, and just too early.

The memos that have raised yellow flags in the current up-cycle, starting with “How Quickly They Forget” in 2011 and including “On Uncertain Ground,” “Ditto,” and “The Race Is On,” also clearly were early, but so far they’re not right (and in fact, when you’re early by six or more years, it’s not clear you can ever be described as having been right). Since I’ve written so many cautionary memos, you might conclude that I’m just a born worrier who eventually is made to be right by the operation of the cycle, as is inevitable given enough time. I absolutely cannot disprove that interpretation. But my response would be that it’s essential to take note when sentiment (and thus market behavior) crosses into too-bullish territory, even though we know rising trends may well roll on for some time, and thus that such warnings are often premature. I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses.

Since I’m convinced “they” are at it again – engaging in willing risk-taking, funding risky deals and creating risky market conditions – it’s time for yet another cautionary memo. Too soon? I hope so; we’d rather make money for our clients in the next year or two than see the kind of bust that gives rise to bargains. (We all want there to be bargains, but no one’s eager to endure the price declines that create them.) Since we never know when risky behavior will bring on a market correction, I’m going to issue a warning today rather than wait until one is upon us.

I’m in the process of writing another book, going into great depth regarding one of the most important things discussed in my book The Most Important Thing: cycles, their causes, and what to do about them. It will be out next year, but this memo will give you a preview regarding one of the most important cyclical phenomena.

Before starting in, I want to apologize for the length of this memo, almost double the norm. First, the topic is wide-ranging – so much so that when I sat down to write, I found the task daunting. Second, my recent vacation gave me the luxury of time for writing. Believe it or not, I’ve cut what I could. I think what remains is essential.

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The State of Education in Croatia

Those who are planning on moving to Croatia for any purpose should be aware of how the education system in the country works. This is especially for families that plan on entering the country. While anyone can find quality real estate Croatia spots, it is another story to find education services that are sensible and easy to work with. Fortunately, the Croatian government has made it easy for students to receive educational support.


Children will be required to attend school in Croatia for a certain period of time. The educational standards that come with studying in Croatia are extensive as students will have to ensure that they perform their studies for a certain period of time.

The Basic Arrangement

The arrangement of the education system in Croatia works with the following points as children from ages six to fifteen are required to attend classes:

  • Compulsory education starts at six years of age. Children can attend private kindergartens or nurseries.
  • From the first to fourth grades of study, students will learn math, fine arts, physical education and a foreign language from the fourth grade.
  • From the fifth to eighth grades, students take more advanced courses in technology, history, math, geography and various sciences.


  • Secondary education occurs following the eighth grade. Art and vocational schools are among the more prominent types of secondary education schools that students can attend.
  • Universities or other schools of higher education are available to those who graduate from secondary education.

The setup for education in Croatia was designed as a means of ensuring that children can get the education that they need. It was particularly designed to ensure that children will not struggle with finding work in the future while also improving upon the international stature of Croatia.

Also, it is free for students to attend courses at primary and secondary schools. The schools are funded by the national government to ensure that students will be able to get to these schools and that their parents will not have any problems with trying to get them to attend.

Key Statistics

  • About 99 percent of children in Croatia attend the compulsory education sites in the country.
  • Around 90 percent of all children attend some kind of secondary education school in their live. About 93 percent of girls and 88 percent of boys do this on average.

croatia flag

  • The literacy rate within Croatia is around 99.6 percent for both boys and girls.
  • The typical pupil-teacher ratio for classes in Croatia is at 13.83 students for each teacher. This is according to UNESCO research statistics. That number goes down to eight students for each teacher at the secondary level.

What Language Is Used?

The Croatian language is used at schools around the country. Some smaller minority schools do allow for lessons to be taught in the language of a particular national minority. These include schools that teach in Italian, German and English. The Croatian language is taught at schools although the general international language requirement does work in that a student can choose to learn one of various common foreign languages based on what a particular school has to offer.

  • Alex Dragas (Guest Writer)


China’s Vision for a New Silk Road

China’s ambitious One Belt, One Road initiative, unveiled in 2013, is really two plans combined to form a larger framework of new trade routes. The first of these is One Belt, which refers to the development of new infrastructure, particularly railroads and highways, to connect China’s interior provinces with Europe by way of Russia, Central Asia and the Middle East.

silk road

Of course, insufficient regional infrastructure has tempered expectations of increasing overland exports. But the bigger problem with One Belt is geopolitical: Eurasia is in a state of crisis, and several of the countries China borders will feel the crisis particularly acutely in the coming years.

Central Asia, a patchwork of states whose borders were drawn to make the countries more easily controlled from Moscow during the Soviet era, is hardly a promising market for Chinese goods. Furthermore, it is one of the most politically unstable regions in the world. One Belt is not a long march into prosperity – it’s a long march into disaster.

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Russia’s Strategy: Built on Illusion

Strong powers can underplay their hands and afford to make mistakes. Weak powers, on the other hand, need to exaggerate their power and be far more precise in its use. Power is like money; the less you have, the more you need to flaunt it and the fewer mistakes you can afford to make. But by trying to convince others that they have more power than they actually do, they run the risk of squandering a scarce resource. It’s nearly impossible to both flaunt power and preserve it at the same time.


This is the core strategic problem of Russia. On the one hand, it is still trying to find its way more than 25 years after the collapse of the Soviet Union, an event President Vladimir Putin has referred to as “the greatest political catastrophe” of the 20th century. In the lives of nations, a quarter of a century is not very long, and the reverberations of the catastrophe are still being felt. On the other hand, Russia lives in a complex and dangerous region, and appearing weak can be the biggest threat to its well-being. Therefore, like a wealthy person coming into hard times, Russia must simultaneously try to appear more powerful than it is and meticulously manage what power it has.

Russia’s Geographic Weakness

Since the fall of the Soviet Union, Russia has faced two fundamental problems. The first is geographic. The second, which we’ll return to later, is economic.

Russia’s main geographic problem is that it needs to maintain a buffer zone to its west to stem the risk of attack from the European Peninsula. Russia has been invaded three times, once by France and twice by Germany. In each case, it survived because of strategic depth. The Baltics, Belarus and Ukraine created the buffer zone that gave Russia room to retreat and exhaust the enemy. Although the weather also played a role, distance was the main challenge for attacking armies. Even in World War I, Germany was unable to sustain the gains it won. In the Napoleonic Wars and World War II, the enemy was ground down and defeated.

After World War II, Russia’s buffer zone expanded dramatically. A second tier of nations to the West – Poland, Czechoslovakia, Hungary and Romania – came under Soviet dominion. Soviet power pushed into central Germany. For the first time in its history, it had strategic depth such that an attack from the European Peninsula was unthinkable.

But maintaining the force that was needed to hold this deep buffer exceeded Soviet resources. The drop in oil prices, the inherent inefficiency in the economy, and the cost of defending what it had won in World War II had become unsustainable, and the Soviet Union collapsed. It first lost the deep buffer of Eastern Europe, and two years later, it lost the critical elements of its core buffer, the Baltics and Ukraine.

An argument can be made that given the situation on the European Peninsula, the threat to Russia has evaporated. But nothing in Russia’s history permits such complacency. In 1932, Germany was a weak and divided liberal democracy. Six years later, it was the most powerful military force in Europe. Russia understands the speed with which European (and American) intentions and capabilities can change. It must therefore continue to pursue strategic depth.

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The Dangers of Quantitative Value Investing

In recent years, quantitative stock analysis has taken the investment world by storm while qualitative analysis has been given a back seat. Value investing however — as Benjamin Graham would remind us — is both an art and a science. A new study in the CFA’s Financial Journal showed the underperformance / diminishing alpha of stocks chosen purely based on their quantitative value, and explains why value factors taken alone aren’t great indicators. But first, a quick trip into the value investing time machine.

quantitative value investing

Quantitative Value Investing History

Benjamin Graham’s and David Dodd’s 1934 Security Analysis is the seminal book on value investing. Security Analysis offers investors a comprehensive guide to analyzing companies to find value stocks which are priced below their intrinsic value. Graham & Dodd advise a number of strategies to find value stocks, ranging from qualitative factors like identifying industry trends and a company’s management team to quantitative factors like book value, P/E ratio, and sales-to-price. As Graham’s value investing ideas gained popularity in the investing community with disciples like Warren Buffet and Mario Gabelli, a ton of portfolio managers and private investors began mining his work to develop their own investment strategies.

With the advent of powerful computers, databases, and stock screeners it has become increasingly easy for investors to implement Graham’s quantitative strategies, while the qualitative study of companies remains nearly as time consuming and research intensive as it was in 1934. This imbalance of effort has generated a dangerous proliferation of quantitative investing without qualitatively studying stock fundamentals.

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The Most Crucial Thinking Skill – Inversion

The ancient Stoic philosophers like Marcus Aurelius, Seneca, and Epictetus regularly conducted an exercise known as a premeditatio malorum, which translates to a “premeditation of evils.” The goal of this exercise was to envision the negative things that could happen in life. For example, the Stoics would imagine what it would be like to lose their job and become homeless or to suffer an injury and become paralyzed or to have their reputation ruined and lose their status in society. The Stoics believed that by imagining the worst case scenario ahead of time, they could overcome their fears of negative experiences and make better plans to prevent them. While most people were focused on how they could achieve success, the Stoics also considered how they would manage failure. What would things look like if everything went wrong tomorrow? And what does this tell us about how we should prepare today?

This way of thinking, in which you consider the opposite of what you want, is known as inversion. When I first learned of it, I didn’t realize how powerful it could be. As I have studied it more, I have begun to realize that inversion is a rare and crucial skill that nearly all great thinkers use to their advantage.


How Great Thinkers Shatter the Status Quo

The German mathematician Carl Jacobi made a number of important contributions to different scientific fields during his career. In particular, he was known for his ability to solve hard problems by following a strategy of man muss immer umkehren or, loosely translated, “invert, always invert.” Jacobi believed that one of the best ways to clarify your thinking was to restate math problems in inverse form. He would write down the opposite of the problem he was trying to solve and found that the solution often came to him more easily. Inversion is a powerful thinking tool because it puts a spotlight on errors and roadblocks that are not obvious at first glance. What if the opposite was true? What if I focused on a different side of this situation? Instead of asking how to do something, ask how to not do it. Great thinkers, icons, and innovators think forward and backward. They consider the opposite side of things. Occasionally, they drive their brain in reverse. This way of thinking can reveal compelling opportunities for innovation.

Art provides a good example.

One of the biggest musical shifts in the last several decades came from Nirvana, a band that legitimized a whole new genre of music—alternative rock—and whose Nevermind album is memorialized in the Library of Congress as one of the most “culturally, historically or aesthetically important” sound recordings of the 20th century. Nirvana turned the conventions of mainstream rock and pop music completely upside down. Where hair metal bands like Poison and Def Leppard spent millions to produce and promote each record, Nirvana recorded Nevermind for $65,000. Where hair metal was flashy, Nirvana was stripped-down and raw. Inversion is often at the core of great art. At any given time there is a status quo in society and the artists and innovators who stand out are often the ones who overturn the standard in a compelling way. Great art breaks the previous rules. It is an inversion of what came before. In a way, the secret to unconventional thinking is just inverting the status quo.

This strategy works equally well for other creative pursuits like writing. Many great headlines and titles use the power of inversion to up-end common assumptions. As a personal example, two of my more popular articles, “Forget About Setting Goals” and “Motivation is Overvalued”, take common notions and turn them on their head.

Read the rest of the interesting article by James here


How To Short A Stock & Make Money

To a novice investor, short selling sounds like one of those sophisticated, mysterious techniques that professional traders use to rob others blind. In reality, anyone can short a stock and make a profit if the stock drops in price.Short selling can be a powerful tool in your investment toolbox, but you need to understand the operator’s manual before you use this tool. Try to short a stock the wrong way and you could drill a hole in your own hand.

short a stock

What is short selling?

Every investor understands the conventional way to make money in the stock market (if they don’t, they shouldn’t be in the market!). You buy a stock today, wait for its price to go higher than you paid, and then sell it for a profit. This is known as being “long” the stock. Pretty straightforward.

Short selling is the same process in reverse. You sell a stock today, wait for the price to fall below what you paid, and then buy it at a lower price. This is known as being “short” a stock, or short selling. Sounds a little weird and complex at first, but it’s actually rather simple to do as I explain next.

When you are long a stock, your goal is to buy low and sell high.

When you are short a stock, you want to sell high and buy low.

How do you sell a stock you don’t own?

The quick answer is you borrow the stock.

How do you do this? Your broker will locate shares for you to borrow. In fact, many brokers require you to borrow shares before they will accept your short sell order. When your broker fills a short sell order for you, another investor agrees to buy the shares from you. It’s your responsibility to deliver the shares to the broker by settlement date—normally three business days later. The graphic below makes it easy to grasp the procedure.

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A Guide to Inflation, Deflation & Everything in Between

Inflation is a fundamental economic principle, affecting everyone who participates in a modern economy.

So what exactly is inflation?

Well, the definition can vary a lot, depending on what you’re reading or where you get your information. Here is one we like. Inflation is an artificial increase in the money supply that leads to higher prices for goods and services. The “higher prices” part is probably no surprise. What people often miss is that the higher prices are just a symptom of an underlying problem. To understand inflation, we need to look at what causes it.


Inflation and the Money Supply

What is money? At the simplest level, money is an economy’s most liquid asset, which serves as a medium of exchange. If we didn’t have money, we would have to barter for whatever we want. For example, if you were a cattle rancher who wants eggs, you would have to exchange steaks with someone who has egg-laying chickens to get eggs in return. Likewise, when the chicken farmer wants a bottle of wine, he would have to look for a vineyard owner who likes scrambled eggs. Everything works much better when we have some commonly recognized medium of exchange. We call that item, money. Most civilizations settled on precious metals as money.

Unfortunately, societies also figured out ways to manipulate the money supply. That’s where we get inflation.

Coins, Paper Money and Inflation

Somewhere along the way, someone hit upon the idea of coining money. Instead of taking gold to the neighborhood bazaar—and possibly losing it or being robbed—savvy shoppers could deposit their gold with someone who would keep it safe. This individual would give out a receipt that other people would recognize and accept as “good as gold.”

Kings and bankers realized they could issue receipts representing more than the total amount of gold people had deposited. It was a great ruse because the chance that everyone would simultaneously demand their gold was very low. Because more coins and bills were circulated, people mistakenly thought they had more money than they really did, so they spent more freely. The amount of gold in the national vault hadn’t changed, though, so each coin or bill lost a little bit of its value. This is inflation. Prices may look higher, but what really happened is that money lost part of its value. Consequently, additional cash is needed to buy the same amount of product. The “real” price didn’t change. What changed was the price of money. Modern governments and bankers have refined inflation into an art. They manipulate the money supply electronically, and often secretly. They’ve convinced themselves—and most of us—that a little inflation is actually good.

It’s true that inflation’s initial effect can look benign and even helpful… but looks can be deceiving.

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When Valuations Dont Seem to Work – John Hussman

“Historically, when trend uniformity has been positive, stocks have generally ignored overvaluation, no matter how extreme. When the market loses that uniformity, valuations often matter suddenly and with a vengeance. This is a lesson best learned before a crash rather than after one.”

John P. Hussman, Ph.D., October 3, 2000

“One of the best indications of the speculative willingness of investors is the ‘uniformity’ of positive market action across a broad range of internals. Probably the most important aspect of last week’s decline was the decisive negative shift in these measures. Since early October of last year, I have at least generally been able to say in these weekly comments that “market action is favorable on the basis of price trends and other market internals.” Now, it also happens that once the market reaches overvalued, overbought and overbullish conditions, stocks have historically lagged Treasury bills, on average, even when those internals have been positive (a fact which kept us hedged). Still, the favorable market internals did tell us that investors were still willing to speculate, however abruptly that willingness might end. Evidently, it just ended, and the reversal is broad-based.”

– John P. Hussman, Ph.D., July 30, 2007

john hussman

When one examines market cycles across history, including the most extreme speculative bubbles, one typically finds segments where valuations were clearly elevated relative to historical norms, and yet the stock market continued to advance. Still, one also finds that the market dropped like a rock over the completion of the market cycle. Likewise, one finds that virtually every point of significant overvaluation was systematically followed by below-average total market returns over a 10-12 year horizon.

It’s precisely the failure of valuations to matter over shorter segments of the market cycle that regularly convinces investors that valuations don’t matter at all. This delusion is strikingly ingrained into investor behavior, and is almost inescapably revived during every speculative episode. As Graham and Dodd wrote in Security Analysis (1934), referring to the final advance that led to the 1929 market peak, the reason investors shifted their attention away from historically-reliable measures of valuation was “first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.” The consequence of the delusion that “old valuation measures no longer apply” was predictably wicked, as it was after the 1969, 1972, 2000 and 2007 extremes. What’s distressing is that this delusion is actively encouraged by investment professionals who ought to know better.

Valuations seem unreliable during speculative episodes because investors neglect a critical distinction. While long-term and full-cycle market outcomes are tightly determined by market valuations, the effect of valuations on outcomes over shorter segments of the market cycle depends on the psychological preference of investors toward speculation or risk aversion. When investors are inclined to speculate, they tend to be indiscriminate about it, and for that reason, we’ve found that the most reliable measure of investor psychology is the uniformity or divergence of market action across a wide range of individual stocks, industries, sectors, and security types, including debt securities of varying creditworthiness.

Our own measures of market action extract a signal from the behavior of thousands of securities, and are not captured by simple indicators like 200-day moving averages or advance-decline lines. Still, as a rule-of-thumb, divergence in the behavior of a broad range of individual stocks from the behavior of the major indices tends to be a warning sign, as do widening credit spreads, or lack of uniformity in the behavior of various market sectors.

Put simply, when valuation measures are steeply elevated but investors remain inclined to speculate, as evidenced by very broad uniformity of market action and the absence of internal divergences, rich valuations often have little effect on market outcomes. However, in an environment of extreme valuations, even fairly subtle deterioration in the uniformity of market internals should be taken as a signal of increasing risk-aversion among investors, and the market becomes vulnerable to steep and abrupt losses.

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Sometimes Smart Money is Dumb Too – Jason Zweig

Do all financial advisers turn their clients into better investors, or do some make their clients’ behavior even worse? My latest column looks at this question. There isn’t any doubt that many financial advisers keep their clients from getting too greedy as markets go up, while also inspiring them with hope during dark times — helping investors stay the course through good times and bad. But ultimately this question boils down to whether you believe that there is such a thing as “smart money” and “dumb money.”

smart money

For decades (centuries?), Wall Street has mocked individual investors for buying and selling the wrong things at the wrong times. And there is plenty of truth to that criticism. Individual investors do chase performance, buying more and more of whatever is hot until they get burned, then selling once it gets cold (or as soon as it gets them back to “breakeven”). That’s what they did with bond funds and emerging-market funds in the early 1990s, Internet stocks in 1999 and 2000, and so on. But the great investing writer “Adam Smith” (George J.W. Goodman), who died in 2014, turned the mockery around, showing how absurd the idea of dumb money becomes when you take it to its logical extreme:

“In more polite circles, John Jerk and his brother are called ‘the little fellows’ or ‘the odd-lotters’ or ‘the small investors.’ I wish I knew Mr. Jerk and his brother. They live in some place called the Hinterlands, and everything they do is wrong. They buy when the smart people sell, they sell when the smart people buy, and they panic at exactly the wrong time. There are services that make a very good living out of charting the activity of Mr. J. and his poor brother. If I knew them I would give them room and board and consult them…. I would push the pheasant and champagne through the little hatch of his cell and ask Mr. J. what he was going to do that morning, and if he said, ‘buy,’ I would know to sell, and so on.”

The behavior gap — the difference between the performance of an investment and the returns of the investors who own it — has historically been cited by stockbrokers as evidence that investors do poorly without financial advice. Brokers are fond of citing reports from Dalbar, a Boston financial-services firm, contending that investors in U.S. stock funds have underperformed the funds they own by an astounding margin of nearly seven percentage points annually for the past three decades.

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