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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Madharry who wrote (29615)	1/9/2008 6:48:18 AM
From: Madharry	Respond to of 78464

interesting comments supposedly from a speech seth klarman gave in october: ....during our parents’ lifetimes and our own, credit has become increasingly available and standards increasingly lax, to the point where credit cards and checks backed by credit lines arrive unrequested in the mail. Where your house can be used as an ATM, where people with dismal credit histories are eagerly sought after to provide them with loans, where investors flock to buy junk bonds and shady companies seek to issue them, and where investment funds are offered the opportunity to enhance their returns through structured products, derivatives and exotic finances, all of which enable high amounts of leverage. The moral imperative of repaying the banker, your neighbor, who granted you the loan across his imposing desk has been replaced by the moral vacuum of anonymous lenders using credit scoring who quickly resell your loan to someone you’ll never meet, who are actually comfortable with the actuarially determined probability that you may in fact default. Credit rating agencies have embraced the debt or-gy (offensive word detected) with lax standards and naïve models, brewing conflicts of interest and accepting healthy fees to label toxic waste as investment grade. A similar risk exists as a result of the burgeoning increase in capital allocated to alternative investments – venture capital, private equity and hedge funds. While returns start to come down as the pension funds have looked to alternatives to add excess return and diversification, they are hardly a panacea. Some alternative managers have historically added considerable value while for others the jury remains out. For alternatives in their entirety, high performance and management fees truncate upside potential – increased competition has forced many alternative managers to incur greater risk to achieve their accustomed returns. For some this means incurring greater credit risk while for others this means utilizing considerable amounts of leverage. The pendulum may be starting to turn as recent developments in the mortgage and hedge fund markets suggest. Because the scale of today’s leverage so greatly exceeds historical levels , it seems possible that we are only at the early stages of the credit contraction. Not surprisingly, it may take time to work off these excesses. Intervention by the Fed, as it recently has, seems likely to give license to further speculation, while failing to address and perhaps even exacerbating the underlying problem of lax lending standards, poor credit quality and excessive use of leverage. Indeed, many market participants believe the solution to these problems of over-leverage and bad credit is more debt. Recently many funds have been formed to make leveraged purchases of loans that are expected to trade in the mid to high nineties instead of par, with 5x leverage or more, bringing the yield to a 15% or 20% return. It seems to me incredibly unlikely that the end to the debt crisis can be near at hand when the solution offered – more debt – is in fact what caused the problem in the first place. Many investors lack a strategy that equips them to deal with a rise in volatility in declining markets. Momentum investors become lost when the momentum wanes, growth investors who paid a premium for the fastest growing companies don’t know what to do when expected growth fails to materialize. Highly leveraged investors, like some quant funds in the headlines, were recently forced to sell regardless of value when their methodology produced losses instead of gains. Counting on a government bailout for every crisis seems a dicey proposition, especially when supposedly impossible events happen on Wall Street every few years. By the time the market drops and bad news is on the front pages, it is usually too late for investors to react. It is crucial to have a strategy in place before the problems hit precisely because no one can accurately predict the future direction of the stock market or economy."