Learning from mistakes is crucial for any investor to thrive in the world of stock markets according to the legendary investor and author of the Gloom Boom Doom report, Marc Faber.
Faber had famously predicted the 1987 stock market crash which resulted in the then all 23 of the world markets to crash. The Swiss investor also predicted the rise of commodities like oil, precious metals and of emerging markets like China in his 2002 book "Tomorrow's Gold: Asia' Age of Discovery".
Reliving his four-decade-long experience as an investor and fund manager, Faber told BOOM admitting one's mistakes and learning from them will only help an investor grow. "I think I've millions regrets and I've made millions of mistakes in my life. And you know, life is a learning process. And the fact that you age does not prevent you from making mistakes," he said.
Apart from keeping an open mind, Faber also advised budding and established investors to realise that the markets do not follow any one's beliefs and opinions and that rather they should study how the markets react to changes.
"It is an important insight that within the discipline that you follow, you continuously have to think that your view and my view are basically irrelevant. The market will move according to many different criteria. They will look at many different factors. And then the market moves independently of what you and I think. That is a very important insight for an investor," he said.
- As the global economy grows, power has become concentrated with governments which infringe upon people's lives
- Diversification of stocks is important for investors
- Learn from one's mistakes on the stock market. Don't be stubborn.
- Nobody can predict how the stock market will react to trends
Edited excerpts of the interview follow
Govindraj Ethiraj: We're talking about investment philosophy. I know you're largely known as a contrarian. You've predicted many booms and busts in the past, including in 1987 on Wall Street, in Japan or the Japanese bubble in 1990. The COVID crisis is not something that anyone could have forecast.When you look back now, how do you look at this from an investor's standpoint?
Marc Faber: Well, basically, the world over the last 20-30 years, has been expanding and tourism was growing. And despite some shortcomings of the market economy and the capitalistic system, the poverty rate in most countries has gone down very substantially. And we had the entry of close to 3 billion people into the global market system into the global capitalistic system. If you look back 30 years in India, or 30 years back in China, Vietnam, Soviet Union, you can say that today, most people are much better off than they were 30 years ago. They can travel, they can find a job, they can change jobs, they have some say about how they want to spend their time and money and so forth.
So many things have improved dramatically, where it hasn't improved much, and especially where the middle class has not made much progress or has actually regressed is in Europe, and in the United States, where young people, the so-called millennials, and the Generation Z, they are worse off, and they are in less inflation adjusted than their parents when they were 30-35 years old. But in general, the world has been growing a lot with the disadvantage that our debt levels in the world have also expanded dramatically, especially after the great financial crisis of 2007-2008. But that decide, I think the world was doing well. The COVID-19 is a virus. The mortality rate is not very high. And the response of governments to the virus, in my opinion, has been excessively interventionist. In the sense that we live in democracies.
In schools, we were taught for the last 20-30 years, that we are free, that we have the right to vote and divorce and so on. And here, some bureaucrats come and tell us we can't go out anymore, not even in your backyard. If you're in quarantine, say in Thailand, you're locked into a hotel room, you can't even use the balcony, let alone get a drink, an alcoholic beverage, and so forth.
So, I think this is a huge infringement into people's personal freedom. And that has also led to a complete collapse in economic activity. This collapse in economic activity has been offset by all kinds of government programs money being handed out by governments. But it only leads to one thing, more power to the government, and less freedom to the individual. So, this is the question that you asked that I answered, but this is not my investment philosophy. And we had agreed that we talk about investment philosophies.
GE: If you're saying that the government is playing a greater role, including in providing stimuli and printing more currency, that changes the equilibrium in the markets. How do you see this? My question is not about whether how you should be reacting to the situation right now. But in general, as an investing approach, how would you look at a situation like this?
MF: Well, in general, the more government you have, the less economic growth you will have. So, I think that people have to get used to the fact that it's going to be like a lottery. Each time there is a lottery, there is one winner. And he can then write a book "How I won the lottery". But the fact is that most people don't win the lottery, and that they lose money. And I think in today's investment environment, there will be a few winners, undoubtedly, and they can write a book so they can go on TV and explain how they were winners.
But in general, if I look at asset markets, and I compare them to say the 70s or even the 90s. You have low interest rates; you have very high-priced bond markets. In other words, if you buy in Europe a bond of Germany, or say specifically of Switzerland, you pay for a 10 years Swiss Franc bond 110. It doesn't carry any interest. It's a zero-coupon bond and that the end of the period after having paid now 110, you get hundred back. So, there is no money basically to be made in bond markets unless you short bonds. Then there is the stock market. In the 70s, the US stock market was oscillating between 20% and 30% of the economy of GDP. In other words, stock market capitalization, as a percent of the economy was between 30% and 20%. Now, it's 90%.
So, it's a sign that financial markets are high. And economic activity hasn't really expanded that much. At the same time, we have commodity markets that are relatively depressed, that I concede that would be a sector, I would look at commodities, especially agricultural commodities, and related stocks. And compared to financial assets, I think that precious metals are not terribly expensive.
So, this is a broad way I would look at the world. I think also, with the government interventions, you will have to pay more tax in future. So overall, I think we're moving into a low return environment, unless you do something special like in the case of India. I think that real estate in city centers, Delhi, Bombay, Mumbai, Chennai, is expensive, but on the outside in the countryside, it's probably still reasonable. So that's where I would buy.
GE: So, when you look across asset classes, and as you do when you're looking at either an economy or the world, for that matter, what are the kinds of trends that you are usually looking for? I know in the case of commodities, you've said that we've been we've been in a 20-year bear market. On gold I know similarly, you still feel that there is potential on 20-year stocks, at least in the context of the US, I think you have pointed out that a lot of the weightages really on the FAAN stocks, you know, the Facebook, Amazon, Apple and Netflix. So, what's the underlying approach here? Or is there is there an underlying approach that you could share with us?
MF: Well, I think the approach that I really recommend is diversification, because you and I and your viewers, they don't know how the world will look like in five years' time. So, you don't want to get stuck into just one asset class. And maybe you win a lot, but maybe the risk of losing everything is also possible. So that I wouldn't necessarily recommend. I would recommend diversification. Number two, I regard this as the cornerstone of investing. You need to know yourself. Are you a traitor? Are you an investor? What is your tolerance for losses? There are people that can't stand even if they lose two or 3%.
So, these people maybe shouldn't invest in the first place. I don't know what they should do with their money. You have to know how you react to adversity. Knowing yourself is key here. Number two, before you invest, I think it's very important to decide what is your strategy? Do I want to be a day trader and follow the market every five minutes and when I'm at dinner, I still have my mobile phone in front of me and trade stocks while I neglect my wife, girlfriend or boyfriend or whatnot? Or do I want to be a longer term, an intermediate investor. And once you decide that you can then filter down and say, "Well, if I'm an investor, do I want to be a momentum player, a gross investor or do I want to be a value investor?"
Now over the last hundred years or so, in general, over longer periods of time, it has paid off to be a value investor. In other words, you buy companies that have a low price to sales ratio. In other words, the market capitalization compared to the overall sales is low, or you buy stocks that are selling at a discount to book value. Or you buy stocks that have a high dividend yield, or you buy stocks of companies that generate free cash flow. So, these are criteria that you can pay attention to and select your investments accordingly, then there is another factor. Popularity. When companies become popular and well known, automatically, they're no longer cheap. So, you can also pay attention to sectors that are popular. In other words, they are discussed on CNBC, Bloomberg, and so forth all day long. And then there are sectors that are neglected, that are not paid attention to. And usually, you will find good value in sectors that are neglected and unpopular. That is quite obvious.
And then, this may sound strange to you and some of your more fundamental oriented investors, I pay attention to charts. So, if I think about silver. Silver was very depressed in the 1950s and 60s, it then went to $50 on the spot market in 1980 in January. Then it collapsed to two and a half dollars. And they traded between say $2 to$3-$4 between 1985 up to 1999. So, when you look at this chart, the peak in 1980, the bottoming we call this a saucer formation or a long-term deep discount period where prices trend for 10-20 years sidewards after having reached a significant peak, if after such a base building period, you get a minor breakout move on the upside. In other words, prices start to move up above the trading range of the last 10-20 years. And if this so-called breakout move occurs with very heavy volume, it is a very powerful signal that maybe fundamentals are going to change because I want to make this very clear here.
The market will react to fundamental changes before the fundamental changes become obvious to Tom, Dick and Harry who works for CNBC and Bloomberg. These people they get the news the last. The market will move ahead of the news, not after the news. And so, the market is a discounting mechanism. And while I wouldn't structure my entire investment philosophy around buying and selling based on charts, I think they are a very useful tool for identifying possible major trend changes.
GE: If I were to pick 1987, when you asked clients to get out or cash out, would that be something triggered by a chart movement? Or was it something else?
MF: Well, '87 was very clear that by August '87, when we reached the top, the market was enormously overbought compared to the long trend. We had gone from less than 800 on the Dow Jones in August 1982. And by the way, I was talking about the base building period. In August '82, when the Dow was at 800, it was no higher than in '64. In other words, 18 years earlier, and inflation adjusted, it was down 70%. So that was a major low. It was not obvious that it was a major low, but it was a major low. And then the market rose very quickly, within five years, essentially to a peak in August '87, at which point the market was incredibly overbought.
The market today, as an example, is high is expensive but it is not terribly overbought, if you compare stock prices to the 50 days or 200 days moving average. So that is a criterion. And in '87, there were fewer and fewer stocks that were making new highs. So, there was some technical deterioration, and interest rates had begun to rise. So that was also a negative factor. But the difficulty nowadays is we're no longer living in a world that is economically a traditional world. We live in a money printing world. And when you print money, you distort many things, including the valuations, the price mechanism, and so to make forecasts becomes more difficult. So, if someone says I'm bearish about stocks, he may be right. In an international currency, say if someone says the US stock market is overvalued. There are two ways this overvaluation can be corrected; a stock goes down. Okay, that is the traditional way. But b, it could be that stocks go up, but the currency collapses, that also brings down stock prices. Or stocks go up but gold goes up much more so against gold stocks lose out.
So, in a money printing environment, investing becomes more, I'd say, complicated. It isn't impossible to make money, but it's more complicated. Because what money printing brings, what Irving Fisher the economist, called the money illusion. You have money, but it is illusionary money. Because it's printed money.
GE: I found that a fascinating quote where you said that, "we have to go back to simple economics where people actually produce things and as a result of production of goods and services, prosperity follows". It also includes companies that produce these goods and services do well and their stocks do well.
GE: If you look back now, as you followed an investment philosophy, which also I mean, in many cases might have been evolutionary, what's the one mistake that you've made? And what's the one thing that you got right? Apart from the 1987, and the 1990 examples,
MF: There's a song that says, basically, I have no regrets. I think I've millions regrets and I've made millions of mistakes in my life. And you know, life is a learning process. And the fact that you age does not prevent you from making mistakes. And I think in the world of investments, if everybody is honest towards himself will admit "I should have done this, I should have done that and will say, well, I bought this stock but I should have bought much more. And I didn't buy this stock, but I should have bought it though I should have sold this stock, and I didn't sell it."
And so, we all make lots of mistakes. I think philosophically, since this discussion applies to investment markets, when I started to work in the 70s, obviously, the environment was very different than it is today. And the financial market was still small compared to the economy, whether we were by now we have had this finite nationalization of markets. I think the fundamental mistake I made is that I thought, the markets will go up, or the markets will go down. And I thought that my opinion had some meaning. But actually, the market will move completely independently of what I think. So, I could be thinking that the market goes down, and it goes up. And then I shouldn't be surprised.
I think, as an investor, rather than to focus on what you think that the market should do, or what you think that the company's worst, you should focus on what will the market think about this company? What will the market react to the earnings of this company? Your opinion and my opinion, in the context of a market economy, is completely irrelevant. So, I think I would have achieved better results if I hadn't been as opinionated as I used to be. Now, I'm more leaning towards let's watch the what the market does, let's be diversified. And let's realize, you and I, we don't know what the prices will do tomorrow. We think they may go up, or we think they may go down. But whether they will go down or up has nothing to do with you and me. So that is an important insight that within the discipline that you follow, you continuously have to think that your view and my view are basically irrelevant. The market will move according to many different criteria. They will look at many different factors. And then the market moves independently of what you and I think. That is a very important insight for an investor.
Don't be overly stubborn, if you think if you say and I know many of my friends. They've been shorting Tesla for the last five years. Now, I agree that Tesla is probably one of the good shorts, but you understand as long as the market believes Elon Musk, that he has superior products or whatnot, the stock can keep on moving up and kill the short sellers, they can kill them. So, you may be right that this company or that company will eventually go bankrupt or if worry does you know many things can happen. And with all the money printing, there is of course, another element which is manipulation. That we have to realize that markets are manipulated to large extent.
So, some prudence in our belief is very important. We can say, "I analyzed and this company has no value and will go down." But it doesn't mean that the stock doesn't go up first a lot because a lot of people are not sophisticated. They don't analyze anything. They just play the momentum. So, before a company goes bankrupt, it could go up 10 times.
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