I Beg to Differ

Howard Marks of Oaktree Capital has deservedly become a financial guru (plus a billionaire). His memos to Oaktree clients are always memorable. Several parts of his recent (July 26, 2022) memo “I Beg to Differ” resonated with me:

“Of course, it’s not easy and clear-cut, but I think it’s the general situation. If your behavior and that of your managers is conventional, you’re likely to get conventional results – either good or bad. Only if the behavior is unconventional is your performance likely to be unconventional…and only if the judgments are superior is your performance likely to be above average.

The consensus opinion of market participants is baked into market prices. Thus, if investors lack insight that is superior to the average of the people who make up the consensus, they should expect average risk-adjusted performance.

If you want to be above average, you have to depart from consensus behavior. You have to overweight some securities, asset classes, or markets and underweight others. In other words, you have to do something different”.

The challenge lies in the fact that (a) market prices are the result of everyone’s collective thinking and (b) it’s hard for any individual to consistently figure out when the consensus is wrong and an asset is priced too high or too low.

Nevertheless, “active investors” place active bets in an effort to be above average.

Thus, every active bet placed in the pursuit of above average returns carries with it the risk of below average returns.

The bottom line of the above is simple: You can’t hope to earn above average returns if you don’t place active bets, but if your active bets are wrong, your return will be below average”.

2022 was a dismal year for the valuation of US tech stocks; Nasdaq lost 33%. With some delay, private tech stocks followed this downward movement. Indeed, startups in the secondary VC market have been trading at 30%+ discount over the last round, but with a clear value bifurcation (tech vs. tech-enabled distinction, for instance).

Notwithstanding, US VC fund raising reached a new high record in 2022 with $162.6B — “we really shouldn’t care about the short term – after all, we’re investors, not traders”. This fresh capital was raised with the perspective to invest in great startups and, now, at great prices.

Conclusion

Fabrica Ventures Late-Stage VC Fund II will “buy when there is blood in the streets”.

The timing could not have been better to achieve above average returns based on diligent and experienced, but unconventional (and divergent from the masses) judgment.

“If you hope to distinguish yourself in terms of performance, you have to depart from the pack. But, having departed, the difference will only be positive if your choice of strategies and tactics is correct and/or you’re able to execute better”– Howard Marks