Howard Marks is the Founder and Co-Chairman of Oaktree Capital Management – which manages funds of around US$100b. He is greatly respected for his investment strategies and insights. I recently heard him speak at the Sohn Hearts and Minds Conference and re-read his book, ‘The Most Important Thing’. In a nutshell, Marks has seven key lessons for all investors.
1. The attractiveness of buying something for less than its worth makes imminent sense. So how is one to find bargains in efficient markets? You must bring exceptional analytical ability, insight or foresight. But because it’s exceptional, few people have it.
2. An accurate estimate of intrinsic value is the essential foundation for steady, unemotional and potentially profitable investing. There are two essential ingredients for profit in a declining market; you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest you’re wrong. Oh yes, there’s a third: you need to be right.
Certain common threads run through the best investments I’ve witnessed. They’re usually contrarian, challenging and uncomfortable – although the experienced contrarian takes comfort from his or her position outside the herd.
3. Investment markets follow a pendulum-like swing:
- between euphoria and depression;
- between celebrating positive developments and obsessing over negatives; and
- between overpriced and underpriced.
This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at extremes than it does at a “happy medium”.
4. There are two concepts we can hold to with confidence:
- Rule number one: most things will prove to be cyclical
- Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.
Cycles are self-correcting, and their reversal is not necessarily dependent on exogenous factors. They reverse (rather than go on forever) because trends create the reason for their own reversal. Thus, I like to say success carries with itself the seeds of failure, and failure the seeds of success.
5. Risk is incredibly important to investors. It’s also ephemeral and unmeasurable. All of this makes it very hard to recognise, especially when emotions are running high. The truth is the herd is wrong about risk at least as often as it is about return.
The road to long-term investment success runs through risk control more than through aggressiveness. Over a full career, most investors results will be determined by how many losers they have, and how bad they are, than by the greatness of their winners. Skilful risk control is the mark of a superior investor.
6. Oaktree’s preference for defence is clear. In good times, we feel it’s okay if we just keep up with the indices (and in the best of times we may even lag a bit)…. Oaktree portfolios are set up to out-perform in bad times and that’s when we think out-performance is essential. Clearly if we can keep up in good times and outperform in bad times, we’ll have above average results over full cycles with below average volatility.
7. One of the most important things to bear in mind today is that economics isn’t an exact science. It may not even be much of a science at all, in the sense that in science, controlled experiments can be conducted, past results can be replicated with confidence, and cause-and-effect relationships can be depended on to hold.