Oaktree Capital
's Howard Marks is a world renown investor and brilliant writer. Yes, he is a billionaire too. Here are some nuggets of wisdom on identifying investment opportunities taken from one of his memos and a presentation.
1) No group or sector in the investment world enjoys as its birthright the promise of consistent high returns.
There is no asset class that will do well simply because of what it is. People argue that you should buy real estate because it's a hedge against inflation or because “they're not making any more.” But, done at the wrong time, real estate investing won’t work.
Every investment approach, even if skillfully applied, will run into environments for which it is ill suited.
Buy and hold. Growth stocks. Value stocks. Small stocks. Large stocks. Foreign. Domestic. And that means that even the best of investors will have periods of poor performance. Nobody performs great all the time.
Now, even if you are correct in identifying a divergence of popular opinion from eventual reality, it can take a long time for the price to converge with value and it can require something that acts as the catalyst.
Underpriced does not mean “Going up tomorrow.”. Overpriced does not being “Going down tomorrow.” You should have the emotional strength to be able to stick with an approach or decision until it proves out, which can be a long time.
2) No approach will allow you to profit from all kinds of opportunities or in all environments.
In investing, you must be willing not to participate in everything that goes up. Only the things that fit your approach. During the technology boom in 1999 Warren Buffett did not buy technology. And in the first quarter of 2000, there were statements passed about Buffett being too old and past his prime. But Buffett was clear: “I don’t do tech. I don’t understand it. It’s not for me. I’m going to sit it out.”
To be a disciplined investor you have to be willing to stand by and watch while other people make money that you passed on. You don’t have to invest in everything. You don’t have to catch every trend. Invest in the things you know about and stick to it.
3) What matters most is not what you invest in, but when and at what price.
There is no such thing as a good or bad investment idea per se. For example, the selection of good companies is certainly not enough to assure good results. Remember Xerox, Avon, Merck and the rest of the "Nifty Fifty" in 1974. Any investment can be good or bad depending on when it's made and what price is paid. There is no security that is so good that it can't be overpriced, or so bad that it can't be underpriced.
4) The discipline which is most important in investing is not accounting or economics, but psychology.
The key is who likes the investment now and who doesn't. Future prices changes will be determined by whether it comes to be liked by more people or fewer people in the future. Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.
The safest and most potentially profitable thing is to buy something when no one likes it. Given time its popularity, and thus its price, can only go one way: up.
Watch which asset classes they're holding conferences for and how many people are attending. Sold-out conferences are a danger sign. You want to participate in auctions where there are only one or two buyers, not hundreds or thousands. You want to buy things either before they've been discovered or after there's been a shake-out.
5) The bottom line is that it is best to act as a contrarian.
An investment that "everyone" knows to be undervalued is an oxymoron. If everyone knows it's undervalued, why haven't they bought it and driven up its price? And if they have bought, how can the price still be low?
Warren Buffet said, “the less care with which others conduct their affairs, the more care with which you should conduct yours." When others are afraid, you needn't be; when others are unafraid, you'd better be.
It is usually said that the market runs on fear and greed. I feel at any given point in time it runs on fear or greed. As 1991 began, everyone was petrified of high yield bonds. Only the very best bonds could be issued, and thus buyers at that time didn't have to do any credit analysis -- the market did it for them. Its collective fear caused high standards to be imposed. But when investors are unafraid, they'll buy anything. Thus the intelligent investor's workload is much increased.
6) Gresham's Law says "bad money drives out good."
When paper money appeared, gold disappeared. It works in investing too: bad investors drive out good. When undemanding investors appear, they'll buy anything. Underwriting standards fall, and it gets hard for demanding investors to find opportunities offering the return and risk balance they require, so they're forced to the sidelines. Demanding investors must be willing to be inactive at times.
The truth is, however, one of the most corrosive of all the difficult human emotions is the feeling of having to sit by and watch other people make money.
Nobody likes that. And so, what happens is a process I call capitulation. You don’t like it at 60. You don’t like it at 80. You don’t like it at 100. But when it hits 150 you say “Okay. I’ll get onboard.” And, of course, that’s usually closer to the top than it was to the bottom.
7) To be a successful investor you have to have a philosophy and a process you believe in and you can stick to even when the times get tough.
This is very important. If you don’t have a courage of your convictions and patience and toughness, you can’t be an investor. Because you’ll constantly be driven to fall in line with the consensus by buying at the top and selling at the bottom.
