In May 2020, Oaktree Capital Management co-chair Howard Marks sat down with Bloomberg senior editor John Authers at the 73rd CFA Institute Annual Virtual Conference.
In the midst of a global pandemic, he offered an illuminating glimpse into the thought processes that have driven his decades-long career in high-yield fixed-income markets and have shaped his investment philosophy.
Here are timeless insights worth revisiting.
View market movements constructively.
Investors tend to perceive market activity through the prism of boom-and-bust cycles and anticipate future movements based on past patterns.
The conventional terms that describe these market movements — boom and bust, up and down — carry connotations that can influence an investor’s perspective and create a distortive effect.
The cycle, generally speaking, is a series of up and down oscillations around a central trend line. I tend to think of them, more productively, as excesses and corrections.
Know what you don’t know.
Intellectual humility is important. Be aware that there are limits to your knowledge. Knowledge is about the past. Decisions are about the future.
The financial crisis at that time served as a vivid case in point. Since its principal cause — a global health pandemic — was without recent precedent or parallel, investment expertise and market experience that might inform the response to, say, a conventional asset bubble or debt crisis are of little to no use.
It’s so silly for an investor to build his investment conclusions around his view of what the disease holds when he knows nothing about it. You shouldn’t make it up on your own, you should look to the experts.
Insist on a Margin of Safety.
This is a key concept among value investors searching for undervalued securities. To define the margin of safety for a particular investment, consider the company, the stability of the industry, and the underlying predictability of both as well as the lowness of the price.
The expert calibrates the expression of his opinion based on how firm the evidence is. The investor should calibrate his confidence in his investment based on how much margin of safety there is. For any given investment that you consider making, you evaluate the investment relative to the underlying fundamentals.
Know when to get aggressive.
Oaktree tends to be circumspect about its investments. They take a cautious approach to their risk asset classes. That’s the concession they make to what they don’t know, and for investors, caution is always appropriate when dealing with the unknown. Nevertheless, Marks and Oaktree aren’t afraid to get aggressive when they believe they’ve identified good investments.
I think that toggling between aggressive and defensive is the greatest single thing that an investor can do, if they can do it appropriately.”
Be different, but correct.
Following the market does not lead to outperformance. To generate better investment returns you have to separate yourself from the herd. And you have to be right. Sound simples, but it’s much more difficult in practice. Rejecting the consensus is an easy reflex, but in investing, that consensus — the market — is right more often not.
If you think and behave different from other people — and you’re more right than they are, that’s a necessary ingredient — then you can have superior performance.
Knee-jerk contrarianism is certainly not a successful strategy. Superior investing has to come from correct idiosyncratic decisions. You have to depart from what they’re doing for a reason.
Get comfortable with discomfort.
Asset prices drop when nobody wants to buy them. So the investments with the largest margin of safety or the largest gap between their current selling price and their intrinsic value can be the most unwanted. Holding unwanted assets can be uncomfortable.
Investment decisions are rarely validated on the day they are made. However, the challenge comes when the discomfort endures for a long time.
Every great investment begins in discomfort. If everyone else didn’t hate the investments, they wouldn’t be cheap. Many times, it doesn’t work for months, or maybe years. One of the most important adages in our business is that being too far ahead of your time is indistinguishable from being wrong. And that’s where the discomfort comes from.
This article initially appeared in Enterprising Investor
