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The Wisdom of Howard Marks

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Howard Marks

Introducing Howard Marks

I am going to introduce you to a lesser-known legend in the world of investing, a man named Howard Marks, who I’m guessing most of you have never heard of.

Howard Marks is a 67-year old billionaire who co-founded investment management firm Oaktree Capital Management which now manages about $84 billion in assets and is a publicly-traded company with ticker symbol OAK.

Oaktree focuses its investments on high-yield bonds, distressed debt and private equity, and has delivered a whopping 23% average annual return over the past 25 years… that’s quite a mind-boggling return and, to put it in perspective, if you invested $100,000 with Oaktree 25 years ago, you’d now have almost $18 million.   Marks has rightly earned his fame and fortune by very carefully managing money for his clients.

Like Buffett, Marks too sends out folksy memos to Oaktree clients where he outlines his views on investing, the markets and the economy that are insightful, direct and sharply written, and have a strong following with value investors including Warren Buffett who says, “when I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something”. Marks’ also has a book is titled The Most Important Thing: Uncommon Sense for the Thoughtful Investor which is a terrific book I have read. You can also read his memos on Oaktree’s website http://www.oaktreecapital.com

Success in investing is not a function of what you buy. It’s a function of what you pay.

Marks recently gave a speech at The Wharton School and here are some of his comments that I wanted to share.

Marks said “Success in investing is not a function of what you buy. It’s a function of what you pay.” And while that doesn’t sound quite right when you first hear it, it does when Marks puts it in context.  When he joined Citibank in 1969, all the big banks were into Nifty Fifty investing, which was about buying the 50 highest-quality, fastest-growing companies in America (household names like Coca Cola, IBM, Kodak, Merck and Xerox) without really worrying about the price they bought them at. Investors bid up shares to about five-time what these stocks were really worth and created a bubble, and lost 90% of their money by 1973 when these shares collapsed.

Shortly thereafter, in 1978, Marks started Citibank’s high-yield debt practice and made a lot of money by investing in some of the worst companies in America.  That’s what led Marks to say that while investing is a function of what you buy, you should also pay close attention to how much you’re paying for companies relative to their intrinsic value. Don’t let bubbles carry you away.

A high-quality asset can be (and often is) overpriced and a bad investment, while a low-quality asset can often be bought cheaply and give you good returns.   The trick lies in knowing how to correctly value an asset beyond what its stock price says it’s worth. When I say what a stock is worth, it makes me think back to the story of Mr. Market an allegory created by Ben Graham, mentor to Warren Buffet and considered to be the father of value investing.

So the trick lies in knowing how to correctly value an asset beyond what its stock price says it’s worth.

Marks also said he doesn’t play winner’s tennis but likes to play what he calls not-loser’s tennis.  That’s a little confusing, I know.  Here’s what he says.   If you think you can see the future and where the world is headed, go for winner’s tennis.  If you think the world is full of uncertainty and randomness, spend your time trying to avoid losers. If you avoid the losers, the winners will take care of themselves, and you’ll have no bad investments to pull down your average.

This goes back to my recent commentary on how negative returns are harder to dig out of than positive returns.   Where a 50% loss can only be recovered through a 100% gain. That’s basically what Marks is talking about.  Picking investments that are not losers.   To do this, you really have to research stocks thoroughly before you buy them, just like Buffett talks of carefully valuing a business as if you wanted to buy the entire company. Do your research well, avoid investing in losers and let the winners ride.

Marks founded Oaktree in Los Angeles, which is in California’s earthquake zone, and he compared an investment to a house in a quake zone. “The house might have a structural flaw. You might live in that house for 30 years and it doesn’t fall down. But that doesn’t prove it doesn’t have a flaw;  it only means it wasn’t tested.” What Marks looks for is not if a company makes money when the market goes up, but whether its business stays intact in a downturn.  Investors must be farsighted and factor-in significant downside risks in addition to evaluating upside potential.

Marks is also happy about how he’s managed his business with fair treatment of clients, avoiding conflicts of interest, candid and transparent communications and acknowledging mistakes. All attributes to which all business people should aspire.

Looking ahead, he is writing now that he anticipates a limited economic recovery, three steps forward, one step back.   This is pretty good considering what we’ve been through in 2008.  But, he’s warned that the low interest rate environment of the past few years has also spawned some risky behavior.

I’d urge you to take a look at some of Marks’ more recent memos on his website and inculcate some of his philosophies into your approach to investing. That said, Oaktree is focused on esoteric investments that are pretty sophisticated for untrained investors to dabble in, so if you want to share in some of Marks’ success, perhaps you could research the value-based attractiveness of Oaktree Capital shares.  Just so you know, I am not in any way endorsing Oaktree shares but merely saying that you could research it if it piques your interest.