Howard Marks (Trades, Portfolio) Chairman of Oaktree Capital Management LP (OAK, Financial). Howard spoke to students in the Amador Valley Investment Club on May 2, 2019. The video was released to a wider audience on the 19th. Since the inception of Oaktree in 1995 Marks core responsibilities revolved around maintaining the firm's investment philosophy and communicating with clients about the firms funds and strategies. Members of the Amador Valley investment club prodded Marks with an interesting set of high-level questions very helpful in investing, resulting in a number of insightful answers. I've summarized the best questions and paraphrased Marks responses as best as I could (questions are in bold):
How does an investor manage a multitude of risks?
We have to prioritize. The main risk is unfavorable outcomes. Usually, losses are most of the unfavorable outcomes. Other unfavorable outcomes could be; falling short of goals or missing a huge gainer (in your benchmark). We worry about the probability of unfavorable outcomes. In summary; prioritize the things you worry about and then worry like crazy
What red flags indicate an overvalued market?
There are two categories of red flags; quantitative and qualitative.
Quantitative means looking at price-earnings and EV/Ebitda multiples etc. Multiple ways to slice and dice the market.
Watching qualitative red flags is harder to do and it involves taking the temperature of the market. Ask yourself these sorts of questions; are investors predominantly thinking about the upside? Do investors generally have fear of missing out aka FOMO?
If investors have the aforementioned fears as opposed to fearing the market or being afraid of losses. Then that’s an indicator of a hot market.
Lately, there are a lot of first-time funds raised for private credit investing. If it's easy for first-time managers to raise funds it indicates a lot of optimism in the market.
When should investors be aggressive and when should they be conservative?
Investors should be aggressive when prices are low relative to intrinsic value and conservative when prices are high relative to intrinsic value.
When everything is going well and everyone is optimistic you should be cautious.
How to time a market?
We can have a sense of whether a market is high or low. Sometimes we have a sense of what is going to happen but we never know when. We never know the “when” but we have a sense of “what” will happen. Underweight or fade overvalued securities.
When should you concentrate and when diversify?
Why do we diversify? We do it to protect against what we do not know. We concentrate to put to work what we do know. Most people think they know something but they also realize don’t know everything.
Risk aversion underlies all intelligent markets. Holding on to what people have is more important to people as opposed to maximizing returns.
For example; Nobody has a one asset portfolio. Everybody has one stock they like better. But I’ve never met anyone who holds only one.
Concentration and diversification need to be balanced all the time. The more risk averse you are, the more you will diversify. The diversifier never has a big loss and never has a big gain.
How do you find asymmetric upside/downside investments?
We want to find securities where the upside far exceeds the potential for losses. By definition, it can’t be easy. Everyone is trying. They all have computers, they are all intelligent and they are all looking. A free lunch can’t be prevalent. They can’t be all over the place. If people find them they buy them. The buying bids up the price and they are no longer a free lunch.
You have to look, you have to analyze, you have to be critical of your own work. Why did you find this opportunity? Why are you right?
There is nothing intelligent to be learned about making money. If there were everyone would study it and everyone with a lot of intelligence would be rich. If it could be reduced to a process that could be easily implemented these inefficiencies would disappear.
There’s a saying in basketball. You can’t coach height.
In investing; you can’t coach superior insight. You have it or you don’t.
Do micro or macro considerations matter more?
This is a trick question. The macro is more important. But the macro is not knowable. Very few people can get the macro right often. For information to be worth something, it has to be important and knowable.
The micro is something that through hard work and skill you can be superior at. It is even knowable in a superior way.
Therefore we stick to the micro at Oaktree. Marks divides the knowable and unknowable as follows:
Knowable: companies, industries, securities.
Not knowable: economies, markets, currencies and interest rates.
In the investment business, You should spend your time knowing something others don’t. You need superior insights. You are unlikely to know things about the macro others don’t.
Disclosure: No positions in any stocks mentioned.
