Brief Summary
This video features Howard Marks discussing his investment philosophy, its origins, and how it's applied at Oaktree Capital. He emphasises the importance of buying assets for less than they're worth, controlling risk, and avoiding losers rather than chasing winners. Marks also touches on the role of randomness, the futility of macro forecasting, and the significance of defensive investing.
- Buying things for less than they're worth is key to investment success.
- Controlling risk is paramount.
- Avoiding losers is more important than picking winners.
- Macro forecasting is not critical to successful investing.
- The market's efficiency declines when active investment declines, potentially creating opportunities.
Introduction
Howard Marks introduces his investment philosophy, which he details in his book, "The Most Important Thing". He explains that the book isn't a simple guide to making money but rather a framework for how to think about investing, acknowledging its inherent difficulty and counterintuitive nature. Marks emphasises that his philosophy evolved over time, shaped by both formal education and real-world experiences. He also mentions his client memos, available on Oaktree Capital's website, which reflect his evolving thoughts on investing.
Fooled by Randomness
Marks discusses Nassim Nicholas Taleb's "Fooled by Randomness," highlighting its importance in understanding the role of luck in investing. He explains that the book's central theme is that randomness plays a significant role in investing, and failing to recognise this can lead to drawing incorrect conclusions from outcomes. Marks illustrates this with the example of a fund manager achieving a great return, which might be attributed to skill but could simply be the result of luck. He stresses the importance of not assuming that what should happen will happen, as the investment world is not governed by the same deterministic laws as the physical sciences.
The Futility of Forecasting
Marks introduces John Kenneth Galbraith and his book "A Short History of Financial Euphoria," using it to illustrate the futility of macro forecasting. He shares Galbraith's quote: "We have two classes of forecasters: Those who don't know, and those who don't know they don't know." Marks argues that while extrapolative forecasts are often correct, they don't generate profits because they're already priced into securities. He explains that forecasts of radical change, if accurate, can be valuable, but they are difficult to make consistently.
The Loser's Game
Marks discusses Charlie Ellis's concept of investing as a "loser's game," contrasting it with championship tennis, which is a "winner's game." He explains that in amateur tennis, players win not by hitting winning shots but by avoiding unforced errors. Ellis believes that investing is similar, and the best way to succeed is by avoiding losers. Marks agrees, though he believes there are inefficiencies in the market that can be exploited, but doing so consistently requires exceptional skill. He concludes that investors must decide whether they are skilled enough to aim for winners or if they should focus on avoiding losers.
Meeting with Mike Milken
Marks recounts his meeting with Mike Milken in 1978, which introduced him to the concept of high-yield bonds. Milken explained that AAA bonds have limited upside potential, while single B bonds, if they survive, have the potential for upgrades. Marks highlights the importance of buying assets with low expectations, where surprises are likely to be positive. He stresses that the key to success is not necessarily buying good assets but buying assets for less than they're worth. Marks also shares an anecdote about how investing in the best companies in America led to losses, while investing in the worst companies through high-yield bonds generated significant profits.
Oaktree's Investment Philosophy
Marks outlines Oaktree Capital's investment philosophy, which was established in 1995 and has remained unchanged since. The core tenets include: risk control as the most important objective, an emphasis on consistency over high returns, the belief that macro forecasting is not critical, and a focus on long-term investing in undervalued assets. He explains that Oaktree aims to avoid losers, believing that the winners will then take care of themselves.
Three Greatest Adages
Marks concludes by sharing three adages that have been most helpful throughout his career. These include: "What the wise man does in the beginning, the fool does in the end," highlighting the dangers of following trends blindly; "Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average," emphasising the need to prepare for bad days; and "Being too far ahead of your time is indistinguishable from being wrong," acknowledging the challenges of long-term investing and the importance of patience.
Q&A
Marks answers questions from the audience, addressing topics such as the potential for everyone to become too prudent, the impact of macro events on companies, the role of diversified index funds, and unhealthy trends in market valuation. He reiterates the importance of having an economic framework in mind but avoiding radical forecasts. Marks also cautions against chasing returns in risky assets due to low interest rates, highlighting the need for caution in today's market.
