Oaktree Capital (OAK, Financial) Chairman Howard Marks (Trades, Portfolio) appeared on the Meb Faber show, an excellent investing podcast, on Nov. 16.Â
I closely follow Marks' firm because he is one of the most careful and savvy investors out there. Oaktree is primarily known for its credit investments, but that doesn't mean his insights aren't incredibly valuable. I'll summarize Marks' key points for you, but the full interview is worth a listen.
Cycles
Marks believes there are recurring patterns in markets and investing. In fact, he just wrote a book called "Mastering The Market Cycle."
The guru looks for patterns that happen in the investment world. He asks himself the following questions:
- Are investors happy
- Are they happy to increase their risk?
- Are investors regretful?
- Are they sad?
- Are they staying on the sidelines?
Sometimes these questions are easy to answer if the mood of the market is pronounced. That gives you an idea where others are and helps to get a picture of where we are in the business cycle.
Then there are quantitative variables that tell us whether assets are high priced or low priced on a historical perspective.
Marks doesn't mention them specifically, but two of those are the ratio of gross domestic product to total market value (also known as the Buffett Indicator):
The other is the Shiller price-earnings ratio:
Per Marks, if you can evaluate the mood and people's behavior, you have a good starting point of where we are in the cycle
Example: Oaktree during financial crisis
The global financial crisis 2007-08 was the worst environment since 1929. Before 2007 at Oaktree, they were very leery. They avoided high-yield bonds and standards of investment were raised.
Did Marks see it coming? No.Â
They prepared because what was being issued in the market (debt securities) didn’t deserve to be. It was very covenant light with low yields compared to the risks that were being transferred. Oaktree doesn’t want to buy when other investors are seeking risk.
After Lehman Brothers' collapse, no one wanted to take any risk. But at that time, Oaktree started buying loads every week. It was buying from funds that were melting down and all kinds of forced sellers. There weren’t many buyers like them.
Picking the top
Looking for the bottom or the top is a big mistake. Finding the perfect day is impossible. What is a bottom? It is the day prices never fall further. You never know; recognize it in advance.When mood and sentiment reach their nadir, it is impossible to tell whether you are at the bottom.
Just start buying when the price is way below your estimate of value.
Mistakes
Oaktree has been conservative. It moved forward, but with caution. If you are cautious, you don’t make as much money as the market.Even though it was fully invested, the firm didn’t make as much as others.
Marks is comfortable being cautious even as an already defensively-minded firm.
The midpoint of the cycle is when things are around fair value.The high point is characterized by excess or exuberance. Oaktree doesn't want to be buyers in a market characterized by exuberance.
People are moving into risk assets only because safe-yielding stuff doesn’t yield anything. All the money has flown out the risk curve.
Marks would never say today is the time to get out. He would never specificy a day and never say to get out. It is too specific. Think of allocation along a range. If 100% cash is fully defensive and 100% is in risky assets, then he likes to adjust toward the defensive side but never goes either way completely.
Outlook and what to buy
Good investing is not a function of buying good things. It is a function of buying things well. There is no asset so good that it can’t be overpriced.
There are very few assets that are so terrible they can’t become a good investment.
What Marks worries about most is being too conservative too soon. In the last few years, the highest returns have gone to the person who took the most risk.
That hasn’t been Oaktree for the past few years and it will continue to be that way
The big money in investing is made by doing things others are unwilling to do.
What are people most down on?
- China
- Emerging markets
- Turkey
The value investor and bargain hunter is looking largely outside the U.S. That is the place to look, but you’ll still have to do determine intrinsic valuations.
Listen to the full interview below:
Disclosure: Author is long Oaktree Capital (OAK, Financial).
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