On Sept. 25, Howard Marks (Trades, Portfolio) of Oaktree Capital (OAK, Financial) appeared on the Tim Ferriss show, a popular business podcast that isn't necessarily geared towards investing. This made for a refreshing change as the discussion didn't follow the typical investment interview format as closely. They did go over the state of the market, and a quick warning: The podcast was taped in August. You can find the full interview here.
Dealing with downturns
Early on they dived into dealing with market downturns and how to manage those. Marks recalled how the firm dealt with the crisis in 2007. They felt something wasn’t right but didn't identify exactly what was wrong.
The reason they didn’t feel right was because the deals that were being done were horrible. Interestingly, this is exactly what Marks is observing right now and talked about in his most recent memo. That memo is loaded with examples of very questionable capital allocation decisions.
Oaktree didn’t predict the mortgage crisis and it wasn’t mentioned in any Marks memo. But when it came they were ready. The key is to prepare for different scenarios. Marks then talked in more depth about his views on market prediction than I've heard him do on other occasions. He broke it out like this:
-Some events can be predicted with high accuracy.
-Some events can be predicted with some accuracy.
-Some events can be extremely unpredictable.
Not all opinions are equally valuable. You have to factor in how accurate you can be predicting that future scenario. We have to view the future not as a predetermined event but think of it in terms of range of outcomes
Current state of the market and how to invest
We are in the eighth inning, but he repeated that investing isn’t baseball. There can be extra innings. People are moving into risk assets involuntary because there is no yield to be found on low-risk assets. Throughout the interview Marks repeated to move forward but with caution.
Marks said Oaktree is fully invested except in standby funds that are specifically raised to deploy in a crisis. The firm is definitely taking risk and Oaktree tends to invest in high-risk assets like credit. But Oaktree takes a low-risk or controlled risk approach. When Marks says “with caution,” he means more caution than Oaktree employs by default. Marks doesn’t think you have to go to 100% cash but he wouldn’t be aggressive.
As investors there are two key risks:
- The risk of losing money.
- The risk of missing on opportunity.
Everyone should do something in the middle.
Marks on cycles
A few times during the interview he went into cycles, the economic cycle being the subject of his new book "Mastering the Market Cycle." Cycles can be different in many ways: speed of onset, duration, ramification, length, course, timing and others.
But some things are similar. A cycle is nearly over when the psychology of market participants is elevated. When bull markets get old you are further into the cycle and generally prices are high. These sort of “tells” are universal and don’t allow you to time exactly, but you should know the cycle is old and you need to start being cautious.
Recommended reading
Grant’s Interest Rate Observer
A Short History of Financial Euphoria
Are there other ways than value investing to be successful?
There are many ways to invest. Lots of people are successful in ways Marks doesn’t fully comprehend. He mentions a number of investors in different domains that have been successful beyond what can be expected by chance:
Venture Capital
Bill Gurley
Kleiner perkins
Sequoia
Macro
Calls these two perhaps the greatest investors in the history of the world:
George Soros (Trades, Portfolio)
Stan Druckenmiller
Quant
Renaissance Technology
Marks did add that the success ratio in these other fields isn’t very high.
Disclosure: Author is long OAK.
