It’s rare to find an investment manager who has both an impressive track record and is also willing to share their philosophy with other investors. Howard Marks (Trades, Portfolio) is one such guru. While he is best known for his memos that combine astute observations on the market with pithy aphorisms and relatable anecdotes, he has also given many interviews on the subject of investing. In a recentÂ interview, as shared byÂ Investors Archive, he discussed hisÂ guiding tenets for success.Â
Control your risk
“The most important thing for the money manager is not making a lot of money, it’s not beating the market, it’s not being in the top quartile - the most important thing is controlling risk. We are in risk-prone sectors of the market. We don’t do high-grade stocks, high-grade bonds, we do alternatives. I’ve always thought that the best formula is to be the low-risk manager in high-risk asset classes.”
This is a common line of thinking among successful investors. Missing out on money-making opportunities is not what kills managers in the long run - excessive exposure to risk does. Being conservative may mean you don’t make as much money as you might have wished for, but you will never get another shot if you blow up.
“We and our clients don’t have the objective of being in the top 5% of money managers in a given year, and we’re unwilling to be in the bottom 5%. They want consistency…It’s not important to beat the market when the market does well, which is most of the time. Our clients want to beat the market when it does poorly. If we can deliver average returns in the good years and above-average returns in the bad years, we will have above-average returns overall, below-average volatility, especially good performance in the bad times - which is when I think you need it - and happy clients.”
Consistency is an underrated quality in the investing game. Some people pursue strategies that are highly volatile and yield wildly differing results. While these may be profitable overall, the emotional toll they can take on the investor should not be overlooked. It is difficult to watch a portfolio lose value over a long period of time, even if you know intellectually that the strategy is statistically profitable. The truth of the matter is, most people don’t have the emotional fortitude to stomach losses and end up abandoning their high-volatility strategies.
Look for bargains in less efficient markets
“Market efficiency basically says that if everyone understands a market, knows about it, has the data, is highly motivated to participate - their efforts will drive out the bargains, and everything will end up being priced fairly. I believe in the concept of market efficiency, I don’t believe that any markets are fully efficient.
We’re active in non-investment grade credit, which means high-yield bonds, leveraged loans, direct lending, mezzanine finance and things like that. We’re active in real estate and real estate debt, infrastructure, emerging markets, Japan - anything off the beaten path. Now, some of these have gotten more efficient than they used to be, because knowledge is cumulative. Once people learn things they basically don’t forget them, so there’s sort of an upward ratchet...It’s tougher. Everyone knows more today than they used to know.”
Marks operates in the bond market, which is significantly less accessible for the retail investor than the stock market. However, his principles can be applied to equities as well as bonds. For instance, you could look at equities outside of the United States. Or you could explore opportunities in markets that require a higher degree of specialist knowledge, such as biotech. The less information there is, the greater the likelihood you will find inefficiencies to exploit.
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