In a previous piece, we looked at some of Howard Marks (Trades, Portfolio)’ investment principles. In a recent interview, he advised investors to control their risk, to seek consistent returns and to look for bargains in less efficient markets. We will now look at three more of his tenets for success.
Have a high degree of specialization
“We don’t have a central research department, each strategy has its own research department. Each person is dedicated to one strategy, we don’t have jacks of all trades. And each fund does one thing...I started at Citibank 40 years ago and our high-yield bond portfolios in 40 years have never owned anything but a high-yield bonds. That’s not true of many funds. Many funds have some commons, some preferreds, some distressed debt, some munis, some sovereigns - other things to goose the returns.
Back when I was at Citibank running convertibles and high-yield bonds my boss said to me: 'Why don’t you put some converts into the high-yield portfolio?' because the stock market was strong at the time. And I said, 'Why, I think that’s a great idea, and I’ll also put in some gold and some old master paintings!'”
This idea is very closely related to Warren Buffett (Trades, Portfolio)’s famous "circle of competence" principle. Simply put, investors should stick to what they know and avoid getting swept up in exotic investment ideas they have no specialist knowledge of. Moreover, Marks advises investors to concentrate their expertise on one particular area and to spend time mastering it. If you divide your time between different asset classes and sectors, it is unlikely you will have sufficient knowledge of any single one.
Micro not macro
“Our investment decisions are not governed by macro forecasts. The macro outlook is very important, it drives the markets these days and has for the last 15 years. I think macro took over from micro at a certain point. But I don’t think it’s knowable.
Most forecasts are extrapolations, everybody agrees with them. If they come true, it doesn’t make anybody any money. The forecasts that would make people money are idiosyncratic forecasts of deviations from trends, and they would be highly profitable, but they’re rarely right. Why do it? The goal is to be a superior investor. If we are not superior we have no edge. We have no reason for being.
It has to come from seeing things differently and doing things differently and having a superior insight. And I just don’t believe that it’s possible to have superior insight in the macro, which is economies, markets, currencies and rates. We spend all of our time trying to know the micro: companies, industries and securities and doing so better than others.”
In other words, the macro environment has too many variables to be knowable. This is a contentious issue, as many analysts and economists make their living telling clients that they can predict the macro future. Historically, most value investors have been skeptical of the idea that one can predict the future, and Marks is no exception.
Do not jump in and out of the market
“We’re not the kind of people that go in and out of the market, from cash to no cash. Very hard to do that right. If you go from an asset, say you sell a high-yield bond that yields 6%, you put it into cash which yields 1% - you better be right right away, and then you also have to get back in at the right time. It’s very, very hard to do that.”
Marks goes on to say that "buy and hold" is a better strategy than dipping in and out of the market. Market timing is very difficult to do correctly, so it stands to reason that most retail investors should not be executing a large number of trades day to day. With that being said, Marks also discussed the importance of being conservative when stocks are very expensive. When the market is severely overbought, as many people think it is today, it is a good idea to lessen your exposure to stocks.
Read more here:
- Howard Marks: 3 Tenets for Investment Success
- Bridgewater: US Profit Margins May Have Peaked
- Amazon: Monopoly in the 21st Century, Part 2
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