Howard Marks, CEO and Founder of Oaktree Management, has established himself as a pioneer in the investing industry. Marks is renown for prudent risk management and wise allocation across asset classes while his clients (totaling some $120B+ as of June ’19) benefit from his investing philosophy that sounds simple, but has significant implications. I read his most recent book Mastering the Market Cycle (2018) and found it of particular relevance considering the questions we ask in today’s market.
Unlike others in the investing industry who steal the spotlight with bold predictions of a certain economic outlook and hot takes on specific companies, Marks employs a wholistic approach to investing and thus asset allocation. Marks is no stock picker, and is modest when describing his investment expertise (funny for a man who has earned a fortune in the business). Marks rather places paramount emphasis on assessing where we stand in the economic cycle, as opposed to attempting to time market swings exactly. Marks claims that by gaining an understanding of where we are in the business cycle, we can more appropriately allocate risk, and position ourselves well for what the future of the cycle may bring. If we perceive valuations to be high, perhaps we position ourselves defensively, and if we see good value, we should be aggressive.
This is another way of thinking about the old adage “buy low, sell high,” (easier said than done) but Marks presents the theory in a more understandable and actionable context. Marks breaks investment performance down to a couple of factors. Do you have more information than your investing peers? And can you analyze/interpret information in a superior way that will lead to higher returns? We cannot answer yes to the former, unless we seek prosecution from the SEC in the context of public markets wherein every investor should have access to the same amount of available information. But we may pursue an advantage with regard to the later. When an investor gives a hedge fund significant capital, they’re really investing in those investment professionals, and their ability to apply their analysis in a manner that can generate alpha (for those of you unfamiliar with the lingo). That said, 2018 was the first year following the Great Recession wherein >50% of active managers outperformed their respective passive benchmarks. Marks’ expertise comes in his ability to see the broad picture and allocate accordingly.
Marks practices what he preaches; in each month following the beginning of the recession, Oaktree purchased ~$500 million in distressed debt. Imagine the psychological toughness that requires: the markets were in a tailspin and it seemed as though we were headed for financial armageddon. There was no panic at Oaktree, however, they simply adhered to finding value in places where investors were acting irrationally and driving prices below their intrinsic value. Such bets have undoubtedly paid off to a degree beyond my estimation. Marks does not dismiss the concern of catching a falling knife, but argues that if you are late to buy in a recovery, the deals have already passed. His approach prescribes averaging your cost to a low figure.
Marks’ most recent memo discusses the FED’s 25bp rate cut, which I wrote about last month. Marks did not argue that the cut was the wrong decision, citing legitimate headwinds that affect today’s economy. He did however draw our attention to the future problems that could surface as a result of the latest cut. If the markets take a turn for the worst, our economy has one less tool in its chest to stimulate growth. He likewise voices concerns that the FED is acting in response to a frustrated White House and not solely as an independent entity which it was established to be; this is a slippery slope that threatens the advantage of a Federal Reserve Bank that should be impartial to politics.
A successful investor does not need to be a stock picking wizard, but should rather understand the business cycle and its contributing factors that can determine its future outlook. A good perception of market psychology is paramount to finding deals and long term investment success, per Howard Marks.
McCann Investments 