Howard Marks on the Business of Investing

Howard Marks is the co-chairman of Oaktree Capital Management, essayist, and the author of the 2011 book, The Most Important Thing. He’s a tremendous contributor to the value investing community. We’ve been lucky over the years to host Howard for multiple in-depth conversations on topics such as his widely acclaimed Buffett-endorsed book, personal investing philosophy, and thoughts on what it means to be an excellent investor.

Howard Marks began his investment career as an analyst researching conglomerates at the end of the ’60s. He then led a group working on distressed assets and served as the chief investment officer for domestic fixed income at TCW. In 1995, Marks formed his current company, Oaktree Capital Management (OAK), giving him over twenty years running his own firm, and nearly fifty years working in the investment industry.

On the Importance of Self-Assessment

It’s no surprise then, that one of the qualities Marks cites as a contributor to gaining superior insight, is experience. Marks believes in the idea that in the short run, the market is a voting machine, and in the long run, it’s a weighing machine–an idea you could also apply when evaluating an investor’s track record. It’s true that luck plays a small component, but in time, it’s your skill that does the talking. This is precisely the concept that Warren Buffett argues and writes about in his article, The Superinvestors of Graham and Doddsville.

It probably takes at least ten years for somebody reliably to be able to say, “I have superior insight or I don’t.” I think it’s very important that people be honest with themselves and really mark your portfolio of the market at the end of the year and say, “Which of the things that I thought would happen happened? Which of the things I thought would happen didn’t happen? Where was my mistake? Do I really have a superior ability to figure out which companies will succeed, which stocks are inexpensive, which risks are worth taking?”

Once you’re aware of your mistakes, it’s on you to make the necessary corrections. To Marks, self-assessment isn’t just about saving you money, but also your time.

It’s not like getting a blood test, but it’s very, very important because you could waste your time and you could waste your life as an investor making average decisions. If you make average decisions, you might as well throw darts or invest in an index fund and get a job that you are better at. I’ve got to believe that if anybody with introspection spends ten or twenty years in the investment business that hasn’t figured out they know better than the market, then I don’t think their life can be very satisfying, so I think it’s very important to do that as a self-assessment and probably if you don’t do it for yourself, somebody else will do it for you.

This is a profound idea. In one of his memos to clients, Marks writes, “In my view, the investment IQ of the market isn’t any higher than the average IQ of the participants.” Thus, if your goal is to achieve superior returns, you must also have superior insight compared to that of the average investor. Another name for this is second-level thinking, a topic Marks writes extensively about in his book, The Most Important Thing.

On Developing and Sticking to Your Investment Philosophy

Howard Marks is known for being a risk averse value investor. You could say that deconstructing risk is one of his specialties, one which has served him particularly well over the years. Admittedly though, Howard says he doesn’t offer a magic formula for successful investing, and that there is more than one way to achieve favorable returns.

There are lots of ways to be successful. I always talk about the importance of risk-controlled investing. There are high risk investors who’ve been successful. I think the key is 1) to have an approach, well thought out, built out hopefully over some years or decades. Hold it strongly.

Ultimately, it would seem that regardless of your personal investing style, Marks believes that in order to be a long-term successful investor, you must use your experience to enhance your circle of competence, and continue to stay within those principles. Only time can tell if your ideas are working, so it’s best to perform some honest, self-assessment on your thinking in the event of going ten years without outperforming the indexes.

On the Most Dangerous Thing

Although his book is titled, The Most Important Thing, Marks also talks about, in his opinion, is the most dangerous thing for investors — risk. The sign of a great investor isn’t the ability to make a lot of money, you could do that in Vegas. The sign of a great investor is to make a lot of money while simultaneously minimizing exposure to risk.

Whether it’s a good year or a bad year for the market, the great investor has to be able to avoid compounding losses. Once again, this brings back the idea that investing is a long-term game, and that short-term performance is not an indicator of future success. Thinking about investing in this way reminds me of the following quote by Seth Godin:

In finite games (short and long) there are players, there are rules and there are winners. The game is designed to end, and it’s based on scarcity. In the infinite game, though, something completely different is going on. In the infinite game, the point is to keep playing, not to win. In the infinite game, the journey is all there is. And so, players in an infinite game never stop giving so they can take.

Building a reputation in investing is definitely a long game. You can’t just win one year and quit. So by mitigating your risk, you increase your chances of staying in the game. That’s what Seth is talking about, thinking long term changes the way you play.

The following transcript of the full conversation has been edited for space and clarity.

The Manual of Ideas: In your memo, Dare to be Great, you say that the bottom line for investors is not whether you dare to be different or to be wrong, but whether you dare to look wrong. How is the daring affected by where an investor is in their career?

Howard Marks: That’s an interesting question — nobody’s asked me that before. I don’t know if there is an answer. The first blush reaction is that when you’re younger and you’re just trying to get started, you can’t afford to be wrong because maybe you’ll never get any further if you lose your job. On the other hand, you could take the position that when you’re starting you don’t have much to lose, so you might as well take a shot. I think the conventional answer is that a person trying to get started will not have the mental resolve to take substantial risk of looking wrong and will tend to do more conventional things.

Members, log in below to access the restricted content.

Not a member?

Thank you for your interest.  Please note that MOI Global is closed to new members at this time. If you would like to join the waiting list, complete the following form:

First name:

Last name:

Email address:

City / state / country:

Company:

How did you hear about MOI Global? Select Member referral Staff This website Media / Internet Other

If referral, please provide member's name:

Which of the following applies most closely to you? Select Investment Firm - Head Investment Firm - Analyst or PM Institutional Allocator - Firm C-Level Executive Institutional Allocator - Firm Employee Family Office - Head or Co-Owner Family Office - Employee Non-Investment Firm - C-Level Executive Non-Investment Firm - Employee Other

How do you hope to add value to the community?

Leave this field empty if you're human:

This article is based on a post by MOI Global contributor Brian Hertzog. For more by Howard Marks, visit the Oaktree website to read his brilliant memos to shareholders.