Howard Marks is Chairman of Oaktree Capital Management and has made his memos to clients available to the public for many years. Oaktree, with $78.7 billion under management, specializes in less efficient markets with a focus on distressed debt investing and alternative investments. Much information regarding Oaktree is now publicly available due to the company’s IPO earlier this year. Mr. Marks released his book, The Most Important Thing, in 2011 and it quickly became a must-read for investors (click here for a review of the book).
The Manual of Ideas recently interviewed Mr. Marks and has provided a 27-page transcript of the discussion. Readers interested in more information can view the 50 minute video and obtain the full transcript as one of 11 great bonuses immediately upon registering for the fully online European Investing Summit 2012.
Here are a few excerpts from the interview:
“The interesting thing about investing is what I call the perversity. The point is that it is so not intuitive. It is so not obvious — investing. A great example lies in the fact that, people think that to be a good investor, you have to understand companies. But the market has an understanding of companies, and if you understand the company the same as the market does, even if the market and you are right, you are not going to make any special profits.”
“…when my son comes to me, who is a budding hedge fund investor, he gives me an idea, a stock, macro trend, or something like that, the first question I always ask is the same: Who doesn’t know that? That is really the question. When you think you know something, the question is whether the market knows it too. And if it does, then your idea has no relative superiority.”
“…[investing] is really not a good business for people who don’t have some ego because you have to do the things that Dave Swensen describes as lonely and uncomfortable. I think it was [Jean-Marie] Eveillard who said it was warmer in the crowd, in the herd. But if you only hold popular positions, you can’t do better than average, by definition. And I think you will be very wrong at the extremes.”
“The greatest example is this: If you went to the horse races, would you always bet on the favorite? The favorite, assuming the crowd is intelligent, which usually it is, is the horse with the highest probability of winning. That doesn’t mean that the favorite is always the best bet. You might have another horse that has a lower probability of winning but the odds are so much higher, that’s the smart bet…”
“[U.S. Treasuries] are a safe investment in the sense that the outcome is known and not really subject to variation. I think they are not a good investment because the known outcome is an unattractive one. Today you can buy the ten-year [Treasury] and with no risk, lock up the certainty of 1.9% return for ten years. Is that really a good thing to lock up?”
“What the investor has to do is weigh out on the one hand price and on the other hand reality. Everybody thinks very dire thoughts about Europe and the Euro, and I would be the last person in the world to argue against that position. Then the next question is, European assets are lower in price because of the macro conditions, but are the macro conditions being viewed too pessimistically?”
“Tenet number three of our investment philosophy says we are active in less efficient markets only. We probably wouldn’t do a hedge fund for large-cap New York Stock Exchange firms because the tendencies are that those would be more efficient than others. But emerging markets, yes. Japan, yes.”
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