It might sound counterintuitive to many but Oaktree co-founder motto in a rising market is ‘don’t just do something – sit there’.
Howard Marks loves market selldowns. He races to them as well as other moments of financial disruption like a fireman would to a blazing house fire.
The problem for the legendary billionaire investor is the determined bull market, first fuelled by ultra-low interest rates and then continuing out of the Covid-19 pandemic, has meant, on average, very few moments of market weakness.
Sure, there are days like at the start of this month with sharp sells down or even wobbles like Wednesday, but on the whole it’s been hard going for contrarian investors such as the Oaktree Capital co-founder. Because when it comes down to it, Marks and his $US200bn ($298bn) Oaktree is in the business of buying shares cheap and selling them when they are expensive.
So what does he do when markets keep going up and up? “My motto is don’t just do something – sit there,” Marks tells The Australian in an interview at Oaktree’s offices in Sydney.
Through more than five decades in the markets, Marks has amassed a fortune and made his clients very wealthy, built around this simple philosophy of investing: Largely doing nothing.
The practice is a little more complicated than that, but essentially boils down to looking for good companies that are fairly valued and aiming for the horizon. “When people find out I’m in the investment business, they say, ‘What do you trade?’
“Trading is the implementation of ideas. Trading is putting money out based on what you think is going to happen tomorrow or in the next hour.
“We don’t do that – we invest. If you make investments for the long term, you don’t have to trade every day”.
The memo
Marks has built up a devoted following beyond Oaktree largely due to the refreshingly honest memos he has been publishing since 1990 around investing.
With titles like “Easy money”, “Uncertainty”, “The Folly of Certainty” and “The Impact of Debt” the memos are simple, clear and seek to demystify markets and investing.
They are peppered with quotes from ice hockey players, there’s baseball analogies, lessons from chess grand masters and some are helped along by cartoons. They are said to be closely read by Warren Buffett and most fund managers around the world can nominate their favourite. Through them, Marks’ returns to three key themes: remove the emotion from investing; don’t make predictions; and aim long.
Marks has just been named among the headline speakers at this year’s Sohn Hearts & Minds investment conference held annually in the name of medical research. This year’s event will be held in Adelaide for the first time, on November 15. It might be a Woodstock for stock pickers, but they come with pools of capital to raise $70m for research.
It’s a return for Marks, who spent the 2016 Sohn event in Sydney getting live updates on the US election from his son back home in California.
In that election, Hillary Clinton was overwhelming tipped to win, but it was Donald Trump who won that race. This leads to a discussion on predictions.
Even with the entire market infrastructure built around forecasts and whether stocks will rise or fall, Marks famously sits out of the conversation.
Don’t bother asking Howard Marks where he thinks the market, US election, even interest rates are heading. He gives the same answer time and time again. No one knows. No one really knows with 100 per cent accuracy. In fact, two years ago, he dedicated an entire memo explaining how forecasts can ultimately be a hindrance to good investing. The penny drops when Marks points out macro forecasts “rarely lead to exceptional performance”. And that’s what fund managers are paid for.
Marks is quick to acknowledge this presents a great conundrum for investing. After all, investing is positioning your capital to benefit from future events. So how can you do that if you don’t know what the future events are going to be?
“You can’t predict, but you can prepare,” he says.
“Every investor is looking a range of possibilities. The economy will slow or speed up, interest rates will go up or down; the market will do this; then this sector will do best and this company will do best within the sector.
“Let’s say you’re likely to get two-thirds right. The probability of getting them all right is less than 1 per cent. Trying to be right is unlikely to work. Rather, how about trying not to be wrong.”
Isn’t trying to be right the same thing as trying to not be wrong?
“It’s a mindset. When I say you can’t predict, you can prepare, the goal is to put together a portfolio that will work under the most likely outcomes and not get crushed under the worst likely outcomes.
“Nothing will work all the time. Anything that’s built to serve over a range of scenarios is unlikely to be the portfolio that absolutely kills it given the one thing that turns out, but that’s how you have to live your life.
“This is why Mark Twain said that quote that I always use: ‘It’s not what you don’t know that gets you into trouble. It’s what we know for sure that just ain’t so’. So allowing that you don’t know keeps you out of trouble.”
‘Fair value’
Instead of an outlook, The Australian asks where markets find themselves at the moment. Marks reaches over the table for a blank sheet of paper. He draws a sine wave with a line across the middle and writes “rich” on the top and “cheap” on the bottom.
“The point is most people mentally – I don’t know if they ever formalise this or are a conscious but the way they think is fair value is rich and cheap.
“If it’s rich, you sell. If it’s cheap, you buy. But the world is not that precise and that obliging. So the way I think of it is fair.
“If you think that the economy or the market are in fair territory, there’s nothing smart to do.”
Marks points out that 96 per cent of financial history has taken place within two standard deviations, while everything “interesting” has taken place outside two standard deviations. “That means 4 per cent of the time it’s interesting, 96 per cent of the time it’s not that interesting. And you should just try to pick good companies, because there’s not that anything super clever about it”.
The Australian tries another approach. What excites him in the markets? Here, Marks points out a looming credit crunch in 2026 and 2027. US companies borrowed a lot of cheap debt most of last decade, and much of this is falling due in coming years. “It’s been a tough time for bargain hunters, and I believe that there are some credit challenges coming in ‘26 and ‘27 that will give the bargain hunter some good opportunities.”
Elsewhere, he ventures out on the cycle that interest rates won’t be on a declining path to ultra-low like recent decades. Rates will be closer to neutral and portfolios needs to be positioned to reflect that. “I don’t think we’re going to go back to zero or 1 per cent, I think we averaged a half per cent in the 2009 to 2021 period. And I don’t think that rates will be monotonically declining from here for the next decade in any significant way.”
Has Marks ever been wrong? Yes, he replies strongly and emphatically.
“But never, importantly, with a lot of money on the line.
“That’s the key. If you hold a view, and you think you’re sure to be right, and you back it with a lot of money, and you’re wrong, that’s how you get in trouble. That’s what Twain meant.
“Any investment that starts with: ‘I could be wrong, but …’ because if you preface it with that nod to uncertainty, you’re unlikely to take an extreme position and back it heavily and that’s how you get carried out.
“You have to accept the proposition that having some failures is an unavoidable aspect of being an investor. If you have a failure, you can’t let it ruin your life or your day. And if you accept that, you’ll have some failures, then you won’t back your decisions so aggressively that a bad one can’t carry you out.
“Nobody’s right all the time, but the goal is to have more winners than losers. Make more on your winners than you lose on your losers.”
