The Most Important Thing – Origins and Inspirations – Howard Marks

Warren Buffett said “When I see memos from Howard Marks in my mail, they’re the first thing I open and read.” Howard is the Co-Chairman of Oaktree Capital Management. He is known in the investment community for his “Oaktree memos” to clients which detail investment strategies and insight into the economy.

“If we avoid the losers, the winners take care of themselves”

Oaktree’s Investment Philosophy:

  • The primary of risk control
  • Emphasis on consistency
  • Importance of market inefficiency
  • Benefits of specialization
  • Macro forecasting not critical to investing
  • Disavowal of market timing

Key Takeaways

  • Tabel says the future consists of range of possibilities with the outcome significantly influenced by randomness
  • Galbraith says forecasting is futile
  • Ellis says if the game isn’t controllable, it’s better to work to avoid losers than try for winners
  • Milk says holding survivors – and avoiding defaults is the key in bond investing

3 Greatest Investment Adages

  • “What the wise man does in the beginning, the fool does in the end”. First the innovator, then the imitator, then the idiot
  • “Never forget the six-foot-tall man who drowned crossing the stream that was five deep on average”. Need to survive both on the good and bad days
  • “Being too far ahead of your time is indistinguishable from being wrong”

Notes

  • Memos from Howard Marks available at: https://www.oaktreecapital.com/insights/howard-marks-memos
  • Investment is not easy, it’s difficult and there’s no magic formula that works
  • Investing, there’s a lot of randomness, cannot determine the stock market with very strict deterministic rules
  • You can’t tell from an outcome whether a decision was good or bad. Good decisions fail to work all the time and the reverse
  • Should not act things that should happen, will happen (“overpriced does not mean it will go down tomorrow”)
  • “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know” – John Kenneth Galbraith
  • Howard does not believe macro forecasts (interest rates, markets etc…). Price forecasts are already cooked into the price of securities. Reason is these forecasts do not make any money.
  • Forecast that make money are forecast of radical change. But in order for forecasts to be useful, they have to be accurate consistently, and no one can be consistent in forecasting radical change. Therefore, forecasts are not valuable.
  • “The difficulty of getting it right consistently. This is what makes defensive investing so important” – Charles Ellis
  • Example is given with tennis. Top tennis players aim to hit winning shots to win games. Amateur tennis players aim to just not miss the ball and eventually will outlast the opponent.
  • Investing is a loser games because it’s won by the people who avoid being losers.
  • “If you buy AAA bonds, there’s only 1 way to go. If you buy single-B bonds and they survive, the surprises are likely to be on the upside” – Michael Milken
  • People who don’t know think the way to make money in stocks is by buy good assets, stock in a good company.
  • The secret to good investing is buying things for less than they’re worth
  • You can buy a great asset, but if you overpay for it, you will lose money. If you pay for a mediocre asset, but it’s underpriced, you will make money
  • Though macro forecasting is not important, understanding the economic framework is still important of how economics impact the price of a stock