20VC Oaktree Capital’s Howard Marks on The Most Important Skill An Investor Can Have, The Right Way To Think About Price Sensitivity & Where Are We At Today; Take More Risk or Less



In this episode, Harry, the host, is joined by Howard Marks, the co-chairman and co-founder of Oaktree Capital Management, to discuss Marks' influential role in Harry's passion for investing and his impressive career trajectory from Citicorp to creating Oaktree, a firm managing over $120 billion in assets. Marks, also an author and a respected figure in the investment community, shares his insights on the importance of understanding market cycles, the value of contrarian thinking, and the necessity of intellectual humility in investing. He reflects on Oaktree's countercyclical, cautious approach, the significance of experience in navigating booms and busts, and the firm's recent transaction with Brookfield. Marks emphasizes the culture of open dialogue and mutual respect at Oaktree, which fosters an environment where diverse opinions and productive disagreements are encouraged. He also touches on the unpredictability of markets, the role of luck in his career, and his ongoing motivation derived from a genuine love for the work.

Summary Notes

Early Passion for Investing

  • Harry credits Howard Marks for inspiring his early interest in investing.
  • Harry would read Howard's investment memos by torchlight during his boarding school days.
  • These memos sparked Harry's passion and shaped his early thinking about investing.

"So I'm often asked, Harry, how did you find your love of investing in financial markets so early in life? And the truth is, my guest today is largely responsible for a lot of it."

The quote highlights the influence Howard Marks had on Harry's interest in investing from a young age.

Howard Marks' Background

  • Howard Marks is the co-chairman and co-founder of Oaktree Capital Management.
  • Oaktree is a leading investment firm with over $120 billion in assets.
  • Howard has a history with TCW Group and Citicorp, focusing on distressed debt, high yield bonds, and convertible securities.
  • He has authored two books, including "Mastering the Market Cycle: Getting the Odds on Your Side."
  • Warren Buffett is among those who highly value Howard's investment memos.

"Howard Marks, co chairman and cofounder of Oaktree Capital Management, a leading investment firm with more than $120,000,000,000 in assets."

This quote provides a brief overview of Howard Marks' professional background and his role at Oaktree Capital Management.

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Howard Marks' Career Path

  • Howard reflects on not getting a desired investment banking job after graduating from the University of Chicago Graduate School of Business.
  • He started at Citibank in the investment research department instead.
  • A mistake by a hungover partner led to Howard's roommate getting the job he had applied for.
  • Howard's career took a different path, focusing on investing rather than investment banking.

"And instead, I started work at Citibank in the investment research department."

This quote explains the beginning of Howard's career in finance, which was not his original plan.

The Role of Luck in Howard's Career

  • Howard acknowledges the role of luck in his career trajectory.
  • He wrote a memo about luck, reflecting on the missed job opportunity and its eventual positive outcome.
  • Howard's career in investing turned out to be more successful than the investment banking path could have been.

"And I wrote a memo about luck. And I said in that memo that if it wasn't for that little bit of bad luck, I could have spent 40 years at Lehman Brothers and had nothing to show of it."

This quote illustrates how what seemed like bad luck at the time played a crucial role in Howard's successful career.

Understanding Market Cycles

  • Howard is known for his thoughts on market cycles and the importance of understanding them.
  • He emphasizes that knowing where we are in a cycle does not equate to making forecasts.
  • Howard believes we can roughly determine our position in a cycle, but it doesn't tell us what will happen next.

"You know, I firmly do not believe in forecasts. And if you look back at that quote, knowing where we are in the cycle, which I think we roughly can do, says nothing about forecasts."

This quote emphasizes Howard's belief that while we can have a sense of where we are in a market cycle, it does not allow us to predict future events accurately.

Market Predictability and Investment Strategy

  • The current stage of the economic cycle influences the probability distribution of future market movements.
  • Late stages of the cycle with above-average positions suggest a higher likelihood of a market decline than a rise.
  • Expected returns may be modest, and the timing of market changes is unpredictable.
  • The distinction between what should happen and what will happen is emphasized.
  • Investment decisions should be based on risk assessment rather than predictions of market timing.

"And it's really important to not think we know what's going to happen. Having said that, where we are in the cycle tells us something about the probability distribution of future developments."

This quote emphasizes the importance of acknowledging uncertainty in predicting market movements, while also recognizing that the cycle stage can inform us about potential future trends.

"And I think if we are at an above average position and a late stage in the cycle, I think what it says is that the probability distribution is negatively skewed, we are more likely to have a decline than a rise."

Here, the speaker is discussing the implications of being at a late stage in the economic cycle, suggesting a greater chance of a market downturn.

Investment Timing and Risk Management

  • The concept of an "insertion point" or the perfect time to invest is challenged; instead, there are multiple times to consider.
  • The current market conditions suggest it may be a more appropriate time to decrease risk.
  • Investor behavior in a low-interest-rate environment, combined with fear of missing out, leads to increased risk-taking.
  • A nuanced approach to investment, adjusting risk levels rather than all-or-nothing decisions, is advocated.

"There is no the time. This is a time. There may be several, and we never know when it's the top or the bottom."

This quote challenges the notion of a single optimal investment time, suggesting that there are multiple opportunities and uncertainties in timing the market.

"I think it's a better time to decrease risk for the reasons that I've been discussing."

The speaker suggests that current market conditions warrant a reduction in investment risk, based on the analysis of economic indicators and investor behavior.

Price Sensitivity and Market Behavior

  • Investment opportunities are most favorable when the market is risk-averse and pessimistic.
  • Current market conditions are characterized by high risk tolerance and a fear of missing out, leading to riskier investments.
  • The best bargains are found in times of market fear, where optimism is low and prices reflect this.
  • Understanding the level of optimism in asset prices is crucial for evaluating investment opportunities.

"So you make the big money as an investor for taking risk when others won't."

This quote highlights the potential for significant gains by investing during times of high market aversion to risk, which can lead to better bargains.

"It's in scary times that you get the best bargains, because there is so little optimism in prices."

The speaker points out that market downturns and fear can create opportunities for investors to acquire assets at lower prices due to a lack of optimism.

Experience and Investment Philosophy

  • Understanding historical market cycles is beneficial for making informed investment decisions.
  • Experience, particularly through difficult times, is valuable for learning and improving investment strategies.
  • Contrarian behavior, which deviates from the crowd, is essential for achieving superior investment performance.
  • Warren Buffett's advice on prudence in relation to others' behavior is highlighted.

"Experience is what you got when you didn't get what you wanted."

The speaker reflects on the value of experience, particularly from challenging situations, as a learning tool for investors.

"The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs."

This quote, attributed to Warren Buffett, advises on the importance of cautiousness in investment when others are being reckless.

Consensus vs. Non-Consensus Investing

  • Conventional behavior leads to conventional performance; to stand out, one must deviate from the crowd.
  • The matrix of being right or wrong, and consensus versus non-consensus, is critical for understanding investment performance.
  • Superior performance is achieved by making non-consensus decisions that turn out to be right.

"If you engage in conventional behavior, that is, you follow the crowd. If good things happen, you'll have good, conventional performance. And if bad things happen, you'll have bad, conventional performance."

The speaker explains that following the crowd results in average outcomes, which do not distinguish an investor's performance from the norm.

Unconventional Behavior and Above Average Performance

  • To achieve above average returns, one must engage in unconventional behavior.
  • Conventional behavior is unlikely to yield unconventional returns.
  • Contrarianism is a method to deviate from the crowd and can lead to above or below average returns depending on the outcome.
  • The attempt to produce above average returns necessitates starting with unconventional behavior.

"If you want to be an above average performer, by definition, you can't engage in conventional behavior."

This quote emphasizes the necessity of diverging from the norm in order to achieve exceptional results. It is a foundational concept for those aiming for high performance in their fields.

Partnership Dynamics at Oak Tree

  • A strong partnership is characterized by mutual respect and intellectual humility.
  • The ability to consider that "the other guy could be right" is crucial.
  • A partnership should focus on finding the right solution rather than insisting on personal opinions.
  • Differences between partners can be complementary.
  • Safety in expressing doubts and uncertainties within the partnership is vital.

"I think that our relationship is characterized by affection for each other, but importantly by mutual respect."

Howard Marks describes the core qualities that define his successful partnership with Bruce Karsh, highlighting the importance of mutual respect and affection in their working relationship.

Intellectual Humility and Decision Making

  • Intellectual humility involves acknowledging the possibility of being wrong.
  • Partners should be open to revising their opinions and admitting uncertainty.
  • A strong partnership allows for safe expression of doubt and candid discussion.
  • The ability to admit when one is unsure is not a weakness but a strength in a partnership.

"Neither of us is afraid to admit doubt about our opinion."

Howard Marks explains how he and his partner Bruce Karsh maintain a healthy dynamic by being open to questioning their own opinions, thereby fostering a culture of intellectual humility.

Encouraging Productive Disagreement

  • Memos are written for both external and internal audiences to understand the working environment.
  • The firm's business principles emphasize a harmonious working environment where everyone can safely express their thoughts.
  • A non-hierarchical culture allows for open expression of opinions, regardless of seniority.
  • Admitting incorrect opinions is not shameful but part of a healthy discourse.

"Everybody who works here understands the working environment... everybody's safe to say what they think."

Howard Marks discusses how Oak Tree's culture encourages all employees to express their opinions without fear of retribution, which is integral to fostering a collaborative and open work environment.

Brookfield Transaction

  • Brookfield is a large Canadian asset management firm interested in expanding into the credit business.
  • Oaktree's expertise in credit and countercyclical investments complemented Brookfield's portfolio.
  • The transaction provided a path to liquidity for Oaktree's employees while maintaining operational control.
  • The cultural fit between Oaktree and Brookfield is harmonious, with shared values of informality, respect, and lack of competitiveness.

"Brookfield now owns 61% of Oaktree. We're working together very harmoniously."

Howard Marks details the successful acquisition of a majority stake in Oaktree by Brookfield and how the two companies operate in a collaborative manner due to their aligned cultures and values.

Brookfield's Ownership of Oaktree

  • Brookfield Asset Management owns a significant majority stake in Oaktree Capital Management.
  • The relationship between Brookfield and Oaktree is harmonious and focused on mutual success.
  • There is no sense of competition or superiority within the partnership, but rather a shared goal of making Oaktree successful.

"Own 60% of Oaktree. All they want to do is make us successful."

This quote highlights the nature of Brookfield's ownership of Oaktree, emphasizing their interest in the success of Oaktree rather than asserting dominance or competition.

Howard Marks' Favorite Book

  • Howard Marks' favorite book is "Fooled by Randomness" by Nassim Nicholas Taleb.
  • He appreciates the book for its insights into the randomness of the investment environment.
  • Marks believes that short-term performance is not a reliable indicator of merit due to the inherent randomness.

"Probably fooled by randomness by Taleb. I think that his ideas about the randomness of the investors environment and as a consequence, the fact that short term performance says rather little about merit."

The quote explains why Howard Marks values Taleb's "Fooled by Randomness," particularly for its perspective on how randomness affects the investment environment and the interpretation of short-term performance.

Howard Marks' Motivation

  • Howard Marks continues to work because of his passion for his job.
  • He finds investing thrilling due to its dynamic nature and enjoys the challenge it presents.
  • Marks quotes Bill Graham, indicating that work is only work if there's something else you'd rather be doing, which is not the case for him.

"It's only work if you'd rather be doing something else. And there's really nothing I'd rather be doing."

This quote, originally from Bill Graham, is used by Howard Marks to express his love for his work, suggesting that he does not consider it work because he enjoys it so much.

Investment Philosophy and Quotes

  • Howard Marks frequently reflects on the quote about the wise and the fool in investing.
  • He believes that successful investing involves recognizing trends early on, while failing investors join in too late.
  • Marks also values the quote by Christopher Morley on living life your own way, which aligns with his personal and professional ethos.

"In investing, it is the fact that what the wise man does in the beginning, the fool does in the end."

This quote encapsulates Marks' investment philosophy, which emphasizes the importance of timing and foresight in making successful investment decisions.

Challenges at Oaktree

  • Oaktree Capital Management is countercyclical and cautious in its investment approach.
  • Howard Marks acknowledges that their cautious stance has not aligned with the recent pro-risk environment, which has been challenging.
  • He believes that they could have been more risk-tolerant during non-extreme periods to capitalize on opportunities.

"To operate cautiously in a pro risk environment isn't fun."

Marks expresses the difficulty of maintaining a cautious investment strategy during a market period that rewarded higher risk-taking.

Career Reflections

  • Marks notes that Oaktree's greatest accomplishments were during cyclical extremes when they were cautious or aggressive at the right times.
  • He wishes they had been more risk-tolerant during the periods between these extremes to maximize returns.

"I think that our greatest accomplishment was to turn cautious at the right times and then aggressive in the meltdowns."

This quote reflects on Oaktree's strategic decisions during market cycles and Marks' retrospective wish that they had taken on more risk during less volatile times.

Future Outlook for Oaktree

  • Howard Marks aims to maintain Oaktree's current operational strategy and risk profile.
  • He anticipates a market downturn in the next five years, which he believes will present opportunities for Oaktree to excel.
  • Marks stresses that now is not the time to increase risk but to prepare for the next downturn.

"We're going to continue to keep the risk off and prepare for the next downturn."

Howard Marks outlines Oaktree's future strategy, emphasizing risk management and preparation for potential market distress.

Acknowledgments and Endorsements

  • Harry expresses admiration for Howard Marks and recommends his memos as essential reading.
  • Howard Marks' son Andrew is thanked for facilitating the interview and providing question suggestions.
  • The transcript ends with promotional mentions of various business services.

"As I said, that just so surreal for me to have Howard on the show, such a huge fan of all his incredible work."

Harry conveys his excitement and respect for having Howard Marks on the podcast, highlighting the impact of Marks' work on his own life.

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