Howard Marks is an American investor, billionaire, and writer. He completed his undergraduate from the Wharton School of the University of Pennsylvania.
He earned a Master of Business Administration in Accounting and Marketing from the University of Chicago Booth School of Business. At that time the concept of the efficient market theory was being developed there.
He is the co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities worldwide. The tenets are drawn by Howard Marks and were narrated by him in an interview. These tenets are the foundation of Oaktree Capital Management. Oaktree capital management is a distressed & credit fund run by Howard Marks & his partner Bruce Karsh. They sold the majority of the stake to Brookfield Asset Management a few years back.
Howard Marks has also written two books.
6 tenets of successful investing by Howard Marks.
1. Control Risks
As Oaktree Capital Management works in a high risks area of the distressed & credit market; it very important for them to control risk. Risk = here it means permanent loss of capital. The risk here does not cover price fluctuation or anything else. So one should always things about risk in all the investments one does may it be equity or debt. Howard say’s
“No need to always beat the market .Maintaining low volatility in the fund is important .It’s okay to do poorly in a good year but we can beat the market in the bad year & reduce volatility”
The above quote goes out of the picture many times while investing. As described by Charlie Munger called locker room culture where one wants to beat all others on a month on month, quarter on quarter, etc. on Wall Street.
2. Being Consistent.
Howard Marks say’s
“not required to be in top 10% or 20% funds, be below average in good times & above average in bad times”
The above quote means that it’s okay to underperform when the market is at a crazy valuation because it gives an opportunity to perform well by investing when there is blood on the street. It’s very important for a prudent investor to be rational over a long period of time as the market can seduce you away from reality. Try always to have a hedge in your portfolio.
3. Only active in a less efficient market.
Oaktree capital management is only active in the less efficient markets like the distressed credit or equity market of the emerging markets where the markets are less efficient. Howard marks came from the batch of mid-’60s when the concept of market efficiency was developed and taught but he didn’t believe in it. Jokingly he said in an interview that if beer is fallen on the floor the professor who taught the market is always efficient will never pick up the same, but a student nearby will pick it up and brink the beer. For example, in the case of India, most of the great investors over the past decades have found the best of the stock from mid and small-cap space which is a less efficient market. But one should be very careful while dealing in less efficient markets like mid & small-cap space in India as it can be too risky.
4. High degree of specialization.
Oaktree operates in different types of segments of asset management. So these tenets mean that each fund manager should operate in his designed area of experience. Real estate distress fund managers should only operate in the same fund and not buy equity in other types of businesses. This is very important to understand & learn as many times fund managers fix up the funds. For example:- From personal observation, many small and mid-cap mutual funds buy small positions of large-cap stocks because they are doing well which is not the requirement of the investors.
5. Investment decisions are not dependent on micro forecasts.
Micro= short term & Macro = long term
“There is no need of economist’s forecasts as it is just an extrapolation”
This means that all the economic forecasts made are just an extension of what has happened in the past; which cannot be true in long term. For example the tech bubble, global financial crises, high-interest rates of 80’s & low-interest rates of present times, etc.
He also says
“One cannot have a superior insight in micro, which is economics, currencies, markets & rates. One cannot predict everything right at the same time in two or more times a row. So one should focus on macro & try to mitigate risk”
6. Long term approach.
Oaktree capital management does not try to time the market; instead, they try to alter between defense & offense. This means that they buy when is fear on the street & sell when there is euphoria on the street . Howard marks call it taking the temperature of the market. When you try to time the market, you need to get two decisions right i.e. selling on time & buying it again. Howard marks for people who don’t know about investing and cycle.
“It’s much better to buy & hold instead of cycle positioning; for the people who cannot make superior decisions”
Howard Marks Memo
Bonus:- Howard Marks write very informative memos to his investors which anyone can read. (from there.)