Billionaire asset manager Howard Marks, the chairman and co-founder of Oaktree Capital, was on Bloomberg TV today talking about what it means to “be great” when it comes to investing.
Marks, who’s famous on the Street for his widely read investor letters, recently put out his “Dare to Be Great II” memo. His first “Dare to Be Great” memo came out in 2006.
“The big question is how much of your time, effort, and capital — and self-esteem — will you risk in the effort of trying to be right? And how much will you spend trying to avoid being wrong? They are two different things. And in order to be — to have a shot at being really right — you got to have a shot at being really wrong,” he said.
Essentially, to be great, you have to be different and willing to fail.
Marks’ observation can be applied broadly. But his letter was really tailored for investors.
“Most great investments begin in discomfort,” he wrote. “The things most people feel good about — investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy — are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.”
Here’s a transcript from Bloomberg TV:
STEPHANIE RUHLE: Now I’m excited for this next segment. How can investors achieve superior results? We are asking one of Wall Street’s greatest minds, Howard Marks. He’s the founder and chairman of Oaktree Capital. He is well-known for his memos to clients and his latest — “Daring Investors to Be Great”. Actually, “Daring Investors to Be Great 2”. It’s the second edition. His first was just a few years ago. We’re going to find out what he means.
Howard, welcome. It’s not just Erik and I who are fans of these letters. Warren Buffet himself has said how much he loves them. So here you are, out with your latest, “Dare to be Great 2”. What does that mean?
HOWARD MARKS: Well, it’s directed primarily, Stephanie, at professional investors who have to be concerned with how they will be perceived. And I wrote “Dare to Be Great 1” in ’06 and I’ve been thinking about it and everybody dares to be great. I mean, who wouldn’t dare to have great performance? The real question I ask in the memo is do you dare to do the things you have to do to be great?
RUHLE: What are those things?
MARKS: Do you dare to be different? Do you dare to be wrong? And do you dare to look wrong? Because you have to dare to be all three of those in order to have a shot at great results.
ERIK SCHATZKER: Howard, you say everyones dares to be great — maybe everybody dreams.
SCHATZKER: Of being great.
MARKS: Well said.
SCHATZKER: It’s pretty certain that not everybody dares to be great because so many money managers just bat average, right?
MARKS: I guess what I mean is they’re willing to be great.
SCHATZKER: Or they would love to be great.
SCHATZKER: So let’s go into more detail about what it takes to be great. What do most money managers do, most institutional investors, what do they do? And then what do the ones who stand out from the rest of the crowd do?
MARKS: Well, I think that — the big question is how much of your time, effort, and capital will you — and self-esteem will you risk in the effort of trying to be right? And how much will you spend trying to avoid being wrong? They are two different things. And in order to be — have a shot at being really right, you got to have a shot at being really wrong.
RUHLE: So right now, for example, where would one say we’re seeing people trying hard to get it right, daring to be different?
MARKS: I think that the people who are buying the social media stocks at the very high prices are trying to be great. They’re trying to — they have seen it go from $US10 to $US40, and now they want to go from $US40 to $US200. Clearly — I mean I can’t imagine they think it’s a low risk strategy, but I think most people drive, look in the rearview mirror, they see what’s happened, they’re dreaming of an extrapolation.
RUHLE: Well, aren’t they afraid to not be on the train? Last year when so many people saw the fundamental problems with the economy, they were fools if they weren’t long on the market, so they piled in just so they wouldn’t underperform the S&P.
MARKS: Well, there is — I mean, the fear of being out of step is a great fear, and I believe that perhaps the most corrosive of all human emotions is having to sit there and watch other people make money when you’re not. And then of course if you’re a professional and other people make money and you’re not, then you could lose your accounts, lose your job, whatever it might take.
SCHATZKER: OK, there’s no question you are right. You feel that way, lots of people feel that way. Why is it then that the majority, the vast majority, of investors aren’t willing to take those risks?
MARKS: Well, because if you take the risks to try to be right, you know you’re going to be right 100 per cent —
SCHATZKER: You could be wrong.
MARKS: You could be wrong. And if you are wrong a few times in a row, then you look at it, maybe you lose your job, maybe you lose your client.
SCHATZKER: Well, that’s what I was going to say. Is it because they’re chicken? They’re about worried about losing their jobs, which, let’s be honest, is a legitimate fear for many people? Or is it because in some cases — or it is a combination of the two? — their clients won’t let them.
MARKS: Well —
SCHATZKER: I mean, all clients in theory, all — whoever they are, pension funds, endowments, the folks who sign up institutional investors to manage their money, want great returns. But they too are concerned —
MARKS: They don’t really want great returns, they want good enough returns. Most of our clients in the professional world constrain us. They say you can only have so much per company, so much per industry, so much per country, and we spend a lot of time negotiating these constraints. They don’t say, oh, if you think that China’s great, put all the money in there. They say, oh, you like China? You’re allowed to put in up to 6 per cent, you know? Because if you put in all the money, you could be wrong.
I say in the memo, and I think the one thing that I’ve carried around that occasioned a return to the topic, was my conviction based on my experience — that the main role among investing institutions, pension funds, endowments, sovereign wealth funds, et cetera, insurance companies — we would never do so much of something that, if it turned out to be a mistake, we would look bad.
Now, that makes perfect sense. Nobody wants to look bad. However —
RUHLE: How do you hit a home run?
MARKS: Well, that’s the point. If you — you have to accept that the converse is we would never do enough so that if it turns out to be a good thing, we’ll move the needle. The two have to go together. You can’t do enough to make a difference on the upside but not enough to get you into trouble on the downside. And almost everything in investing is symmetrical. And it’s the symmetry that people are leery of. It’s not — they’re not, as you point out, Erik, they’re not afraid to make money, they’re not afraid to be great. They’re afraid to have a big mistake on their hands.
RUHLE: You say most great investments start with discomfort.
MARKS: Yes, that’s right.
RUHLE: Is there an investment right now that feels uncomfortable?
MARKS: There’s nothing that is sufficiently out-of-favour today, and sufficiently neglected, to be a great buy. I continue to believe that public money is flooding in to the risky sectors, supporting the prices, and the — and supporting the prices from my standpoint, I’m not — that is not a good thing, that is a bad thing, which means making them expensive.
Where’s the public money not going. Where can it go? Private investments. Only the pros really can make private investments.
RUHLE: They’re the only ones with access.
MARKS: That’s right. Well, and there are no mutual funds or ETFs for private debt, for example, or very few. And so I think that private investments are more shunned or less popular, and thus cheaper than public investments.
SCHATZKER: If the success of your approach to investing relies on finding these uncomfortable areas of credit markets, is it a good thing or a bad thing for things like ETFs that invest in private credit to emerge? Do you want to see more money chasing these — so that more people have an opportunity to find these uncomfortable options?
MARKS: No, I’m not in favour of democracy in this regard. I’d like to have these markets myself.
MARKS: It’s unlikely. If you go back 36 years ago, when I started Citibank’s higher bond fund, most people wouldn’t do them, they called them junk funds.
RUHLE: For a reason.
MARKS: 90 per cent of — no, for a bad reason, Stephanie. But 90 per cent of investing organisations had a rule These things were considered imprudent and improper and Moody’s said fails to possess the characteristics of a desirable investment. Most people would —
SCHATZKER: Prudent is a bad word in investing, isn’t it?
MARKS: It is. It’s a limiting word, because it’s a value adjustment. And 36 years ago, people would say, oh, I would never invest enough. Maybe you could make a lot of money, but it wouldn’t be right. Today, within the bounds of reason and legality, I hope, everybody will do anything to make a buck. So there are very few of these orphaned markets today. That makes it harder for us to find spectacular bargains.
RUHLE: Anything to make a buck. I don’T want to get into any of the details of it, but for you who is so thoughtful in every word that you write, when Michael Lewis had the headline “The market is rigged,” what was your response? How did you feel?
MARKS: I thought that was hyperbole. I thought it was an exaggeration. What he’s talking about is hundredths of a cent per share. And so it’s not right, it’s not fair, but it doesn’t mean you can’t make money in the market. It doesn’t mean that you think you’re going to make 20 per cent but you’re really only going to make 6. It means you think you’re going to make 20? Well, you’re only going to make 19.96 per cent.
And — number one. And number two, I think it really only applies to big institutional orders. Those are the ones that send the fast traders systems signals that more buying is coming, and those are the ones you can take advantage of. But the mum and pop who puts in for 100 shares, 1,000 shares, and gets their order done, they’re not, I don’t think, being ripped off.
So I thought it was an exaggeration.
RUHLE: Finally, a thoughtful, experienced, fantastic response to a headline we’ve all been screaming about for two weeks.