What Howard Marks can teach investors ?

Howard Marks is a billionaire investor who runs Oaktree Capital. Among great investors  the name Howard Marks comes right after Warren Buffett & Charlie Munger. Recently Mr. Marks was in Mumbai  and gave a talk on ” The Truth about Investing”, Though this talk was not open to all, some one who attended the same sent notes from the meeting. Few points from the notes are given below and my comments on the same in italics.

 1. No one can consistently forecast. Our industry is full of people who became famous by getting it right once. Investors would be wise to accept that they can’t see the future and restrict themselves to doing things that are within their control. While we can’t see where we are going, we ought to have a good sense of where we are.
More often than not since the future is unclear, we rely on experts who come on TV and talk about where the markets are headed etc. Many of these experts will tell you for example why de-monetization was a bad idea, and when data comes out that it was not as bad as it was predicted to be, they will also tell you why it was a good idea !! Instead of listening to these people, if investors focus on where they are financially and where they want to be, it will do them a lot of good.
2. Superior results don’t come from buying the  right asset , but from buying assets at less than their worth. Investing is not about what you buy, but what you pay.
This needs no explanation, price is what you pay, value is what you get. We refrain from buying mangoes or buy less quantity in off season but buy more at lower prices in season. It should not be any different in investing too.
3.Sometimes there are plentiful opportunities for unusual returns, wait patiently for such opportunities. Big gains come when consensus underestimates reality. Be aggressive at bottoms, defensive at highs. Key to out performance is to think different, and to think better. Superior returns come not from being right, but being right more than others.

The key phrase is when consensus underestimates reality. Few years back investing in Gold was in fashion and consensus was that Gold was a great investment, there were gold funds launched and after the crash of 2008 who wanted equity funds ?. Today the 5 year return of Gold is negative ! and equity funds in the same period have returned anywhere from 13-20% p.a !

4.Over the last few years, investor time frames have shrunk, obsessed with quarterly returns. Advantage is to be right in the long run.

Many investors fret over the short term returns and churn portfolios to ‘maximize returns’, this can actually minimize returns ! As long as the allocation is right it is best to avoid tinkering the portfolio especially over 1-2 years. It is enough to review the investments once every 6 months or even better once a year.

5. It is essential to invest counter-cyclically. Cyclical up’s and down’s don’t go on forever,  but at extremes most act as if they will. Markets are riskiest when there is widespread belief there is no risk, this was the case in 2007.

In 2007, Infrastructure & Real Estate were the ‘open sesame’ magic words to open the Ali Baba’s cave of wealth. Good stocks like Hindustan Unilever were ignored and DLFs and Unitechs ruled, While as on date Unilever gave 16%+ p.a returns if bought and held since 2007, DLF & Unitech have lost close to 80% & 97% of invested value. It was believed that infrastructure co’s were no risk investments exactly when they were the riskiest, as these co’s were borrowing heavily from banks and betting big, while stocks like Unilever with great businesses and zero debt were looked down upon ! Today everyone is behind mid and small caps , small cap index is at a 9 year high and midcap index is trading at 35 times earnings, history says this kind of moves can not be sustained, but who cares !

Of course all the above are obvious to us today but they should have been obvious back then too. While following these rules is easier said than done ( try telling midcaps are expensive today !)  if we internalize the key learnings which are A. To avoid forecasting, B. Invest for the long term and C. Stay away from expensive assets that itself would ensure prosperity.

Happy Weekend !









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