Oaktree Capital's Howard Marks: Understanding the Uncertainty of the World

Howard Marks (born April 23, 1946), an investor, was born in New York, USA, and graduated from the University of Chicago. He is the founder of Oaktree Capital Management. Howard Marks worked at Citigroup early in his career, then joined TCW Group. In 1995, he co-founded Oaktree Capital Management with five other partners and was once listed on the Forbes Global Billionaires list. In April 2022, Forbes released the "2022 Global Billionaires List", with Howard Marks ranking 1397th with a wealth of $2.2 billion.

Chairman of Oaktree Capital, Howard Marks:

The world is made up of uncertainties. What truly harms us is not what we don't know, but what we think we know.

And investing is about combating this uncertainty through a comprehensive system.

It could be grasping the big cycles, researching safety margins, discovering high-quality companies, or understanding human nature.

Everyone has their own methods, but we must understand that the future is unpredictable, and the essence of the world is chaotic.

His works include:

The following is a summary of his speech:

I am delighted to have you all here to listen to me talk about my books, my investment philosophy, and how we manage money.

I want to take this opportunity to reaffirm what I firmly believe is necessary in investing, and today I also want to talk to you about how the investment philosophy behind this book came about and where these influences came from.

Today, I want to talk to you about how I developed my investment philosophy.

1. You must understand that the world is made up of uncertainties

We need to realize that the world is a world full of uncertainties in order to understand how to deal with it. If you think that the way to deal with the future is to accurately predict what will happen, believe that you are correct and use it as a basis for action, you are definitely asking for trouble. If something unexpected happens, your outcome could be very bad.

The humorous Mark Twain once said, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." I think, too much belief in the future can be a dangerous root.

2. Too much uncertainty is the source of danger in our world

Building investments on predictions of the future is a very dangerous thing. My predictions don't have to be better than anyone else's, after all, no one can make correct macro predictions about the future. So our investment portfolio must perform well under various macro conditions to control risks. Knowing that we are ignorant allows us to accept the various possibilities of the future.

3. The development of the world as I understand it is often controlled by random events We cannot say for certain what the future holds, as it is made up of random events that may occur. Even if you know the distribution of these random events and their relative probabilities, you still do not know when they will happen. I think this is very important.

4. Leave room for safety to deal with uncertainty

It can be said that in my career, my success comes from studying what might happen in the future, but not assuming that it will happen, leaving room for uncertainty, and preparing for life in a world of uncertainty.

5. Risk is precisely what most people think will not happen

What is risk? A very good interpretation is: "Risk means more things can happen than will happen" (as pointed out by Elroy Dimson, a professor at the London School of Economics).

If a risk is something that most investors believe will happen in the current market, then it is not a risk; if most investors believe that something will not happen in the future, then that is where the risk lies.

But the truth is we never know if something will happen or not. From this perspective, we must strive to understand the future, to understand its possibilities, but never assume that we have fully figured it out.

6. Having no particularly bad records is better than being good and bad at times

What is a good investment strategy? It is steady, with no particularly bad records, which is better than being good and bad at times. Sustaining this for 10 years, 20 years, 30 years, 40 years... we call this investment performance successful.

7. How should you invest?

First, you need to consider what kind of investment results the future will bring. When constructing a portfolio, this portfolio should be at least okay, meaning it remains feasible in any scenario that may arise, only then should you invest.

Second, strive to control risk. This risk should not spiral out of control in any scenario you can think of, so that you do not encounter poor investment performance.

Third, we do not assume that we can understand the macroeconomy, but we should indeed know more about the micro. What is the micro? It's companies, industries, and securities. On this specific, relatively small-scale to-do list, if you can diligently research these projects while having the right skills, you can achieve a deeper understanding of these companies than others.

8. The Holy Grail of Investment: Cheap Goods

In the investment beliefs I have formed over the past 10 years, investing in some high-quality companies may result in losses, buying good companies does not necessarily mean good investments, and we have made a lot of money by buying into bad companies. So, you may lose money on good companies and make money by investing in bad companies. This means that the quality of a company is not the reason for investment performance.

What determines investment performance then? The price you pay. From a safety perspective, my investment philosophy, what I have realized is not what you buy, but what price you pay. Buying good things is not the key to success, but the price you pay is the sensitive issue 9. Wise people act at the beginning, while foolish people act at the end

In the end, every investment trend has a period of excessively low levels. For those who invested in A-shares, when the market was at 2000 points, their entry was the right thing to do. However, later on, others were attracted by the successful rise of A-shares. As A-shares continued to rise, people kept buying in, becoming more and more excited and making more profits. Some people would buy in at 5000 points, which is where the problem arises. The point here is that those who bought in at 2000 points were in the early stages of the trend. Their timing and pricing choices were correct, and they obtained returns with sufficient safety margins. On the other hand, those who bought in later in the trend lacked the certainty brought by timing and price safety margins, leading to major issues.

10. Never forget that a six-foot-tall person may drown in an average five-foot-deep river

For those who treat investment as life, they should understand that this market is not enough to allow everyone to survive on average. However, for those who treat investment as life, we must survive every day. Therefore, our investment portfolio must be able to support us through the toughest times. Our investment portfolio should be designed with enough expertise, thorough risk considerations, and sufficient conservatism so that we can weather those difficult days.

11. What is the task of an asset manager

First, control risk.

What is the task of an asset manager? To make a lot of money? Beat the market? Outperform Wall Street? We disagree with all of these. The primary job of an asset manager is to control risk. At Oaktree Asset, we view risk control as a top priority.

We position ourselves as an alternative asset manager. We do not invest in mainstream stocks or bonds. Instead, we explore less-attended corporate bonds, convertible securities, distressed debt, controllable investments (energy, infrastructure), real estate, publicly listed stocks (undervalued), emerging markets, etc. For each category, we have our own investment strategy.

Second, stability.

Our investment performance will not rank first this year and last next year. We usually rank in the middle because of our outstanding risk control. We stand out in difficult times. We have achieved this goal over the past 30 years.

We achieve average returns, which are already good in good times when everyone is making money. However, our clients want us to outperform the average in bear markets.

In simple terms: in bull markets, we achieve average returns, and in bear markets, we achieve excess returns. If we can achieve this goal year after year, for decades, what will happen? Our performance volatility will be lower than the average level. The overall return higher than the average return is because of our outstanding performance in bear markets, which is necessary for our clients to feel happy.

I believe this is the secret to our company's growth. We have reached a scale of billions of dollars after 20 years, from $3.5 billion in 2006 to $100 billion today (note: in the past few years). We truly started asset management in 2007, 2008 during the crisis period. We received at least $10 billion in 2007 because our performance in bear markets was better than the average level We can show people the investment results, and they will feel that our oak tree is trustworthy. We have the ability to deliver sustainable and stable investment performance. That's how we grow!

Third, we are looking for the part of the market that is inefficient.

We believe that in the part of the market that people can understand, it is very difficult for investors to gain an advantage to make money. However, in the part of the market that people usually cannot understand, you can do relatively better. Projects like bonds, convertible bonds, personal mortgages, infrastructure construction, real estate, emerging markets... It is relatively easier to gain an investment advantage in these areas, but it is still not easy, just relatively easier compared to products in fully efficient markets.

Fourth, we believe that macroeconomic forecasts are not the key to successful investing.

You don't have to be able to predict macroeconomics to be a successful investor. Successful investors I know, like Warren Buffett, have built their success by surpassing macroeconomic forecasts. They focus on the micro aspects, using their knowledge in companies, industries, and stocks to achieve success. Lastly, we are not market timers.

We don't take your money and invest it when we think the market is going up, and then pull your money out when we think the market is going down. If you try to do this, it's too easy to make mistakes.

Using the experience of playing baseball, by avoiding losses, profits will naturally come. The success of long-term investments is built on creating a portfolio and enduring relatively few losses, spending less time in difficult times. If you can simply achieve these simple things, you will have a good investment record for decades. That is also our goal