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I love Howard Marks. He's one of the clearest macro thinkers in the industry. The guy's been in the business since 1969. His memos are an absolute treasure trove of experience and insight.
Best of all, they're public, and listed on the Oaktree website right back to 1990...
Marks recently visited Goldman Sachs for a chat. In just 45 minutes, he laid out some of the key messages and principles that have seen him through a wide variety of economic cycles.
We'll dig into that in a sec. First, let's quickly head back to 2007/08 for some context.
Marks' firm Oaktree raised just under $11bn to buy 'distressed assets' before the crisis really hit. They saw it coming. When Lehman was collapsing, they were buying. The bet paid off and by 2011, high yield bonds had gained around 50%, which Marks then described as 'fairly valued'.
But he wasn't worried about more returns. There are always more opportunities.
I think opportunities like this last one will recur, though probably not to the same extent and probably not for the same reason.
Since we started doing this in the 1980s, this was our third episode like this. And there will be more, because people go to excess.
It's the excessive booms that lead to the busts, and it's the busts that give us an opportunity to buy -- I don't think that will ever change.
Yep. That's the cycle, and it usually goes to excess. When capital is too freely available, and/or too cheap (basically the same thing), excess will always be the outcome. It works in both directions, but it's more flamboyant and noticeable in the booms than it is in the busts...
Marks lays out the signs of a boom 👇
"Look at this piece of crap that got issued yesterday. If a company can raise money on this basis, there's something wrong in the market."
It's as simple as that. You know?
And the market--maybe some of you have heard the term "bond vigilantes," but the market is supposed to be like a vigilante. It's supposed to be a disciplinarian.
It's supposed to enable good, prudent deals to get done, but not stupid deals.
But when anybody can raise money for any purpose or no purpose on any terms, that's a danger signal.
And that's what was going on.
And it was just getting worse and worse and worse and worse.
No, he wasn't talking about this 👇
He was actually referring to the '05/'06 period with those comments. But history rhymes... The signs were just as applicable in this cycle when anything from bored apes to SPAC's was able to instantly attract investment...
Now, the market's gone full vigilante disciplinarian.
Some SPAC's are on life support, others have already been take to the woodshed 👇
You Have To Be Uncomfortable & Idiosyncratic
Idiosyncratic means unique to an individual. It's also related to idiot in ancient Greek, which is beautifully poetic... Taking on idiosyncratic positions opens you to the risk of looking like a massive idiot (then again, how can you profit if you don't take on the risk of being wrong?)
Marks explains 👇
Everybody has the same influences. Everybody thinks pretty much the same. Everybody anoints the same winners and criticizes the same losers.
And, obviously, tomorrow's winners are usually found on the pile of today's losers, not on today's pile of today's winners.
But to prospect in today's pile of losers, the things that everybody else thinks are junk, you have to be idiosyncratic.
And you have to take on idiosyncratic positions. And it's a rare person who can do that and not feel some discomfort.
So, I think that those two words, uncomfortable idiosyncratic, tell a huge part of the story. But you have to do it. And you have to--you know, when Lehman goes under, you have to buy. You can't sell.
Now, this isn't just a contrarian mindset. This approach works at the point of maximum pain. It's a very deliberate, calculated, directional type of contrarianism.
In order to outperform, by definition, you have to depart from the crowd. You have to hold a different position. And you have to have resolve to do it.
(At the time when it's hardest to do so).
On Forecasts & Predictions
There are two kinds of forecasters: Those who don't know, and those who don't know they don't know - Galbraith
While Marks is often known as a good forecaster, he disagrees.
I do not believe in forecasts. I believe it's hard to predict the future.
It's not that hard to predict the present. In other words, it's not that hard to understand what's going on today.
So, I do something I call take the temperature of the market. Try to figure out whether the market is heated or frigid. And because you want to buy when other people are pessimistic and when the climate is cold. You don't want to buy when the market is overheated and everybody's optimistic.
This segment sums up the approach perfectly
HM: There was a prominent economist from the '70s who called me up a few years ago. He said, "You changed my life." I said, "How?" He says, "I don't think forecasts anymore. I tell people what I think is going on.
And I tell them what I think the implications are."
KK: Is that gloom and doom? One of those economists?
HM: I'm not going to tell you. But I mean, that's so gratifying.
KK: You've put him out of business.
HM: No, I improved his business. I made him more valuable to his clients.
KK: By not forecasting.
HM: By not forecasting. If forecasting is not valuable, then you can do a great service to your clients by telling them that.
Risk cannot be quantified (even after the fact)
One of THE most important takeaways. As much as economists and quants try to pretend they've modelled the risks down to infinitely small numbers, anything can happen.
We've just been through it with Covid. How many risk models included pandemic and global economic shutdown?
And that's one of the reasons why I don't believe in models.
Because risk, being the probability of a bad event, can't be quantified in advance.
You can have an opinion. You can state it as a number. But that's not quantification. Quantification is measurement.
And the probability of a negative event in the future cannot be measured.
Risk cannot be quantified, even after the fact.
You buy something for a dollar. A year later you sell it for two. Was it risky? Any answers? No. You can't tell. Was it a crazy thing where you got lucky and doubled your money? Or was it a really clever thing that nobody else had figured out where you were sure to double your money? And the answer is you can't tell.
No, I don't think risk can be measured. I don't think the past is absolutely applicable. In fact, the big money is lost at the juncture when the past stops being applicable, which happens eventually.
Absolute gold. Give it a watch here 👇
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