Howard Marks: Thinking About Macro

Oaktree Capital

Regular readers of my memos know that Oaktree and I approach macro forecasts with a high degree of skepticism.  In fact, one of the six tenets of Oaktree’s investment philosophy states flatly that we don’t base our investment decisions on macro forecasts.  Oaktree doesn’t employ any economists, and we rarely invite them to our offices to share their views.

The reason for this is simple: to use Buffett’s terminology, we’re convinced the macro future isn’t knowable.  Or, rather, macro forecasting is another area whereas with investing in general – it’s easy to be as right as the consensus, but very hard to be more right.  Consensus forecasts provide no advantage; it’s only from being more right than others – from having a knowledge advantage – that investors can expect to dependably earn above-average returns.

Howard Marks: The Most Important Thing

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You can argue that not every stock goes up long term, in which case, you’d be right. There are plenty that stagnate, while others fall apart completely.

And how can you tell which is which, especially given the second quote: “No rule always works, the environment isn’t controllable, and circumstances rarely repeat exactly?”

To that very good question, I would make three recommendations:

Know your pain vs. pleasure tolerances.

Allocate your portfolio appropriately.

Know each company’s actual value before you buy into it.

As Marks says, “Investing requires just one thing: dealing with the future.” And the future is undoubtedly going to be filled with emotions, failures, and corrections.

Howard Marks: Something of Value

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What is Value Investing?

Value investing is one of the key disciplines in the world of investing. It consists of quantifying what something is worth intrinsically, based primarily on its fundamental, cash flow-generating capabilities, and buying it if its price represents a meaningful discount from that value. Cash flows are estimated as far into the future as possible and discounted back to their present value using a discount rate made up of the prevailing risk-free rate (usually the yield on U.S. Treasurys) plus a premium to compensate for their uncertain nature. There are a lot of common valuation metrics, like the ratio of price to sales, or to earnings, but they’re largely subsumed by the discounted cash flow, or DCF, method.

Importantly, value investors recognize that the securities they buy are not just pieces of paper, but rather ownership stakes in (or, in the case of credit, claims on) actual businesses. These financial instruments have a fundamental worth, and it can be quite different from the price quoted in the market, which is based on the manic-depressive ups and downs of a character Benjamin Graham called “Mr. Market.” On any given day, Mr. Market can be exuberant or despondent, and he quotes prices for securities based on how he feels. The value investor understands that – rather than informing us as to what a given asset’s value is – Mr. Market is there to serve us by offering up securities at prices, which can be meaningfully disconnected from the actual value of a stake or claim in the underlying business. In doing so, he sometimes gives us the opportunity to snatch up shares or bonds at a meaningful discount from their intrinsic value. This activity requires independent thought and a temperament that resists the emotional pull of the market cycle, making for decisions based solely on value.

Howard Marks: Prospective Returns Are Low on Everything.’ Howard Marks Outlines Investment Opportunities, Risks

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Barron’s: What’s the biggest question we’ll face when the Covid-19 pandemic winds down?

Howard Marks: The rate at which we’ll return—and the extent to which we’ll return—to our prior behavior. My guess is we’ll go a good bit of the way back to what used to be business, or life, as usual. For the most part, life won’t be fundamentally changed. The things that you or I now would consider out of the question, like going to the movies, a sporting event, or a party, will become commonplace again once the disease is under control.

You’re not a stock picker, but do parts of the stock market look appealing?

On the other hand, when you look at the nontech companies, there are a lot of areas where business models are severely challenged by the pandemic and other trends. If you can find among those companies some where the reality isn’t going to be as bad as the expectation, then you can make money in those holdings. It is all a matter of looking for situations where the merits are underestimated by investors.

Giddy-up: What investment icons learnt from punting (gambling)

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And the great lesson in humility that every gambler learns very quickly – that is, that even the smartest people can’t win them all – is also a lesson that should be imprinted on the brain of every investor.

“Investing is a game of skill – meaning inferior players can’t expect to be above-average winners in the long run,” Marks wrote in a seminal piece on the similarities between gambling and investing, appropriately titled "You bet!"

“But it also includes elements of chance – meaning skill won’t win out every time. In the long run, superior skill will overcome the impact of bad luck. But in the short run, luck can overwhelm skill, and the two can be indistinguishable.”

“Success in gambling doesn’t go to those who pick winners but to those with the ability to identify superior propositions," Marks says. "The goal is to find situations where the odds are generous to one side or the other, whether favourite or underdog. In other words, a mispricing.

“It’s exactly the same in investing. People often say to me, 'YZ is a great company with a bright future, so I bought the stock.' They’re picking a favourite but ignoring the proposition. The former alone isn’t enough; they should consider the latter as well.

Howard Marks: Real estate, retail, entertainment and hospitality stocks are the real opportunities for investors now

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Howard Marks has a new message for investors, look at 'out of favour' assets as they have a better chance of getting returns at a time when interest rates are at rock bottom. 

The assets that Marks, who is co-founder and co-chairman of distressed-asset fund Oaktree Capital Management,  considers to be "out of favor" are those that suffered the worst from the lockdowns, including retail, entertainment, hospitality and real estate stocks. 

"Out of favour, we have real estate, especially retail real estate and real-estate in big cities. We have entertainment stocks, cruise stocks and hospitality stocks," he said. 

Howard Marks Says "The Stock Market Is WRONG"

 

If your analysis is correct you buy more when your stock goes down. There is a fine line between hubris and certainity. 

"Buying at the low point has to terrify you."

Howard Marks: The Fed Has Bailed Out The Market From A Depression

 

In this video Howard Marks talks the Fed bailing out the stock market with trillions of dollars. How has this affected the market and can they keep this printing up forever? We'll let Marks do the talking!