Investing Wisdom From Howard Marks of Oaktree Capital

Investing Wisdom from Howard Marks of Oaktree Capital

My regular listeners probably heard one of my earlier segments where I spoke about Howard Marks, the 67-year old billionaire who co-founded investment management firm Oaktree Capital which now manages about $84 billion in assets and is a publicly-traded company with ticker symbol OAK.

Oaktree focuses its investments on high-yield bonds, distressed debt and private equity, and has delivered a whopping 23% average annual return over the past 25 years… so Marks has rightly earned his fame and fortune. To give you an idea of just how much a 23% rate of return is: If you invested $10,000 25 years ago, it would be worth $1,769,000 today.

And, like Buffett, Marks too sends out folksy memos to Oaktree clients where he outlines his views on investing, the markets and the economy that are insightful, direct and sharply written. And today, I’m going to share a few insights from Marks’ latest memo – morphing his thoughts so they apply to individual financial planning. I’ve decided to break this up into a two-part series – with the first half of Marks’ memo today, and the rest to follow next week.

Key Questions to Ask First

So in this latest memo, Marks first addresses philosophical questions on what to consider in setting up your investment portfolio. Once you have a clear idea on what your investment goals are, based on your retirement needs, Marks says you should discuss the following questions with your advisor:

- Is it possible to build a retirement portfolio that can beat the market? If yes, then how, and to what extent can we beat the market?

- What’s the best way to manage risk?

- How do we define success, and what risks are we willing to take to achieve investment success?

Then, as you build your portfolio, you’d want to balance it out between index investments (where you should not expect market-beating returns), individual stocks such as dividend payers, and perhaps some alternative investments to a smaller extent. If you’re closer to retirement, you might also want the safety of inflation-protected bonds. And for the safety of bonds, index investments and dividend stocks, you should be willing to accept “average” performance. But for the alternative investment portion of your portfolio, you should expect above-average or superior returns, as Marks calls it.

Pick Funds that Dare to be Different

For your alternative investments where you’re seeking superior returns, look for funds that are backed by a strong track record, and where fund managers dare to be different. You see, if you pick a mutual fund that’s run by a manager who is essentially following or mimicking what others are doing, you’ll just end up paying high fees without getting any real bang for your buck.

So for this alternative portion of your portfolio, look for managers that are courageous enough to be different and open to being wrong… managers who assemble a portfolio that is different from those held by most other funds. As Marks puts it, to be a top performer, the fund manager has to “escape the crowd” by being active in unusual market niches, buying things others haven’t found, don’t like or consider too risky to touch. A good alternative fund manager avoids what the market considers to be a darling, or all the rage, and engages in contrarian cycle timing, and concentrates heavily in a small number of things that he thinks will deliver exceptional performance… everything that personifies great investors such as Howard Marks and Warren Buffett.

As Marks puts it “the cautious seldom err or write great poetry” in referring to fund managers that follow the herd.

So look for fund managers who dare to be different, have a consistent history of market-beating performance and are transparent with their investors. That said, you also need to recalibrate your expectations with such alternative funds because their investments often could take longer to bear fruit… so only invest a small portion of your funds that you’re not planning on touching till you reach retirement… because if you picked the right alternative investment fund, those superior returns could compound very nicely over time.

Now I know that it’s near impossible for most individual investors to really evaluate alternative investment funds, so this is where a good, qualified advisor can offer advice and help kick some of your returns into high gear.

And as I mentioned above, Marks’ company – Oaktree Capital – is publicly traded with ticker symbol OAK, so you can buy shares to participate in Oaktree’s success; When you invest shares in OAK, you are not buying into Marks’ portfolio, but rather participating the company’s profit from its portion of the investment it takes for itself and the fees that are generated from his clients. Oaktree shares also offer a pretty compelling 7.7% dividend yield at current levels… but this is not a recommendation so please do your own research should you consider buying Oaktree.

Most great investments begin in discomfort.

Most people feel good about making investments where the underlying premise is widely accepted, where recent performance has been positive and where the outlook is rosy – but such investments are high in demand and are unlikely to be available at bargain prices.

Bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late – investments that generate discomfort for most people. And this is where good alternative funds excel. For example, Oaktree Capital focuses on distressed debt – bonds issued by companies that are on the ropes in some way or another, bonds that are priced at pennies-to-the-dollar… bonds that comfort-seeking investors would not even think about. This discomfort is what causes distressed debt to be priced cheaper than it is really worth, and it’s one sector that has helped fuel Oaktree’s outsize returns. This area of investing is practically impossible for the typical investor to get into and one has to have superior skills in order to avoid being burned badly if things don’t work out.

Marks also says; Dare to Be Wrong

Marks also reminds us that with courageous, discomfort-generating investments, you must also be prepared for failure as an inescapable potential consequence of trying to do really well. In other words, be prepared to lose money on this alternative portion of your portfolio… it’s not something anyone wants, but get into alternative investments with the understanding that non-mainstream investments could be harder to liquidate and have greater risk, and while your fingers are crossed for the upside, be aware that you could also lose money. That said, a good alternative investment fund should protect you significantly on the downside too.

So look for alternative funds that invest judiciously, have more successes than failures, and make more on their successes than lose on their failures.

Alas… No Magic Formula

Marks also cautions us that there is no easy formula to produce superior risk-adjusted returns – because if there were, everyone with a positive IQ would be rich.

Or, as good ol’ Charlie Munger, Warren Buffet’s Partner bluntly puts it, “Investing is not supposed to be easy. Anyone who finds it easy is stupid” and does not understand investing’s complex and competitive nature. Hardly the words of someone who wants to be politically correct, but he makes a good point. Why should successful investing be so easy that the uneducated and lazy investor achieves superior rate of return? It just doesn’t happen that way.

Superior investment results can only come from a better-than-average ability to figure out when risk-taking will lead to gain and when it will end in loss. And this is not easy task. So it’s good to look for fund managers that ideally have a strong background in economics, financial math, accounting and investment analysis.

Okay, I’ll wrap up here for today, and continue with more on Howard Marks’ thoughts on investing next week.

Safe Investing Isn’t Scary – It Only Takes Little Time

Is safe investing scary? Or is it simply that we are afraid to change? There are a zillion philosophies and proponents of investing and investing techniques but so many of us stick to doing what we have been doing rather than change or move forward.

Every week a new book comes out about another investing technique and people rush to buy it but then how many execute, how many will change what they are doing to try this new technique?

Whether we talk about investment analysis software of safe retirement investing there is one impediment to realizing profitable investment results and one critical proven concept that so many either avoid because they can’t believe it is proven or they want to make it better.

The impediment:

Our life is good, or maybe it’s okay. Sure the price of gas is going up and rent keeps climbing or the car insurance bill never goes down, just up, but typically we make due figuring we’ll get a raise or, well we will just cut something out of our regular spending habit.

In other words we are afraid of Change, yes, CHANGE.

We know – because there are TV reports, newspaper and magazine articles that there are people who make money at investing, good money, but they have time to do it, lots of time and that’s not us, not me.

BUT becoming an investor, a part-time investor, a very, very part-time investor can provide significant rewards like covering the cost of rising gas prices or rent jumps and all the new clothes children need.

Joining an athletic club to keep our bodies in shape requires a major change in our daily and weekly routines. But most people believe keeping their body in shape is worth the three, five, seven hours a week investment – investment in themselves.

Investing in our financial future doesn’t need to take much longer than one shower a week. Okay, you prefer a bath – same thing, same time investment in ourselves, our financial wellbeing. A decent personal investment software program will enable you to do just this.

The proven concept

Yes there are many successful ways of safe investing, of strong profitable investing.

But interestingly there is one particular method of investing that pops up time and again, frequently disguised by an author or proponent with a different name or even his name, but the core remains the same.

Just the other day I learned of another investor’s concept and recommendations, but his core was the same.

But this proven means of investing doesn’t have a sexy name and even the derivative names, the names that are different with different concepts all have the same core, these too sound strange and definitely not something you can just blurt out in a conversation with a co-worker unless you want them to say, “Huh, What.”

So here we go again with change. Being willing to listen to a little bit of jargon, just like everyone has their own workplace jargon.

Relative Strength is the proven answer.

In other words does a stock or a fund have the strength to go forward? It’s really that simple. And if it does is it’s strength greater or lesser than other stocks or funds? That, you might say is the relative and comparative part.

An investment software program that focuses on relative strength can make an investor a happy camper because it is focusing on the most basic of proven profitable stock market technical analysis methods.

If you want more information about relative strength, read some of Michael Carr’s books. He is widely considered the relative strength guru.

Just to clarify a bit, here are some typical terms or formulas based upon relative strength:

  • Relative strength momentum
  • Alpha
  • Return
  • Relative strength index
  • Price oscillator

Carr discusses seven different types or formulas, and there are more, but the core remains relative strength.

If you want to improve your financial health along with your physical well-being, try an investment software program that offers or focuses on relative strength investing. And look for one that will enable you to become a profitable safe investor in as little time as it takes to shower down after a hard workout.