Investment wisdom from Howard Marks of Oaktree Capital

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

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

And, like Buffett, Marks also sends simple memos to Oaktree clients outlining his views on investing, the markets and the economy that are insightful, direct and well-written. And today, I’m going to share some insights from Marks’ latest memo: transforming his thoughts to apply to individual financial planning. I’ve decided to break this into a two-part series: the first half of Marks’ memo today and the rest next week.

Key questions to ask first

So in this latest memo, Marks first tackles philosophical questions about what to consider when setting up your investment portfolio. Once he has a clear idea of ​​what his investment goals are, based on his retirement needs, Marks suggests that he discuss the following questions with his advisor:

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

– What is 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’ll want to balance it between index investments (where you shouldn’t expect outperformance), individual stocks such as dividend payers, and perhaps some alternative investments to a lesser extent. If you’re closer to retirement, you may also want the safety of inflation-protected bonds. And for the safety of bonds, index investments, and dividend stocks, you must be willing to accept an “average” return. But for the alternative investment portion of your portfolio, you should expect above-average or above-average returns, as Marks calls it.

Choose funds that dare to be different

For your alternative investments where you’re looking for 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 choose a mutual fund managed by a manager who essentially follows or mimics what others are doing, you’ll end up paying high fees without getting any real bang for your buck.

So for this alternative part of your portfolio, look for managers who are brave enough to be different and open to being wrong…managers who put together a portfolio that is different from most other funds. As Marks says, to outperform, 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 a favorite, or the latest fad, and gets involved in counter-cycle timing, concentrating heavily on a small number of things that they believe will deliver exceptional returns. ..everything that epitomizes great investors like Howard Marks and Warren Buffett.

As Marks puts it, “the cautious rarely err or write great poetry” when referring to fund managers who follow the pack.

So look for fund managers who dare to be different, who have a consistent track record of outperforming the market and who are transparent with their investors. That said, you also need to recalibrate your expectations with such alternative funds because your investments can often take longer to pay off…so only invest a small portion of your funds that you don’t plan to touch until you reach retirement…because If you chose the right alternative mutual fund, those outperformance could add up nicely over time.

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

And as I mentioned earlier, Marks’ company, Oaktree Capital, is publicly traded under the symbol OAK, so you can buy stock to participate in Oaktree’s success; When you invest in OAK stock, you are not buying into Marks’ portfolio, but rather sharing in the company’s profits from your share of the investment it takes for itself and the fees it generates from its clients. Oaktree stock also offers a fairly attractive dividend yield of 7.7% at current levels… but this is not a recommendation, so please do your own research if you are considering buying Oaktree.

Most great investments start with discomfort.

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

Bargains are usually among things that are controversial, that people are pessimistic about, and that have performed poorly lately: investments that make most people uncomfortable. 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 one way or another, bonds that are priced at pennies on the dollar…bonds that comfort-seeking investors wouldn’t even think about. . This discomfort is what makes distressed debt priced lower than it’s actually worth, and it’s a sector that has helped fuel Oaktree’s outsized returns. This area of ​​investing is practically impossible for the typical investor and one has to have superior skills to avoid getting seriously burned out if things don’t work out.

Marks also says; Dare to be wrong

Marks also reminds us that with courageous investments that create discomfort, you also have to be prepared for failure as an inescapable potential consequence of trying to do it really well. In other words, be prepared to lose money in this alternative part of your portfolio…not something anyone wants, but invest in alternative investments knowing that unconventional investments may be more difficult to liquidate and have higher risk, and while your fingers are crossed for the positive side, keep in mind that you could also lose money. That said, a good alternative investment fund should significantly protect you on the downside as well.

So look for alternative funds that invest wisely, have more successes than failures, and earn more on their successes than on their failures.

Unfortunately… There is no magic formula

Marks also warns us that there is no easy formula for producing superior risk-adjusted returns, because if there were, everyone with a positive IQ would be rich.

Or, as good old Charlie Munger, Warren Buffet’s partner, puts it bluntly: “Investing isn’t supposed to be easy. Anyone who finds it easy is stupid” and fails to understand the complex and competitive nature of investing. Hardly the words of someone who wants to be politically correct, but has a good point. Why should it be so easy to invest successfully for the uneducated and lazy investor to achieve a superior rate of return? It just doesn’t happen that way.

The best investment results can only come from a better-than-average ability to determine when risk-taking will lead to a profit and when it will end in a loss. And this is no easy task. Therefore, it is good to look for fund managers who ideally have a strong background in economics, financial mathematics, accounting, and investment analysis.

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