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Making sense of the markets

Event Recaps | Oct 10, 2018 |

By Richard Khavkine

The billionaire investor Howard Marks has simple advice for market players who want to become superior investors: Be idiosyncratic—and then follow through.

Marks asserts that distinguishing yourself takes patience, discipline, and psychological know-how. He addressed a packed McNally Auditorium on October 3 during a question-and-answer event moderated by Erik Schatzker, the host of Bloomberg Television’s “Inside Track.”

Among the prerequisites for a superior investor, Marks said, is the cultivation of an almost Zen-like approach to markets which by their very nature can confound, frustrate, and surprise. “Most great investors I know are unemotional,” said Marks, the founder and co-chairman of the global asset management firm Oaktree Capital Management.

But breaking away from the pack is all the more difficult with an ever-increasing amount of information about markets, whether from books, memos, or financial gurus that puts more and more investors on a level playing field, he said.

“And that makes it hard for us, for all of us, to do it right,” said Marks, whose book, Mastering the Market Cycle: Getting the Odds on Your Side, was recently published.

That proliferation of influences adds up to what Marks called “emotional cross currents.” And that fervor compels most investors to buy high and sell low—a sure recipe for mediocre returns at best.

Outperforming the mean, he said, requires confidence to act contrarily. “You have to buy when everybody else is selling. You have to sell when everybody else is buying,” Marks said. “You have to resist the influences that move the crowd.

For example, he said, “staying steadfastly conservative” when indicators suggest to do so, but during what otherwise appears to be a bullish market, demands singular self-assurance.

Superior investors engage the market in two ways: asset selection and what Marks called cycle positioning. While it is difficult to forecast where markets are headed, determining where in a bear or bull cycle the market stands is feasible—and, ultimately, profitable.

“They want to hold more and riskier assets when the position in the cycle makes the future look bleak and they hold less assets and safer ones when the position in the cycle looks like a bubble,” he said of superior investors.

But again, expertise about markets, and what drives them, is far greater than it was when Marks began his career as an equity research analyst at Citicorp nearly 50 years ago. Consequently, superior investors can get overly circumspect and forego profits—Marks among them.

“I turned cautious some while ago when I saw what I considered risky behavior creeping back into the credit markets and we adopted a mantra at Oaktree called move forward but with caution,” he said.

Although the firm’s wariness was “in some academic sense” the correct course at the time, Marks said, it was too prudent: “That caution has held us back,” he said.

A superior investor takes advantage of those “mistakes”, he said. “So it is a zero-sum game. But if there were no mistakes, there would be no such thing as outperformance.”

Reaping benefit from those missteps, Marks said, requires not so much predictive abilities but skill and aptitude to counter prevailing sentiments. “It’s all about seeing things that other people don’t see,” he said. “Good investing is not a matter of buying good things but buying things well.

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