Howard Marks (Graham & Doddsville Interview): Markets, Active Investing, View on India, Career Advice

Smart Money

Graham & Doddsville: Interview with Howard Marks (Oaktree Capital), Fall 2017

Any new thoughts on market psychology these days?

  • First, you look at valuations – P/E, yields, yield spreads, transaction multiples, cap rates – and you ask “are they high or low relative to history and relative to interest rates?” You gauge the appropriateness of valuations which is entirely quantitative
  • Then, there’s the qualitative. How are people behaving? Are people euphoric or depressed? Are they skeptical or unquestioning? If a new fund comes out, is it oversubscribed overnight, or does it go begging? What are they saying on TV?
  • Warren Buffett says, “The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs.”
  • I think there’s a lot of credulousness, and not much risk aversion, and I think that’s a cause for concern. Stock market valuations are high, VIX is at the lowest reading in history, and the FANGs are adored. High yield bonds are at their lowest yields in history, emerging market debt is yielding still less, private equity is raising the most money ever, Softbank is raising $100bn fund for technology investments.
  • You can’t argue that things are languishing cheap today, you have to adjust your behavior

Lot of active equity managers worried about investor’s move to passive investing. Your thoughts on this debate?

  • Active managers have gone through a tough time but in the investment markets, there is no such thing as a permanent good idea
  • There have been factors about the market that made actives perform badly for the last dozen years. I don’t think this move is permanent, I think it’s rotational
  • Having said that, I believe the average mutual fund, which has high fees and expenses, didn’t earn them on average. Now, people are catching on
  • On average, an average investor does average before fees and below average after fees. Why should the average investment manager be highly paid?
  • There can be exception managers and they can be worth it. I think one of these days, we’ll head that way again

With the age of the quant, should a value investor change anything about first-level, second-level, or even third-level thinking?

  • Artificial intelligence is probably a threat to all of us but I believe great investing is as much art form as science and I don’t know if a computer can be taught to paint a Rembrandt
  • A computer beat the greatest chess player. We were told that Go, the Asian game, is not scientific, and that unique intuition prevents a computer from succeeding at Go- but now computers beat the best Go players
  • Seems like computer could probably be programmed to beat the average investor. Can it outperform the best investor with a golden intuition or gut? I don’t know, but we’ll see
  • If the whole herd is directed by a screen, you’ve got to find something that the screen hasn’t thought of. I believe that will always be possible, because one important thing to remember is that the actions of investors change the market
  • Everything that’s important about investing is counterintuitive and everything that’s obvious is wrong (I exaggerate). The question is, can a computer or a model, be taught to make counterintuitive judgments? I don’t know, we’ll see

Do you think investing timeframes have materially changed as a result of the information age?

  • Today, everybody has their performance every second in real time, and in one of the biggest mistakes that took place in this process, the clients decided to put a lot of emphasis on short-term performance
  • If you put a manager on probation because he had a bad quarter, if he sells the stocks that are down and buys the stocks that are up, you have forced him into a poor decision
  • Nobody says, “How did you do in the last ten years?”
  • In theory, an investor who skillfully changes his approach and keeps up with the demands of the market- if that person existed- could do well all the time. Very few people, if any, satisfy that criteria
  • Every approach goes out of favor sometimes which means that every investor has period in the dog house. You must have an approach and you have to stick to it despite the times when it’s not working

Any strategy or industry that is looking very attractive to you right now?

  • Nothing’s very attractive. Some things are less unattractive than others. In the whole world, it’s hard to find what we call a beta market, that is an open, public, scale market that represents a bargain
  • What’s cheaper than others? Non-prime real estate is cheaper than prime real estate. I think that private debt is cheaper than public debt. Emerging markets are probably cheaper than the developed world. I think Japan’s cheaper than the US

How do you look at emerging markets these days? View on India?

  • Anybody who thinks they can go to a country and after few days have a superior insight into its future is nutty. When I was in equity research, started to develop a very jaundiced view of plant visits. Is a clean plant better than a dirty one? Is a pretty one better than an ugly one? Thing that matter cannot be assessed by some visit and looking at physical things most of the time
  • India has a lot of people, it has a high birth rate, which is very important for creating GDP growth. It has a lot of unmet needs, it has a lot of people who would like to get into the middle class. I believe it has a work ethic. When I see the poorest of the poor, they’re impeccably groomed. That impresses me
  • Of course, India is famous for corruption and bureaucracy. Those are the negatives but the question is can the former overcome the latter? I hope so
  • Indian equities have gone up but everything in the world has gone up. I think Indian equities are at full multiples, but that’s true everywhere. We may be at similar multiples in the US. I would ask you 20 years from now, which will have had higher growth, the US or India? If India has higher growth (which I would bet it would) and can avoid the occasional crisis that tend to befall emerging markets, then my guess is that investors in India will have done well
  • I always say that to deal with the future, you need two things. A view of what’s going to happen and a view of the probability that you’re right
  • I’m no expert on predicting the future of nations and I haven’t done it much in my life. I wouldn’t bet a lot of my money on my positive opinion on India but I’d bet some

Advice to those entering investment management today?

  • Investment management is fascinating because it’s not easy. The difference between investing and dentistry is that there is no randomness in dentistry. If you do the same things to fill a tooth, you’ll be successful every time. That’s not true of investing. There is no magic formula and there are no physical laws at work. And there’s a lot of randomness. It’s an intellectual puzzle with partial information
  • You should pursue investing if you’ll love it, not to make a lot of money. I predict the investment management business is not going to remain as remunerative for everyone as it has been in the last 35 years
  • “There’s only one success: to be able to live your life your way” – Christopher Morley
  • If the proposition of investment management is interesting to someone, then they should do it, because they’ll have a great deal of fun. Not everybody has the intuition you need to be successful. Warren Buffett says he tap dances to work every day. But not everybody’s Warren Buffett. This business isn’t a lot of fun when you’re not successful, but it sure is when you are

Howard Marks, CFA, is the Co-Chairman of Oaktree Capital, an alternative investment management firm he co-founded in 1995.

Image Source: Barron’s