2023-07-21 15:33:12
Howard Marks memos are the first thing Warren Buffett reads as soon as they are published.
Now, Marks has decided to dedicate the most recent of them to explaining why he got all the answers right. calls it has done in its 50 years in the market.
Oaktree’s founder attributes part of his success to the fact that he has done very few calls – just every five decades – and all at times of major market distortions.
“Once in a while – once or twice a decade, perhaps – markets rise or fall so high that the case for action is compelling and the probability of being right is high,” he writes.
“What if I had tried to do 50 calls in my 50s? Or 500? I would be making judgments regarding markets closer to the middle ground – maybe a little up or down, highs or a little low, but not so extreme as to allow for reliable conclusions.”
To decide what to do in these extreme moments, Marks says that it is not possible to depend on information that is available to everyone, such as macro data or company balance sheets.
“Anyone can study economics, finance and accounting and learn how markets are supposed to work,” he writes.
“The really superior results come from exploring the differences between how things should work and how they actually work.”
To do this, it is necessary to understand how investors behave throughout the cycles and “measure the temperature of the market” (the phrase that lends the memo its title).
“When viewed over the long term, investor psychology and therefore market cycles – which seem volatile and unpredictable – fluctuate in ways that approach reliability.”
In extreme moments, says Marks, the investors who make the most money are the contrarianswhich resist the waves of euphoria and pessimism.
But, of course, it’s not enough to be once morest all the time.
“Most of the time, consensus is as close to right as most individuals can get. To be successful in contrarianism, you must understand (a) what the herd is doing, (b) why it is doing it, (c) what is wrong with it, and (d) what should be done instead and why.”
As the manager recalls, his first call accurate came only in the year 2000, when he already had more than 30 years in the market and predicted the collapse tech.
“Does that mean there were no ups and downs to look out for in those early years? No. Does it mean it took me all this time to acquire the insights and experience necessary to detect the excesses of the market.”
Other call which Marks describes as accurate was done between 2004 and 2007, when he and his partners began to fear excessive risk taking by investors, especially in the real estate market, encouraged by a low interest rate policy.
Marks said he started talking regarding it too soon, still in 2004, and the consequences only appeared in 2008, with the burst of another bubble, that of subprime mortgages.
But identifying the problem allowed Oaktree to move on the defensive, selling assets and “significantly raising the bar once morest which potential new investments would be evaluated”.
When Lehman Brothers went bankrupt, in September 2008, the task became how – and whether it was worth it – to allocate an $11 billion fund that Oaktree had created at the beginning of the year to take advantage of the opportunities of the crisis it was anticipating.
The fourth call came in 2012, when he and his partners predicted a new bull cycle for the S&P 500 – which rose 16.5% a year through 2021.
And the last one occurred at the beginning of the pandemic, when markets plummeted in a few days – and very little was known regarding what the consequences of covid might be.
“While some people think that ignorance of the future means they shouldn’t take any action, someone who thinks regarding the matter logically and without emotion should recognize that ignorance does not mean that the position you are in is necessarily the position you should remain in,” the memo states.
“The key, as Rudyard Kipling wrote in the poem Ifis keeping your head on straight when everyone around you is losing theirs.”
Giuliana Napolitano
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