Barron’s had an awesome interview over the weekend with Howard Marks. They made it the cover story for a reason. If you missed it, you must immediately read it here.
For those that don’t know, Howard Marks is the chairman of Oaktree Capital Management ($77 billion under investment). They focus on distressed debt and Warren Buffett is one of his biggest fans. What I found very appealing was his use of sentiment in his overall market thesis.
He’s been in this game longer than I’ve been alive and whenever I see someone willing to share what they’ve learned, it is like Christmas.
Here are a few of my favorite quotes from the story and my take.
“I can tell you from talking to institutions that, after 13 years of having their hearts broken by the stock market, they still are still leery of stocks even with the recent rally,” Marks says. “You can see that in their low stock allocations, compared with the period of 2000 and before. But imagine a couple of more years of good performance for stocks, which well could happen, and the love affair will really be rekindled.”
Well put. Here at Schaeffer’s we share similar views, as markets always peak at euphoria and we simply aren’t see that here.
Along the way, he learned that to consistently beat the market, it was far better to concentrate on unloved, less-followed and therefore less-efficient sectors like distressed debt.
Again, very similar to our methodology. I like to say we buy ‘low expectations’ not ‘low priced stocks’. When NFLX and BBRY were kicked out of the Nasdaq-100 last December that looked like the end of the world. Yet, both have soared higher this year as expectations were way out of line with what the companies were worth.
“These crises seem to come about every 10 years or so,” Marks observes. “As one of my partners, Sheldon Stone, likes to say: ‘The air goes out of the balloon much faster than it went in.’ “
A great point. How many times do we see a week’s worth of gains gone in a day? Well, not much this year, but it happens. Just remember, things go down a lot faster than they go up.
Mark’s takeaway: If you want to succeed as an investor, you must work harder than others and find more obscure corners of the investment world that might not be ruled by the same brutal efficiency as stocks.
Again, look for edges that others don’t see. Here at Schaeffer’s we focus on option sentiment in ways no one else does. This our edge. Sure, it doesn’t always work – but knowing we have a slight edge is all it takes. Do it over and over again to maximize profits.
Perhaps most trenchant in Marks’ investing philosophy is his insight into investor behavior. Investors, in his opinion, tend to be lazy and superficial in their investment decisions, embracing rosy scenarios when optimism reigns and end-of-the-world despond when markets sink. Classic manic-depression, in other words, and not the wisdom of crowds. These swings cause markets to move in a pendulum motion around fair value, rather than in the linear direction most observers assume. That means investors must be astute, both in determining fair value and judging the amplitude of each emotional wave.
What more can I say other than I totally agree. Great stuff right there.
Lastly, here are some other famous quotes from his book The Most Important Thing Illuminated.