Podcast Review | Move Forward with Caution w/ Howard Marks

By Nelson DeMestre | Associate Analyst at NAOS Asset Management

“Investment is the discipline of relative selection”. Sidney Cottle, as Editor to Graham and Dodd’s ‘Security Analysis’

This podcast is a genuinely interesting insight into the Co-Founder and Co-Chairman of Oaktree Capital Management, Howard Marks. Marks begins by communicating the range of mental models investors need to conquer the inherent challenges to stock market investing. He speaks to the need to graduate from overly simplistic “the market is too expensive so sell or too cheap so buy” mentalities. Even concepts such as aggressive versus defensive and value versus growth are deeply subjective, brushing over the true complexity of investing.

However, above all else, an emphasis must be paid to what we can control.

The foremost amongst them: Price.

Marks uses the example of his beginnings in the investment field as a security analyst in 1969, where the Nifty 50 raged higher on the back of the quality of its businesses (IBM, Texas Instruments, Coca Cola). Marks notes many investors were paying PE ratios between 60 and 90 for these companies, only to lose 90% of their money within the following five years. Their respective PE ratios fell back to the earth, sitting between 8 to 9 times. More to this point, Marks notes: “There are no assets that are so good that they can’t be overvalued”.

On how to balance cycle positioning?

“We invest fully in just about all situations”, principally as market timing is impossible and missing out on market appreciations can generate lost performance that is locked in permanently.

Yet if one does desire to increase portfolio caution, there are three central ways:

1. Go to cash. The risk here is the more you hoard cash, you have upside risk in terms of the market galloping ahead of you. If this occurs, you may never recoup this appreciation.
2. Change asset allocation (e.g. moving to bonds or shifting from emerging markets to developed ones).
3. Change composition within the asset class itself.

Yet, Marks makes the argument, its highly difficult to make the aforementioned changes on “hunches” on the macro-environment.

What investment portfolio/advice should your grandkids follow?

• Start young.
• Don’t tamper with it.
• Don’t sell out at the bottom.
• Don’t get in and out of the market.
• Market has returned 10% a year, if you assume similar going forward:
• Then your money will double every 7 years.
• If they are 5 and live to 75, on 10% p.a., it will double 10 times
• 1 dollar will be a thousand 70 years from now.
• “The greatest invention in history is compound interest”

Link to podcast