An interview with billionaire debt investor and founder of Oaktree Capital Management, Howard Marks. In this interview Howard discusses the six tenets of investing he uses at Oaktree to select investments. Howard also talks about risk, best financial decision he has made and gives advice for small investors.
Howard Marks: My Six Key Tenets of Successful Investing
Marks welcome to the program. We start every show with a very important financial question you’re reading.
Yes I am.
Best financial decision or career decision you ever made well was to start Oaktree and tell us a little bit about that.
I had had two jobs. I worked at Citibank for 17 years and then trust company the West for 10. And at the end of 94 my colleagues and I decided to leave to start Oaktree.
Why did you do that. I mean you had a great career. What did you see that was going on in the 90s that made you want to do that.
Well first of all the funny thing about our business is if you reach a certain stature you can go out on your own and the House doesn’t get their share you know. So we were working for the minority of the fees. That was number one. Number two we wanted to have a firm that ran our way. We have very definite ideas about how to run money. And over there they ran money every which way depending on the strategy. And when I became president over there I was uncomfortable fronting for approaches I didn’t agree with.
So what are those approaches that you founded this company with. Tell us a little bit because this has to do with your book as well. So what is the approach that oak tree took that was maybe different than where you were.
Well all we did is we we continue to run money as we had you know. Right. So we sat down and wrote out how we had been running it and that became oak trees investment philosophy which we still follow today. And the key thing about Okorie is that all of the strategies follow the same philosophy and which is tenets. The first one says that the most important thing for the money manager is not making a lot of money. It’s not beating the market. It’s not being in the top quarter of the most important thing is controlling risk. And you know we are in risk prone sectors of the market. We don’t do high grade stocks high grade bonds we do alternatives. Right. And I always thought that the best formula was to be the low risk manager in high risk asset classes.
How do you do that when you’re in those high risk areas.
Well you know in each one there are different ways to do it. But for example in high yield bonds which is where I started at Citibank 40 years ago we buy single. Now in the last 10 years the people who bought triple season on down made more money. But I think it’s more uncertain and the clients who come to us want a high degree of reliability.
So you think that controlling risk is a road that is your main. Your first tenant. Yes. Can you compare that with the way that many managed funds do look at there like whatever. Maybe they don’t even have articulated tenants but it seems to me that everybody’s like was going to beat the market right.
Well I think that’s right. I think that for most people beating the market is the most important thing and maximizing return. I believe that it’s not important to beat the market when the market does well which is most of the time our clients want to beat the market when it does poorly. Right. And if we can deliver let’s say average return in the good years and above average returns in the bad years we will have above average returns overall below average volatility especially good performance in the bad times which is when I think you need it and had the clients in addition to managing risk. Okay consistency. Okay. You know we and our clients don’t have the objective of being in the top 5 percent of money managers in a given year and we’re unwilling to be in the bottom five. They want consistency. Number three is we are only active in the less efficient markets where we think hard work and skill can pay off.
So that’s really interesting and it won’t interrupt you for a second because I think a lot of people who listen to this show they hear me talk about like why are you buying you know a U.S. growth fund when you could buy the index. Yes.
Explain what your decision and why that decision is different and what those markets present to you my first 10 years at Citibank were spent in the equity research department from 68 to 78. I ended up as director of research for the last few years and then I was moving over to money management and the boss said What do you want to do. I said Alz I’ll do anything except spend the rest of my life choosing between Mercan Lily. I mean there there are such a thing. You know I went to the University of Chicago in the mid 60s when they were just starting to talk about market efficiency. It’s a concept that was developed there and taught there and market efficiency basically says that if everybody understands the market knows about it has the data is highly motivated to participate and so forth that their efforts will drive out of existence all the bargains and everything will come up being priced fairly for the risk right. I believe in the concept of market efficiency. I don’t believe that any markets are fully efficient but as I say I don’t think you can if you said to me you know you can work here for the next 50 years.
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