Investing with Oaktree Capital Management’s Howard Marks

Current Market Context (as of June 1, 2022):

• Howard Marks characterizes the current environment as having "reasonable balance" where previous excesses in optimism, leverage, and risk-taking (2009–2019) have been corrected.
• Marks identifies the current market state as "attractively valued" for certain assets, noting that psychological capitulation in public markets has created relative opportunities compared to private markets.
• Public equities have experienced significant markdowns: the Nasdaq is down 30%, and some proven business model software companies are down 50–60%, contrasting with the unproven, revenue-less companies favored in the 1999–2000 bubble.
• A divergence exists between market asset classes: public markets reflect "carnage" and price dislocation, while private market valuations have not yet fully adjusted, suggesting private assets may currently be relatively more expensive.

Strategies for Market Cycles and Conviction:

• Marks rejects macroeconomic forecasting, citing John Kenneth Galbraith's observation that forecasters either do not know or do not know they do not.
• Instead of forecasting the future, Marks focuses on assessing the "present" and "where we were" (e.g., the systemic panic and asset failures in Fall 2008).
• During the 2008 crisis, Oaktree deployed $500 million weekly for 15 weeks, investing a total of $10 billion while others retreated.
• Decision-making was driven by the logic that if the system failed regardless, their investment would not matter, but if the system survived, failure to invest would be a dereliction of duty.
• The firm relies on "Pavlovian conditioning" from prior crises (1991, 2002) to view downturns as necessary opportunities for bargain hunting rather than fear.

Partnership Dynamics and Governance:

• Marks attributes the 35-year longevity of his partnership with Bruce Karsh to mutual respect, zero personal arguments, and strictly complementary skill sets.
• Marks defines a healthy partnership foundation as shared values combined with complementary skills and the humility to recognize one cannot do everything the partner can.
• The duo maintains conviction during downturns by making joint decisions, preventing emotional isolation.

Historical Lessons on Valuation and Risk:

• Marks warns against the "No Price Too High" mentality, citing the Nifty Fifty decline in the early 1970s where investors ignored valuation for "great companies."
• He emphasizes the distinction between buying "good things" and "buying things well," asserting that price always matters regardless of company quality.
• Oaktree's pivot to distressed debt in the late 1970s was built on the innovation of compensating for high risk with high interest rates, rather than assuming no price is too high for equity.
• Recent performance of the "FANG" stocks (Facebook, Amazon, Apple, Microsoft, Google) illustrates that even top-tier companies can underperform by 30% if acquired at peak valuations post-2020.

Investment Philosophy on Disclosure and Education:

• Despite the potential competitive disadvantage, Marks publishes prolific memos to educate "fellow man" rather than view readers as competitors.
• He derives creative satisfaction from simplifying complex financial concepts and has maintained this practice for 33 years.
• Marks advises that investors should look for relative value opportunities, noting that while private markets currently lag in discounting, they will eventually catch up to public market corrections.
• Current cycle indicators suggest a shift from the "capital abundant" and "lenders eager" conditions of the past to a more balanced, capital-conscious environment.