Experienced Voices

The Legendary Teacher 02: Returns & Risk

“Return alone – and specially return over short periods of time – says very little about the quality of the investment decision.” Howard Marks

Return, Return & Return! the obsession of investors with return is not unknown. When an investor is exposed to the simplified Security Market Line like below, People more often then not come with two interpretations: 1. Riskier assets give higher returns or 2. For higher returns, people need to take higher risks. Unfortunately none of them are the absolute truth. One person, who has been educating the aspiring investors about the right ways to think about the returns & risk is Howard Marks, Another Legendary Teacher.

Howard Stanley Marks is an investor, thinker, and writer. He is the co-founder and co-chairman of Oaktree Capital Management, which he founded in 1995 along with three of his colleagues. Recognized as the largest distressed securities investor and one of the largest credit investors worldwide, Oaktree specializes in alternative investment strategies. Over the years Mr Marks has largely been responsible for overlooking the firm’s key investment principles, communicating closely with clientele regarding products and strategies, and contributing his experiences and knowledge relating to investments.

Mr Marks has built up his career on the mantra- “You can’t predict. You can Prepare.” As of 2020, the 74-year-old investor known for his insightful assessment of market opportunities has a net worth of $2.2 Billion and in 2019, he was ranked 370th on the Forbes 400 rankings of the wealthiest Americans. He has been a pioneer in the field of investments, Oaktree Capital in its three decades+ history has beaten their respective indexes by a huge margin. The overall TWRR for their closed ended funds have been in high teens. [Check the Link]

Howard Marks was born and raised in Queens, New York. He holds a B.S.Ec. degree cum laude from the Wharton School of the University of Pennsylvania with a major in finance and an M.B.A. in accounting and marketing from the Booth School of Business of the university of Chicago, where he received the George Hay Brown Prize. He is also a CFA charter holder. His first job after university was in investment research for Citibank. He then went onto TCW, the US asset manager, before Oaktree. He is also a published author of books: “The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor” & “Mastering the Market Cycle”.

Howard Marks propagates that Investment success doesn’t come from “buying good things,” but rather from “buying things well”. One of his success traits would be making money off finding situations where he can buy low, especially distressed assets, then sell high. Timing your buying is more important than the quality of what you buy, he says. He has been contributing towards the development of next generation of thoughtful value investors by writing his investor memos. His memos are worldly acclaimed and are widely anticipated for their detailed investment strategies and insights into the current economic conditions. Currently, Mr Marks is assessing the unprecedented times through a pandemic as an investor, though he remains hopeful. In his recent memo, he says “I’m writing to take a closer look at the market’s rise and where it leaves us. The goal, as usual, isn’t to predict the future but rather to put the rally into perspective.” One can reach his memo’s published over last 30 years easily on the website of Oaktree capital. (Link to Memos)

Bottom Line: there’s no such thing as a good or bad idea regardless of price!” Howard encourages everyone to go ahead and take their set of risks in life as risks mean more things can happen than will happen. Though those risks should be a conscious decision and approach should be to get the odds in your favor.

Happy Investing & Keep Learning!

On the Teacher’s day Sep 5′ 2020, I decided to share the list of such legendary teachers to help you on your investment journey. Look out for this section for more legendary teachers on Investing & learn a thing or two from them. The article was prepared with the help from Nawaal Kareem.

Investment Objectives & Advice

The Giant’s Warning!

“Those who can not remember the past are condemned to repeat it.” – George Santayana

On Mar 30, 2000 One of the stalwart of value investing Julian H. Robertson Jr. hung up his boots & closed down his seven funds. It was due to the underperformance of his funds over last 18 months, when the funds lost 4% in 1998 followed by a decline of 19% in 1999. By the March 2000 his fund were down another 13.5%. In contrast to his funds, the Technology heavy index Nasdaq was rising rapidly, His investors started to pull out money and roughly $7.7bn was withdrawn.

Investing Pandit’s & News houses didn’t let go the chance to write the headlines about the incident. Some of the headlines to help you give the better picture of reality:

“There is an old adage, Don’t fight the markets. Julian did and lost”Washington Post

“The financial markets humble ordinary investors all the time. In Julian H. Robertson Jr., they have humbled an investing giant.”The New York Times

Julian was not alone to face this criticism, Other value investors like the legend himself Warren Buffet was also under attack. Value investors were touted as the old economy investors. Those who don’t know Julian Robertson, He is one of the most consistent billionaire for last two decades currently at the age of 88 with a net worth of $4.3bn (Forbes link). He had founded the hedge funds “Tiger Management” in 1980 and for the first 18 years $10k invested in his fund would have turned into ~2.6mm with a CAGR of 32% net of fees, This by any yardstick was phenomenal performance. In his letter to investors, he gave the warning as below:

“The current technology, internet & telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short term performance in the current environment is to buy these stocks. That makes the process self perpetuating un-till the pyramid eventually collapse under its own excess.

What happened next is a historical dot com bubble burst during early 2000. From the peak of Mar 2000 by Mar 2002, Nasdaq saw a correction of more than 70% & Index had fallen to the level last seen in 1995. Seven years of investing with zero returns! Even with the touting from so called new generation money managers, he did not give up his investing principle. He rather thought it to be best to close his funds, return the money of investors. He didn’t quit the game of investing just the responsibility to manage other people’s money. He explained his reason to investors as well:

“The people who were cynical and jumped in and played this boom are going to win this game. But to take the cynical risk against your fundamental belief, I wonder if in the long run that will work.”

He also shared his wisdom about the reason behind his success & the challenges:

“The key to Tiger’s success over the years has been a steady commitment to buy the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.”

These words to me reminded a lot about the current market scenario. In absence of actual earnings, the thing fueling the current rally is the high expectation of future growth coupled with liquidity. I do not know the future and not sure what would be the outcome but as an ardent follower of value investing approach, The probability of further upside is not sufficient for me to take the plunge even if I have to sit out of the rally. My only sane advise would be to repeat the warning, Don’t be the last Fo-Mo buyer!

Happy Investing!