A man passes the New York Stock Exchange, Friday, June 24.The Associated Press
Investing is not about making money. At its root, investing is more about controlling risk, according to prominent investor and author Howard Marks.
"Making money is not mysterious. You buy things that go up," he said. "To do it with the risks under control such that if things go against you, you don't do too badly, that is the mark of a pro."
The co-founder of the world's largest distressed debt investment firm spoke at the CFA Society Toronto's annual investment dinner on Wednesday.
Oaktree Capital Management's approach, Mr. Marks said, emphasizes building in a margin of safety to the investment process. That means buying securities with good assets behind them, rather than "ephemeral" assets. "We don't do technology," he said.
"We also want companies that make almost as much money in bad times as they will in good."
Minimizing the downside has served Mr. Marks well.
Over Oaktree's 22-year history, the firm's distressed debt funds have returned an average of 19 per cent annually after fees, the event's moderator Barry Ritholtz said. During the global financial crisis in 2008, Oaktree raised more than $11-billion (U.S.) to scoop up distressed assets.
Mr. Marks's quarterly memos to clients have become widely distributed, counting Warren Buffett himself as a faithful reader. "When I see memos from Howard Marks in my mail, they're the first thing I open and read," Mr. Buffett has said.
The key to superior risk-adjusted returns is to have some sort of informational or analytical edge over the investing masses, Mr. Marks told the audience. "Investing is a crazy area where it's very easy to be average and very hard to be above-average."
But in an age with ever more market information available on demand, and with more skill than ever participating in markets, it's at least arguable no individual investor can gain an advantage with regard to macro forecasting, Mr. Marks said.
"Everybody wants to know what the Fed's course of action is going to be. But it's not knowable by any one person better than anybody else."
Mr. Marks said that he can make superior investment decisions based on present observations alone, with no need to make guesses about the future. "Most people think that's an important part of their job, to predict the future," he said.
His goal is to find that edge among the universe of distressed securities. Unlike during the financial crisis, however, there is very little in the way of distress in the U.S. market right now.
The rate of default among U.S. high-yield bonds has fallen from a long-term average of about 4 per cent per year, to an average of a little higher than 1 per cent over the last six-plus years – an unprecedented low.
And when the opportunities are fewer, the firm should, and does, have less investor money to put to use and less in the way of management fees.
That kind of attitude in finance, as Mr. Ritholtz put it, is "a rare and beautiful thing."
Tim Shufelt