Does the fact that there’s a recession ahead mean we should reduce our investments or alter our portfolio allocation? “I don’t think so”, he said in his latest memo.
Marks of Oaktree Capital Management said one cannot know much about the short-term future or we cannot dependably know more than the consensus, he said.
“The possibility – or even the fact – that a negative event lies ahead isn’t in itself a reason to reduce risk; investors should only do so if the event lies ahead and it isn’t appropriately reflected in asset prices,” he said.
Marks said even if one has an opinion about the short term, s/he cannot or should not have much confidence in it.
“If we reach a conclusion, there’s not much we can do about it – most investors can’t and won’t meaningfully revamp their portfolios based on such opinions. We really shouldn’t care about the short term – after all, we’re investors, not traders,” he said in his latest memo.
If an investor wants to achieve above average returns, he has to depart from consensus behavior, Howard Marks said in the memo.
He said readily available quantitative information with regard to the present cannot be the source of superior performance, adding that first-level thinkers look for simple formulas and easy answers but it is the second-level thinkers who know that success in investing is the antithesis of simple.
Marks said one has to be overweight on some securities, asset classes, or markets and underweight others and do something different to achieve superior return in the market.
The consensus opinion of market participants is baked into market prices, he noted, adding if an investor lacks insight that is superior to the average of the people who make up the consensus, he should expect average risk-adjusted performance.
“If you’re happy doing average, you can simply invest in a broad swath of the assets in question, buying some of each in proportion to its representation in the relevant universe or index. By engaging in average behavior in this way, you’re guaranteed average performance. (Obviously, this is the idea behind index funds.),” Marks said.
Marks said every active bet placed in the pursuit of above average returns carries with it the risk of below average returns.
“You can’t hope to earn above average returns if you don’t place active bets, but if your active bets are wrong, your return will be below average,” he said.
Marks said since other investors may be smart, well informed and highly computerised, an investors must find an edge that others don’t have.
“You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You have to be more right than others …which by definition means your thinking has to be different,” Marks said.
According to him, if the extreme highs and lows are excessive and the result of the concerted, mistaken actions of most investors, then it’s essential to leave the crowd and be a contrarian.
“Every investor has to make a conscious decision about which course to follow. Pursue superior returns at the risk of coming in behind the pack, or hug the consensus position and ensure average performance,” he said.
Marks said unconventional behavior is the only road to superior investment results, but it is not for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes.
“Thus each person has to assess whether he’s temperamentally equipped to do these things and whether his circumstances – in terms of employers, clients and the impact of other people’s opinions – will allow it…when the chips are down and the early going makes him look wrong, as it invariably will,” he said.
Think beyond short term
Marks said If one waits at a bus stop long enough, he’s guaranteed to catch a bus, but if he runs from bus stop to bus stop, he may never catch a bus.
“If everyone else is focusing on something that doesn’t matter and ignoring the thing that does, investors can profitably diverge from the pack by blocking out short-term concerns and maintaining a laser focus on long-term capital deployment,” he said.
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