The simplest way to introduce Howard Marks would be to say that he is the co-founder and co-chairman of Oaktree Capital Management. This company manages more than US$160 billion in assets, and Howard Marks specializes in finding distressed assets to invest in. Oaktree Capital Management has been quite successful under the guidance of Mr. Marks and has produced post-fees long-term returns of 19% p.a. for its investors. Apart from his investing success, Howard Marks is also admired by investors for his “memos” that provide unique insight into the economy and his successful investing strategies. So it’s definitely worth the effort to take a closer look so that you can pick up a few tips to improve your investing skills.
Top 5 Investing Lessons From Howard Marks
1. Accept That You Don’t Know The Future
Even the most brilliant person can’t know everything. That’s why Howard Marks has time and again stressed the importance of intellectual humility. By accepting the limits of one’s knowledge, investors can decrease the likelihood of making mistakes arising from overconfidence.
Mr. Marks simply advises that as it is impossible to predict what the future holds, investors would instead focus only on the things that are within their power. For example, while one cannot be certain whether a new wave of COVID will happen in the short or medium term, one can choose whether to invest aggressively or conservatively right now depending on ones’ convictions.
Now based on that choice, investors can choose appropriate investments across key asset classes like Equity, Debt, Gold, etc. to create a diversified portfolio. Asset allocation and diversification can help maximize returns while reducing overall risk irrespective of future market movements. So, instead of trying to predict the future, focus on what you can control in the present so that you are well-prepared for all possible future outcomes.
2. Ensure You Have A High Margin Of Safety
The margin of safety is a cornerstone of value investing which focuses on choosing investments whose market price is lower than their intrinsic value. This is one of the key lessons from Benjamin Graham, the father of value investing, and was first mentioned in his book “The Intelligent Investor”.
The margin of safety is defined as the difference between the real or fundamental value of a business and the price that the investor pays for it. So, the larger the margin of safety, the greater the difference between the actual value and the market price of the investment. The key benefit of a higher margin of safety is that it reduces the overall risk for the investor.
Howard Marks further suggests that in order to pick undervalued stocks with the highest margin of safety, investors should look beyond the company’s financials and the price. You also need to consider factors like stability, the underlying predictability of the company’s earnings as well as the outlook of the industry it operates in.
3. Always Know The Risks Of An Investment
Unlike the commonly held belief, Mr. Marks does equate risk with the volatility of an investment. Howard Marks considers risk as the probability that an investor might end up losing all of the principal amount invested. So he believes that the best way to reduce risk is to focus on avoiding losses. One way to avoid losses would be to not take any risk, but that might result in significantly lower returns.
So, the alternative is to control the level of risk. Some ways suggested by Mr. Marks to control the risk associated with an investment are:
Diversification of investments across multiple asset classes
Periodic rebalancing of the portfolio
Understanding and maintaining ones’ risk tolerance
Investing for the long term
Linking investments to specific goals
However, doing all of this by yourself can be challenging, so choose the smart way by executing your investments with an ET Money Genius membership. Genius is an intelligent investing framework that lets you choose customized investment strategies and portfolios so that you maximize your returns consistently while reducing volatility and ensuring adequate downside protection.
4. Know The Probability Of Incurring A Loss
Most investors understand that in certain situations, losses are unavoidable. But Howard Marks encourages investors to go further and consider the probability of a negative outcome from their investment. This is because different investments feature different risk-reward ratios, so investors need to have a clear understanding of this relationship. Understanding this relationship clearly can help provide unique investment opportunities.
For example, if a stock is considered to be too risky, it will find few takers and this will result in a reduction in the price of the stock. If the fall is large enough, it can increase the margin of safety to such a high level that the risk of investing is substantially reduced. But to benefit from such a scenario, investors have to do their homework and map out the potential positive/negative outcome and the probabilities associated with each outcome.
5. Understand The Importance Of Market Cycles
Howard marks is a strong believer of market cycles and their ability to govern various aspects of investing ranging from investor sentiments to stock market crashes. In his book “Mastering the Market Cycle”, he introduced 2 key rules about market cycles:
Rule 1: Most things will be cyclical
Rule 2: The best investments opportunities arise when other investors forget the first rule.
This is best illustrated by the fact that in general investors tend to overvalue stocks when the going is good and the same stocks get undervalued during tough times. This results in investors witnessing alternate periods of euphoria and depression. Successful investors realize that these are transient phases that offer unmatched opportunity for long-term wealth creation.
Bottomline
There is a lot that even seasoned investors can learn from Howard Marks and his investment strategies. For new investors, the first step is to get the basics right and Howard Marks has a simple suggestion about how to do it. In his own words, “The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst.” These wise words are definitely a motto that all investors should live by.