Howard Marks’s Missives, Now for the Masses

The writings of Howard Marks, chairman of Oaktree Capital Management, have a cult following on Wall Street.
Published about six times a year, his memos to Oaktree clients have become required reading in certain investment circles. The dispatches have been praised by everyone from Warren E. Buffett to “Tyler Durden,” the anonymous blogger for Zero Hedge, the popular finance Web site. Mr. Durden recently called Mr. Marks “one of the most thoughtful observers on the markets” and described his recent memo on gold as a “must read.”
After 20 years of churning out the letters, Mr. Marks is now a published author. His book, “The Most Important Thing,” was released last week by Columbia Unversity Press. In 192-pages, he weaves excerpts from two decades’ worth of the missives into a single volume, dispensing gobs of investing insights obtained in his 42-year career.
Oaktree, based in Los Angeles, manages $82 billion for clients, mostly in fixed-income strategies. Mr. Marks and four co-founders started the firm in 1995 after spinning out from the asset manager TCW. Before TCW, Mr. Marks, a native New Yorker, spent 16 years at Citibank, where he began as a stock analyst and later managed convertible and high-yield bond portfolios.
DealBook’s Peter Lattman recently caught up with Mr. Marks, who was back at work in London after returning from his 65th birthday celebration in Spain.

Q.

When did you realize that your memos were reaching a broader audience than just your clients and colleagues?

A.

Well, I wrote the first memo in 1990, and it was two pages about what I called “The Route to Performance,” how it’s through consistency and loss avoidance rather than spectacular achievements. And I had no response. On the first day of 2000, I published one called “Bubble.com,” about how I thought that the tech stocks were a bubble. Within a few months that proved right. I then started to hear from people. So after 10 years I became an overnight success.

Q.

The book’s title comes from your first 19 chapters, each one arguing this thing or that thing is the most important thing in investing. Who came up with that device?

A.

Actually, I’ve used it before. I published a memo several years ago called “The Most Important Thing.” I wrote that I found myself sitting in a client’s office saying the most important thing is controlling risk. And then 15 minutes later I say the most important thing is buying cheap. And then 15 minutes after that, I say the most important thing is realizing that you don’t know what the future holds. So I said these are all the most important things.

Q.

The book draws heavily on newspaper articles and the writings and quotes of famous investors, even Mark Twain. I have this image of your traveling around with a pair of scissors and a burgeoning file of newspaper clippings. Tell me about your writing process.

A.

That’s just what I’ve been doing this morning. I have a clip file spread out on my desk for the next memo. It’s working title is “How Quickly They Forget,” and it’s about short memories and how that dooms people to repeating mistakes. Nobody remembers the crisis anymore.

Q.

I recall a John Kenneth Galbraith quote from your book related to that.

A.

Galbraith said: “Contributing to euphoria are two further factors little noted in our time or past times. The first is extreme brevity of a financial memory. Financial disaster is quickly forgotten. When the same or closely similar circumstances occur again, sometimes only in a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery.” What could be more true of the years leading up to the crisis?

Q.

You call Los Angeles home, but for the past half-decade you and your wife, Nancy, have spent four months a year living in London. What effect has that had on your investment outlook?

A.

I think it has given me, and hopefully the firm, a more global perspective. London is now our second largest office. The other thing is that I find it very interesting to look at the United States from the outside.
I’ll give you one brief example. Think about gold. We tend to think that what’s been happening with the price of gold is that it is now worth more dollars than it used to be. But outside the United States when you talk to people, you see people think that it’s not an increase in the price of gold in terms of dollars but a decrease in the price of dollars in terms of gold. And seeing it reflectively like that I think is very helpful.

Q.

Other than you and your Oaktree colleagues, if you had to pick one person to manage your money who would you choose and why?

A.

In the late ’60s, when I was a rookie analyst following office equipment companies, a portfolio manager asked me, “Who’s the best sell-side analyst on Xerox?” I answered, “The one who thinks most like me is so-and-so.” As far as I can tell, Seth Klarman of the Baupost Group and I think the most alike. His returns are great and his risk control is stellar.

Q.

In your book you mention Michael Milken as a major influence. His creation of the junk bond market played a key role in your career.

A.

Marshall McLuhan said “the medium is the message.” I think high-yield bonds have been the medium for a lot of my philosophy. Your philosophy comes from the events you live through. I started at Citibank in the late ’60s when the bank was what was called a Nifty Fifty investor. It bought the stocks of the best companies in America: IBM, Xerox, Merck, Coke, etc. Once analysts ascertained that the growth prospects were bright, the stocks were bought without regard to valuation and we ended up paying P.E. ratios in the 80s and 90s. A few years later you had lost 90 percent of your money.
Then I met Mike Milken in ‘78, and he said if you buy the bonds of B-rated companies and they survive, all the surprises will be on the upside, and a little light bulb went on. I realized that you could invest in the debt of the worst companies in America and make a lot of money if you were paid an appropriate risk premium. That’s really a big part of the philosophy, that quality investing is not about buying good things, it’s about buying things well. The most important thing is the relationship between price and value. If you can figure out the fair value of an asset and buy it for less, that is the best, most dependable way to invest.

Q.

You mention Milken but not me, which is frankly a bit disappointing because I once make an appearance in one of your memos, albeit anonymously.

A.

That memo was from early October 2008. We were speaking and I told you we were buying aggressively, and you said to me, “You are?!” That conversation became the basis for a memo. We decided that if we’re spending a lot of our clients’ money during what some people thought was about to be the end of the world, we should at least fill them in. So we talked about how this is the third debt crisis we’ve lived through, and to us the pattern was obvious and the wrongness of not buying was obvious. There’s a canard that people retreat behind in a crisis. They say you really shouldn’t try to catch a falling knife and they say we’re waiting for the dust to settle and the uncertainly to be resolved. Then by the time the dust settles and the uncertainty is resolved and the knife clearly stops falling, there are no more bargains.