Howard Marks

Barry Ritholtz was joined by Howard Marks to talk about competition, decision making, and persistence. Marks is the co-founder of Oaktree Capital Management and author of The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor. His funds have achieved 18-22% returns and his net worth is $2B. Marks has been incredibly successful in his financial life, but it’s wise to remember the words of Seymour Schulich; “The word ‘billionaire is a very crude and inaccurate measure of how well I have played the game of life.”

Bigger than the billions are Marks’ ideas, which he shares with Ritholtz.

Competition is not capitalism.

This expression comes from Peter Thiel (episode #43), who writes that the accumulation of capital does not happen in instances of competition. The reason there are few wealthy pizza palace owners is because there is too much competition. Competition eats away at capital accumulation, no matter how good your pie.

Marks learned this serendipitously in his career. One day a client called the place he worked and asked about a high yield bond fund. The company didn’t offer that, so Marks’ boss assigned him the task of developing one. Marks’ career grew as the desire for bond funds grew. There were very few people at the time who were operating bond funds like this and Marks says he was “lucky to get in early.”

It’s the same story Jason Calacanis (episode #77) tells about getting in early with blogging and Jay Jay French (episode #75) tells about his band being ready to play on MTV. More competition would have meant less capital for each of them.

Think at the second level.

“If you think the same as everybody else, you’ll behave the same as everybody else, and you can’t expect to outperform them.” – Howard Marks

Marks tells Ritholtz that first level thinking is the style of thinking that many people use. It’s cause and effect thinking. It’s thinking in simple contexts rather than complicated or complex ones.

First level thinking is – someone pays me for my work, it must be valuable.

Second level thinking is – why does someone pay me for my work, what value do I provide?

Taylor Pearson, Adam Davidson, and others suggest that the employment landscape is changing in exactly this way, and the people who recognize it first will be the second level thinkers.

Marks suggests we follow this advice from Warren Buffett:

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs,”

And Marks has applied this thinking too. In 2007 he started a distressed debt fund – in 2008 the market crashed. In January 2000 he wrote about the internet bubble – in March it peaked. It’s a sample size of two, Ritholtz points out, but it’s a pretty good record.

How to avoid the winner’s curse.

The winner’s curse is, by definition, paying more than anyone else will pay. So how do you avoid paying too much?

Marks suggests awareness, “the secret to solving all problems starts with awareness of that problem.”  We call this the Rumpelstiltskin Effect, and have seen it over and over again:

  • Adam Savage cracked the code by finding out out glass bottles are named.
  • Carol Leifer cracked the code by finding out how to shut down hecklers.
  • John Chatterton cracked the code by finding out how to identify sunken submarines.

Avoiding the winner’s curse – or any psychological pitfall – begins by knowing its name.

“The biggest investing errors come not from things that are factual or analytical,” Marks says, “but from those that are psychological.” If you can keep yourself out of the way, you’ll be well on your way.

The average way to be the best.

Marks tells Ritholtz about a meeting he once had with a fund manager. The guy told Marks that he was proud of his slightly above average results, because over 20 years that meant he was in the top 5% of all performers.

A short time later Marks met a manager who was in the midst of a quite bad year, but justified it by explaining you had to have some years of loses to have the great years of gains.

Instead it’s more about survival. If you avoid blowups, you’ll survive. If you do good work, you’ll survive. In blogging like this, more people leave each year and the pool of survivors moves up the ladder of success.

What to do when you hear the crickets.

For ten years no one responded to Marks’ chairman memos. Ten years! And it’s not like these weren’t of consequence. Warren Buffett said, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.” Ritholtz praises them as well, but also asks, why Marks kept writing them when it seemed like no one cared.

“I enjoyed the process,” Marks says. It’s the same thought process Chris Hadfield (episode #111) used in his pursuit to become an astronaut. Hadfield reasoned that there was a good chance he would never make it, but wanted to try. He made sure that the work along the way was interesting to him as well as leading the way to becoming an astronaut.

Finance has been a great career for Marks, but many young people do it for the money. Don’t, says Marks. Instead, find something you enjoy doing and get good at it.

How to not make mistakes.

The best way to avoid mistakes, says Marks, is to read widely. You’ll start to see the cycles of life. Marks tells Ritholtz about this bull market cycle; nobody thinks things will improve -> some people think things are getting better -> most people think things will improve forever -> CRASH. Nobody thinks things will improve…

You dont’ have to live through these things to understand them, Marks says. Instead read widely about different ideas and cultures and history. As the roman financier Seneca wrote:

“By other men’s labors we are led to the sight of things most beautiful that have been wrested from darkness and brought into light; from no age are we shut out, we have access to all ages.”

Try Against the Gods, Fooled by Randomness, or The Short History of Financial Euphoria, says Marks. Also good are Poor Charlie’s Almanack, The Warren Buffett Way, or Outsiders. Ritholtz too has book suggestions.

We’ll never be mistake free, says Marks, and sometimes we’ll need to face situations with consequences. In those cases, he suggests we seek outcomes we can live with.

Be logical, not emotional.

Marks says that a lot of companies get tripped up in emotional hurdles – especially when they buy back their stock. Why do companies buy back stocks when the price is high, Marks asks. Instead they should be buying back when the price is low.

Have a set of procedures for how you would like to act and plan ahead. When John Chatterton dove into a sunken submarine, he had to navigate by touch using only his memory of the sub’s layout. When Chris Hadfield launched into space, he had his steps choreographed like a dancer. When Ramit Sethi (episode #36) teaches courses, he tells people how to have logical answers (add value) rather than emotional ones (cut price).

Our logical responses are like paths through the woods. If we are familiar with them, then we can better stay on them, even when running from a bear (market).

Thanks for reading, I’m @MikeDariano.

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