Some Tit Bits of Christoph Gisiger with legendary investor Howard Marks
Howard Marks, Co-Chairman of Oaktree Capital, cautions about the growing pressure for risky behavior and explains why it’s time to play defense.
Today, many investors are what my late father-in-law used to call «handcuff volunteers». They are doing what they have to do, not what they want to do. In the US, the typical institutional investor, meaning a pension fund or an endowment, needs an annual return rate of 7 to 8% to make the math work. But in a low-return world this is very hard to achieve, and impossible without bearing significant risk. This means that people acknowledge that they have to move out on the risk curve. I see rather that than euphoria.
Attractive investment opportunities arise when you spot some security or some part of the market being ignored and you come to the conclusion that it’s languishing cheap. But today, I don’t think anything is being ignored. Investors are willing to do almost everything.
From 2008 to 2013 there were roughly 80 new credit funds of which 20 were first time funds. But in the last five years, there have been around 320 new credit funds of which more than 80 were first time funds, as I wrote in my September memo. To me, the ability of asset managers to raise first time funds is indicative of risk tolerance on the part of clients. Even though many of these asset managers never managed such an investment vehicle before, they’re offering to learn with the money of their clients.
There is a belief in markets and in managers and thus a willing to take risk. What comes to mind is what I consider the number one investment adage: «What the wise man does in the beginning, the fool does in the end.
Investing is a funny thing because a lot of people think that the long-run is a series of short-runs. Yet, the long-run is a thing in itself: If you aim to pursue superior long-run performance then it doesn’t work to try to accomplish superior short-run performance every year.
The major volatility of the market is the result of fluctuations in psychology: Good news makes people excited and buy. Bad news makes them depressed and sell. But if you get excited when things go well and depressed when things go badly you’ll buy high and sell low, and you are unlikely to have superior results. By definition, your reaction has to be different from that of others.
There are three ways to calibrate your portfolio: Number one is go to cash. But that’s very extreme and easy to be wrong. Number two, you change your asset allocation: bonds rather than stocks, high grade bonds rather than low grade bonds, US rather international markets, developed world rather than emerging markets, large companies rather than small ones, and defensive companies rather than cyclical or growth companies. And then, the third way is to be defensive even within your existing asset allocation, just by shifting to safer approaches and safer managers within your asset classes. It’s challenging today to invest in a low-return, highly priced world. But I think a cautious approach can enable you to access returns even while behaving prudently.