Howard Marks on what matters in investing (and what doesn’t)

Howard Marks, co-founder of the US-based hedge fund Oaktree Capital and one of the most celebrated investors of recent times, believes that in the world of investing what really matters is the performance of one’s holdings over a five-year or 10-year period.

“I think most people would be more successful if they focused less on the short run or macro trends and, instead, worked hard to gain superior insight concerning the outlook for fundamentals over multi-year periods in the future,” Marks said in the latest edition of his periodical memo.

The veteran asset manager and author said that investment professionals should focus on the study of the earnings potential of a company, buying companies at attractive prices relative to their potential, hold onto investments as long as the earnings potential is attractive, and make changes to investment only when things cannot be reconfirmed.

“Don’t mess it up by over-trading. Think of buying and selling as an expense item, not a profit center. Investors should find a way to keep their hands off their portfolios most of the time,” he argued.

Marks is renowned for finding deep value and price distortions in the financial markets. During the depth of the global financial crisis, when investors were fleeing corporate bonds and stocks, Marks was buying aggressively and later making a substantial profit on those investments.

The asset manager recently told Bloomberg News that a “great bargain” was coming for investors as rising global interest rates and a recession in the US push valuations of companies towards distressed territory.

In his memo, Marks also highlighted what does not matter in investing.

Trading Mentality

Marks argued that most people see stocks and bonds as something to trade, not as something to own. “Investors abandon the owner mentality and, instead, act like gamblers or speculators who bet on stock price moves. The results are often unpleasant.”

Short-term Performance

He proposed that investors should not base their decisions on short-term performance or results. Reported performance in the short-term can give a misleading picture, he said.

“Obviously, no one should attach much significance to returns in one quarter or year,” Marks said. The asset manager said that investment performance is simply one result drawn from the full range of returns that could have materialised and, in the short term, it can be heavily influenced by random events.

“Thus, a single quarter’s return is likely to be a very weak indicator of an investor’s ability, if that,” he said.

Volatility

Marks vehemently argued against seeing volatility as the definition of risk in an investment portfolio. He, instead, argued that the probability of a bad outcome is a risk, and volatility is, at best, an indicator of the presence of risk.

Marks argued that it is essential for investors to recognise that protection from volatility generally isn’t a free good.

“Reducing volatility for its own sake is a sub-optimising strategy: It should be presumed that favoring lower volatility assets and approaches will – all things being equal – lead to lower returns,” he said.