Nicolai Tangen, CEO of the NBIM (the Norwegian Wealth Management Fund), interviewed Howard Marks on June 12, 2024. His full interview is available on YouTube or in Podcast format. Howard Marks is a wise investor and a great financial author and educator. In the past, I shared notes on his book “Mastering the Market Cycles” and edited one of his lectures (The Truth About Investing).

Today, I summarized my key takeaways from his interview with Nicolai. If you are a fan of Howard, you will recognize his classic – timeliness – talking points on Oaktree’s Investing Philosophy. Enjoy!

1. Risk Control:

   • “I believe it’s easy to make money in the market, especially in good years. The challenge and real skill lie in making money with risk under control, so that if it turns out to be a bad year, you won’t do too badly.”

2. Consistency:

   • “My clients don’t want results that are all over the lot – at the top one year and at the bottom the next. We try to be consistently a little above the middle, but thanks to risk control, we bounce up to the top in really bad years.”

3. Market Efficiency:

   • “I believe in market efficiency and target only the less efficient markets.”

4. Specialization:

   • “You can’t be a successful generalist. You have to know more than everybody else about a few things.”

5. Avoiding Macro Forecasting:

   • “We don’t rely on macro forecasting to drive our investments.”

6. Market Timing:

   • “We don’t expect much from market timing.”

Has the philosophy changed over time?

• “I knew all these principles 50 years ago, but my adherence to them has grown stronger. My conviction in market efficiency has particularly strengthened. My experience has shown the limits of knowing more than others, which leads into non-market timing.”

Experience with Macro Forecasting:

• “Forecasters are not consistently right. At the bank 55 years ago, we said an economist is a portfolio manager who never marks the market. No economist presents his record because they wouldn’t be hired.”

Adherence to Rules:

• “I’ve never been tempted to break from them. They emphasize the limits on knowledge. The longer I live, the more I understand these limits.”

Limits of Knowledge:

• “Randomness or luck is everywhere in our business. We’re dealing with people, not physical laws. People’s actions make history, and their behavior is unpredictable. Randomness plays a big part.”

Judging the Quality of a Decision:

• “A good decision doesn’t always work due to randomness, and a bad decision doesn’t always fail. The first book I read at Wharton was about decision-making under uncertainty. The lesson was that you can’t judge the quality of a decision by the outcome.”

Investment Process with Age:

• “Age mellows you. You understand things more deeply and develop patience, understanding that quick action is not the answer.”

Understanding Market Cycles:

• “The world is cyclical. Nothing moves in a straight line. Regression toward the mean is more dependable than continued movement in one direction. The biggest mistake is believing that a process will continue non-stop forever.”

Current Market Status:

• “I think we’re in the middle ground, a little above fair value but not so high that a decline is predictable or dependable. The stock market is a good barometer because it’s obvious and we get frequent readings.”

Risk Management at Oaktree:

• “Sound risk management is not risk avoidance. Avoidance usually results in return avoidance. We engage in the intelligent bearing of risk for profit, aware of the risk we take. Risk control is everybody’s responsibility, not just a separate risk department.”

Games and Investing:

• “Card games and games like poker, bridge, and backgammon are helpful for investing. They involve risk-taking, assessing probabilities, and structuring bets. Financial markets are not a game in the ha-ha sense, but involve taking calculated risks.”

Contrarian Investing:

• “Being contrarian means betting against the consensus. When the consensus is too strong, the payoff for betting on the improbable outcome may be compelling. The process requires deep analysis and understanding the errors in consensus thinking.”

Advice for Young Investors:

• “Due to the prevalence of randomness, you can’t be an investor if you have to be right all the time. Investing is a great puzzle with many considerations. Equip yourself philosophically and undergo an apprenticeship to learn from experienced investors.”

If you like this article, check out other Financial Wisdom in my Archive, YouTube videos, and Audio Podcasts. Enjoy your financial journey. Sweat Your Assets!