Look up Howard Marks on Wikipedia and you’ll see him identified as an American writer.
Never mind that Marks is the co-founder of Oaktree Capital Management, the world’s largest manager of distressed debt with $150 billion in assets under management. No less of an investor than Berkshire Hathaway's Warren Buffett has called Marks’s investment memos must reading.
Last month, John Mauldin of Mauldin Economics conducted a fascinating interview with Marks at his annual Strategic Investment Conference. Though many serious value investors are fond of saying “only 5% of investors are really value investors,” Marks questioned the entire value investing paradigm and whether it makes sense “to circumscribe investing as thoroughly as [has] been done.”
The reality is more nuanced. “Everybody considers Warren Buffett, for example, the paragon of value investing,” Marks told Mauldin.
He noted that Buffett “made a lot of money” in Coca-Cola dating back to the 1950s, when the stock was a member of the high-flying Nifty Fifty. For a period of time in the 1970s, the soft drink giant’s stock got clobbered, but it re-emerged as a growth stock in the 1980s and 1990s. “Buffett himself does not circumscribe value investing to the extent that has come to be the case,” Marks said.
Sometime in the mid- to late-1960s, Marks believes that both the value and growth schools began “to create this big swath in between the two camps so that each one is firmly and crisply defined.”
He doesn’t believe it’s that simple. “When you get up from the rec room, the change falls between the cushions on the couch,” he told Mauldin. “I’ve always found that a lot of the greatest opportunities are in that gap.”
Marks himself has seen it all—almost. He started out following some of the great growth stocks of the 1960s like Xerox and Citibank. A decade later, the bank asked him to move to Los Angeles to help establish its presence in the emerging junk bond market.
As he told Financial Advisor in October 2018, it was there he learned that equities of outstanding companies could be lousy investments because they were priced for perfection while bonds of bad companies selling at serious discounts could produce outsized returns.
“If there’s a space in the middle that nobody’s prospecting, you can find better opportunities there,” he told Mauldin last month.
In 2018 Marks authored a widely acclaimed book, Master The Market Cycle. When Mauldin questioned him about the current market cycle, punctuated by a brief, violent bear market last March, Marks noted how different it was.
Most bear markets are triggered by “an excess of optimism.” Last year’s collapse was caused by “an exogenous factor, the virus.”
That’s why Marks told Mauldin “we’re kind of off cycle.” Normally, there is a “coincidence of economic growth and market appreciation.” Usually, he said, the market and economic tops occur in close proximity to each other.
After recessions occur, markets typically anticipate recoveries. But since last year, Marks noted, “asset prices have risen much more than the economy has risen.”
When asked if the markets were being myopic, Marks said the Federal Reserve’s manipulation of interest rates accelerates future transactions into the present. The upshot is that it warps price discovery.
This worries him. “We do not have a free market in money today,” he noted. When the Fed sets the discount rate at zero, people go “running into 3% investments and think they are in Nirvana.”