market folly

We're posting notes from the London Value Investor Conference 2016.  Next up is Howard Marks of Oaktree Capital.


Howard Marks' London Value Investor Conference Presentation

Markets have been pretty boring for the last six years. We have to keep our focus in times of boredom.  We are living through a period of complacency with zero interest rates leading some to believe in TINA (there is no alternative). There are no areas of acute over-valuation in Marks’s main markets which are corporate bonds, distressed debt, and real estate. In the stock market he thinks social media stocks are overvalued.

Everyone thinks that interest rates will remain low in the future, there is low demand for capital and the demographics are quite poor. His intellectual side says that low growth is here to stay. His alter ego tells him that when everyone is thinking the same thing he should be more optimistic. However, he did say that he does not listen to his alter ego very often.

Value investing is a big tent.  He also referred to it as the value pantheon. It ranges on a continuum from cigar butts to investing in franchise businesses with large moats and good management at a reasonable price.  He referred to this as Buffett’s journey. What is outside the value tent? Only dreams – companies with no earnings and only growth prospects.

Marks said that he had never carried out a liquidation and that he was not drawn to the cigar butt end of the spectrum. Because he wants high returns, he is very price sensitive so he does not buy safe, quality, unleveraged companies. He is somewhere in the middle of the value pantheon.

When Marks and his partners set up Oaktree they adopted the motto, “If you avoid the losers the winners will take care of themselves.”  In high yield bonds Oaktree have only suffered a 1.4% default rate. While avoiding the losers worked in bonds as they moved into other markets like distressed debt and mezzanine it became less appropriate. If you want more than high single digit returns in these markets you have to do more than avoid losers. ‘Risk control’ and ‘loss avoidance’ are important but not ‘risk avoidance’.  He warned that risk avoidance often leads to return avoidance.

If you hear that an asset is so dangerous that there is no price at which it can be bought your antennae should prick up. It probably means it is a good time to buy.  Throughout his career he has bought assets that other people would not invest in. When an asset class gains a reputation for being unseemly and becomes stigmatised like high yield bonds in the 1980s, emerging markets in the late 1990s, bank securities in 2008 and more recently the oil sector it is usually time to buy.

Investing is harder today than earlier in his career because there is more competition from other investors. The search for bargains has become more intense. Like the growth investor, the value investor needs to think about disruption. He highlighted the big changes a foot in the media, television cable area as an example.

Oaktree put some money to work in the oil sector earlier this year. They have been doing more commercial real estate investing than anything else over the last five years.   The real estate market is heterogeneous. Prime office buildings are expensive in the US today. They have been busiest in out-of-the-way places in non-prime properties. He mentioned that they have been buying zombie properties that require renovation and new tenants which they have been buying from banks at a discount.

Howard Marks' recommended reading for young investors:

- Berkshire Hathaway's annual reports written by Warren Buffett

- Ben Graham's The Intelligent Investor

- Chapter 1 of Marks' book The Most Important Thing on second level thinking


Be sure to check out the rest of the presentations from the London Value Investor Conference.