market folly

Oaktree Capital's Howard Marks is out with his latest investor letter in which he reviews the wild year of 2009. Marks always brings insightful commentary to the table and we'd previously highlighted his ways to play inflation. Turning to 2009, he sums up the action by writing (emphasis his),

"Ultra-low interest rates on reserve securities and the high returns promised on riskier ones combined to convince investors to reassume some of the risk they had sworn off just a few months earlier. The curtailment of forced selling and the arrival of a few buyers were enough to convert the sweeping decline into a rally ... Thus, remarkably given the circumstances, 2009 was the best year in history for most of our markets. This shows that good fundamentals aren't a prerequisite for gains. Too-cheap prices, a halt to fundamental deterioration and forced selling, improved psychology and the arrival of buyers can be enough."

Marks also noted that Oaktree exemplified counter-cyclical behavior and was pleased with the results as they were largely buying bargains in 2008. For 2009, Oaktree as a firm was up 38.9%, the best gain in their history. For 2008, they lost 20.7%. We've also posted up some other hedge fund performance numbers from last year for those interested in comparing. Marks called the recent markets the "craziest two-year seesaw I've ever seen." The past two years have been the perfect illustration of buying when there's blood in the streets and selling when greed and complacency take over.

Looking forward, Marks notes that Oaktree only nibbled at real estate in 2009. They have been building capital up in order to deploy it in this sector at the right time. Simply put, they are being patient here. This certainly sticks to their counter-cyclical focus. And while real estate has already been beaten down, it looks like the opportune time to swoop in is still ahead.

We'll end with some of Marks' closing remarks where he identifies some very practical investing lessons. He writes (emphasis his),

"I don't believe volatility defines risk, but it does introduce the risk of grave error ... Losing faith and selling out at the bottom is the cardinal, irreparable sin in investing, and the bigger the decline, the higher the probability of doing so and the greater the penalty. Thus 2008 presented the biggest opportunity in history to convert downward fluctuations into permanent losses."

Embedded below is Howard Marks' entire review of 2009. RSS & Email readers will need to come to the site to view it:



As always, great insight from Oaktree's chairman. We've also previously covered some of his other commentary, including Marks' thoughts on how to play inflation. For more great hedge fund investor letters, head to our coverage of Perry Partners' letter as well as the recent one from Dan Loeb's Third Point.