#A Dialogue with Howard Marks – The Most Important Thing: Uncommon Sense for the Thoughtful Investor

CFA Society India along with OakTree Capital Management LP and CFA Institute hosted Mr Howard Marks, CFA, Co-Founder of Oak Tree at Mumbai on Mar 5, 2025. Mr Marks was engaged in an wide ranging fireside chat with Mr Venkatchalam Ramaswamy, MD & CEO, EAAA Alternatives.

On his memos and what keeps him going
Howard remarked that “after writing for 10 years, I became an overnight success in 2000”, demonstrating the importance of persistence. While he has been writing since 1990, the memo that he wrote in Jan 2000 titled “bubble.com” was the tipping point. The view was correct it was correct fast. He further stated that the purpose of memo was not to accomplish an external goal, but to just write down his thoughts, a process that he enjoys greatly and hence has no plan to stop writing. To him, it is a thrill that people read and incorporate it into their thought process and tell him that he influences their thinking.

With the business of investing a fascinating one, the more one thinks about the concepts of the risk and psychology, the more one understand them. And as one digs deeper, come with new things. As an example, he cites one of his recent memos on “Asset Allocation” in October 2024 where he came up with an idea of reducing asset classes to just two – Equity, an ownership asset and Lending, a contractual obligation, a thought that he never had in over 5 decades of investing.

What makes a fantastic franchise
Oak tree was founded in 1995 by Howard Marks, Bruce Karsh, Sheldon Stone, Larry Keeli and Richard Masson after they had worked on an average of 9 years at TCW Group and over years has grown to manage over $200 bn in assets. The key to successful partnership has been “shared valued and complementary skills”. In addition, while not having a business plan or a budget, the founders codified and wrote down the values that the organisation they wanted to create that went beyond the investment philosophy.

“We thought we were doing good work for the clients and if we continue to do good work for the clients, we would have a successful enterprise”

While the firm had an efficacious investment philosophy that they stuck to and guides everything that they do, Howard believes that they got lucky.

When tech bubble burst, S&P was down, people lost interest in stock markets. And when US Fed cut rates, people lost interest in bond markets and a new field got invented – alternate investments. He believes that they were at the right time at the right place.

Where are we in the cycle?

Given the recent volatility in markets, one of the most important questions in the minds of investment professionals is – where are we in the cycle?

We operate in an investment environment that proscribes and defines wheat we do. There are times when it offers great opportunities where we can make a lot of money without taking too much risk and there are times, when opportunities are few and pursuing them result in significant risk. The most important decision in a short to medium term is how to vary the balance between aggressiveness and defensiveness. For this it is essential to understand the right place on the risk-return balance to operate for oneself and the clients. Along with that knowledge, the awareness of what is going on in the environment helps one position in the aggressive – defensive continuum.

And the only way to do that is by an awareness of where we stand in the cycle. While remaining a non-believer in forecasts, it is essential to know where we stand. The current state of the market tells us what its likely to do. But it does not tell us when. One may think that the market is risky to invest and stay cautious, but it can continue rewarding risk taking and go higher. The higher the market goes the more likely it is and may be sooner.

While its important to be macro aware or cycle aware, he reckons that opportunities to profit from it is only at great extremes, when markets are at crazy high or crazy low, where it makes sense to time markets.

With respect to the current state of markets, in his view we are on the optimistic side, but not in a bubble yet, as he wrote in his memo in January 2025. While prices remain high, there is no mania or irrationality yet.

It may be time to ease of the pedal!

Further thoughts on Sea Change – How should one allocate in the New normal

The decline in the interest rates since 1980, was the most significant event in the financial world, but under rated as it was gradual. Declining interest rates are beneficial they increase asset values (as it reduces the discount rates) and its beneficial to borrowers as well. Private equity allowed one to own assets with borrowed money, benefiting from the twin effects produced excellent returns. What if it’s over – that’s the idea of Sea Change.

Between 2009-21, the fed fund rates were ultra-low and was at 0% most of the time. That might be over. The interest rates are higher than they used to be, but not high. When you go back and look at the 70-year history of fed funds rate, the average is 5%. We will stay in this neighbourhood for the next 10 years and we will not be declining and will not be ultra-low. What worked in the declining interest rate period will not be the one that works the best in the period of stable and non-ultra-low rates. Need new strategies.

Being a contrarian

Dave Swensen ran Yale Endowment boldly investing with younger managers based on his intuition of them and he was greatly successful. He says investment management needs “uncomfortable idiosyncratic” decisions. To be superior you need to diverge from crowd. You cannot be contrarian for the sake of it. You need to be non-consensus and be correct. Often consensus is as close to being right and its hard to be out different and right. If you are a contrarian, you deviate from herd, you do something different, its uncomfortable and you may have to wait for a long time. You need the intestinal fortitude to stay invested that period. Being away from the herd is not easy.

Being too far ahead of your time is indistinguishable from being wrong

View on de-dollarisation and new world order

US is a good destination for capital. Combination of free enterprise – innovation – imagination – rule of law – vibrant capital markets – good management practices. This is not going to change overnight. Most of them have little choice than to be invested in US.  

Trump is one of the most pro-business presidents. He is a capitalist, and he truly wants to make economics and business successful. While the past presidents have been predictable, Trump is unpredictable. Viewing it from the prism of probability, the past administrations were defined by a narrow probability distribution, but Trump is not defined by a narrow probability distribution. We are living in a world of uncertainty, unpredictability – lower likelihood estimates and fat tails. His goals are good, but there are questions about his means. He wants to make American companies more successful that will come at the cost of non-american companies. He wants to get the govt budget under control and if he can achieve, they are positive tail events for US.

One lasting lesson on investing

• Think things through
• Question your assumptions
• Question the rules that you are handed.

He cites an example from the glory years of NIFTY50, when as a young professional in 1969 he was too young to question, a period where you bought and invested in NIFTY50 for 5 years – you lost 95% of capital. Only by not accepting and questioning, you can be superior.

To be a superior investor, you need to have a better insight that others do not have!