Distressed debt / second-level thinkingb. 1946American

Howard Marks

Oaktree Capital and the investor memos

A distressed-debt investor better known for how he thinks than what he buys. Marks's memos are the clearest published account of what separates an insight from a consensus.

Marks spent his career in the unfashionable end of credit — high-yield bonds, then distressed debt — and co-founded Oaktree Capital in 1995. Oaktree's specialism is buying the debt of companies in trouble, which requires being willing to act when everyone else is selling for structural rather than analytical reasons.

He is more widely read for the memos he has published since 1990, which Buffett has said he opens first. Their recurring argument is that most investors do first-level thinking: they identify a good company and buy it, without asking whether their view is already the price. Marks's position is that an edge can only exist where your conclusion differs from consensus and consensus is wrong.

The second theme is cycles. Marks refuses to forecast, and instead asks a narrower question — where are we in the cycle of risk appetite? When investors are being paid little to take risk, he takes less. It is a defensive posture that costs money in late-stage bull markets, which he accepts explicitly.

Where it fails: 'be cautious when others are greedy' has no timing attached, and Marks has been cautious through long stretches that kept rising. The framework is better at explaining what happened than at telling you what to do this week.

The ideas that survived

Second-level thinking: First level: 'it's a good company, buy it'. Second level: 'it's a good company, everyone knows it, and the price already contains that — so what do I know that they don't?' Only the second can produce an edge.
You cannot predict, you can prepare: Marks does not forecast. He assesses where the market sits in its cycle relative to risk appetite, and adjusts aggressiveness rather than trying to time a turn.
Risk is not volatility: Risk is the probability of permanent loss. A price that moves violently and recovers cost nothing; a quiet position that never comes back cost everything.
The most dangerous thing is the belief there is no risk: Marks's cycle work is largely about sentiment: risk is highest precisely when investors have stopped perceiving any.

Books

The Most Important Thing2011
Mastering the Market Cycle2018

Elsewhere

Biographical reference only. Nothing here is investment advice, and no affiliation with or endorsement by the people profiled is implied.

The ideas that survived

Second-level thinking

First level: 'it's a good company, buy it'. Second level: 'it's a good company, everyone knows it, and the price already contains that — so what do I know that they don't?' Only the second can produce an edge.

You cannot predict, you can prepare

Marks does not forecast. He assesses where the market sits in its cycle relative to risk appetite, and adjusts aggressiveness rather than trying to time a turn.

Risk is not volatility

Risk is the probability of permanent loss. A price that moves violently and recovers cost nothing; a quiet position that never comes back cost everything.

The most dangerous thing is the belief there is no risk

Marks's cycle work is largely about sentiment: risk is highest precisely when investors have stopped perceiving any.