Howard Marks, Co-Chairman of Oaktree Capital Management, is not only one of the world’s greatest investors but has also been one of the most generous in terms of sharing his knowledge and experience with the value investing community. As we look forward to learning once again from Howard Marks at Latticework 2016 next Wednesday, I’d like to reflect on the following insight, one of many, shared by Howard Marks at a past ValueConferences event:
“To me, the most important single question at a point in time with regard to strategy, I’m not talking about tactics, I’m not talking about what’s going to go up tomorrow, I’m not talking about eternity, but for the middle term, let’s say three to five years, the most important thing at a given point in time is how you’re balancing offense and defense… we want to have a lot of offense when prices are low, psychology is depressed and the outlook is bad to most people but we don’t think it’s so bad. And we want to have defense when prices are high, psychology is buoyant and everybody sees a brilliant future, and we don’t think the future may live up.”
What is offense and defense in investing? On page 145 of The Most Important Thing, Howard Marks defines offense as “the adoption of aggressive tactics and elevated risk in the pursuit of above-average gains” And what’s defense? “Rather than doing the right thing, the defensive investor’s main emphasis is on not doing the wrong thing.” While on the surface there might not seem much difference in doing the right thing and avoiding doing the wrong thing, Howard Marks goes on to say that there is a big difference in the mindset needed for one or the other:
“While defense may sound like little more than trying to avoid bad outcomes, it’s not as negative or non-aspirational as that. Defense actually can be seen as an attempt at higher returns, but more through the avoidance of minuses than through the inclusion of pluses, and more through consistent but perhaps moderate progress than through occasional flashes of brilliance.”
So where do we stand today? In 2013, Howard Marks unequivocally stated “we’re in the middle.” The implication being that investors ought to balance offense and defense as that is what successful investors do in the middle. Roughly three years later, we wonder what Howard Mark’s assessment is of the current investment climate.
Howard Marks: Be Aware of the Temperature of the Market
Howard Marks is a keynote instructor at Latticework 2016.