Considered one of the most successful investors today, the American Howard Marks, co-founder of Oaktree Capital Management, is known for advocating that you have to bet on what others would tend to avoid in order to obtain good yields. This view of investing helps to understand his view that the biggest risk an investor can take is being out of the market, regardless of the scenario.
“Most people would say [hoje] that the biggest risk is a slowdown linked to inflation and bad economic news. In my experience, this is a temporary problem,” he said. “I think the biggest risk is not being in the market.”
Marks gave an exclusive interview to the podcast Outliers, presented by Samuel Ponsoni, fund manager of the Selection family at XP, with the participation of Mariana De Biase, in charge of analyzing the broker’s international funds. The episode is now live and you can check out the original version, in English, as well as the dubbed version, in Portuguese, on Spotify, Deezer, Spreaker, Apple and other podcast aggregators. Additionally, the podcast is also available in video format on XP’s YouTube channel.
Oaktree is one of the world’s largest fund managers specializing in alternative investments, with over 1,000 employees and $164 billion in assets under management. Marks is also known for his Notes by Howard Marksperiodic market and investment reviews that are required reading in the industry.
A proponent of long-term strategies, Marks points out that knowing the right time to buy or sell a security is very difficult. He rejects impulsive behavior, such as selling stocks in a downturn for fear of even bigger setbacks.
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“Economies and markets have a positive underlying trend. We know there are cycles, but at the end of the day it’s positive,” he said.
By way of illustration, Marks recalls that the S&P 500 index, which includes the main companies listed in New York, has increased by an average of 10% per year in 90 years. Appreciation, however, has not been constant, there have been ups and downs. In ten years, for example, the greatest gains may have occurred on 20 specific days.
“If you go in and out and stay out of the market for a while, you can lose those 20 days. No one knows when they will happen,” the executive observed. “If you stay at a bus stop for a long time, you can catch a bus. But if you keep jumping from point to point, you might not catch any,” he added. He often uses metaphors and quotes.
For Marks, it is only at the “extremes” that it is possible to have a clearer view of the direction of the market. And according to him, now is not the time for extremes, despite the sharp declines in stock markets in 2022, inflation and rising interest rates.
With the withdrawal of the stimulus measures for the US economy created in the Covid-19 pandemic, the “obvious excesses”, according to Marks, have left the scene, causing the stock markets to have a strong appreciation in 2021.
Marks adds that the pandemic – which he likens to a “meteor” – and Russia’s invasion of Ukraine, which began in February this year, are factors external to the economy, and have led to a movement that does not correspond to the concept of a traditional economic cycle. The executive has published a book on the subject, titled Mastering the market cycle.
“Especially because of these factors, it is difficult to decipher the market today,” he said. “But I want to emphasize that it is still difficult.”
According to the manager, “we’re not so expensive that you have to fall more, but we’re also not so cheap that you can’t fall anymore,” he commented. Marks gave the interview on May 18, when the S&P 500 was down 15% year-to-date and the Nasdaq Composite was down 22%. Since then, the negative performance has worsened.
In this sense, he recommends to investors a “normal” attitude towards the market, neither aggressive nor defensive. “If you’re very concerned about avoiding downside swings, you might want to increase your defense a bit, but certainly not in an extreme way,” he noted.
Along the same lines, he reveals that Oaktree’s approach is “neutral”. “We invest every day, but we always include an element of defense in what we do, because we look for what we call a margin of safety,” he said.
That’s not to say there aren’t good options out there, but it’s important to look for “bargains,” low-priced papers with the possibility of good returns. “Compared to three months ago, some things have gone on sale,” he said.
Marks recommends calm. According to him, investors tend to check quotes every day and end up over-trading. For him, short-term vision and hypermarket – the excess of transactions on the market – are not advantageous behaviors.
“People get excited when things are going well, when prices are high, and they buy; and they get depressed when things go wrong and they sell low, which is the opposite of what you should be doing,” the executive said.
Here and now
Skeptical of macroeconomic forecasts and the so-called market timing – strategy based on decision-making trying to predict the best asset prices and the ideal times to buy or sell financial assets – its recommendation is the fundamental analysis of companies, sectors and bonds. “We are acting in response to current market conditions, not in response to what we think will happen in the future,” he said.
His view of inflation in the United States over the next five years, for example, is that it will be above the level of the past 40 years (“when we couldn’t reach 2%”), but that it will be lower than the more than 8%, on an annual basis, currently verified. “I think it might be 3% or 4%, but we’re not going to do anything at Oaktree based on that,” he said. According to him, decisions will continue to be made based on the perspectives of individual companies and sectors.
“People need to know that when they talk about inflation, which I find very mysterious, they shouldn’t trust their predictions or anyone else’s predictions. I definitely don’t trust myself.”
The same logic, according to Marks, was adopted at other times. As an example, he cited the manager’s performance when the housing bubble burst in the United States in 2008, which precipitated a global financial crisis. The company has invested $10 billion in debt securities of distressed companies.
“Not because we had bullish forecasts, but because we saw good deals, we saw bonds flooding into the market at ridiculously low prices. The prediction was that the global financial system could collapse,” That didn’t happen, and recovering the bonds earned $6 billion for Oaktree customers, with another $1.5 billion for Marks and its partners, according to information published at the time in the newspaper. The New York Times.
Oaktree’s specialty is debt securities high yieldsecurities of companies which are not of higher quality and which present a higher risk of default, but which pay higher interest – and, in theory, have a greater potential for market appreciation depending on the performance of the society.
Marks’ logic is to be more aggressive when most are panicking, “selling without discipline”, and more cautious when others are euphoric, “buying hard”. “The real goal for an investor of my level is to seek what I call asymmetry. You want to make a lot when the market goes up, but you don’t want to lose a lot when the market goes down,” he said.
It’s what Marks calls risk control, one of the tenets of Oaktree’s investment philosophy. In the book The most important for the investorMarks lists some of the most important tasks for understanding, recognizing and controlling risk.
Another lesson of the book is to “see things differently from the consensus”. For him, to have a superior performance, the investor must think differently. More than that: he must have what he calls a “variant perception”. Basically, it’s about going beyond the obvious and having “second level thinking”.
“The example I give in the book is that the top thinker says, ‘It’s a good company, we should buy the stock. But the second level thinker says, “It’s a good company, but it’s not as good as everyone thinks. The price must be too high. We should sell the shares,” he explained.
The full interview and previous episodes can be seen on Spotify, Deezer, Spreaker, Apple and other podcast aggregators. Additionally, the podcast is also available in video format on XP’s YouTube channel.
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