Howard Marks’ background

Mr. Marks began his career as an analyst and then portfolio manager for Citicorp. His specialty as an investor has historically been bonds and leveraged companies, but he is knowledgeable about most everything.

Howard Mark’s thoughts and ideas on value investing are often compared to those of Warren Buffett and Charlie Munger. And they are also friends in real life.

He is perhaps best known for his book The Most Important Thing.

Howard Mark’s book The Most Important Thing

This book is a summary of Howard Mark’s memos for the Oaktree Fund. The book’s title comes from the fact that in almost every memo he found himself writing “The most important thing is _______.”

The book provides an overview of Howard Mark’s investment philosophy as a value investor.

Howard Marks strategies for value investing

Howard Marks places a strong focus on risk. The prevailing strategy for the Oaktree fund, and his own style as a value investor, is to outperform the stock market in good years, without losing money in bad years. Their average annual return has been 19%.

Marks has been critical of the stock market’s (high) valuations for most of 2010-2020. Here are some of his views:

• Most of what happens in the market can be analyzed and understood through the supply and demand (or inflows and outflows) of capital.
• Think in several steps: “First-order thinking”, “Second-order thinking”, etc. A first-order thinker thinks “the stock is cheap because it has a P/E of 2”. A second-order thinker thinks, “Maybe the stock is cheap for a reason, I’ll investigate further before jumping to a conclusion.”
• Keep an eye on interest rates: is the economy in expansionary phase (low interest rates) or in contractionary phase (high interest rates)?
• Keep an eye on sentiment: Bull market vs Bear market.
• Three phases of a Bull market: (1) some long-term investors think things will get better, (2) most active investors notice an improvement or growth going on in the economy, and (3) everyone is optimistic and thinks the stock market can only go up.
• Three phases of a Bear market: (1) a few experienced investors are skeptical about the climate of the stock market, despite the general optimism that prevails, (2) most active investors realize that problems, low growth or value destruction is going on, and (3) everyone is pessimistic and has a hard time thinking that there will ever be better times.
• One of the greatest tests of a good investor is learning from economic crises. It is said that you are not a real investor until you have gone through and learned from at least one crisis.
• In hindsight, everything is obvious. You should have taken more risk and maybe even used leverage during the beginning of a Bull Market, and avoided risk during the end of the Bull Market. However, it is difficult to make those decisions without years of experience.
• When there is too much readily available capital, it inevitably seeks out many bad investments.
• When there is a lot of capital in circulation in the market, competition for the best investments increases and many value investors forget, or are too lazy, to have a sufficient margin of safety built into their purchases. Investors become accustomed to accepting low returns (measured by high P/E ratios).
• The more risk taken by market participants, the more risky the stock market as a whole becomes. People change their mindset from value investing (“how do I get my money back on this investment?” to speculation. In times of crisis, psychological factors are almost always stronger than technical or fundamental factors.
• Standard diversification methods (by geography, industry, asset class) work well in good times, but rarely hold up in times of crisis and stock market crashes. Why is this? Because margin calls, liquidity shortages and domino effects occur – leading to unexpected price falls that are difficult to predict.

Read more: About other successful value investors and their investing strategies.