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Welcome to "Das liebe Geld" (Money Is Dear), the podcast for investing and wealth building. My name is Max Franke and today I am discussing the wisdom of one of the best industrialists of our time, Howard Marks. I will talk about how Howard Marx thinks about the movements in the markets , how he, as an investor, views risk in investing, and I will talk about how our behavior and temperament can help or harm us in investing .
Warren Buffett once said that investing is simple, but not easy. The principles of investing are relatively easy to understand. This is not rocket science, as explained in numerous episodes of this podcast. However, this does not mean that most investors will succeed in investing with above-average success, but there are truly successful investors.
These include, for example, Warren Buffett, Charlie Manga, or Howard Marks. Howard Marks has also appeared several times in this podcast, for example in episode 7 about risk on the stock market or in episode 54 about networked thinking. And like many other successful investors, he shared his knowledge and investment philosophy with the world , for example in his famous memos.
These are his thoughts on investing, which he regularly writes down and then publishes for free on the website of his investment company, Oak Tree Capital Management . These are in-depth analyses of markets, risk cycles and the psychology of investing, which are also understandable for interested readers.
As far as I know, they are only available in English, are extremely worth reading, and have a truly worldwide readership, including Warren Buffett, who once said that when I see memos from Howard Marx in my email , they are the first thing I open and read. Marx also distilled the highlights of his memos into a book , which I can also highly recommend, entitled The Most Import Thing.
That's reason enough for me to delve deeper into him and his wisdom, which leads to the question: who exactly is Howard Marx? Well, Marx was born in New York in 1946 . He studied economics at the prestigious Warten School and holds an MBA from the University of Chicago. After his studies, he initially worked at Citybank in the field of credit analysis, where he dealt with, for example, junk bonds, i.e., high-yield bonds, also called Ramshan bonds .
These are very risky debt securities. which are issued by companies with poor credit ratings . You can find more details about this in episode 33 on investing in bonds. And Marx went a step further and invested in so-called distressed securities. These are securities of companies that were already insolvent or on the verge of bankruptcy, and he made a lot of money with them.
After another professional position at TCW Group, he then founded the investment firm Oak Tree Capital Management in 1995 together with his partner Bruce K, which currently manages assets of approximately 200 billion US dollars. Marx became known to a wider audience during the financial crisis in 2008.
Markets were in a slump, panic reigned everywhere, but Oak Tree invested. And that's also interesting because Oak Tree is known for acting conservatively and being very risk-aware . In any case, they invested 600 million US dollars and made a profit of a whopping 6 billion US dollars. Overall, Marx Micked Oak Tree achieved an average annual return of an impressive 19% over a period of 16 years, which is really strong.
For him too, all of this has paid off financially. Forbes magazine estimates his net worth at approximately 2.2 billion US dollars. So much for biography. The really interesting question is, how does Howard Marx invest? What is his investment philosophy and what can we learn from him? Howard Marks' investment philosophy includes several points that we have already encountered in this podcast.
First, there is the awareness that markets develop in cycles. Marx sees this as a very important point when investing. So markets do not move linearly in one direction. It goes uphill, then the peak is reached, then it goes downhill until the lowest point is reached, then the cycle starts again. I talked about this in episode 65, titled "The Eternal Cycle".
And as investors, we cannot anticipate these turning points in the market cycle. But we should prepare for them. Key point in episode 95: Preparation is everything. Marx said: "You can't predict, you can prepare." You ca n't predict it, but you can prepare for it. In other words, we should master the market cycles.
What does that mean ? Many investors take the current market trend and extrapolate it into the future. So they consciously or unconsciously assume that it will always continue like this. It does n't. Keyword: Episode 48. This too will pass, and many investors are driven by the desire to predict the future.
Be it with regard to the development of the markets, the political situation or the potential of a particularly innovative company. And Howard Marx clearly distinguishes himself from this in his thinking. For him, it is a fundamental belief that we cannot predict the future . This makes it all the more important that we are aware of the cyclical nature of the markets.
This means, on the one hand, that markets are driven by emotions and excesses, and this applies in both positive and negative directions. And that also means that every phase eventually comes to an end. Whether the markets are in the basement or when the markets are euphoric and going from record to record.
Our task as investors is to act proactively, to recognize that every movement eventually comes to an end, and to observe where we are in the cycle. And here, for example, company valuations could be an indicator, with very high valuations suggesting an end to the upward movement, or the sentiment and behavior of investors.
In simpler terms, if the headlines are increasingly euphoric and more and more money is flowing into the market, then this suggests an advanced phase of the upward movement. However, if fear and panic prevail, then we are probably near rock bottom. Part of the truth is also to correctly interpret the cycle, or rather, to determine where we are in the cycle.
That's easier said than done. And that is one of the difficult exercises of investing. The cyclical nature of markets and the understanding that every market movement eventually comes to an end goes hand in hand with another important point in Howard Marx's investment philosophy , namely risk awareness.
In the academic world, risk in the context of investment is often equated with volatility, i.e., the susceptibility of a security to fluctuations. And Marx sees it differently. For him, risk is the possibility of a permanent loss of capital, and in his opinion, as investors we should focus on capital preservation.
He is convinced that a successful investment strategy is particularly strong defensively. And in that respect, he is very close to Warren Buffett with his first rule of investing, discussed in episode 14, which is: " Never lose money". Howard Marx said, in essence, that if we avoid losing stocks , the profits will come all by themselves.
And he believes that the goal is not to achieve maximum profits or to chase after huge profits , but rather to avoid losses. And in this context, risk management is a key task for investors. I talked about this in episode 7, which focused on risk on the stock market. The economy is developing positively in the long term.
On average, markets rise in 7 to 8 out of 10 years. Anyone can join in and make money. And according to Marx, that's the easy part. The truly good investors, in his opinion, master the interplay of making money with proportionally lower risk. They thus create an asymmetry. They make money when the market grows and lose less than the market in bad times.
They generate above-average returns in the long term with average risk, or they generate average returns with below-average risk. So, if you always just mirror the market average, or if you perform worse than the market in extreme cases, then as an investor you are not contributing any value with your financial decisions, and then instead of investing in individual stocks you should just mirror the market.
For example, with a passive investment strategy and a broadly diversified ETF portfolio. Another point in Howard Marks' investment philosophy is Second Level Thinking, which could be translated into German as networked thinking. I already talked about this in episode 54. It's about thinking on a second level, going a step further and considering the consequences of an action or event.
We know this from chess. I don't just make a move; I consider how my opponent will react to my move and what that in turn means for my game. Investing isn't quite that simple. Simply put, one should not be satisfied with simple answers or place undue faith in consensus . One should ask questions. In this context, Marx observed, for example, that on the first level one thinks, "This is a good company, so I'll buy it." On a second level, however, I think it's a good company, but everyone thinks it's great, therefore it's overpriced.
So, here too, the point is not to predict the future. The aim is to consider possible or probable impacts and to question initial assessments. Quote: "At Oak Tree, we never forget that we don't know what will happen." So this incredibly successful person and truly exceptionally good investor argues that we should be intellectually humble instead of always explaining the world.
Howard Marx doesn't even try to be a prophet. He believes that resilience is more important than precision. So instead of making perfect forecasts, he builds his portfolio in such a way that it is resilient in various possible scenarios . One could also say that it survived. Quote: "It does n't matter whether you are right or wrong, but how much money you make when you are right and how much you lose when you are wrong." And that's reminiscent of an aspect from episode 108: never breaks compound interest.
There I quoted investor Ray Dalio with his all-weather strategy and investor Vitalie Katz Nelson with his all-weather investment portfolio. Two very successful investors with very similar convictions and investment approaches to Howard Marks, and this is a very clear distinction from many influencers out there who have been investing for a few years and now think they can explain the world in all its depths and identify tomorrow's stock market winners.
In keeping with the cyclical nature of the markets, Marx likes to invest in difficult times. He is trying to take advantage of market turbulence. And here too, he thinks similarly to Warren Buffett, who shaped the stock market. Be fearful when others are greedy, and be greedy when others are fearful.
And for Howard Marx, the price he pays is always important. So a stock can be excellent, but if the price is too high, it's not a good investment for him. The reverse is also true. So even a fairly average company can be a good investment if the price is right. In this context, Howard Marx is often quoted as saying: "There is no security so good that it cannot be overvalued and thus become a bad investment .
And very few securities are so bad that they cannot be so undervalued and represent a good investment. To put it somewhat more simply , a mediocre company at an extremely low price can be a better investment than a great company at an inflated price." And that's certainly true, but it doesn't mean that it's easy for us to assess or implement.
So this underlines the opening quote: investing is simple, but not easy. Another important lesson is that you should think independently and differentiate yourself from the consensus . Marx essentially said, "You can't do what everyone else is doing and then expect to outperform the market ." On the one hand, that sounds very clever and correct, but if we're honest, it's incredibly difficult to achieve and most of us probably won't succeed.
But differentiating yourself from the consensus also means that We mustn't succumb to herd mentality . I talked about this in episode 15, and Howard Marx also warns against blindly following the herd of investors. This is especially true when buying a security at the height of its popularity , because all the positive facts and opinions are already priced in, and the general consensus can be overly positive.
Following the crowd might feel safe, but in reality, we risk only achieving below-average returns. And this brings us back to the point that critical thinking is one of the most important qualities in investing. In other words, conformity rarely leads to good results. And this ultimately leads to the insight, which has been discussed several times in this podcast, that when investing, you should above all know yourself and keep your emotions in check .
Marx said that he doesn't believe emotional people can't be good investors, but successful investing requires self-awareness and self-control. It's about avoiding behavioral errors, about not giving in to fear or vultures. And that we were patient and had a long-term perspective. That concludes this episode of "The Love of Money" about Howard Marks.
I hope you were able to take away one or two valuable insights . If you enjoy this podcast, please subscribe for free on your favorite podcast player. Activate the bell icon to be notified of new episodes and leave a review. That would help me a lot. The next episode will be released in two weeks. Until next time!
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