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I'm with you, JJ, and I appreciate your time. Welcome back. Well, it's Howard Marks again today. Super investor Howard Marks. This is the third part, and it will be the last. Today we'll hear what Howard Marks has to say about his investment philosophy in six quick points. He summarizes this and then talks about luck, chance and their role in investing, as well as probability.
So , let's see what he has to say. I think it's worth hearing. My philosophy, I think, is the Oaktree philosophy. Six very simple points. Number one— risk control. I think it's easy to make money in the market. This is especially true for successful years, and most years are like that . The challenge, the real skill, is to make money while keeping risks under control.
So that if the year turns out to be unsuccessful, you don't suffer too much loss. Mm. And number two is consistency. My clients don't want results that constantly fluctuate : sometimes in leaders, sometimes in outsiders. So we try to be consistently slightly above average, but through risk control in very bad years we come out ahead.
Number three—I believe in the existence of market efficiency, and we only target less efficient markets. Less efficient markets, did you hear what he said? So if you look at the portfolio, this is the first quarter of 2024 for Howard Marks' portfolio, Oaktree Capital Management. I don't know how much he himself is involved in this, because a lot of people work there , but if you look at the markets where they have invested recently, it's not exactly the USA.
We have other types of markets: Argentina, Brazil and China. So inefficient markets mean that they consider the assets there to be undervalued, and he talked about that in the previous part. He wondered if China was cheap. Is it too cheap? He said, you know, and that's part of their philosophy. And interestingly, he also said about volatility: portfolio consistency and not taking excessive risks.
So in bad, declining years, they have the opportunity to make up for lost time. Okay, let's see what else he has to say. Number four—a high degree of specialization. In my opinion, it is impossible to be a successful generalist. You should know more than others about a few specific things. Fifth, we do not rely on macroeconomic forecasts when making investments.
And sixth, we don't expect much from trying to guess the market timing. So, this is our philosophy. So I'm not surprised by his words about market timing; this is quite important to his philosophy. It's more of a consistency in long-term investing. Which of these rules was the hardest to follow? Have you ever been tempted to break some of them?
I mean, you definitely had to be tempted. I never wanted to violate them, because I believe they all emphasize, in my opinion, the boundaries of knowledge. And the longer I live, the more I understand these limits, and the more convinced I am of this. What are these boundaries of knowledge? First, chance or luck is present everywhere in our business.
You are not dealing with physical laws like in physics or engineering. You mostly deal with people. So, what are markets? This is a collection of people. Uh -huh. How is history made? Because of people's actions. And how is the world governed? Because of people's actions. Therefore, processes built around people are impossible to predict.
Physicist Richard Feynman once said that physics would be much more complicated if electrons had feelings. Yes. People have feelings. Therefore, their behavior is unpredictable. And chance plays a very big role. Yes, you often talk about this . He had mentioned this before. He talks about thinking in terms of bets, that book he read and recommended to others, " Thinking in Terms of Bets," written by a poker expert.
She was one of the best poker players in the world, and she takes everything as a gamble. And he doesn't mean gambling . When he says that chance and luck play a role, it's because we investors know that everyone makes mistakes, and it's possible to be right, but for the wrong reasons. People often talk about this in investing , and you can be wrong, but for the right reasons.
You can make a good investment, a good bet, but there can always be a black swan event. That's why people say they bet everything on one company, no matter how good it looks from every angle, and something related to luck or chance can happen that ruins that bet. So, you know, diversification is there, but randomness is also important.
That's exactly what I'm talking about. Um, about how to assess the quality of a solution. Yes. Tell me about it. Well, thanks to chance, a good solution doesn't always work. And a bad decision doesn't always lead to failure. The first book I read when I entered Wharton 61 years ago was about decision-making under uncertainty in the oil and gas industry.
And the most important lesson I learned from that book is that you can't judge the quality of a decision by its outcome. This is a concept that many, many people cannot understand. Well, of course you can. But if you think about how random the world is , you realize that in the short term, randomness alone can lead to any outcome.
This is also because some stupid people get rich. Well, that's true. We all know people about whom we say, "Oh yeah, he was right, but for the wrong reasons." Yes. And stupid people who get rich, of course. You know, one of the things we see all the time on the internet, right? Where people brag about how they made money on short-term speculation during a bull market, this is what happens.
In my opinion , the ingredients of success are aggression, timing, and skill. And if you have enough aggression at the right time, you don't need much skill. It might help you get it right once or twice , but to be right consistently for your entire career is a matter of skill. You can't rely on luck for decades.
So, he's talking about getting rich slowly, as opposed to the big get-rich-quick schemes that we see a lot of people taking advantage of over time. Now we'll just listen to who he respects, who he listens to among investors. We listen to Howard Marks and other super investors that I've had on this program, on this podcast.
You can go back and watch all the super investors if this is your first time here, or subscribe if you want to follow and see more content like this, and hit the like button to help the algorithm spread this video to more people. So, let's find out who Howard Marks looks up to, who he respects in the world of investment.
Who are you communicating with? Who do you take as an example? I try to, um, draw knowledge from a wide range of sources. Um, there aren't really any specific individuals. Of course, I always like, um I used to really try to understand what Charlie Munger was thinking , and I try to follow Warren Buffett, but he does n't say much.
Hmm . Actually, he says quite a lot, Warren Buffett . In all these years, he simply hasn't been commenting on the market every day, every week, every month. Um, Stan Druckenmiller . Once a year, Buffett speaks for hours at the annual general meeting, which is recorded. Ken Miller, uh, he's... Stan Druckenmiller, in case you didn't catch it.
Sorry to interrupt again. I've heard criticism that I interrupt too often and have a big mouth, so I apologize for that. I'll try not to interrupt so often. But yeah, Stan Druckenmiller, who was at Nvidia and exited in the first quarter, he's a different type of investor, a trader. You can get Stan to talk, but he's a trader, so his opinion changes in the short term.
Yes. Um, there's...Uh, Seth Klarman—a very smart financial manager in Boston. Ahem. And I'm just trying to, um...I would call myself an observer. Mhm. Uh, and I just try to critically observe what's going on around me. Mhm. It's good advice, I think, to be an observer of what's happening in the market.
He listening to these super investors, those good investors, whom he mentioned, of course, Charlie Munger , although not so often anymore. We can see what Charlie Munger has been saying over the years. Well, that's all for now . If you want to catch up on another channel, I didn't mention this on the show today, but on "Stocks Today with JJ" I react—talking about watching what's going on—I react to the news every day.
Now I make two videos a day. So subscribe to that channel too if you want. And also on Patreon, “Odd Ball Patreon,” if you’re interested in that, I’ll of course leave a link in the description to all of that. So, I do weekly updates on investing, things I don't share anywhere else, if you're interested.
And I also teach a kind of course on stock analysis. I've already done two. I'm going to do one a week. These are my thoughts on how to do stock analysis from the beginning. We went back to 00. The first was ROCE, with which I began the analysis of the profitability of the capital employed. If you want to learn what it is and why it's important, you can check out Patreon.
Thank you to everyone who is watching or listening. I'll put a link on the screen if you're watching YouTube to show what YouTube recommends watching next. Also, take a look at the video description, there are two previous episodes about Howard Marks. Thanks for watching, see you in the next video.
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