Howard Marks interview with Nicolai Tangen

Howard Marks, the author of the book "Mastering the Market Cycle" and co-founder of Oaktree Capital Management. He is joined by Nicolai Tangen, the CEO of Norges Bank Investment Management, discussed investment philosophy, cycles, and how he absorbs information.

Investment philosophy

Howard marks introduced his investment philosophy:

Risk control.
Consistency.
Market efficiency, only target less efficient markets.
Specialization, know more than everybody else about a few things.
Not relying on macroeconomic forecasts.
Not timing the market.

Thoes philosophy was coming from his experience of the limits of knowledge. because investing is not a science, it's dealing with a lot of people, people have feelings, their behavior is unpredictable. Randomness is a big part of investing. Especially in the short term, stupid people get rich, you can't verify the quality of the decision by the outcome.

Howard think the key element of success is aggressiveness, timing, and skill. If you aggressive enough and in the right time, you don't need too much skill, but if you want success repeatedly, you need skill.

Howard believes that the market is cyclical, because people's greed and fear. When market is crazy high or crazy low, he think it's chance to make money based on the foreacst. The only problem is extreme high or low is too rare.

Risk management

Howard Marks emphasized that risk management is not risk avoidance, risk avoidance usually means return avoidance, if you want to profit, you have to take risk. and you can't take money just by taking risk, you have to do it skillfully.

Risk means more things can happen than will happen. Under any sets of circumstances, any outcome is possible. excessive certainty is dangerous. Aknowledge the limits of knowledge is our friend. If everything looks perfect, it's dangerous. Example:

In late 2023, the consensus think Fed will cut 6 times in 2024, but the Fed only said they will cut 3 times. the consensus is too optimistic.

In Oaktree, Howard resisted having risk control department, because he think risk control is the responsibility of everybody.

Games

Howard think games is very helpful to investment:

It's risk taking
It's all about probabilistic, assessing the probability is very important.

Annie Duke, a PHD in decision analysis, also a poker world champion, wrote a book called "Thinking in Bets", she approached poker professionally, analytically, and with discipline. She helps people to think about the structuring bets. Example:

In basketball game, when you bet on the popular team, if you win, you don't get much. but sometimes the payoff is better when you bet on the unpopular team.

Contrairianism

Contrairianism means beting against the consensus, usually the payoff is better. It's doesn't mean routinely think what is the consensus think and do the opposite, you need to think what is the consensus think, why they do that and why they are wrong. why they do that way.

If you want to be a contrarian person, you need to be comfortable with loneliness, you have to dare to be different. you have to dare to be wrong. Howard has a good partner, Bruce Karsh, they support each other, that make them more easy to overcome the loneliness.

It's more easy to be contrarian in the frothy than in the fearful market. Howard use a barometer to measure the market, like the temperature. He look at the oppinion of the people, how uniform they are, how satisfied they are, how strong they are.

Information flow

Howard's information flow is very simple, he read a newspapers, he consume 2-3 newspapers a day and read "The Economist", what the most important is not what happened, but what it means, why it happened. He try to figure out what is the temperature of the market, what is the position of the cycle.

Howard is keep eye on Charlie Munger, Warren Buffet, Stan Druckenmiller, Seth Klarman

Advice

Howard's advice to young people is:

If you want to be a good investor, you can't be right all the time.
Investing is a great puzzle, you have to equip your philosophy to deal with it with many many considerations.

Book mentioned

"Mastering the Market Cycle" by Howard Marks
"Thinking in Bets" by Annie Duke
"Fooled by Randomness" by Nassim Nicholas Taleb