Howard Marks is co-chairman and co-founder of Oaktree Capital Management, an investment manager with more than $120 billion in assets under management. How smart is Marks and how sound is his judgement? Charlie Munger once said: “I probably know Howard Marks as well as I know anybody and he is a very smart man….[For example] you have to believe in the tooth fairy to believe [Bernie Madoff] was having those ﬁgures by the methods he claimed to be using. You wouldn’t have gotten that one by Howard Marks for two seconds. I mean you wouldn’t have ﬁnished your sentence before he noticed it couldn’t be true. But people don’t think like Howard Marks.”
Marks said in a recent Barry Ritholtz podcast that he believes: “Recognizing and dealing with risk and understanding where we are in the cycle are really the two keys to success.” In a masterful review of Mastering the Market Cycle, Jason Zweig writes:
Mr. Marks admits his book is a kind of tug of war between his certainty that “we don’t know what the future holds” and his belief that “we can identify where the market stands in its cycle.” By studying how the economy, the markets and the psychology of investors all move in long cycles of expansion and contraction, Mr. Marks and Oaktree have been better able to cut back risk near market peaks and ramp it up near market bottoms, he says. But Mr. Marks doesn’t think you can use that sort of understanding to go all in or all out of markets again and again. He likes the book’s subtitle—“Getting the Odds on Your Side”—better than its title, he quips. “Recent performance doesn’t tell us anything we can rely on about the short-term future,” he says, “but it does tell us something about the longer-term probabilities or tendencies.”
It is worth reading what Zweig wrote above is his review of the book at least twice since it represents the core message of Mastering the Market Cycle.
Marks explains in his new book that by doing things like reading widely, studying history and paying close attention to the state of the world right now, an investor or business person can be generally aware of where the cycle might be even though they can’t predict precisely when it will shift in the short term. By doing this work an investor or business person can increase their margin of safety by “getting the odds on their side.” Marks believes that the right way makes this analysis is to think probabilistically.” Marks suggested in an interview with Zweig that investors calibrate their exposure to risk using: “a continuum from 0 to 100, he says, with 0 being completely out of the market and 100 being completely in using aggressive techniques like investing with borrowed money.” Having said that, Marks is very wary