From Advisor Perspectives:
When Howard Marks graduated from the Booth School of Business of the University of Chicago, he was turned down for the one job he really wanted. That, he said, was the luckiest moment of his career. The firm that turned him down was Lehman Brothers.Possibly also of interest:
Marks is the co-chairman and founder of Oaktree Capital Management. He spoke to an audience of investment professionals and MBA students at the annual MIT Sloan Investment conferencein Cambridge on February 20th.
His talk was moderated by Randy Cohen, a senior lecturer at the Sloan School. Marks and Cohen discussed a range of topics, including his luck and skill in career choices, the lack of efficacy in forecasting, the importance of second-level thinking, investing in the current interest rate environment and the ingredients for investment success.
On luck and skill in career choices
Marks said he was not the kid who started reading prospectuses at nine years old and then invested his bar mitzvah money. Before deciding on a career in finance, he considered being a history professor, an architect, an advertising man and an accountant. Before graduating from the University of Chicago, he interviewed for jobs in corporate treasury, banking, investment management, investment banking, accounting and consulting.
But he got lucky when he was turned down for the one job he was sure he wanted. Marks recounted that the recruiter had decided to hire Marks, but the partner in charge of making the final hire came in to work hung over that morning. He offered the job to the wrong guy. If it wasn’t for that piece of bad luck, he said, he could have spent the first 30 years of his career at Lehman Brothers, ultimately ending up with nothing for whatever equity stake he might have earned.
Luck is very important, according to Marks, and he advised the future MBAs to “put themselves in the way of good luck” as opportunities only come around once in a while and you have to take them.
On the lack of efficacy in forecasting
Forecasters have been very poor and consistently so, Marks said. In the summer of 2013, forecasters unanimously predicted that rates would go up after Federal Reserve Chairman Bernanke started talking about tapering. This was the most important decision in 2013 and most forecasters got it wrong as rates went down. He credited Jeffrey Gundlach at DoubleLine for being one of the few who got this decision right.
The most important decision of 2014 was the price of oil; very few forecasters got that right either. Marks advised giving up on the forecasting game and taking a more humble approach to fore knowledge. When he is asked what is going to happen to the price of oil, he said, the only correct answer is, “I don’t know.” Oil is an asset that does not produce cash flow, and it has not sold at a free market price. Since it is an administered price, he knows it will be unpredictable.
While Marks warned about forecasting, he said that you can’t invest without making some judgments about the future. Marks said that Oaktree invests in the areas that are under pressure. In the last four months those areas have been oil and oil-servicing companies. “Value investors proudly invest in assets based on the discounted price of future cash flows,” he said.
Do not invest in companies where their future is heavily dependent on the price of oil, Marks warned, because it is so unpredictable. Instead, he advised investing in companies that “can survive in a broader range of outcomes because the [oil] environment is so bizarrely uncertain.”
In periods when the markets do not change dramatically, most investors get it right most of the time but it does not make them any money. It is very valuable to forecast radical changes, as in the case of oil prices, but most people don’t get this right and this makes forecasting so unavailing. When something radical happens, someone gets it right, but Marks asks himself did this person get anything else right before or after, or do they just take extreme positions?
Marks quoted Mark Twain, “It’s not what you don’t know that gets you in trouble but what you know for certain that just ain’t true.”...MORE
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