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Big Idea from a Super Investor: Howard Marks on Contrarianism

Note: This article formed part of the May 2015 Special Report sent to subscribers of our premium newsletter Value Investing Almanack.


What do you do if Warren Buffett calls you personally and offers to write the foreword for your book? First, you write the book as soon as possible and second, you make it worthy and useful enough to deserve an endorsement from Buffett. (source: Google talk)

That’s precisely what Howard Marks did with his book –The Most Important Thing: Uncommon Sense for the Thoughtful Investor. He runs Oaktree Capital, a $90 billion hedge fund, and has more than four decades of investing experience. Just like Buffett he has been writing memos to his investors for last twenty five years.

These client memos contain insightful commentary and a time-tested philosophy about sensible investing. Howard Marks is not only a super investor but a thoughtful author too. His writings are not to be missed and that’s what Buffett seems to say in this statement –

When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something, and that goes double for his book.

In this post, I try to draw one big lesson from his writings and offer them to you for reflection. The big idea for today is contrarian investing. Let’s dive in right away.

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Risk, Volatility, and Investing: 5 Big Lessons from Howard Marks’s Latest Memo

“If you were to read just five books in your life to become a sensible investor,” I often suggest people seeking my view, “…they have to be Warren Buffett’s letters, Poor Charlie’s Almanack, Peter Lynch’s One Up on Wall Street, Ben Graham’s Intelligent Investor, and Howard Marks’s memos.”

Well, if you don’t know who Howard Marks is, let me tell you he is the CEO of Oaktree Capital and is one of the most famous investors who manages to keep a low profile, despite managing almost US$ 90 billion.

Marks is also the author of an amazing book – The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In its ultimate praise, Warren Buffett writes, “This is that rarity, a useful book”.

Apart from the investing gems he has shared through this book, Marks also writes regular memos for investors where he outlines his investment philosophy, in line with what Buffett does via his annual letters to shareholders.

Here is what Buffett has to say about Marks’s memos – “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something…”

From whatever I have read in his memos, Marks focuses a lot on risk control and seeks to exploit market cycles. He prefers judgment to mechanical quantification, and believes in the power of checklists.

Marks’s latest memo is a masterpiece in itself. One particular reason it touches a chord with me is because it talks about a pain-point – the concept of ‘risk’ – that I feel as an investor each day, and maybe you do too.

Here are 5 big ideas I have pulled out from the memo. If you wish to learn anything and everything about investment risk, this one memo will help you do that.

In fact, reading this memo would provide you with all the big lessons that even a one-year MBA in Investment Risk won’t provide.

So, let’s get going with 5 big lessons from Howard Marks’s latest memo (the emphasis is mine).

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Howard Marks on How to Identify Investment Opportunities

One of the questions I am asked often via emails or before my Workshops is – “How to identify the right stocks for investment?”

I have explained the thought process in my value investing course, through my posts, and also do so in the Workshop.

The core steps are well-known – look for simple businesses that fall under your circle of competence and avoid everything else, read their financial statements to assess their strength and also vis-a-vis their competitors, and then value them using a few intrinsic value methods.

This process covers a large part of the “action” as far as identifying sound investment opportunities is concerned.

But there is a step prior to this process as well – a step where you create the right mental framework required to identify the right investment opportunities.

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The Most Important Investment Letter You Must Read Now

One of the few investors Warren Buffett respects a lot is Howard Marks. Marks is the CEO of Oaktree Capital and is one of the most famous investors who manages to keep a low profile, despite managing almost US$ 90 billion.

Marks is also the author of an amazing book – The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In its ultimate praise, Warren Buffett writes, “This is that rarity, a useful book”.

Apart from the investing gems he has shared through this book, Marks also writes regular memos for investors where he outlines his investment philosophy, in line with what Buffett does via his annual letters to shareholders.

Here is what Buffett has to say about Marks’s memos – “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something…”

[Read more…]