When I tell my friends I’m going to New York to have lunch with Howard Marks, they typically respond with two questions. Isn’t he a drug dealer? And isn’t he dead?
They’re thinking of the late Welsh cannabis smuggler. I’m meeting the “other” Howard Marks: legendary investor, unequivocal contrarian and closely followed observer of market psychology, who sets out his investment views in a popular series of client memos, read by the likes of Warren Buffett. The billionaire co-founder of $163bn investing powerhouse Oaktree Capital Management has made his name over the past five decades by diving into markets — among them high-yield bonds, distressed debt and China — when others were unwilling to do so.
Marks, 76, distrusts economic forecasts but believes in market cycles. He thinks that, in investing, emotion is the enemy because it tends to make us buy at the highs and sell at the lows. And he tries to live by Buffett’s famous investing maxim: be fearful when others are greedy and greedy when others are fearful.
I arrive 10 minutes early for our lunch at Il Gattopardo, near the Museum of Modern Art in Midtown Manhattan, to find that my guest is already sitting at his usual corner table. He’s dressed in a smart grey suit and tie, and his customary clear-framed glasses. As befits a man whose entire world view is predicated on anticipating what could go wrong, he is, in his own words, “pathologically prompt. I can’t be late if I want to.”
The restaurant is named after Giuseppe Tomasi di Lampedusa’s historical epic The Leopard. After Marks has introduced me to the restaurant’s owner, Gianfranco, and ordered iced tea (for him) and fizzy water (for me), I wonder aloud what parallels we might draw between the novel’s most famous quote — “If we want things to stay as they are, things will have to change” — and the financial markets.
“I think it’s a mistake to think you can keep the world from changing,” muses Marks. He minored in Japanese studies at the Wharton School of the University of Pennsylvania, and learnt the concept of mujō, a word originating in Buddhism, meaning impermanence and the inevitability of change. “You have to be cognisant of history, or you’ll repeat it, but you also have to understand that it may not apply,” he goes on.
We’re meeting amid a regime change in markets as the decade-long period of cheap money comes to an end. Inflation is high, interest rates are high and rising, and a US recession looms. Stocks and bonds are having one of their worst-ever years, leaving investors with big losses. We may not be able to predict where we’re going, but I’m here to learn from Marks where he thinks we are today.
The restaurant promises traditional southern Italian comfort food for the contemporary palate. Marks has been eating here for at least 15 years and says he’s never had a bad meal. The food at Il Gattopardo “is kind of like Oaktree investing”, he jokes: “always good, sometimes great, never terrible”.
As we browse the menu, I can’t resist asking Marks if he’s ever heard of his namesake. The story that follows takes me by surprise.
Around the turn of the millennium, Marks’s friends started returning from trips to the UK and bringing him books by or about the notorious drug smuggler. “I was tickled by it,” he says — so much so that, years later, when he and his wife Nancy were living in London for several months a year, he asked a friend’s son to orchestrate a meeting. Mr Nice (as the drug dealer was known) came for tea at his namesake’s apartment in Belgravia. The Welshman shared his life story, and the pair spent a “lovely afternoon” chatting, Marks recalls.
Were there ever any cases of mistaken identity? “No. I always figured it would happen at some border, but nobody ever said a word,” he says. “I’m kind of the opposite from him.”
The restaurant has filled up and it’s getting noisier. Marks chooses his favourite farro and porcini soup to start and I pick burrata with Parma ham. For the main course, we decide to share the special, a branzino, roasted whole and served with lemon, and a side of spinach.
Marks was brought up in a two-bedroom apartment in a working-class neighbourhood of Queens by an accountant father and a stay-at-home mother. His parents “were worriers” and were adults during the Great Depression. This left its imprint on the young Marks: “I grew up hearing things like ‘don’t put all your eggs in one basket’ and ‘save for a rainy day’.” (Marks’ own son, Andrew, brought up in very different circumstances, invests mainly in tech companies.)
After majoring in finance at Wharton, Marks began his career in equity research at Citicorp, before being moved to the bond department — “which was considered Siberia” at the time — to start a convertible bond fund. Shortly after, “I got the call that changed my life”.
It was the head of the bond department, Marks recalls. “He said, ‘There’s some guy named Milken or something out in California and he deals in something called high-yield bonds, can you figure out what that means?’”
It was, of course, junk bond king Michael Milken, who was pushing the nascent market of high-yield bonds — which allowed companies that had previously been shut out of financial markets to raise money if they offered high enough returns for investors to compensate for the increased risk of default. Throughout the 1980s, Marks began investing in many high-yield bond issues, which were unleashed in the name of leveraged buyouts (RJR Nabisco) and empire building (Wynn Resorts).
It was, he says, an example of what Malcolm Gladwell describes in his book Outliers as “demographic luck”. “Ten years earlier [high-yield bonds] didn’t exist, 10 years later they were commonplace,” Marks explains. Timing is everything. “I’m a big believer in luck and I believe I’ve been incredibly lucky in my life.”
Marks upped sticks to California in 1980, attracted by the quality of life, and later joined bond specialist TCW. There, a lawyer named Bruce Karsh convinced him to help start a fund focusing on another nascent and relatively obscure area: distressed debt, a strategy where investors pay cents on the dollar for the debt of failing companies, in the anticipation that the funds will be able to recover some cash. They left TCW and set up Oaktree with three others in 1995.
Marks is the public face of the business, travelling the world talking to clients and setting the company’s investment philosophy and macroeconomic positioning. Karsh, who has been described as the “quiet secret” behind the scenes, oversees its day-to-day investment decisions. Despite their differences, says Marks, “we’re both conservative, sceptical and natural contrarians. And most importantly, we share values.”
In September 2008, the pair’s contrarian mettle faced its ultimate test. Lehman Brothers filed for bankruptcy and the prevailing fear was that the entire financial system would collapse. In the preceding months, Oaktree had raised an $11bn opportunities fund in anticipation of trouble ahead. Marks and Karsh were weighing up when it was time to pounce.
It was a tough decision for which there was no precedent. “We talked it out,” says Marks. “Our conclusion was that if we invested, and the world melted down, it wouldn’t matter what we did. But if we don’t invest, and the world doesn’t melt down, and we miss those bargains, then we didn’t do our job. So we had to invest.”
For the next 15 weeks, Karsh ploughed $450mn a week into the markets, snapping up the debt of recent LBOs that other investors were trying to offload. The audacity was to pay off: the opportunities fund gained 16.6 per cent a year, after fees.
13-15 W 54th St, New York, NY 10019
Farro and porcini soup $20
Mozzarella and Parma ham $32
Sparkling water $12
Home-brewed iced tea $6
Total inc tax and service $205
By now our starters have been cleared away and the waiter brings the branzino and divides it across two plates.
Marks’s speech is like his prose: simple, conversational and peppered with quotes, adages and anecdotes by everyone from Albert Einstein and John Kenneth Galbraith to the Chinese general Sun Tzu and American playwright Neil Simon. He is the first to admit that little of what he writes is original; instead he hopes to add value by pulling together ideas from a number of sources.
Marks has written several books, including The Most Important Thing: Uncommon Sense for the Thoughtful Investor. And his memos are closely followed by the 200,000 or so people who receive them. But it wasn’t ever thus.
He began writing the memos in 1990, initially sending them by post to Oaktree’s 50 or so clients. For the first 10 years, “I never had one response,” he says. And then, on January 2 2000, Marks distributed a memo called “bubble.com”, in which he made the “overwhelming” case for “an overheated, speculative market in technology, internet and telecommunications stocks”, similar to past manias such as the 18th-century South Sea Bubble.
The memo “had two virtues”, says Marks. “It was right and it was right quickly.” The technology-heavy Nasdaq index slumped four-fifths from peak to trough between March 2000 and October 2002. “After 10 years, I became an overnight success.”
As we enjoy our simple main course, Marks expounds one of his core philosophies: that economic cycles are driven by the pendulum of human emotion. “In real life, things fluctuate between pretty good and not so hot, but in the market, things go from flawless to hopeless,” he says. “Nothing’s ever flawless and nothing is ever hopeless, but when people reach those extremes, it’s a good opportunity for the contrarian.”
We’re lunching in late September. The US Federal Reserve has quickly raised interest rates to curb inflation and there has been a correction in equity markets. For Marks, “we’re in what I call the zone of reasonableness . . . And when it’s in fair territory, there’s nothing brilliant to do.”
I follow up with him in mid-November and his stance has turned considerably more aggressive. The pendulum of human emotion has swung towards hopeless and the bargain hunter’s excitement is palpable.
“Risk aversion has replaced Fomo [‘fear of missing out’],” says Marks. “Capital is harder to come by. Debt is available at very attractive returns . . . which are likely to go higher.” He sees compelling buying opportunities in high-yield bonds, distressed debt, leveraged loans, mortgage-backed securities and collateralised loan obligations that are Oaktree’s bread and butter. Marks is expecting a pick-up in corporate bankruptcies “but not soon because any company that wasn’t asleep at the switch” refinanced their debt and pushed out their maturities.
“It’s been a tough last decade-plus for bargain hunting, but I feel we’re holding more cards now,” he goes on. “The easy days are over for now. It’s no longer an asset owner’s paradise, a seller’s market and a borrower’s market.”
Recently, Oaktree’s most high-profile borrower has been Evergrande. This year the asset manager seized two plots of land — “Project Castle” in northern Hong Kong and a “Venice” project on the Chinese mainland — from the heavily indebted Chinese property developer after it defaulted on its debt.
For Oaktree, China marked yet another example of how, if somewhere is deemed “uninvestable”, it marks a good starting point to take a look. Marks says he got comfortable with investing in China after years of high-level discussions with authorities and assurances that the rule of law would prevail. Crucially, Oaktree insisted that its loans to Evergrande were secured against collateral.
The Evergrande trade is still playing out but earlier this month, Oaktree sold the Project Castle plot, recouping all of its original investment and making a profit of about $140mn, due to a 19 per cent interest rate on its loan.
There are some areas that are off limits, even for Oaktree. It has never invested in Russia and some emerging markets countries, says Marks, because “we couldn’t depend on the rule of law”. And it doesn’t invest in the debt of countries: “Sovereign debt investing requires political analysis and I think political analysis is almost an oxymoron — can politics really be analysed?”
Marks’s own main political interest is a group called No Labels, a non-partisan advocacy group that attempts to foster bipartisan legislative efforts such as the Infrastructure Bill and the Inflation Reduction Act. “This is my source of optimism,” he says. “I’m not confident it’s going to work but we have to try.”
The waiter returns and we order a cappuccino (Marks) and a macchiato (me). The conversation turns to Oaktree, which is contemplating its future beyond its founders. The group floated on the stock market in 2012 and then sold a majority stake in 2019 to Canada’s Brookfield Asset Management, Oaktree’s partners retaining operating control.
Marks says he never wants to stop working, although he may gradually spend more time on his other interests (including tennis, backgammon and “buying, fixing up and decorating houses”). Within the next year or so he and Karsh will identify their successors in running the company.
Oaktree’s growth has been outpaced by rivals such as KKR and Apollo, but Marks says he has no regrets. “Bruce and I both feel that if we had been more aggressive and taken more risks, we would have more money today . . . but we’re extremely satisfied with the way things are,” he says.
Again he turns to the words of the Sage of Omaha to sum up how he feels: “Buffett says, ‘Why would you risk something you have and need for something you don’t have and don’t need?’ Why would I risk my reputation and my professional standing to make more money, when I can’t spend what I have? . . . Bruce feels the same way.”
We’ve been talking for over two hours. The restaurant has emptied, Marks’s assistant is calling him back to the office and lunch is drawing to a close. What’s the least important thing, I wonder, as we wait for the bill. “The cult of celebrity, all these people who are just famous for being famous,” he says. And for investors?
“The short run is by far the least important thing,” adds Marks. It’s folly to try to predict what will happen to interest rates or how high inflation will rise. “What matters is the long run. We try to buy the stocks of companies that will become more valuable, and the debt of companies that will pay their debts. It’s very simple. Isn’t that a good idea?”
Harriet Agnew is the FT’s asset management editor
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