Random Thoughts on the Identification of Investment Opportunities

Howard S. Marks -- January !" #$$!

#. %o group or sector in the investment wor&d en'oys as its (irthright the
promise of consistent high returns.
There is no asset c&ass that wi&& do we&& simp&y (ecause of what it is. )n e*amp&e
of this is rea& estate. +eop&e said" ,-ou shou&d (uy rea& estate (ecause it.s a hedge
against inf&ation", and ,-ou shou&d (uy rea&estate (ecause they.re not making any
more., /ut done at the wrong time" rea& estate investing didn.t work.
. 0hat matters most is not what you invest in" (ut when and at what price.
There is no such thing as a good or (ad investment idea per se. 1or e*amp&e" the
se&ection of good companies is certain&y not enough to assure good resu&ts -- see
2ero*" )von" Merck and the rest of the ,nifty fifty, in #$3!.
)ny investment can (e good or (ad depending on when it.s made and what price
is paid. It.s (een said that ,any (ond can (e trip&e-) at a price.,
There is no security that is so good that itcan.t (e overpriced" or so (ad that it
can.t (e underpriced.
4. The discip&ine which is most important in investing is not accounting or
economics" (ut psycho&ogy.
The key is who &ikes the investment now and who doesn.t. 1uture prices changes
wi&& (e determined (y whether it comes to (e &iked (y more peop&e or fewer
peop&e in the future.
Investing is a popu&arity contest" and the most dangerous thing is to (uy
something at the peak of its popu&arity. )t that point" a&& favora(&e facts and
opinions are a&ready factored into its price" and no new (uyers are &eft to emerge.
The safest and most potentia&&y profita(&e thing is to (uy something when no one
&ikes it. 5iven time its popu&arity" and thus its price" can on&y go one way6 up.
0atch which asset c&asses they.re ho&ding conferences for and how many peop&e
are attending. So&d-out conferences are a danger sign. -ou want to participate in
auctions where there are on&y one ortwo (uyers" not hundreds or thousands.
-ou want to (uy things either (efore they.ve (een discovered or after there.s (een
a shake-out.
!. The (ottom &ine is that it is (est to act as a contrarian.
7 Oaktree 8apita& Management" 9.+.
)&& Rights Reserved
)n investment that ,everyone, knows to (e underva&ued is an o*ymoron. If
everyone knows it.s underva&ued" why haven.t they (ought it and driven up its
price: )nd if they have (ought" how can the price sti&& (e &ow:
-ogi /erra said" ,no(ody goes to that restaurant; it.s too popu&ar., The e<ua&&y
o*y-moronic investment version is ,=very(ody &ikes that security (ecause it.s so
cheap.,
>. /ook the (et that no one e&se wi&&.
If everyone &ikes the favorite in a foot(a&&game and wants to (et on it" the point
spread wi&& grow so wide that the team -- as good as it is -- is un&ike&y to (e a(&e to
cover the spread. Take the other side of the (et -- on the underdog.
9ikewise" if everyone is too scared of 'unk (onds to (uy them" it wi&& (ecome
possi(&e for you to (uy them at a yie&d spread which not on&y overcompensates for
the actua& credit risk" (ut sets the stage for their (eing the (est performing fi*ed
income sector in the wor&d. That was the case in &ate #$$?.
The (ottom &ine is that one must try to (eon the other side of the <uestion from
everyone e&se. If everyone &ikes it" se&&; if no one&ikes it" (uy.
@. )s 0arren /uffet said" Athe &ess care withwhich others conduct their affairs"
the more care with which you shou&d conduct yours., 0hen others are
afraid" you needn.t (e; when others are unafraid" you.d (etter (e.
It is usua&&y said that the market runs on fear and greed. I fee& at any given point
in time it runs on fear BorBgreed.
)s #$$# (egan" everyone was petrified of high yie&d (onds. On&y the very (est
(onds cou&d (e issued" and thus (uyers at that time didn.t have to do any credit
ana&ysis -- the market did it for them. Its co&&ective fear caused high standards to
(e imposed. /ut when investors are unafraid" they.&& (uy anything. Thus the
inte&&igent investor.s work&oad is much increased.
3. 5resham.s 9aw says ,(ad money drives out good., 0hen paper money
appeared" go&d disappeared. It works ininvesting too6 (ad investors drive
out good.
0hen undemanding investors appear" they.&& (uy anything. Bnderwriting
standards fa&&" and it gets hard for demanding investors to find opportunities
offering the return and risk (a&ance they re<uire" so they.re forced to the side&ines.
Cemanding investors must (e wi&&ing to (e inactive at times.
7 Oaktree 8apita& Management" 9.+.
)&& Rights Reserved
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are
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