Howard Marks, the chairman and co-founder of hedge fund Oaktree Capital, has become almost as well known for his entertaining and informative investor letters as he is for investing acumen. One of his earlier investor letters, penned back in 2006, was titled “Dare to Be Great”, provoked a good bit of conversation at the time. Marks has returned to theme of what it takes to be a great investor with a recent letter to investorstitled “Dare to Be Great II“.

Howard Marks

The Big Question

After giving some thought to his 2006 memo, Marks decided to rephrase his question (and his answer). The rephrased question is: “Do you dare to do the things you have to do to be great?”

Marks explains his reformulated question below. “The big question is how much of your time, effort, and capital — and self-esteem — will you risk in the effort of trying to be right?  And how much will you spend trying to avoid being wrong? They are two different things. And in order to be — to have a shot at being really right — you got to have a shot at being really wrong.”

Dare to different and dare to be wrong

Marks was interviewed on Bloomberg TV in a follow-up to his “Dare to Be Great II” letter, and he offered some additional perspective on his point of view. He said investing success wasn’t just about wanting or dreaming to be great, it was about daring to invest differently from the herd and embracing the risk of being wrong.

He points out how psychologically difficult it is to not join the investing herd. “I mean, the fear of being out of step is a great fear, and I believe that perhaps the most corrosive of all human emotions is having to sit there and watch other people make money when you’re not.”

Most investing professionals are willing to just “not be wrong”

“They [investing professionals] don’t really want great returns, they want good enough returns.” To explain this provocative statement, Marks argues that very few fund managers are willing to take the risk to become truly great investors as being wrong could cost them their job. They’re focused on hitting a high-percentage single or double rather than risking striking out or having their big swing caught at the warning track.

Marks also points out that the common limitations on fund managers in terms of holdings of a specific issue or concentration in a sector are designed to prevent a fund manager from being too wrong. “I say in the memo…that the main role among investing institutions, pension funds, endowments, sovereign wealth funds, et cetera, insurance companies — we would never do so much of something that, if it turned out to be a mistake, we would look bad.”