Howard Marks of Oaktree Capital Management (NYSE:OAK) spoke at the Goldman Sachs Financial Services Conference on Tuesday, December 9th, and took questions from the moderator and the audience afterwards part of the presentation.
Marks co-founded Oaktree Capital Management in 2011, and the hedge fund now has over $90 billion in assets under management. The firm specializes in credit and distressed asset investing. The famous value distressed- oriented investor spoke about the energy sector as one place where he is finding value.
Howard Marks says stay focused on the big picture
When asked about his approach to investing, according to a transcript of the conference, Marks replied: “I believe — at Oaktree Capital, I pretty much tend to the big picture. And I think that the most important single question that any fund manager or portfolio strategist has to answer at any point in time is whether to be on offense or defense and how aggressive, how defensive. And I believe that if you get that question right, then you don’t have to get security selection and selection of strategies and managers exactly right. And vice versa, if you get that wrong all the security selection you do in the world isn’t going to help you, probably.
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He continued to elaborate on his perspective. “So, I tend to spend my time on the big picture. And while one of the tenets of our philosophy is that you can’t see the future, we believe that by judging from what’s going on around us at the present time we can make some appropriate adjustments. And I think that we have gotten the bullish/bearish, offense/defense decision essentially right over time and we’re always endeavoring to keep doing that.”
Howard Marks see opportunities in the energy industry
When asked about the suddenly beaten-down energy sector, Howard Marks said he did see more opportunities in energy right now. “Sure. Well, you would certainly think that if your product falls in price by 40%, there are a lot of levered businesses that aren’t going to service their debt. And in fact, of course, prices of energy-related debt have fallen — in some cases, substantially — and we’ve been investing.
I think that most –. So, yes, there are — six months ago, you wouldn’t have said there are opportunities to invest in the energy industry. It looked like a booming industry. Today, there clearly are, and they may get better from our standpoint.”
Marks also offered some historical perspective on oil prices…and the importance of preparing for the unexpected. “And I was rereading my memos and back around — I don’t know — it was probably 10, 12 years ago, I put out a memo saying well what could it be that causes the world to weaken. I think I know the memo and I think it was 10 years ago last month. What could it be? I say, well, it could be $100 oil, which then seemed like a pipe dream. It could be weakening of the dollar. It could this and it could be that. And then, I said number five, it could be something else.”
The unforeseen is the real issue, according to Marks, and part of good investing is staying out of situations with higher likelihoods of unforeseen risk. He notes: “And it’s really number five that we always have to worry about, because the world can adjust to the things it can think about, but there’s always the possibility of the unforeseen. And I’m the dead-set against the efficacy of forecasting. And if you need any evidence, think back six months.”
Howard Marks highlights that virtually no one predicted oil would drop to $65 a barrel. “Where were the people who predicted that oil would go down 40%? I would imagine that oil was $110 and the bulls said it would go to $112, and the bears said it would go to $108. where are the people who said it could go down 40%? So we always — we shouldn’t think we know what’s going to happen in the future. Mark Twain said, “It’s not what you don’t know that gets you into trouble; it’s what you know for certain that just ain’t true.”
He ended off with a “value investor mentality” note stating:
I put out a memo on gold about this time in 2010, and I said you can’t — there’s nothing intelligent that can be said about the price of gold. And you can’t predict the price level of a good that does not produce income. And I think it’s true in gold and I think it’s true in oil.
And what’s a low price for oil? What’s a high price for oil? Who knows? Why was oil at $110 six months ago? And aren’t those reasons still true today, with it at $60?
And the people who — there are people who at $110 said, oh, I missed my chance to buy oil at $100. I’m kicking myself. I hope it gets backs there.
Have they bought oil at $65? and the answer is, no, because there’s no place you can get comfort on the price of a commodity, in my opinion.