Howard Marks memo to Oaktree Capital Clients on “Inspiration From The World Of Sports.”
I’m constantly intrigued by the parallels between investing and sports. They’re illuminating as well as fun, and thus they’ve prompted two past memos: “How the Game Should Be Played” (May 1995) and “What’s Your Game Plan?” (September 2003). In the latter memo, I listed five ways in which investing is like sports:
- It’s competitive – some succeed and some fail, and the distinction is clear.
- It’s quantitative – you can see the results in black and white.
- It’s a meritocracy – in the long term, the better returns go to the superior investors.
- It’s team-oriented – an effective group can accomplish more than one person.
- It’s satisfying and enjoyable – but much more so when you win.
Another angle on the investing/sports analogy has since occurred to me: an investment career can feel like a basketball or football game with an unlimited number of quarters. We may be nearing December 31 with a substantial year-to-date return or a big lead over our benchmarks or competitors, but when January 1 rolls around, we have to tackle another year. Our record isn’t finalized until we leave the playing field for good. Or as Yogi Berra put it, “It ain’t over till it’s over.” It was Yogi’s passing in late September that inspired this memo. [Since most of the references in this memo are to American sports, with their peculiarities and unique terminology, this is a good time for an apology to anyone who’s unfamiliar with them.]
Howard Marks - Yogi Berra, Baseball Player
Lawrence “Yogi” Berra was a catcher on New York Yankees baseball teams for eighteen years, from 1946 to 1963. Although he was rarely number one in any offensive category, he often ranked among the top ten players in runs batted in, home runs, extra-base hits (doubles, triples and home runs), total bases gained and slugging percentage (total bases gained per at bat). He excelled even more on defense: in the 1950s he was regularly among the top three or four catchers in terms of putouts, assists, double plays turned, stolen bases allowed and base stealers thrown out.
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Yogi was selected to play in the All-Star Game every year from 1948 through 1962. He was among the top three vote-getters for American League Most Valuable Player every year from 1950 through 1956, and he was chosen as MVP in three of those years. The Yankee teams on which he played won the American League pennant and thus represented the league in the World Series fourteen times, and they won the World Series ten times. He was an important part of one of the greatest dynasties in the history of sports.
To me, the thing that stands out most is Yogi’s consistency. Not only did he perform well in so many different categories, but also:
- He led the American League in number of games played at the grueling catcher position eight years in a row.
- He was regularly among the catchers with the fewest passed balls and errors committed.
- He had around 450-650 at bats most years, but over his entire career he averaged only 24 strikeouts per year, and there was never one in which he struck out more than 38 times. (In 1950 he did so only 12 times in nearly 600 at bats.) Thus, ten times between 1948 and 1959 he was among the ten players with the fewest strikeouts per plate appearance.
In short, Yogi rarely messed up.
Consistency and minimization of error are two of the attributes that characterized Yogi’s career, and they can also be key assets for superior investors. They aren’t the only ways for investors to excel: some great ones strike out a lot but hit home runs in bunches the way Reggie Jackson did. Reggie – nicknamed “Mr. October” because of his frequent heroics in the World Series – was one of the top home run hitters of all time. But he also holds the record for the most career strikeouts, and his ratio of strikeouts to home runs was four times Yogi’s: 4.61 versus 1.16. Consistency and minimization of error have always ranked high among my priorities and Oaktree’s, and they still do.
Howard Marks - Yogi Berra, Philosopher
Although Yogi was one of the all-time greats, his baseball achievements may be little-remembered by the current generation of fans, and few non-sports lovers are aware of them. He’s probably far better known for the things he said:
- It’s like déjà vu all over again.
- When you come to a fork in the road, take it.
- You can observe a lot by just watching.
- Always go to other people’s funerals, otherwise they won’t come to yours.
- I knew the record would stand until it was broken.
- The future ain’t what it used to be.
- You wouldn’t have won if we’d beaten you.
- I never said most of the things I said.
I’ve cited Yogi’s statements in previous memos, and I borrowed the Yogi-ism at the top of the list above for the title of one in 2012. “Out of the mouths of babes,” they say, comes great wisdom. The same was true for this uneducated baseball player, and many of Yogi’s seeming illogicalities turn out to be profound upon more thorough examination.
“Baseball is ninety percent mental and the other half is physical.” That was another of Yogi’s dicta, and I think it’s highly useful when thinking about investing. Ninety percent of the effort to outperform may consist of financial analysis, but you need to put another fifty percent into understanding human behavior. The market is made up of people, and to beat it you have to know them as well as you do the thing you’re considering investing in.
I sometimes give a presentation called, “The Human Side of Investing.” Its main message surrounds just that: while investing draws on knowledge of accounting, economics and finance, it also requires insight into psychology. Why? Because investors’ objectivity and rationality rarely prevail as much as investment theory assumes, and emotion and “human nature” often take over instead. That’s why my presentation is subtitled, “In theory there’s no difference between theory and practice. In practice there is.” Yogi said that, too, and I think it’s absolutely wonderful.
Things often fail to work the way investment theory says they should. Markets are supposed to be efficient, with no underpricings to find or overpricings to avoid, making it impossible to outperform. But exceptions arise all the time, and they’re usually attributable more to human failings than to math mistakes or overlooked data.
And that leads me to one of the most thought-provoking Yogi-isms, concerning his choice of restaurant: “Nobody goes there anymore because it’s too crowded.” What could be more nonsensical? If nobody goes there, how can it be crowded? And if it’s crowded, how can you say nobody goes there?
But as I wrote last month in “It’s Not Easy,” a lot of accepted investment wisdom makes similarly little sense. And perhaps the greatest – and most injurious – of all is the near-unanimous enthusiasm that’s behind most bubbles.
“Everyone knows it’s a great buy,” they say. That, too, makes no sense. If everyone believes it’s a bargain, how can it not have been bought up by the crowd and had its price lifted to non-bargain status as a result? You and I know the things all investors find desirable are unlikely to represent good investment opportunities. But aren’t most bubbles driven by the belief that they do?
- In 1968, everyone knew the Nifty Fifty stocks of the best companies in America represented compelling value, even after their p/e ratios had reached 80 or 90. That belief kept them there . . . for a while.
- In 2000, everyone thought tech investing was infallible and tech stocks could only rise. And they were sure the Internet would change the world and the stocks of Internet companies were good buys at any price. That’s what took the TMT boom to its zenith.
- And here in 2015, everyone knows social media companies will own the future. But will their valuations turn out to be warranted?
Logically speaking, the bargains that everyone has come to believe in can’t still be bargains . . . but that doesn’t stop people from falling in love with them nevertheless. Yogi was right in indirectly highlighting the illogicality of “common knowledge.” As long as people’s reactions to things fail to be reasonable and measured, the spoils will go to those who are able to recognize this contradiction.
Howard Marks - Looking for Lance Dunbar
There may be a few folks in America who, like the rest of the world’s population, are unaware of the growing popularity of daily fantasy football. In this on-line game, contestants assemble imaginary football teams staffed by real professional players. When that week’s actual football games are played, the participants receive “fantasy points” based on their players’ real-world accomplishments, and the participants with the most points win cash prizes. (Why is it okay to engage in interstate betting on fantasy football but not on football itself? Because proponents were able to convince the authorities that the act of picking a team for fantasy football qualifies it as a game of skill, not chance. But last week, Nevada became the sixth state to ban daily fantasy sports, concluding that it’s really nothing but gambling.) The commercials for fantasy football say things like, “Sign up, make your picks, and collect your winnings.” That sounds awfully easy . . . and not that different from discount brokers’ ads during bull markets.
In daily fantasy football, the challenge comes from the fact that the participants have a limited amount of money to spend and want to acquire the best possible team for it. If all players were priced the same regardless of their ability (a completely inefficient market), the prize would go to the participant who’s most able to identify talented players. And if all players were priced precisely in line with their ability (a completely efficient market), it would be impossible to acquire a more talented team for the same budget, so winning would hinge on random developments.
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