Who is the world’s most admired financial guru? Warren Buffet, of course. What’s less known is that when the ‘Sage of Omaha’ needs advice he turns to a private equity investor called Howard Marks.
According to Buffet, "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something.”
Marks – Co-Chairman of Oaktree Capital Management – is famous on Wall Street for the ‘memos’ he writes to clients. They are widely admired for their clarity and practical wisdom. As well as PE, his investment strategies encompass credit, real estate, and listed equities.
And Marks’ legendary insights make money for his clients. Lots of it. LA-based Oaktree currently manage $192 billion, working for 67 of the 100 largest U.S. pension plans. (March 31, 2024.)
Just like Buffet, his style is not in any way showy. The opposite, in fact. Rather than emphasising everything he knows, the investment philosophy behind the memos is based on an “I don’t know” principal.
Explaining, Marks quotes Stanford behavioural psychologist Amos Tversky, an expert in the field of cognitive bias – “It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what's going on.”
For Marks, then, Wall Street’s Achilles’ heel is its certainty. Its collective arrogance. The more you think you know, the more mistakes you’re going to make. Humility, he implies, is a fundamental strategic asset.
Marks continues, an investment decision “primarily revolves around choosing between two polar opposites: what I call the "I know" school and the "I don't know" school. Most of the investment professionals I've met…fall squarely into the "I know" school. These are people who believe they can discern what the future holds, and in their world, investing is a simple matter
Marks puts Oaktree firmly in the “I don’t know school.” In one memo, he comments, “We accept that we're among the many who do not know what the big-picture future holds…we feel that because we're not clairvoyant, it's important to acknowledge our limitations and put the highest priority on avoiding losses, not executing bold strategies.”
Marks does not think big, then. He purposefully thinks small. Focusing on the detail, choosing to work “in inefficient markets where specialisation, skill and hard work can add value and lead to above-average performance over time.”
So, next time you need some investment advice, Omaha is still a good place to go, but it’s also worth listening to Howard Marks, the ‘Sage of California.’