Critic of “market timing” and skeptical of inflation forecasts, Howard Marks says that “the greatest risk is not being in the market”

Considered one of the most successful investors today, the American Howard Marks, co-founder of Oaktree Capital Management, is known for defending that it is necessary to bet on what others would tend to avoid in order to obtain good returns. This way of looking at investments helps to understand his view that the biggest risk an investor can take is being out of the market, regardless of the scenario.

“Most people would say [hoje] that the biggest risk is a downturn related to inflation and bad economic news. From my experience, this is a temporary problem,” she said. “I think the biggest risk is not being in the market.”

Marks gave an exclusive interview to the podcast outliers, presented by Samuel Ponsoni, fund manager of the Selection family at XP, with the participation of Mariana De Biase, responsible for analyzing the broker’s international funds. The episode is now live, and you can check out the original version, in English, as well as the dubbed version, in Portuguese, on Spotify, Deezer, Spreaker, Apple and other podcast aggregators. In addition, the podcast is also available in video format on XP’s YouTube channel.

Oaktree is one of the world’s largest fund managers specializing in alternative investments, with over 1,000 employees and $164 billion in assets under management. Marks is also known for his Memos from Howard Marksperiodical analyzes of markets and investments that are mandatory reading in the sector.

Defender of long-term strategies, Marks points out that it is very difficult to know the right time to buy or sell a security. He rejects impulsive behavior, such as selling shares in a downturn for fear of even greater setbacks.

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“Economies and markets have a positive underlying trend. We know there are cycles, but at the end of the day, it’s positive,” he said.

To illustrate, Marks recalls that the S&P 500 index, which gathers the main companies traded in New York, has advanced an average of 10% per year in 90 years. The appreciation, however, was not constant, there were ups and downs. In ten years, for example, the biggest gains may have occurred in 20 specific days.

“If you go in and out, and stay out of the market for a while, you can lose these 20 days. Nobody knows when they will occur”, observed the executive. “If you stand for a long time at a bus stop, you will be able to catch a bus. But if you keep jumping from point to point, you might not catch any,” he added. He often resorts to metaphors and quotations.

extremes

For Marks, it is only at the “extremes” that it is possible to have a clearer view of the direction of the market. And in his assessment, the moment is not one of extremes, despite the sharp drops in the stock markets in 2022, inflation and the increase in interest rates.

With the withdrawal of stimulus to the US economy created in the Covid-19 pandemic, the “obvious excesses”, according to Marks, left the scene, which made the stock exchanges have a strong appreciation in 2021.

Marks adds that the pandemic – which he compares to a “meteor” – and the invasion of Ukraine by Russia, which began in February this year, are factors external to the economy, and resulted in a movement that does not fit the concept of a traditional economic cycle. The executive published a book on the subject, entitled Mastering the market cycle.

“Especially because of these factors, it is difficult to decipher the market today,” he said. “But I would like to point out that it is always difficult.”

According to the manager, “we are not so expensive that we have to fall more, but we are also not so cheap that we cannot fall anymore”, he commented. Marks gave the interview on May 18, when the S&P 500 was down 15% year-to-date and the Nasdaq Composite was down 22%. Since then, the negative performances have deepened.

Neutrality

In this sense, he recommends to investors a “normal” attitude towards the market, neither aggressive nor defensive. “If you’re very concerned about avoiding downward fluctuations, you might want to increase your defense a little bit, but certainly not in an extreme way,” he noted.

In the same vein, he reveals that Oaktree’s approach is “neutral.” “We invest every day, but we always include an element of defense in what we do, because we look for what we call a margin of safety,” he said.

This does not mean that there are no good options on the stock exchanges, but it is important to look for “bargains”, low-priced papers with the possibility of good returns. “Compared to three months ago, some things were put on sale,” he said.

Marks recommends calm. In his assessment, investors tend to look at quotes every day and end up carrying out too many operations. For him, short-term vision and hypertrading – the excess of transactions in the market – are not beneficial behaviors.

“People get excited when things are going well, when prices are high, and they buy; and they get depressed when things go wrong and they sell at low prices, which is the opposite of what you should be doing,” said the executive.

Here and now

Skeptical of macroeconomic forecasts and the so-called market timing – strategy based on decision making trying to predict the best asset prices and the ideal times to buy or sell financial assets – his recommendation is the fundamental analysis of companies, sectors and bonds. “We act in response to current market conditions, not in response to what we think will happen in the future,” he commented.

His view on inflation in the United States over the next five years, for example, is that it will be above the level of the last 40 years (“when we couldn’t get to 2%”), but it will be lower than the more than 8%, in annual basis, currently verified. “I think it’s going to be maybe 3% or 4%, but we’re not going to do anything at Oaktree based on that,” she said. Decisions, according to him, will continue to be made based on the perspectives for individual companies and sectors.

“People should know that when they talk about inflation, which I find very mysterious, they shouldn’t trust their predictions, or anyone else’s. I sure don’t have confidence in mine,” he stated.

The same logic, according to Marks, was adopted at other times. As an example, he cited the manager’s performance when the housing bubble burst in the United States in 2008, which precipitated a global financial crisis. The company invested $10 billion in debt securities of distressed companies.

“Not because we had an optimistic forecast, but because we saw bargains, we saw bonds pouring into the market at ridiculously low prices. The prediction was that the world financial system could collapse,” he said. That did not happen, and the recovery of the bonds yielded US$ 6 billion to Oaktree’s clients, with an additional US$ 1.5 billion for Marks and his partners, according to reports published at the time in the newspaper. The New York Times.

Oaktree’s specialty is debt securities high yieldsecurities from companies that are not investment grade and with a higher risk of default, but which pay higher interest – and, in theory, have greater potential for appreciation in the market according to the company’s performance.

lessons

Marks’ logic is to be more aggressive at times when most are panicking, “selling without discipline”, and more cautious when others are euphoric, “buying hard”. “The proper goal for an investor at my level is to look for what I call asymmetry. You want to win big when the market goes up, but you don’t want to lose big when the market goes down,” he declared.

It’s what Marks calls risk control, one of the tenets of Oaktree’s investment philosophy. In the book Most important for the investorMarks lists among the most important tasks to understand, recognize and control risk.

Another lesson from the book is to “see things differently than consensus”. For him, to have a superior performance, the investor needs to think differently. More than that: it must have what he calls “variant perception”. Roughly speaking, it consists of going beyond the obvious and having “second-level thinking”.

“The example I give in the book is that the first-rate thinker says, ‘This is a good company, we should buy the stock.’ But the second-tier thinker says, ‘It’s a good company, but it’s not as good as everyone thinks. The price must be too high. We should sell the shares,’” he explained.

The full interview and previous episodes can be seen on Spotify, Deezer, Spreaker, Apple and other podcast aggregators. In addition, the podcast is also available in video format on XP’s YouTube channel.

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