What is it people most want from an investment? Clearly there are a number of possible answers here but, if you posed the question in a ‘multiple-choice’ format, one might reasonably expect ‘superior returns’ to come out as the top answer. And yet, when you dig a bit deeper, what investors say they want and what they actually want may not necessarily be the same thing.
This point is cogently made by one of The Value Perspective’s favourite investors Howard Marks – the Chairman of Oaktree Capital, whom we last met in Where do I get lucky? – in a recent memo to clients entitled ‘Dare to Be Great II’. This is a follow-up to a memo Marks wrote in 2006, which you may not be wholly surprised to learn was entitled ‘Dare to be great’.
Marks' premise is that wanting to generate superior returns is all very well but, in order to do so, you must be prepared to be different. “The real question is whether you dare to do the things that are necessary in order to be great,” he says. “Are you willing to be different and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both.”
Back in 2006, Marks had suggested “Most great investments begin in discomfort”, going on to explain: “Non-conformists don’t enjoy the warmth that comes with being at the centre of the herd. further, unconventional ideas often appear imprudent. The popular definition of ‘prudent’ – especially in the investment world – is often twisted into ‘what everyone does’.
“The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy – are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about and that have been performing badly of late.”
Clearly this is an idea with which The Value Perspective can relate very strongly – and what we can also do is tell you this is an idea that is very difficult to put into practice. to underline this difficulty, Marks himself tells the story of being asked by a client – an unnamed sovereign wealth fund – to give a talk on the subject of what it takes to be “a superior investing organisation”.
The first step, Marks explained, is to come up with “an explicit investing creed” – forming a view, for example, on what you believe in and on the principles that will underpin your process. later on, however, he told his audience they also needed to decide whether they wanted superior investment returns or to avoid looking foolish – because it is not possible to have it both ways.
Over the preceding 15 years, the sovereign wealth fund had invested around $1bn (£600m) with Oaktree. that is hardly an insignificant sum and yet, because it amounted to what Marks characterises as “only a few tenths of a percent of what the world guesses their assets to be”, his message to his audience was that, frankly, they may as well not have bothered.
Key among the principles underpinning an investment process, believes Marks, must be a clear idea of how will you define success and what risks you will take to achieve it. “In short,” he asks, “In trying to be right, are you willing to bear the inescapable risk of being wrong?” For any true value investor, that has to be seen as an occupational hazard.