“Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average,” (1) said Howard Marks in an aphorism-filled speech he gave last night. Organized by the Federation’s recently relaunched Finance & Investment Division, 150 men and women gathered in a conference room at the Century Plaza hotel to listen to the chairman of Oaktree Capital Management. Marks, who is in charge of managing the investment firm’s $19.8 billion, is widely known for the publicly available memos he posts on his firm’s website, and he gave last night’s audience plenty to think about.
In a talk called “The Current Cycle and the Long Term,” the value investor and consistent worrier first explained how the world got to where it is today and then outlined a few principles for investors to consider when planning for the future.
One major factor that Marks identified as having helped bring about the bubble and the resulting crash was what he called “expansiveness.” Every person and organization did this, but Marks’ most memorable description was the one he used to describe American spending habits to his European colleagues: “The average American has $1,000 in the bank, $10,000 on the credit card, makes $20,000 after taxes every year—and spends $22,000.” (2)
“People ask me when we’ll be back to normal,” Marks said. “I ask them what they mean by normal.” (3) Marks considers the years from 1992 - 2007 to have been “the best of times,” and he doesn’t think they’re coming back.
The main question that investors have to answer now? “What future do you want to prepare for? Do you want to prepare for prosperity or not?” (4) Marks isn’t talking about something you can achieve with positive thinking and a vision board; he’s telling investors that they should make decisions as if the market will not perform well. Why? “No one ever went bust preparing for tough times.” (5)
The recent tough times have even gotten Marks thinking about gold, which, he says, people speak about in religious terms, much in the way they speak about God. “I’m not going to convince you to believe in God; you’re not going to convince me not to.” (6) But the practical thinker has lately become more open to including gold in his clients’ investment portfolios—even if he can’t determine what a good or fair price for gold is—and he admits that its ability to retain value in a down market has a pretty good track record. “There’s no way to explain it,” Marks said, “but it’s probably done it [retained value] for 3,000 years, so there’s no reason to expect it to stop doing that this month.” (7)
Marks expressed doubts about financial regulation (8: “Yes, it prevents the next crisis; it also prevents the recovery we’ll wish we’d had”) and spoke with concern about the recovery to date (9: “There’s an overly heavy reliance on government stimulus and an artificially low interest rate.”) And he predicted that the next set of big market problems would arise in the commercial real estate market. (The explanation he gave for that can also be found here.)
But when would the problems in commercial real estate actually become too big to ignore? That question—“when”—is one Marks said that “no one” could answer, and cautioned that, “Being too far ahead of your time is indistinguishable from being wrong.” (10)