Lessons on markets and entrepreneurship from Howard Marks
In the second Vise Evolve Event, our Head of Investment Strategy, Dave Twardowski, sat down with the inimitable Howard Marks, co-founder and co-chairman of Oaktree Capital Management, for an hour-long discussion about building a business and mastering the markets. Below are a few highlights from the conversation.
Growing from $0 to $150 billion in AUM
The prospect of starting a business was daunting even for Howard Marks, but he and the founding members of Oaktree Capital Management believed their prior success working together would make the transition easier. “We knew how we would operate. We didn’t have to sit down and ask what we were going to do? The plan was more of the same,” Howard explained. And it worked incredibly well. Oaktree quickly eclipsed $5 billion in assets under management and turned into a profitable business.
What he and his co-founders didn’t expect was the amount of non-investing work involved in their new roles. Their previous employer had handled all of the legal, operational, and administrative work in the past. All they did was work with clients and manage money. Now, as their own bosses, they were responsible for everything. “The good news is that our first employee was a Chief Administrative Officer who was up for the task,” says Howard.
Independent advisors, or all entrepreneurs for that matter, who start a business feel this pressure that they should already know everything, but you can’t possibly know everything—nobody has the capacity to know it all. Surrounding yourself with motivated people, as Howard did in the early days of Oaktree, can help overcome the early challenges you may face as an independent advisor.
The last, and perhaps most important, lesson Howard stressed is about company culture. Culture is about mission and values, and making your employees excited about how they can contribute to the whole. “The most important thing is to have a creed, or something you believe in. One of the first things I did [when starting Oaktree] was write down our investment philosophy and business principles,” notes Howard. Even as the company grew from 30 to 1000 employees, the written statements and Howard’s memos have remained a core part of the internal culture.
Mastering the markets
Are stock prices too high? A lot of attention has been given to equity prices and valuations in recent years. “The P/E ratio, price-to-earnings ratio, on the S&P 500, which is one of the principal stock indices, is about 20 or 21. The historical average is about 15,” says Howard. The knee-jerk reaction among investors is to call it a bubble, but according to Howard, the current situation is more nuanced than the valuation suggests.
Today, technology stocks make up a large portion of the S&P 500. These are household names like Facebook and Netflix, which offer more growth potential than what we’ve seen from market leaders in the past. That, in itself, may justify the historically high valuations of late. The other thing you have to consider is interest rates. When the Fed slashed rates to shore up the economy, it increased the value of all financial assets, including stocks. In other words, the higher prices we’ve seen in the market are commensurate with the current rate environment.
“So if you adjust for the change in composition [of the S&P 500] and the [low] level of interest rates, I don’t think [stock prices] are too high,” says Howard, “But they are dependent on [interest rates] remaining the way they are.”
Building a portfolio: Investing is about making tradeoffs between risk and reward. “When my friends come to me for financial advice, I always ask them: do you want to keep what you have or get more?” says Howard, “The more you try to earn more, the more you open yourself up to the possibility of having less, and vice versa.”
This, of course, can mean different things in different environments. In a low rate, low yield environment—like the one we are in today—it may mean you have to give up some of the safety of bonds to better achieve your client's goals. “With cash yields at 0% and 10-year Treasuries near 1.5%, many of us will move further out on the risk curve to try and get a decent return,” says Howard. That, in his opinion, may come from stocks or alternatives rather than bonds.
Note: Howard Marks is an investor in Vise
May 28, 2022