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THE RATIONAL OPPORTUNIST

Howard Marks

NEW YORK | Howard Marks became one of the top names in distressed debt by anticipating the biggest bubbles of his era and by documenting his thoughts in his legendary newsletters to investors. After co-founding Oaktree Capital in 1995, Marks made his fortune in large part by capitalizing on the calamity that followed the bursting of the dot-com bubble and, later, the credit crisis. With Oaktree now controlling $100 billion in assets, Marks is looking ahead to his next big chance.

Everything looks overvalued these days. Where do you see valuations going, and how does that affect your approach?

Valuations are high, whether you look at price-to-earnings ratios on stocks or yields on bonds or capitalization rates on real estate or transaction multiples on private equity. This is largely a function of the ultra-low rates mandated by central banks. I believe the easy money in this cycle has been made. Oaktree is essentially fully invested, but we're invested with more caution than usual.

What investing opportunities excite you now?

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We're investing significantly on the private side. I believe private assets that cannot be invested in passively, and to which money cannot easily make its way, can be the source of better risk-adjusted returns.

Do you think passive investing via exchange-traded funds is distorting
the market?

If you want to create an ETF and drive business your way, you put in Apple or Amazon. You see Amazon in value ETFs, in growth ETFs, in quality ETFs. It's probably overrepresented. All the stocks in the index will be driven up relative to stocks not in the index. And the higher your price relative to your intrinsic value, the bigger your stock will be weighted in the index. That's not a good thing.

Will a lot of investors wait for signs of a downturn before reducing risk?

That is the normal approach when the market's doing very well. In one of my memos, I referred to a guy who said he has stocks that are past his sell point but he's letting them burble higher. So what's the point of a sell point? People think they'll ride it a little further and get out adroitly, but that's hard to do. I'm not saying get out now—I'm just saying one's portfolio should have more caution and less risk than at most times.

Is it hard to find pockets of distress in the U.S. market today?

For people like us who practise good-company-bad-balance-sheet investing, there's not much to do right now. The best bargains are usually among the things nobody wants—scary, risky. And when the stuff hits the fan, as it does every decade or so, you can find exceptional bargains.

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How did that pan out a decade ago?

My first cautionary memo of the last cycle was in November 2004, and I said the same thing as today. I said that people are trying to get high returns in a low-return world, and they're taking a lot of risk to do so. We raised the biggest fund in distressed-debt history to take advantage of the crisis. We were able to invest about half a billion a week in the last 15 weeks of 2008, following the Lehman Brothers bankruptcy. All you needed to make a lot of money at that juncture was money and nerve.

What do your mistakes tend to have in common?

We turn cautious too early. We see these excesses building in the market and we blow the whistle, like now, and the market continues to go up. The first great adage I learned in investing was that being too far ahead of your time is indistinguishable from being wrong. /Interview by Tim Shufelt

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