Super Investor #25 in our series is Howard Marks – The Master of Market Cycles. Howard Marks is one of the most respected voices in the investing world, particularly in the areas of risk management, market cycles, and distressed debt investing. As the co-founder of Oaktree Capital Management, he has built a reputation for navigating financial markets with a keen understanding of how investor psychology influences asset prices. His widely read memos provide deep insights into economic conditions, risk, and market behavior—so much so that even Warren Buffett has praised them, saying, “When I see memos from Howard Marks in my mail, they’re the first thing I open and read.”
Marks’ ability to recognize and adapt to changing market conditions has made him a super investor worth studying. Unlike some investors who rely solely on value metrics or growth potential, Marks focuses heavily on where we are in the market cycle and adjusts his strategies accordingly. His disciplined, risk-conscious approach offers valuable lessons for long-term investors who want to avoid market euphoria and capitalize on opportunities when others are fearful.
Who is Howard Marks?
Howard Marks is the co-founder and co-chairman of Oaktree Capital Management, a firm that specializes in alternative investments, particularly distressed debt. He was born in 1946 and built his career as a thought leader in the financial world, with an emphasis on controlling risk rather than chasing maximum returns.
Marks is best known for his memos, which provide a roadmap for understanding financial markets and investor psychology. His book, The Most Important Thing, distills his core investment principles, emphasizing risk management, market cycles, and the importance of second-level thinking—looking beyond obvious factors to anticipate how markets might behave.
His track record at Oaktree is impressive, with the firm managing over $180 billion in assets. Marks has successfully guided investors through financial crises and economic downturns, demonstrating that understanding risk is just as crucial as identifying investment opportunities.
Early Life and Background
Howard Marks grew up in Queens, New York, and attended the Wharton School at the University of Pennsylvania, where he earned a degree in finance. He later obtained an MBA from the University of Chicago, where he studied under professors who emphasized efficient markets and modern portfolio theory.
His early career included a stint at Citicorp, where he specialized in high-yield bonds and distressed debt. This experience proved invaluable, as he developed expertise in credit investing and understanding companies that were struggling financially but had the potential for recovery.
In 1995, he co-founded Oaktree Capital Management, which focused on high-yield bonds, distressed debt, and other alternative investments. By positioning the firm to take advantage of economic downturns, Marks built a highly successful investment business that capitalized on market inefficiencies.
Investment Philosophy: How Howard Marks Approaches the Market
1. The Importance of Market Cycles
One of Marks’ key beliefs is that markets move in cycles, driven by investor psychology. He argues that recognizing where we are in the cycle—whether investors are overly optimistic or pessimistic—is crucial to making sound investment decisions.
For example, during the 2008 financial crisis, Oaktree Capital aggressively bought distressed debt at bargain prices. Marks understood that while fear was dominating the market, assets were becoming undervalued, presenting an opportunity for long-term investors. Conversely, when markets are overheated and valuations are stretched, Marks advocates for caution, even if it means sitting on cash.
2. Risk Management Over High Returns
Marks is a firm believer that minimizing risk is more important than chasing the highest possible returns. He often quotes the saying, “If we avoid the losers, the winners will take care of themselves.”
Instead of focusing on finding stocks with the highest potential upside, he emphasizes downside protection—seeking investments where the risk of permanent capital loss is low. This mindset aligns well with Warren Buffett’s first rule of investing: “Don’t lose money.”
3. Contrarian Thinking and Second-Level Analysis
Marks often emphasizes the importance of second-level thinking—looking beyond the obvious to anticipate how markets will react in different scenarios. First-level thinking is simple and reactive (e.g., “Tech stocks are rising, so I should buy tech stocks”). Second-level thinking is more nuanced (e.g., “Tech stocks are rising because of market euphoria. Are they overvalued?”).
Being a contrarian is central to Marks’ philosophy. He believes investors should be wary when markets are euphoric and take action when fear dominates. A perfect example is his firm’s aggressive investment strategy during the 2008 financial crisis when most investors were fleeing the market.
Track Record: The Wins (and Losses) that Defined Howard Marks
1. Distressed Debt Investing
Oaktree Capital is one of the world’s largest investors in distressed debt—buying bonds and loans of companies facing financial trouble. Marks has successfully navigated multiple market downturns, turning distressed assets into profitable investments.
2. Navigating Market Crises
Marks’ ability to recognize market cycles helped his firm profit during major financial downturns, including:
- 2008 Financial Crisis: While many investors were panicking, Oaktree Capital was deploying capital into high-yield debt and distressed assets. Many of these investments recovered strongly as the economy rebounded.
- COVID-19 Market Crash (2020): Oaktree again took advantage of market dislocations, buying assets at depressed prices.
3. Managing Risk Effectively
Despite his success, Marks is the first to acknowledge that predicting market cycles perfectly is impossible. However, his disciplined approach to risk management has helped him avoid major losses, proving that protecting capital is just as important as generating returns.
Lessons for the Everyday Investor
- Understand Market Cycles: Pay attention to market sentiment. When euphoria is high, be cautious. When fear dominates, look for opportunities.
- Prioritize Risk Management: Focus on preserving capital rather than chasing the highest returns. Avoid investments where the downside risk is significant.
- Think Contrarian: When everyone is optimistic, consider whether prices are too high. When markets are crashing, assess whether great assets are on sale.
- Avoid Market Timing: While recognizing market cycles is helpful, trying to time the exact tops and bottoms is nearly impossible. Instead, adjust your risk exposure gradually.
- Stick to Fundamentals: Invest in companies with strong financials and competitive advantages rather than chasing trends.
The Legacy of Howard Marks
Howard Marks has had a profound impact on the investing world, particularly through his insightful memos. His emphasis on risk, market cycles, and contrarian thinking has influenced some of the greatest investors, including Warren Buffett and Seth Klarman.
His books, The Most Important Thing and Mastering the Market Cycle, are essential reading for serious investors looking to improve their understanding of market behavior and risk management.
Marks’ ability to simplify complex financial concepts has made him one of the most trusted voices in investing. His legacy will continue through the investors who apply his principles of discipline, patience, and second-level thinking.
Timeless Quotes and Wisdom from Howard Marks
- “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.”
- “You can’t predict. You can prepare.”
- “To achieve superior investment results, you have to hold non-consensus views regarding value, and they have to be accurate.”
Conclusion: The Enduring Influence of Howard Marks
Howard Marks has built his career by focusing on risk management, understanding market cycles, and thinking beyond the obvious. His insights remind investors that patience, discipline, and a keen understanding of market psychology are the keys to long-term success.
By applying Marks’ principles, individual investors can improve their decision-making, avoid emotional investing, and position themselves to take advantage of opportunities when others are fearful.
Happy Investing!