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Investing: ‘not a game, not a hobby’
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Move forward, but with caution.” Howard Marks, co-founder and chairman of Oaktree Capital Management, offers his prescription for investing in an uncertain world.
“Before the advent of the global financial crisis, most people in finance were 100 percent sure they knew what made the global economy tick, what the economic and business would look in five or 10 years, and what it would take to fix something if it went wrong,” the 67-year-old billionaire investor said during a visit to Shanghai last week.
“Today, two things have changed. Most people realize the world may work differently, and few people are as certain of their opinions as they used to be.”
Marks said investors should set strategy according to their personal situations and ask themselves whether they worry more about the risk of losing money or the risk of missing an opportunity.
“Make sure your expectations are moderate, emphasize corporate investments, commit to active decision-making and remember that reasons for caution aren’t imaginary,” said Marks.
Since Oaktree’s inception in 1995, Marks has been in charge of the formulation and implementation of the firm’s investment philosophy, which adheres to the primacy of risk control and emphasizes knowledge of companies and their securities over macro-forecasting.
Oaktree’s assets under management increased to US$73 billion at the end of 2009 from US$52 billion at the end of 2007. Headquartered in Los Angeles, Oaktree held its initial public offering in 2012. It had US$79.8 billion of assets under management at the end of September.
Prior to Oaktree, Marks was in charge of investment in distressed debt, high yield bonds and convertible securities for the TCW Group, and he worked in senior positions at Citibank early in his career.
Besides double-digit returns in distressed debt investment, Marks also forged his reputation by sharing his investment advice with clients though memos, which are among the most widely read on Wall Street. His memos were gathered into the book “The Most Important Thing,” which was published in 2011.
Warren Buffett, one of Marks’ biggest fans, once said of him: “When I see memos from Howard Marks in my mail, they’re the first thing I open and read. I always learn something.”
Marks, on a visit to Shanghai, shared some of his investment views with Shanghai Daily.
Q: In one of your investment memos, you said “one of key swings of the investment pendulum is between too much confidence and too little.” Based on your observation, how confident are global investors in Chinese market?
A: I do believe that about four years ago, confidence in China was too high. Everybody thought China was perfect and the rest of the world was highly flawed, and the growth here would never slow down. It is always too dangerous to invest when confidence is too high. The term we use is “price for perfection,” and perfection really never exists.
Now the rest of the world has done well with recovering economies, while China is slowing down. But the challenges in a slowdown are becoming clear. I believe, superficially, confidence in China now may be too little. Normally speaking, when confidence is insufficient, you can make some good investments.
Q: What do you think are major challenges for foreign investors in China?
A: Every investor should have transparency and access to economic and company data. Also, a company has to be reliable. Moreover, investment involves the ability to buy and sell, the performance of management in protecting the interest of owners and the behavior of government with regard to capital markets and investors.
I think it’s a matter of maturation. Europe and the US are mature adults. Mature adults have limited and moderated potential. China is an adolescent. Adolescents have great potential but are subject to a lot of volatility. China is an adolescent in a market sense and has to mature. It takes time and it takes experience.
Q: Chinese tend to keep their money in banks rather than investing in other assets. What advice would you give to Chinese people?
A: When you invest in the bank, you get high safety, high liquidity but maybe not high returns. When you invest in securities, you try to get more return and you give up some liquidity and safety. It takes a certain education and sophistication. Obviously, it has been done in the rest of the world for hundreds of years. As China becomes more mature, investing in securities is one of the things people will do. We’re hopeful to have a part in that process.
But I would like to caution people that making money in a market is not that easy. It’s not a game. It’s not a hobby. It’s a serious pursuit.
People should not expect to trade actively to make money. They should buy good investments for the long term and stay in them. In particular, they should be educated so they know what they’re doing and why they’re doing it. They should have the confidence to stay, even when the going gets tough. And they have to control their emotions. These things are not easy.
I don’t think anybody should undertake investing lightly. History shows that, on average, investing has been profitable. But never forget the man who was six feet tall and drowned while crossing a stream that was five feet deep. The key of investing is to survive in the tough times.
Q: What do you think about the Chinese economy?
A: I am not an economist and not an expert on China. But I do believe in China’s potential. With urbanization, human resources and an emerging middle class, China has a long way ahead. The problem is, in past, the extremely high economic growth was encouraged with extremely strong provisions of capital and thus extremely strong fixed-asset investment.
Now the authorities want a transition to more gradual and sustainable growth. Even as they rein in stimulus, the growth here could be considerable, based on the advantages I described earlier. Economies are not easy to manage, and transitions can be very difficult.
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