Notes — Howard Marks on the Value-Growth Divide, Investing in Uncertainty, and Living Well

Source-grounded literature notes. Own words. Citations by section. Howard Marks, interviewed by William Green for Richer, Wiser, Happier, 14 March 2022.

Four questions [Adler frame]

Q1 — What is it about? An intellectual autobiography of Howard Marks‘s investment philosophy across 54 years (1968–2022), with particular focus on a pivot forced by conversations with his son Andrew during the 2020 COVID lockdown. The core theme is the tension between price discipline (value investing’s classical dictum) and open-mindedness toward great compounders — and the broader meta-skill of intellectual humility that Marks believes separates good from great investors. Woven in: a March 2022 situational assessment covering inflation, Bitcoin, and China.

Q2 — How is it argued? Biographical narrative in chronological arc: Nifty 50 → junk bonds → Oaktree → COVID lockdown conversations → the Something of Value memo. Each phase is a lesson, not merely a career milestone. Case studies (Amazon, Black Monday, Lehman, Bitcoin) are used to test principles rather than illustrate them. Andrew Marks’s challenges function as Socratic provocations. Marks closes with Templeton, Buffett, Munger, and Christopher Morley as touchstones rather than authorities.

Q3 — Is it true? The market-efficiency argument is well-supported; the EMH literature broadly endorses the view that alpha from publicly available quantitative data is increasingly competed away. The “feel” argument is harder: Marks has survived and prospered, but the sample is one. The survivorship objection applies — many investors with “feel” have failed without leaving a record. Marks does not answer this directly; William Green‘s question about emotion-as-enemy gives him a framing, not a proof. The China-as-adolescent thesis (as of March 2022) has since been complicated by the Evergrande crisis, the zero-COVID aftermath, and ongoing property sector distress. The directional optimism may still hold, but the “best decades” claim is harder to defend on a five-year horizon from 2022. The crypto mea culpa is exemplary: honest, specific, and actionable. [?] On Bitcoin, Marks acknowledges not knowing enough to hold a view — which is its own position and a defensible one.

Q4 — What of it? The practical takeaway is not a stock-picking system but a meta-discipline: when a school of investing becomes so rigidly defined that it produces automatic dismissals of what merely looks expensive today, it has become a constraint rather than a protection. For a FIRE / value-investing reader, the actionable Marks revision is: (1) maintain price discipline, but (2) distinguish between a company that is expensive because it is genuinely overvalued and a company that is expensive because its future growth cannot be captured in today’s P/E ratio; (3) when you identify a true compounder, hold it through the noise rather than rotating out the moment the discount closes. The Limits of Negativism example (2008) is also generative: scepticism runs in both directions — blow the whistle when optimism is excessive, and when pessimism is excessive.

Glossary

Nifty 50: A loose group of ~50 large-cap US growth stocks fashionable in the 1960s–70s, including Polaroid, Kodak, Xerox, and IBM. Thesis: these companies were so great that “no price is too high.” PE ratios ran 70–90; five years later they ran 7–9. The prototype of a bubble where the quality of the asset is used to suspend price scrutiny.

Cigar-butt investing: Graham’s original method. Find an asset selling at a large discount to intrinsic value — a “cigar butt” with one free puff left — buy it, collect the puff (i.e., the discount narrows), sell, repeat. The process is value-realisation, not value-creation; it has nothing to do with the long-run potential of the company. Buffett’s early strategy, later revised with Munger’s influence.

Fallen angel: A bond originally issued as investment-grade that was subsequently downgraded below Baa3/BBB-. Before Michael Milken, the only high-yield bonds in existence were fallen angels. Milken’s insight: there is no theoretical reason why bonds cannot be originally issued below investment grade, provided the coupon compensates for the risk.

High-yield (junk) bond: A bond rated below investment grade by Moody’s (below Baa3) or S&P (below BBB-). Higher default risk compensated by higher coupon. Prior to the late 1970s, Moody’s manual defined a B-rated bond as one that “fails to possess the characteristics of a desirable investment” — without reference to price. The high-yield market grew from ~$2 billion outstanding in 1978 to ~$2 trillion today. Marks entered it in May 1978.

Efficient Market Hypothesis (EMH): The proposition that prices in liquid markets already reflect all publicly available information. Under strong EMH, no one can systematically outperform on any information. Marks’s view: the market is much more efficient than it was in the 1960s; the edge from purely quantitative, publicly available data has been competed away; the remaining edge comes from non-quantitative insight or understanding of the future.

Capital-V Value Investing: The theologised form of value investing focused on low P/E, P/book, P/revenue screens — treating growth investing as a categorically different activity. Marks contrasts it with “value investing with a small v,” which is simply buying assets well (i.e., at prices below intrinsic value), regardless of whether the company is classified as value or growth. The capital-V form became so precisely defined that it excluded compounders like Amazon.

Compounder: A business that grows intrinsic value at a high rate (Marks uses 15–20% p.a.) for a long period (15–20 years). The intrinsic value of a true compounder is difficult or impossible to cap with conventional discounted-cash-flow analysis, because the growth rate makes the out-years dominate. The capital-V value investor who rotates out once the discount closes misses the bulk of the return.

Portfolio insurance: A financial product, popular in the mid-1980s, that claimed to let institutional investors hold equities without taking additional risk, by hedging dynamically. The 1987 Black Monday crash exposed the flaw: when everyone sells the hedge simultaneously, liquidity disappears. The S&P fell 22% in a single day (19 October 1987). Marks invokes it as an example of “this time is different” thinking — the product was sold on the premise that a new mechanism had eliminated the old risk.

Feel: Marks’s term for investment judgement that is not derivable from quantitative analysis but is logically defensible. Specifically: a better understanding of non-quantitative information available today, or a better understanding of future developments. The Limits of Negativism memo (October 2008) is his worked example — no calculation could prove the financial system would not melt down; the decision to buy was logical but not quantitative.

§1 — Career arc: from equity research to junk bonds

Marks joined Citibank’s research department in summer 1968, the apex of the Nifty 50 era. By 1977, the portfolio’s results were bad enough that a new CIO, Peter Vermilion, was brought in. Vermilion offered Marks a choice: he could stay in large-cap equities or join the bond department to start a convertible-bond fund. Marks took bonds, giving up 75 subordinates and a $5 million budget for no staff, no budget, no committees. He describes himself as “ecstatic”: competing in an overlooked backwater, needing to know everything about a few companies rather than two sentences about 400.

In August 1978, the call from the head of the bond department: a man named Milken in California was dealing in “high yield bonds.” The conceptual step Milken made was simple but previously impossible in practice: bonds could be originally issued below investment grade, if the coupon was sufficient to compensate for the default risk. Prior to this, Moody’s defined a B-rated bond as one that “fails to possess the characteristics of a desirable investment” — without reference to price. That definition treats a below-investment-grade bond as categorically bad, not just bad at a bad price. Marks went from losing money in the best companies in America to making money in the bonds of some of the worst. The lesson was comparative and price-based, not quality-based.

§2 — The Nifty 50 as prototype bubble

“No price too high” is the hallmark of every bubble, Marks argues. The Nifty 50 PE ratios (70–90) were defensible on the theory that these companies were too great for bad things to happen. Bad things happened. Three mechanisms: (1) no price is ever too high turned out to be false in real time; (2) even the “great” companies had feet of clay (Polaroid, Kodak, Simplicity Pattern all became marginal); (3) holding these stocks the day Marks reported to work and selling five years later meant losing almost all the money.

Marks’s interpretation is not that quality doesn’t matter but that quality without price discipline is the mechanism of every bubble — not just the Nifty 50 but the dot-com era (e-commerce companies with no business plans), and by implication anything described as too obviously great to be valued skeptically.

§3 — The Something of Value evolution

The Something of Value memo (January 2021) emerged from three months of lockdown conversation with Andrew Marks (a professional investor, described as “extremely thoughtful” and “a thinker”). Andrew’s core challenge, as Marks summarises it:

Buffett’s actual method — buying great companies at fair prices and holding for decades — is not the cigar-butt rotation model his reputation rests on. Graham’s greatest investment was Geico, a great company, not a cigar butt.
The capital-V value school, defined entirely by price metrics (low P/E, P/book, P/revenue), has nothing to say about a company’s quality or long-run potential. It is a purely present-tense frame applied to inherently future-tense businesses.
When a school of thought becomes “theologised” — so precisely defined that it blocks out exceptions — it has become a limitation, not a tool. Open-mindedness is the corrective.

Andrew’s specific example of knee-jerk habit: Marks came out negatively on Bitcoin in 2017 (when it went from $1,000 to $20,000) on the grounds that it produces no cash flow and cannot be valued intrinsically. His prior successes at blowing the whistle on portfolio insurance (1987) and dot-com startups (1999) had made scepticism of “new new things” a habit — and habit had displaced genuine analysis. Andrew’s point: you have to know more than most people to make a superior investment decision. Marks did not know more than most people about crypto; he just had 50 years of generalised investment experience. That is not a sufficient basis for a strong negative view. [?] Whether the Bitcoin correction was merely early or fundamentally wrong remains unclear; Marks does not revisit the episode in this interview.

The memo’s title carries a double meaning: it is about how to think about value investing, and it is also a silver lining — a genuine something of value that emerged from the pandemic.

§4 — Market efficiency and the shrinking edge

Marks traces the compression of the quantitative edge across the career:

1960s: Buffett could page through Moody’s manual, find deep discounts no one else was looking for, and buy at 50 cents on the dollar — because almost no one understood the logic of discount investing.
Today: everyone has screens, data feeds, and the same training. The SEC ensures everyone gets the same material information on the same day. The question “who doesn’t know that?” now almost always returns “everyone.”

Andrew Marks’s formulation: widely available quantitative information on the present is unlikely to be the source of superior profits. What remains as sources of alpha: (a) a superior understanding of non-quantitative information available today (qualitative company or management assessment, industry dynamics, regulatory trajectory); or (b) a superior understanding of future developments (where the company and industry will be in 5–10 years).

Marks’s term for both is “feel.” It is not unrigorous — he means conclusions that are logically defensible but not derivable by calculation. The Now What and Limits of Negativism memos from September–October 2008 are his worked examples: during the Lehman meltdown, no experiment could prove the financial system would not collapse. The decision to buy was not quantitative. It was: “if we buy and the world melts down, it doesn’t matter; if we don’t buy and the world doesn’t melt down, we failed to do our job.”

§5 — Emotion and the contrary investor

Marks’s account of how most investors behave:

Economy does well → company profits grow → earnings beat → stock rises → investor becomes more optimistic → buys more (at higher price).
Economy turns down → profits contract → earnings miss → stock falls → investor becomes pessimistic → sells (at lower price).

This is buying high and selling low — the exact inverse of rational behaviour. The structural correction: scale out as prices become unreasonable; step in when prices reflect excessive pessimism.

Marks’s worked applications:

Black Monday (19 October 1987): Article in the NYT eight days earlier — “This Time It’s Not Any Different” — named the mechanism correctly. The portfolio insurance product was a “this time is different” claim. It failed in real time.
March 2008 / September–October 2008: After the Lehman bankruptcy, one investor in a re-equitisation round could not name a scenario negative enough to satisfy her. Marks ran back and wrote The Limits of Negativism, put up his own money. One of his best investments.
March 2020: S&P fell from 3,300 (19 Feb) to 2,200 (24 March) in 33 days — down a third — then recovered to 3,300 by June. Many called it a bubble. But Marks did not: prices were rational given low interest rates; a rational model of the economy’s recovery was not implausible. Calling the June 2020 price a bubble was, in retrospect, premature by 20 months at minimum.

Buffett’s formulation: “The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.” When others are unafraid, we should be terrified (they are paying too much). When others are terrified, we should turn aggressive (their terror makes things available cheaply).

Marks identifies unemotionality as the common trait across the great investors he knows: they are not all the same in other respects — some write, some don’t; some ski, some don’t — but they all reach conclusions under conditions of uncertainty without emotional amplification of either the upside or the downside.

§6 — Inflation, China, Bitcoin (March 2022 assessment)

Inflation: Three structural differences from the 1970s: (1) today’s supply-chain disruptions are largely temporary and mechanistically explainable (one missing component halts production); (2) the post-pandemic demand bulge resulted from COVID relief spending and will normalise; (3) the policy tool is well understood — raise rates — and the private sector is no longer heavily unionised with cost-of-living adjustments, so the wage-price spiral that characterised the 1970s is much harder to recreate. His prior rate on a loan: 22¾% at the peak. He does not expect to go there. But he expects more inflation over the next five years than the last five, and recommends: more floating-rate instruments, less fixed-rate; real estate where rent increases can be passed on; companies whose profits grow faster than inflation.

China: Marks’s “economic adolescent” frame. Europe and Japan are economic senior citizens (little vitality, best decades behind). The US is a mature adult (doing fine, but the best decades probably past). China is an adolescent — tempestuous, subject to ups and downs, but the best decades ahead. “Uninvestable” as a label means prices cannot be borne aloft by adoration — which is an argument for cheapness. Marks has held long-term positions in Chinese equities, NPLs, and credit. Caveats: the range of outcomes is “enormous” because the key variables are political, ideological, and social rather than economic; Marks explicitly says this is not his area of expertise. [?] He does not name a specific probability distribution; the “economic adolescent” frame is a directional conviction, not a quantified thesis.

Bitcoin: The mea culpa is clear. In 2017, Marks came out negatively on Bitcoin on the grounds of no intrinsic value, no cash flow, and his general wariness of “new new things.” Andrew pointed out: to make a superior investment decision, you need to know more than most people — about the technology, the supply-demand case, the use cases. Marks had none of that. He is willing to say he does not have a strong view on crypto, is trying to learn, and accepts that his 2017 intervention was an example of knee-jerk scepticism from the wrong domain.

§7 — Ethics at Oaktree and living on the high road

Oaktree’s founding business principles (1995): integrity, candour, openness, fair treatment. The 2022 addition: responsibility (to the planet and to all members of society). Marks is explicit that this is not an investment thesis — he is not claiming ethical investing outperforms. He is claiming it is the right way to live. He does not get a salary, bonus, or fund profit participation; his compensation is equity ownership. He would not work for nothing at a place he could not represent with pride.

On partnerships: Marks and Bruce Karsh have been partners since 1987 and have “never had an unkind word” in 35+ years. Marks attributes this to shared values (operating on the high road) and complementary skills: Marks is a fast, intuitive thinker; Karsh is slow, methodical, and rethinks decisions. The absence of disrespect for each other’s cognitive style is the key.

Christopher Morley’s line: “There is only one success: to be able to live your life your way.” Marks uses this with student audiences to resist optimising for peer-group validation or money beyond the point of diminishing marginal utility. Erik Erikson’s eighth developmental stage — the retrospective life review — is the forcing function: at that stage you cannot rewrite your reputation. The time to act according to your values is now.