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

Howard Marks

When you say my parents lived through the Depression, I always try to make the distinction: not only did they live through it — they were adults during it. If you were five years old, it may not have imprinted so much. But my parents were born in the early 1900s and were in their twenties during the Depression. If you lived through that, you came away risk averse and cautious.

When I was growing up, phrases like "save for a rainy day" and "don't put all your eggs in one basket" were everywhere. If you were born ten years later than me, or certainly twenty, you never heard those things. I think that's important. In addition, my father was a world-champion pessimist, which prevented me from getting into the habit of expecting good things to happen.

Howard Marks

Before we go too far on this subject, I have to point out I was not brought up Jewish. My mother was a Jew who converted to Christian Science because medicine wasn't curing some illness and she got better. She attributed it to Christian Science and became an ardent follower. I was brought up as a Christian Scientist — church every Sunday, Bible class every Wednesday, and never had a drink or a trip to the doctor.

Howard Marks

I think that's right. It was a religious upbringing.

Howard Marks

Looking back, I'm not sure I recognised at the time how bad the firestorm was. I thought I was doing fine — it was just the Nifty 50 stocks that were having a terrible time. I joined the investment research department at First National City Bank, which later morphed into what they now call Citi. It was perhaps the world's largest financial institution at the time, riding high alongside the Nifty 50.

Most money-centre banks subscribed to Nifty 50 investing — investing in the best and fastest-growing companies in America, companies so great that nothing bad could ever happen. Because they were growing so fast and of such high quality, the official dictum was that there was no such thing as a price too high. Those four words — no price too high — are the hallmark of a bubble. We hear them said every time something is in a bubble.

If you bought those stocks the day I reported to work and held them for five years, you lost almost all your money. The Nifty 50 carried PE ratios between 70 and 90; five years later they were between seven and nine — 90% off the top. And many of these companies that were supposed to be so great they could never fail did fail. Where's Polaroid? Where's Kodak? Whatever happened to Simplicity Pattern?

Howard Marks

I'm a great believer in luck. I wrote a memo in January 2014 called "Getting Lucky" and it got the most response of any until recently — it was about how lucky I've been. But certainly: I started a convertible bond fund in May 1978 and got the call in August that changed my life. The head of the bond department said, "There's some guy named Milken out in California who deals in something called high-yield bonds. Do you think you can figure out what that is?"

There had always been low-grade bonds, but before 1978 they came into existence as fallen angels — high-grade bonds that got into trouble. What Michael Milken and Drexel Burnham did uniquely was to argue that you should be able to issue non-investment-grade bonds if the interest rate is sufficient to offset the risk. That makes perfect sense. But prior to those days, it was impossible to issue a bond that wasn't investment grade.

I went from losing a lot of money in the best companies in America to making money steadily in the bonds of some of the worst companies in America. That led me to two conclusions: it's not what you buy, it's what you pay — and good investing comes from buying things well, not from buying good things. If you don't know the difference between those two things, you're probably in the wrong business.

Howard Marks

If you asked me what kind of investor I am, the main bifurcation is growth versus value, and I would have said I'm a value investor. Value invests on the basis of asset values and cash flows — what's here and now. Growth invests on the basis of potential in the distant future. That distinction probably arose in the 1980s or 1990s and became, as someone once said to me, theologised — hardened into a religion.

Fast forward to March 2020. The pandemic hits. My son Andrew, his wife, and their baby arrive in California to ride it out and move in with us. For March, April, and May, we live together. It's rare for two generations of adults to live together in today's world, but the result was great conversations. Andrew is a professional investor — extremely thoughtful, a real thinker. We had spirited debates.

The result was a memo I wrote in January 2021 called "Something of Value." The title has two reasons: it's really about how people should think about value investing and loosen the divide between value and growth, and the other reason is that it was a silver lining in the pandemic — something of great value to be able to live with my son for three months.

Howard Marks

When the S&P breaks the 500 equity index into a growth portion and a value portion, the growth stocks are those projected to have very high rates of future growth. But the value stocks — it's all about price. Low price-to-book, low price-to-revenue, low price-to-earnings. Nothing about the quality of the companies. Nothing about the companies at all.

What Andrew impressed on me is that Buffett — the king of value investing — has a core point: when you invest, you should think of yourself as buying a piece of a company, not buying a piece of paper or a trading card. If you buy the stock of a great company and it stays great, you should tend to want to hold it for a long time. That is a great departure from capital-V Value.

What does a value investor actually do? Buffett talks about buying dollars for 50 cents: you find something you think is worth a dollar, buy it for 50 cents, it becomes worth a dollar, you sell it, and look for another dollar to buy for 50 cents. It's a constant rotation of buying cheap assets and hoping they become fully priced, then moving on. It's a short-term relationship designed only to garner discounts. It has nothing to do with the long-run potential of the company.

Andrew pointed out that Charlie Munger is broadly credited with getting Buffett to stop doing cigar-butt investing and start buying the stocks of great companies at good prices. And even Ben Graham's greatest investment was GEICO — a genuinely great company — which actually outweighed all his gains in everything else he ever owned. Even the patron saint of value investing made his best returns on a growth investment.

Howard Marks

I think so. And what Andrew was saying is that this idea of just garnering discount, discount, discount, discount — it's not enough. You should get on some good companies. Develop a superior understanding of those companies and know when to hold for decades. That doesn't fall neatly under the canon of value investing, but you're still looking for value — you just can't quantify it to the penny because many of the attractions exist in the future.

The memo was about softening the edges of the divide between value and growth. We made a distinction between value investing with a small "v" and with a capital "V" — the capital-V version being the theologised, precisely defined one. When one school of investing becomes so dogmatic that it's limiting, life is more ambiguous and you have more options. Insisting on open-mindedness was one of the most important messages of the memo.

Howard Marks

Exactly. I ran into Miller and asked how he, a died-in-the-wool value investor, could buy Amazon. You know what he said? "Looked like value to me." That's the kind of thinking you have to have.

When I was a boy in the 1950s and '60s, the world didn't change much from year to year — the price of a comic book was always a dime. You could invest on the proposition that things worth a lot today would be worth a lot tomorrow. But today everything changes every day, and the role of technology is ubiquitous. It's a mistake to say "I invest in things I believe will not change" — that seems rather close-minded.

Howard Marks

There's no easy answer, as there isn't to most things in investing. The first time I heard "this time it's different" was the New York Times, October 11th, 1987 — an article by Anise Wallace titled "This Time It's Not Any Different." She described how people rally behind that phrase, but even Templeton allowed that 20% of the time things really are different. Life is easier if you postulate that things don't change. It's more complicated when you have to live on shifting sands.

What was special about October 11th, 1987? It was eight days before Black Monday — October 19th — when the Dow lost 22% in a single day. The article was well-timed and exactly right: people were throwing out valuation norms, believing this time was different. There was also a product called portfolio insurance — the idea that you could increase your stock market exposure without incremental risk. That was another form of "it's different this time," and it didn't work either.

Now I would say that more than 20% of the time things really do change. Things change constantly, and so it's very hard to rely blindly on the norms of the past. A lot of people got into trouble in 2020 because the information-technology stocks had extremely high PE ratios on depressed earnings, and people said, "That's an anomaly — they're too expensive." But the people who missed those stocks in 2020 had very inferior results. Open-mindedness and flexibility: find something great, find a company that can grow at 15–20% a year for 15–20 years. It's almost impossible to cap with an intrinsic value number, but you might want to stay with it.

Howard Marks

What I did was right for the time. Fixed-income credit was perfect for me as a non-optimist: you get downside protection from the assets, the risk is constrained. If Peter Vermilier had said to me, "I want you to start a venture capital fund and find Amazon when it's created in 30 years," I would have been a disaster. One of the important lessons is you have to play within yourself — do the things that fit your personality, your makeup, and your mindset.

But I could have become more flexible and a little more of a believer earlier, and Andrew points that out. In the early part of my career, I was successful at blowing the whistle on excesses — being the sceptic, saying "that's too good to be true." Andrew pointed out that became a knee-jerk habit. And if the goal is open-mindedness, you shouldn't be closed to things.

Howard Marks

Right. In 2020, people looked at some of the information stocks selling at PE ratios of 80 and said, "That can't be a good idea." But you shouldn't have hard and fast rules. On the other hand — and the great thing about investing is there are so many different hands — you do have to believe in something, you do have to draw the line somewhere.

Lest anyone forget: in the end, superior investing comes down to superior insight. Everything else is a two-edged sword. If you concentrate and you're right, you make more money. If you concentrate and you're wrong, you lose more money. Lever up and you're right — more money. Lever up and you're wrong — more losses. There is only one thing which is not a two-edged sword: insight. If you have superior insight, you can do better in up markets and in down markets.

The market has become a smarter place. When Buffett was buying those dollars for 50 cents, it was because very few people understood the essence of smart investing. He could buy them for 50 cents because nobody else was bidding 55. Today everyone has a computer, a data feed, a screen. Everyone understands the idea of picking up stocks that are too cheap. This leads into the efficient market hypothesis: the market is much more efficient today than it used to be. It's very hard to find unique information.

As Andrew formulated it: widely available quantitative information on the present is unlikely to be the source of superior profits, because everybody has it. The SEC's job is to make sure that everybody has the same information on the same day. So your superiority as an investor has to come from things that are not factual — from what will develop in the future, from a better understanding of non-quantitative information available today, or a better understanding of what the future holds. Both of those are summed up by what I call feel.

Howard Marks

Emotion is the greatest enemy of superior investing. Most people in the herd become more optimistic and more inclined to buy as prices rise. Then eventually things stop going well, prices decline, people get pessimistic and more likely to sell. The higher the price, the more they buy. The lower the price, the more they sell. This is the opposite of what we should be doing.

There's a reason Buffett said, "The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own." When other people are unafraid, we should be terrified — because that means they'll pay prices that are too high. When other people are terrified, we should turn aggressive — because their terror makes things available cheaply. The great investors I know are unemotional about their investing and they go counter to these trends.

Howard Marks

I hope so — I'd hate to be reducible to a brain in a tank turning out investment ideas. The investors I respect are not all the same. Some write, some don't. Some draw, some don't. But they're all bright, and for the most part they're all unemotional. You have to be able to reach conclusions that are not analytically or quantitatively based. You have to have some imagination.

If you go back and read the memo I wrote in October 2008 — at the bottom for credit, when it was an utter meltdown — or the one I wrote four days after Lehman filed for bankruptcy, titled "Now What": you couldn't figure out whether the world was going to continue to exist. You couldn't prove that the financial institutions weren't going to melt down. Bear Stearns had disappeared. Merrill Lynch had gone to BofA. Lehman was bankrupt. Washington Mutual, Wachovia. It felt like falling dominoes.

So I wrote "Now What" and I said: if we buy and the world melts down, it doesn't matter. But if we don't buy and the world doesn't melt down, then we failed to do our job. We must buy. That's not scientific. I hope it's logical. But it was not quantitative or analytical. It was intuition — and a deep level of gut.

Howard Marks

That was the memo "The Limits of Negativism," from October 12th, 2008. As an investor, one of our responsibilities is to be sceptical. Most people think being a sceptic means blowing the whistle when people are too optimistic — someone comes in and says "I've managed money for 30 years, made 11% a year, never had a down month" — you say, "That's too good to be true, Mr Madoff." But what I realised that day was that our job as sceptic also includes blowing the whistle when things people are saying are too bad to be true — when there's excessive pessimism. That's what that day was.

We had a leveraged loan fund in danger of a margin call. I went around to investors asking them all to put up more equity. One person said, "Well, what if this happens?" I said we'd be fine. "What if it's worse than that?" Still fine. "What if it's worse than that?" She could not find a set of assumptions negative enough to satisfy her. She refused to participate in the re-equitisation. I ran back to my office, wrote the memo, and because it was my duty, I put up the money myself. It was one of the best investments I ever made.

Howard Marks

Life gets harder when you give up on things never being different, when you can't live by a formula. The S&P 500 hit 3,300 on February 19th, 2020, then hit 2,200 on March 24th — down a third in 33 days. By June 2020, it was back around 3,300. A lot of people said this was ridiculous — we still had a pandemic, the economy was shut down. People blew the whistle: "Bubble!" Now the market is a third higher still, around 4,500. Anyone who called bubble and went to the sidelines was, at minimum, too early.

I couldn't bring myself to call bubble, partly because of conversations with Andrew. First, I think a bubble is an irrational high; today's prices are not irrational — they're rational given the low level of interest rates. The lower the interest rate, the higher the value. And second, I believe we're looking at a period of healthy economic growth. Rational prices and a good economic outlook is not a formula for a collapse.

What I now say is: around your normal risk posture, today may be a time to be a little defensive, mainly because today's prices are fair given the interest rates but interest rates are likely to rise, which means assets will be worth somewhat less. I wouldn't ramp up aggressiveness, but I wouldn't hide under the mattress.

Howard Marks

The question is always: is this like the 1970s? I believe some of today's inflation is temporary. There were supply chain interruptions — a Toyota has 30,000 parts; if one is unavailable, you get no cars for a while. There was also a bulge in demand from COVID relief in 2020 and early 2021. Some will prove temporary depending on whether inflationary expectations get baked in.

We have roughly 7% inflation now; in the 1970s we had roughly twice that. In those days nobody knew how to fix it — win buttons, price controls, a pricing tsar. Now we know all you have to do is raise rates, even if it causes a recession. The private sector was also heavily unionised then, with cost-of-living adjustments in union contracts that fed through to prices in an upward spiral. We don't have COLAs in the private sector now.

I don't think we're going to have inflation like we did then, or interest rates like we did then. I have framed on my wall the slip from my bank which says the rate on my loan is now 22¾%. We're not going there. But we will have more inflation in the next five years than the last five.

What do you do about it? If you're a fixed-income investor, have more in floating-rate instruments and less in fixed-rate — and certainly avoid long-term fixed-rate, which falls most if rates rise. Second, healthy real estate can be a good tool: if people's wages are rising, you can pass on rent increases, particularly in multifamily residential. Third, invest in companies where profits grow faster than inflation. None of these is a formula you can apply without thinking, but those are the places to look.

Howard Marks

Our discussions with Andrew really centred heavily on cryptocurrency, because in 2017 — the year Bitcoin went from $1,000 to $20,000 — I came out very negative. I said there's nothing there, it doesn't produce cash flow, it can't be valued intrinsically. Andrew's greatest goal was to point out that had been an example of knee-jerk scepticism. I had made a lot of money inverting against the "new new thing" in the past — portfolio insurance in 1987, e-commerce startups with no business in 1999. That combination of habit and success produces more habit.

Bitcoin went from $20,000, back to $6,000, stayed there through 2018 and 2019 and into April 2020. Andrew said to me, in the most loving possible way: "Dad, you don't know what you're talking about. You don't know the supply-demand case. You don't know the technology. You don't know the uses. To make a superior investment decision in any field, you have to know more than most other people — and you certainly don't." All I had was 50 years of generalised investment experience. I didn't know anything about crypto that anyone else didn't know. He was right. It's a reminder of the importance of humility — of being a continuous learning machine, and accepting that the other person could be right.

Howard Marks

One of my heroes was Peter Bernstein, the investment philosopher. He wrote a memo asking, "Can risk be reduced to a number?" He said: there's a range, we don't know where the answer will fall, and sometimes we don't know the extent of the range. China is like that — the range is enormous because we're dealing with cosmic questions. These are not economic or financial questions; they are political, ideological, social.

China is the second-largest economy in the world and I have friends who can give me the date on which it will become the largest. I've always thought you should have money invested in China, and one of the things I've seen is that when something is important, 2% is not enough — it won't move the needle. If China is going to become the world's biggest economy, 2% in China is not enough, in my opinion.

When the market labels China "uninvestable," my ears perk up — because uninvestable by definition means the price cannot be borne aloft on adoration. Maybe it's cheap. Maybe it's something one should do. My view for the last half-dozen years has been: Europe and Japan are economic senior citizens with little vitality. The US is a mature economic adult, doing fine, but I'd argue the best decades are behind it. China is an economic adolescent. If you've had an adolescent in your house, as I have, you know it can be tempestuous — ups and downs. But you also know the adolescent's best decades lie ahead.

You can't prove what China's future holds, just as you couldn't prove on the day after Lehman's bankruptcy that the financial system was not going to melt down. I happen to believe that China wants to be a member of the world community — that Shanghai, for example, wants to be one of the world's financial centres — and it would take a great leap of imagination to think those goals can be achieved if China does the geopolitical things people are afraid of.

For a regular investor without my advantages, I'd say: most people should invest through others — an index fund, an ETF, or an actively managed account. We don't do our own legal work or dental work. We don't fix our own cars. Why should we manage our own money and believe we can outperform as part-timers? Pick funds and managers. And think twice before dabbling in areas you don't know.

Howard Marks

In 1995, when Bruce Karsh and I left TCW to form Oaktree with our colleagues Sheldon Stone, Richard Masson, and Larry Keele, we sat down — I was the scribe — and wrote down how we wanted to do business. There were two things: the business principles, about how we wanted to live; and the investment philosophy, about how we would invest. The business principles — integrity, candour, openness, fair treatment — are not investment matters. That's about life.

We recently added responsibility to the business principles. I'm not saying it's going to make us or our clients more money. I'm saying that's the way we should live. We should feel a responsibility to the planet and to all members of society. When I went to Chicago, Milton Friedman was riding high — the corporation's only job is to make money for shareholders. That view reached its apogee under Clinton and George W. Bush. I don't think it's held anymore by many people. Corporations have responsibilities to stakeholders beyond shareholders, and that includes society broadly.

I want to work at an organisation that operates that way. There are organisations that seem to say you can take advantage of your counterparties. Some of them make a lot of money. But that's not the way I want to live, or the way Bruce Karsh or the rest of Oaktree wants to live.

Howard Marks

Most of the time, the person whose ethics are more flexible makes more money in the short run. I think ethical investing is a good idea in the long run — that's the reason Charlie is happy about it. But in the short term it is not a prerequisite for success. If you say you want to do this on the high road, I think it's always easy to figure out what that is. Sometimes it's hard to do it because it costs you money in the short run. I think it's the right way. And at this stage in my life, I don't need the money. I sure wouldn't be doing this if it wasn't at a place I enjoy and am proud to represent.

Howard Marks

I wrote a memo back around 2002 called "The Most Important Thing," which became my book nine years later. One of the sections I had in the memo but didn't put in the book — because it's not about investing — was about having good partnerships. The secret: shared values and complementary skills. A chicken shouldn't work with a pig. A buccaneer shouldn't work with a clergyman. Can you imagine a partner whose view of ethics was different from yours? Bruce and I share, in the extreme, the desire to operate on the high road.

We're very different people with very different skills. I'm a fast thinker — intuitive, instinctive. Bruce is a slow thinker: he reaches a conclusion, then thinks it over again, then again. The combination has been incredibly successful. The key is that I don't disrespect him for taking time with his considerations, and he doesn't disrespect me for being intuitive. That's an incredible formulation for a good partnership.

Howard Marks

It's the line I use when speaking to student audiences and they ask for career advice. What it says is: you shouldn't do what society says is cool, or what your peer group thinks is cool. You certainly shouldn't do the thing that merely makes you more money — which is an important thing for people to hear. You only get one life, and you have to make the most of it.

People say nobody on their deathbed says, "I should have made more money." That's true. Some say, "I wish I'd led my life better. I wish I'd been kinder — to my family, my spouse, my children, my colleagues, my competitors." Everybody should try to think about what is actually going to make them happy. For some people, a large pile of money. But that's overrated. A multi-billionaire friend told me the other day: "You can't spend a billion dollars." Trying to get from $10 billion to $20 billion is probably not going to change your quality of life. Everybody has to figure out what's really going to make them happy.

Erikson, the psychologist, talked about the eight stages of man. In the eighth stage, we look back and ask: how have I lived? Am I happy with how I'm thought of? When you get to the eighth stage, it's too late to recalibrate. If you're not happy with what you see, you can't go back and rewrite your reputation. It's very important to figure out what you want and then get it done.

Howard Marks

Very much so — but I would point out: I didn't pick it. It picked me. Vermilier said, "I want you to go into the bond department." Nolan Bailey called and said, "Do you think you could figure out high-yield bonds?" Bruce Karsh came to me and said, "Let's form a partnership and start a distressed debt fund." I definitely ended up in the right place at the right time. I can't take credit for it and I don't feel the need to.

Howard Marks

You're right — we are all good at different things. When I talk to students, not only do I tell them about Christopher Morley; I give them this advice: find something you'll enjoy, find something that plays to your strengths, and avoid your weaknesses. If you can do those things, you have a great life ahead.

Howard Marks

It's my great pleasure. I would do it again.