#53 Howard Marks: Luck, Risk and Avoiding Losers

Episode Summary

Executive Summary: Howard Marks argues that successful investing and decision-making come from recognizing cycles, controlling risk, and acting against emotion when markets become extreme. He explains how Oaktree bought aggressively during the 2008 crisis, why risk is about bad outcomes rather than volatility, and why second-level thinking and humility about luck, uncertainty, and being wrong are essential. He also connects economic reality, globalization, tariffs, automation, and politics to tradeoffs that cannot be avoided.

Main Topics: Crisis investing and acting when others panic (Priority: 5/5): Marks recounts Oaktree’s actions during the 2008 financial crisis, arguing that when the financial system may or may not fail, investors still have a duty to act rather than freeze. He describes buying aggressively after Lehman because inaction would have violated their mandate if the system survived. Emotion, herd behavior, and market psychology (Priority: 5/5): He explains that investors tend to buy when prices rise and sell when prices fall because human emotions push them toward the wrong timing. Markets are just collections of people with feelings, so sentiment drives extremes at tops and bottoms. Risk, uncertainty, and distinguishing decisions from outcomes (Priority: 5/5): Marks defines risk as the probability of bad outcomes, not volatility, and stresses that good decisions can lead to bad outcomes and vice versa because uncertainty is inherent. He emphasizes evaluating process over short-term results. Cycles, excesses, and the role of the Fed/government (Priority: 4/5): He describes cycles as the result of upside excesses that later overshoot downward. He discusses inflation, interest rates, tax stimulus, Fed independence, and how government policies redistribute rather than create wealth. Globalization, tariffs, and economic reality (Priority: 4/5): Marks argues that globalization increases total output through specialization, while tariffs and political promises often ignore economic reality. He explains that trade deficits are not inherently bad and that tariffs are paid by domestic consumers. Second-level thinking and contrarian advantage (Priority: 5/5): He says superior investing requires thinking differently from the crowd and being right, which often means looking wrong in the short run. This is the basis for finding mispriced assets and exploiting others’ mistakes. Automation, inequality, and universal basic income (Priority: 4/5): Marks is pessimistic that automation and AI will displace too many jobs for the market to absorb easily. He sees UBI as a partial safety net for basic needs but not a solution to the loss of work’s broader social and psychological benefits.

Key Arguments: The 2008 crisis created a false binary: if the financial system melted down, no portfolio decision mattered; if it did not, failing to invest would be the wrong choice. Oaktree chose to invest because responsibility required action. Investors are emotionally wired to chase gains and flee losses, which makes market timing naturally counterproductive. Risk should be judged by the probability of bad outcomes, including both losses and missed gains, not by price volatility alone. A good decision can still lose money, so organizations should evaluate process and avoid blame when outcomes are unlucky. Cycles arise from collective excess and correction; governments and central banks can soften cycles but often create new excesses when they overstimulate. Governments do not create wealth; they redistribute it, so policy debates are fundamentally about tradeoffs and who bears costs. Trade deficits and tariffs are misunderstood because tariffs are paid by domestic consumers, and globalization generally raises total welfare through specialization. Second-level thinking requires seeing what the market has already priced in and understanding where consensus is wrong. Automation and AI are likely to destroy more jobs than past transitions unless society finds a large-scale policy response, which Marks doubts current politics can deliver. Parents should teach children about money, scarcity, responsibility, and decision-making rather than insulating them from bills or mistakes.

Data Points: Oaktree crisis investing pace: $650 million per week - Average weekly investment during the last 15 weeks of 2008 Total crisis deployment: $10 billion - Amount invested by Oaktree during the final 15 weeks of 2008 Distressed debt returns: 16 or 17% a year for 30 years - Marks cites Oaktree’s long-run record in distressed debt without leverage U.S. economic growth: ~2% per year - Approximate average annual U.S. GDP growth used to explain why cycles still occur U.S. inflation peak in the 1970s: 16% per year - Marks describes runaway inflation during the 1970s Recovery length: 10th year - Marks notes the U.S. recovery had reached its 10th year and could set a record Corporate tax cut: 35% to 21% - He references the December tax bill as stimulative and over-stimulative Manufacturing employment decline: 19 million to 12 million - U.S. manufacturing jobs over roughly 40 years, despite output growth Manufacturing output change: Doubled - U.S. manufacturing output measured in dollar terms over roughly 40 years Productivity increase implication: Output per worker tripled - Marks uses this to illustrate that productivity, not just China, drives job loss Jobs lost to China: 3 million - Estimate cited for U.S. jobs lost to China over about 15 years Potential job loss from productivity: 24 million - Marks estimates jobs lost to rising productivity compared with earlier manufacturing employment Trade deficit example: $800 billion - Illustrative figure used when discussing the U.S.-China trade deficit State tax migration example: 7 states with no state income taxes - Marks notes incentives to move from high-tax states to no-tax states Backgammon probability: 36 possible dice outcomes - Used to illustrate probability distributions and uncertainty Most likely dice roll: 7 - Six combinations out of 36 yield seven in his backgammon example

Pivotal Quotes: "if we avoid the losers, the winners take care of themselves" — Howard Marks: His core risk-control motto and investment philosophy "In the real world things fluctuate by between pretty good and not so hot. But in the investment world, investors go from perfect to no chance of survival in their psychology." — Howard Marks: Describing extreme investor emotion during crises "the future is not ours to know, but it helps to know that being wrong is inevitable and normal" — Howard Marks: Closing reflection on uncertainty, process, and humility

Implications: Listeners should focus less on prediction and more on process, risk control, and contrarian judgment. For investors and policymakers, the lesson is that emotions, cycles, and economic reality impose limits that slogans and optimism cannot erase.