Behind the Memo: Fewer Losers, or More Winners?

Episode Summary

Executive Summary: Howard Marks argues that successful investing is not about chasing the most winners, but about consciously choosing between offense and defense. Using tennis, Wimbledon, and his long-standing Oaktree philosophy, he explains that avoiding losers often matters more than finding winners unless an investor truly has skill and tolerance for volatility. The core question: do you have alpha, and can you bear risk intelligently?

Main Topics: Avoiding losers as a long-term investing philosophy (Priority: 5/5): Marks revisits his early insight that avoiding defaults and catastrophic mistakes can drive superior long-run outcomes, even without spectacular annual rankings. Risk control vs. risk avoidance (Priority: 5/5): He distinguishes taking intelligent risk for expected return from simply avoiding risk altogether, which can also mean avoiding returns. Tennis as a metaphor for investing styles (Priority: 5/5): Using winner's-game vs. loser's-game tennis, Marks explains that investors must know whether their edge comes from offense (winning shots) or defense (fewer errors). When to go for winners (Priority: 4/5): He argues that aggressive winner-seeking only works for investors with real skill, discipline, and the stomach for volatility and errors. Holding winners and the cost of selling too early (Priority: 4/5): Marks links active-manager underperformance to selling appreciated assets too soon, using Apple as the clearest example. Risk, return, and alpha through the bell-curve graph (Priority: 5/5): He revisits his classic risk framework: more risk increases the range of outcomes, not just expected return, and only managers with alpha can create favorable asymmetry.

Key Arguments: The phrase 'avoid the losers' became Oaktree's motto because a single bad year can permanently damage a long-term record, while steady avoidance of mistakes compounds well. Investing is the intelligent bearing of risk for profit; eliminating all risk usually eliminates return as well. A conservative, defense-first strategy can be superior when the asset class has limited upside, as in high-yield bonds where avoiding defaults is the main source of success. A winner-seeking strategy only works if the investor truly has skill, can identify mispriced opportunities better than others, and can tolerate drawdowns. Tennis shows the same principle: professionals can play a winner's game, but amateurs usually succeed by playing a loser's game—keeping the ball in play and not making errors. Many active investors underperform because they sell winners too early and fail to hold enough exposure to the few exceptional long-term compounders. Simply matching broad market exposure over time can be enough for many investors; trying to outsmart the market without special skill often lowers outcomes. The risk-return graph should be understood as widening outcome dispersion with higher risk, not as a guarantee that more risk always produces more reward. Alpha matters because exceptional investors can create asymmetry: upside that exceeds downside relative to the market, which most investors cannot reliably do.

Data Points: General Mills pension equities ranking over 14 years: Never above the 27th percentile or below the 47th percentile; finished at the 4th percentile over the full period - Marks cites this to show how one bad year can ruin an otherwise steady record Apple stock price increase (2003 to 2013): From $0.37 to $15, about 40x - Used to illustrate the cost of selling winners too early Apple stock price increase (2003 to present in transcript): From $0.37 to about $175, about 485x - Shows why holding winners is difficult but powerful High-yield bond yield example: 8% yield to maturity - Marks explains that bond investors should expect to earn the promised yield by avoiding defaults rather than hunting for big winners Wimbledon winners comparison: Eubanks vs. Medvedev: Eubanks had about 74 winners vs. Medvedev's 52 - Eubanks pursued aggression but still lost because of too many errors Wimbledon unforced-error ratio: Eubanks had about 3 unforced errors for every 4 winners; Medvedev about 1 for every 4 winners - Illustrates the winner/loser tradeoff in aggressive play Wimbledon finals winners comparison: Alcaraz vs. Djokovic: Alcaraz had about 66 winners vs. Djokovic's 32 - Shows a successful winner-seeking strategy when skill execution is high Grand Slam titles by Novak Djokovic: 23 - Marks uses Djokovic's record to underscore elite skill and consistency Grand Slam titles by Rafael Nadal: 22 - Provided as comparison in the tennis discussion Grand Slam titles by Roger Federer: 20 - Provided as comparison in the tennis discussion Investment-market long-term return example: S&P 500 has been up over 10% a year for 100 years - Used to argue many investors are best served by staying invested rather than trying to time markets Long-run compounding example: A dollar invested 100 years ago would be worth about $15,000 today - Illustrates the power of buy-and-hold exposure over time

Pivotal Quotes: "If we avoid the losers, the winners will take care of themselves." — Howard Marks: The foundational Oaktree motto and central theme of the memo "Investing is about really the intelligent bearing of risk for profit." — Howard Marks: Marks defining what investing should be, and why risk cannot be eliminated entirely "If you have a chart of a stock that's been up for 20 years... think of all the days you would have had to talk yourself out of selling." — Howard Marks: A comment on why holding winners is psychologically difficult

Implications: For most investors, disciplined risk control and staying invested matter more than heroic stock-picking. Only those with genuine skill and tolerance for volatility should pursue aggressive winner-seeking; everyone else should prioritize avoiding big mistakes.