The Rewind: Dare to Be Great

Episode Summary

Executive Summary: Howard Marks revisits “Dare to be Great” to argue that outperformance in investing requires second-level thinking, willingness to be unconventional, and concentrated bets on skilled people and misunderstood opportunities. He uses market history, Yale/Harvard endowments, and examples like high-yield and distressed debt to show why consensus, committees, and over-diversification often suppress returns.

Main Topics: Why superior investing requires unconventional thinking (Priority: 5/5): Marks argues that average behavior produces average results, so outperforming requires second-level thinking, an edge, and the courage to act differently from the crowd when logic supports it. Market bubbles and the 2006 backdrop (Priority: 5/5): He places the memo in the context of the 1990s tech bubble, the post-bubble shift into bonds, and the housing boom that preceded the financial crisis, illustrating repeated crowd excess. Efficient markets, ignorance, and prejudice (Priority: 4/5): Marks explains that mispricings usually arise from gaps in knowledge or bias, but that these inefficiencies are harder to find as markets become more informed and computerized. Institutional behavior and committee limitations (Priority: 5/5): The discussion emphasizes that committees and large institutions tend to encourage caution, consensus, and agency risk, which can undermine the idiosyncratic decisions needed for top performance. The role of managers, concentration, and over-diversification (Priority: 5/5): Marks favors backing a small number of truly skilled managers with meaningful capital rather than spreading assets too thinly or merely matching peer allocations. Pioneer investing in overlooked niches (Priority: 4/5): He highlights early high-yield bonds and distressed debt as examples where being first into neglected areas created outsized returns for those willing to rely on analysis before data was abundant. Risk control plus bold asset allocation (Priority: 4/5): Marks argues that strong long-term results come from combining careful manager selection and risk control with selective boldness in portfolio construction and asset allocation.

Key Arguments: Outperformance is not available through a formula; it depends on implementation, judgment, and an edge that differs from the crowd. Investing is competitive, not absolute: success means beating other investors, not merely beating a benchmark or par. Most market inefficiencies come from ignorance or prejudice, but these are shrinking as information becomes more widely available. Unconventional actions can produce either very good or very bad results; contrarianism must be grounded in sound reasoning, not novelty for its own sake. Institutional settings, especially committees, tend to dilute unique insights, suppress dissent, and encourage safe, consensus outcomes. Agency risk causes decision-makers to protect their jobs and reputations, often at the expense of client returns. Superior managers should be given meaningful capital because small allocations cannot materially improve results, while concentration in strong hands can. Over-diversification and peer-referencing often guarantee mediocrity by ensuring a portfolio cannot differ enough to outperform. Early investment in misunderstood niches such as high-yield bonds and distressed debt can generate exceptional returns because prices are depressed by fear and ignorance. Risk control is essential, but in asset allocation some boldness is required if a portfolio is to outperform the norm.

Data Points: Publication date: September 7, 2006 - Original date of the memo “Dare to be Great.” Stock market return in the 1990s: 20% a year for 10 years - Marks describes the 1990s as the best decade in history, driven heavily by equities and tech. Post-bubble market decline: 3 consecutive down years - The market decline after the tech bubble burst was the first three-year decline since 1929. First three-year decline since: 1929 Great Depression - Used to emphasize the severity of the post-tech-bubble bear market. Harvard and Yale endowment approaches: Uncomfortably idiosyncratic / endowment model - Marks contrasts Yale’s and Harvard’s unconventional allocations with broader institutional norms. Analysts adding value: 5% - Marks cites Peter Vermilye’s view that only a small minority of analysts add value. Yale pioneering period: Around 1987 - Dave Swensen is described as pioneering the endowment model around this time. High-yield bond entry: 1978 - Marks recounts being asked to explore high-yield bonds before they were widely understood. Distressed debt entry: 1988 - Marks notes Oaktree’s early move into distressed debt as a neglected area. Tech vs. value divergence: Greatest ever in 1999 - He cites 1999 as the largest divergence between growth and value stock returns in history. Buyout fund performance: No better than the S&P 500 - Kaplan’s study of buyout funds from 1980 to 1997 is used to show that many alternatives underperform after fees/leverage context is considered. Pension plan allocation: 70% of alternatives portfolio - Example of a client giving Oaktree a large share of its alternatives allocation. Initial fund commitment: 40% of capital - A pension client committed 40% of capital to a new Oaktree strategy. After-fee gain: 118% - Result over the following three years from the 40% initial fund commitment. Committee meeting load: 11 hours per week - Marks recalls his Citibank committee burden before moving to portfolio management. High-yield bond portfolio horizon: Two decades plus - He says Oaktree’s high-yield portfolios outperformed high-grade bonds over more than 20 years.

Pivotal Quotes: "You have to see things differently from other people and better than other people." — Howard Marks: Explaining second-level thinking and why outperformance requires an edge. "Can't lose usually goes hand in hand with can't win." — Howard Marks: Describing the tradeoff between excessive caution and the pursuit of superior returns in asset allocation. "The cautious seldom air or write great poetry." — Howard Marks: Using a fortune-cookie line to illustrate that caution can prevent both mistakes and greatness.

Implications: Listeners should expect durable outperformance to come from selective boldness, not consensus safety. For institutions, the message is to reduce bureaucracy, align incentives, and give skilled decision-makers real capital and room to differ.