The Rewind: Dare to Be Great II

Episode Summary

Executive Summary: Howard Marks revisits “Dare to be Great Too” to argue that superior investing requires uncomfortable contrarianism: being different, risking being wrong, and sometimes looking wrong for a long time. He contrasts benchmark-hugging and institutional career-risk with the need for asymmetric bets, disciplined risk control, and courage to act when opportunities are most distressing.

Main Topics: Contrarianism as the path to outperformance (Priority: 5/5): Marks argues that great investing is not about wanting great outcomes but about daring to behave differently from the crowd, because conventional behavior usually yields conventional results. Risk control vs. risk avoidance (Priority: 5/5): He distinguishes prudent risk management from avoiding all losses, saying that trying to eliminate every possible loss can prevent the taking of necessary, positive-expected-value risks. Asymmetry and the need for upside/downside balance (Priority: 5/5): The memo emphasizes structuring investments so that upside exceeds downside, while acknowledging that most tactics are two-edged and cannot eliminate risk entirely. Institutional incentives and career risk (Priority: 4/5): Marks explains how committee structures, public scrutiny, and asymmetric payoffs for agents discourage bold decisions and lead to over-diversification or benchmark conformity. Distressed debt and crisis investing (Priority: 4/5): Using Oaktree’s experience in bankruptcies and the financial crisis, he shows that discomfort and fear in markets often create the best opportunities for disciplined buyers. Looking wrong, being early, and surviving uncertainty (Priority: 4/5): He stresses that even correct decisions can look wrong for a long time due to timing uncertainty, so investors need temperament and client support to stay the course.

Key Arguments: Superior returns require unconventional portfolios; if a portfolio looks like everyone else’s, it cannot be meaningfully different or superior. The best opportunities often arise in discomfort—when assets are disliked, controversial, distressed, or cheap because others avoid them. Risk avoidance is not the objective; intelligent risk control is. Eliminating all losses can eliminate the possibility of strong gains. Institutional decision-makers often face downside-only career incentives, so bold success is not rewarded enough to offset the punishment of failure. Many investing tactics are symmetric and therefore not a source of durable alpha on their own; only superior insight/skill creates true asymmetry. Investors must be willing to be wrong and to look wrong temporarily, because good ideas can take years to work and markets can stay irrational. If you want top-decile outcomes, you must first build a portfolio that differs materially from the crowd, then rely on judgment to identify mispricings. Distressed debt investing at Oaktree succeeded because the market’s discomfort priced assets too cheaply, and the firm had the nerve to buy when others wouldn’t. Zero defaults in high-yield can signal under-risking; some losses are acceptable if the portfolio is being managed prudently for higher expected return. Timing matters less than conviction plus patience: being early can feel like being wrong, but that does not negate the underlying thesis.

Data Points: Original memo publication date: April 8, 2014 - The sequel memo “Dare to be Great Too” was originally published on this date. Gap between memos: 8 years - Marks says the sequel reflects being eight years older and more experienced. Oaktree opportunities-fund buying pace after Lehman: $450 million per week - Bruce Karsh’s fund invested at this average rate for 15 weeks after Lehman’s collapse. Duration of aggressive post-Lehman buying: 15 weeks - The period over which Oaktree invested heavily under treacherous conditions. Firm-wide investing relative to Bruce Karsh fund: About 150% of $450 million/week pace - Marks says the firm as a whole invested roughly one and a half times the fund’s weekly pace. Distressed investing history: 33 years - Bruce Karsh has run Oaktree’s opportunities funds for the last 33 years. Oaktree client allocations over 15 years: Close to $1 billion - Marks cites sovereign wealth fund allocations to Oaktree over the prior 15 years. Resulting portfolio share at any time: Only a few tenths of 1% - Despite large cumulative allocations, Oaktree represented a tiny fraction of assets at any moment. High-yield bond origin: 1977 or 1978 - Marks references the advent of high-yield new issues as a key development in risk-taking for profit. Example of benchmark concentration: Top decile vs bottom nine deciles - He uses this compensation riddle to show that a manager must hold a differentiated portfolio to have any chance of top-decile returns. Default rate comparison: About one-third of the universe default rate - Marks says Oaktree’s high-yield default rate has averaged roughly one-third of the market/universe rate. Alan Greenspan warning: December 1996 - Marks notes that the market continued rising for more than three years after the “irrational exuberance” warning. Market continuation after warning: >3 years - The stock market rose for more than three years after Greenspan’s cautionary statement.

Pivotal Quotes: "The best investments begin in discomfort." — Howard Marks: He uses this as a core principle of contrarian investing and distressed-debt opportunity selection. "Worldly Wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." — John Maynard Keynes: Marks cites Keynes to explain why institutions often prefer safety for reputation over the chance of superior returns. "You miss 100% of the shots you don't take." — Wayne Gretzky: Referenced to reinforce the idea that avoiding all failure also guarantees missing potential gains.

Implications: For investors, outperformance requires independent judgment, tolerance for temporary underperformance, and structures that reward good risk-taking. For institutions, incentive design may be the biggest barrier to alpha.