The Rewind: It Is What It Is

Episode Summary

Executive Summary: Howard Marks revisits "It Is What It Is" to argue that investors must accept today’s realities, especially the inevitability of change, and invest probabilistically rather than predictively. He links Japanese philosophy (mujo), market cycles, and behavioral excesses to show why macro forecasts are unreliable and why disciplined, contrarian positioning matters when valuations are stretched and risk premiums are thin.

Main Topics: Acceptance of present realities (Priority: 5/5): Marks explains the phrase 'it is what it is' as recognition of current facts and past actions, not fatalism. Investors must start from what exists today and make the best decisions possible. Mujo and cyclical change (Priority: 5/5): He draws on Japanese philosophy to emphasize that change is constant, cycles rise and fall, and no environment can be forced to persist. Investing is therefore about coping with cycles rather than controlling them. Probabilistic thinking over prediction (Priority: 5/5): Marks argues that the future is unknowable and should be approached as a distribution of possible outcomes. Investors can infer probabilities from current conditions, but not forecast with certainty. Behavioral and market-temperature analysis (Priority: 5/5): He advocates examining quantitative valuation measures and qualitative mood indicators—optimism, fear, liquidity, and crowding—to judge whether conditions favor bargains or caution. Critique of macro forecasting (Priority: 4/5): Marks rejects macro-based portfolio construction and says Oaktree does not rely on economists. He contrasts predictions with inferences and argues that most economic forecasts are ungraded and unreliable. The 'silver bullet' fallacy in alternative assets (Priority: 5/5): He warns that when everyone piles into an investment solution—hedge funds, private equity, or other alternatives—it ceases to be a solution and becomes crowded, expensive, and vulnerable. Contrarian discipline and client expectations (Priority: 4/5): Marks concludes that investors should act cautiously when conditions are euphoric and more aggressively when markets are disfavored, while maintaining realistic expectations and treating clients well.

Key Arguments: The future cannot be known or controlled; investors should adapt to current circumstances rather than assume they can shape them. Cycles are the most dependable feature of markets, and success/failure contain the seeds of each other. Probabilities matter more than certainties; even an 80% likelihood can still result in the opposite outcome. Market valuation and investor psychology together help indicate whether assets are attractive or dangerous. Macroeconomic forecasting is a weak basis for investing because it is rarely accountable and often overconfident. When an investment style becomes a widely accepted 'solution,' capital inflows usually reduce its attractiveness and future returns. High past returns in alternatives do not imply high future returns; they may reflect money borrowed from the future. Disciplined contrarian behavior and realistic expectations are better than chasing the latest promised source of easy performance.

Data Points: Original memo publication date: March 27, 2006 - Date of the memo Howard Marks is revisiting. First hearing of phrase 'it is what it is': 1995 - Marks says he first heard it from attorney Peter Ostroff when Oaktree was being formed. Wharton foreign study duration: One semester - Marks notes a Wharton requirement to study one semester of foreign literature in English. Number of Japanese studies courses taken: Five - Marks says these courses became a highlight of his college career. Years since last hearing of phrase before Oaktree: 26 years ago - Marks says the phrase was first heard 26 years before the 2006 memo. Economists' implied scoring record: 35% correct - A rhetorical example of how economists are rarely graded on forecast accuracy. Probability example: 80 black balls, 20 white balls - Used to illustrate probabilistic thinking and uncertainty. Super Bowl example probability: 8 out of 10 - A former player said Carolina would win eight times out of ten, illustrating uncertainty despite a strong probability. Alternative investment fund sizes: $10 to $15 billion - Marks cites large private equity funds as evidence of crowded capital flows. High-grade bond yield example: near 5% - Used to illustrate low expected returns in mainstream fixed income. Consensus expected return on U.S. stocks: 5-7% - Marks references low expected returns for equities. Alternative returns time horizon: 12 years - He says the average private equity fund had not added value for 12 years. Historical reference to tech bubble: Almost 20 years - Marks describes the rise of alternatives since the tech bubble burst. Reference to risk and return memo: November 2004 - He cites a prior memo arguing prospective returns were low and risk premiums skinny. April 1998 memo reference: April 1998 - He cites earlier commentary on alternative investments and manager economics.

Pivotal Quotes: ""It is what it is."" — Peter Ostroff: The phrase that inspired the memo, used when Oaktree’s founders asked whether they had missed anything in preparing to launch. ""We may never know where we're going, but we'd better have a good idea where we are."" — Howard Marks: Marks’ core framework for investing in cyclical markets without relying on prediction. ""The market's not a very accommodating machine. It won't provide high returns just because you need them."" — Peter Bernstein: Cited by Marks to reinforce that investor needs do not force markets to deliver attractive returns.

Implications: Investors should focus on valuation, sentiment, and cycle position instead of forecasts. Crowded trades and fashionable solutions usually lower future returns, so caution, selectivity, and contrarianism are essential.