Avoid Disaster w/ Superinvestor Howard Marks (RWH063)

ELI5/TLDR

Howard Marks, 56 years in the chair at Oaktree, sits down with William Green to walk through the spine of his investment philosophy. The thesis is simple and almost annoyingly old-fashioned: in investing, the surest path to long-term excellence isn’t picking the most winners, it’s avoiding the disasters. He builds the case with stories about pension funds that quietly compounded their way to the 4th percentile, distressed debt deployed during the Lehman week, and a polite but firm rejection of every form of certainty. The secondary message is about constructing a life that allows you to do the work without becoming the work.

The Full Story

The pension fund that never finished first

The kernel of Marks’s worldview comes from a 1990 dinner in Minneapolis with David Van Benschoten, who ran the General Mills pension fund. Over 14 years, Van Benschoten’s equity portfolio never ranked higher than the 27th percentile of pension equity portfolios, and never lower than the 47th. Solidly second-quartile, year after year. Compounding the whole 14-year run, the fund ended up in the fourth percentile.

Marks does the math out loud: average a 27th and 47th-percentile finish and the intuition says you’ll land near the 37th. Instead you land near the top. The reason is asymmetry. Big losses take a long time to climb out of, and most managers wreck their long-term records by occasionally shooting themselves in the foot while reaching for the stars. Steady second-quartile, no disasters, beats the swing-for-the-fences crowd over a full cycle.

That dinner produced his first memo, “The Route to Performance,” and the line that became Oaktree’s motto in 1995: “If you can avoid the losers, the winners will take care of themselves.”

Why bonds taught him to subtract

Graham and Dodd, in the 1940 edition of their book, called bond investing “a negative art.” Marks initially bristled, then understood. If 100 high-yield bonds all pay 8%, and 90 will pay while 10 will default, it doesn’t matter which of the 90 payers you own. Your performance is determined entirely by what you exclude. You don’t pick winners; you weed out losers, and the promised return arrives.

That mindset, picked up when he started Citibank’s high-yield bond business in 1978, traveled with him into Bruce Karsh’s distressed debt funds in 1988 and emerging-market equities in 1998. The strategies grew more aggressive over time, but the underlying disposition stayed the same.

Tennis, baseball, and playing within yourself

Marks borrows from Charley Ellis’s 1975 article “The Loser’s Game.” Pro tennis is a winner’s game. The pros have enough control to hit aggressive shots that end points. Amateurs, lacking control, are better off just keeping the ball in play. The opponent will eventually error out.

Investing, he argues, is closer to amateur tennis than pro. Too much randomness, too little control, too many unknowables. So consistency and competency beat the grand gesture. He returns to this throughout: most of the alpha in investing comes from not destroying yourself on the bad days.

The Buffett analogy that sits next to it is Ted Williams and the strike zone. Williams charted his batting by 18 zones in the strike zone and knew which pitches to swing at. Buffett’s twist is that in investing, unlike baseball, you can’t be called out on strikes. You can wait. Marks adds a caveat: if you’re a professional managing other people’s money in a 16-year bull market and you sit there with the bat on your shoulder, you might get fired anyway.

The man who drowned in the five-foot stream

The other line Marks uses to bury the “average outcome” mindset: never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average. Surviving on average is meaningless. You have to survive every day to reach the finish line, which means surviving the worst days.

This is the practical force behind his obsession with leverage. Long-Term Capital Management ran tiny edges juiced by enormous borrowing. The strategy assumed survivability under all conditions. When the conditions broke, the leverage broke them. Same with Amaranth, the energy fund that imploded in 2006. Both bet boldly on premises that turned out to be wrong, and there was no surplus capital, no capacity to ride out the storm.

His pithier framing: “You can successfully invest in volatile assets if you’re sure of being able to ride out a storm. But if you lack that certainty and face the possibility of withdrawals or margin calls, a little volatility can mean the end.”

Fewer losers or more winners — pick one

This is the memo that gives the episode its opening quote. To produce superior results, you either own more things that go up, fewer things that go down, or both. Almost no one can do both. The aggressive personality has the temperament for finding winners. The defensive personality has the temperament for avoiding losers. Most people lean one way and should accept it.

The actionable point isn’t which side to pick. It’s that most people never make the choice consciously. They drift between aggressive and defensive depending on the news cycle, never pick a strategy, and end up with a portfolio that reflects neither.

The risk speedometer

Around 2017, Marks wrote a memo called “Calibrating.” The framing: imagine your risk tolerance as a speedometer running from 0 (no risk) to 100 (maximum risk). Every investor should figure out where they belong normally, given their age, wealth, income, dependents, level of aspiration, proximity to retirement, and what he calls intestinal fortitude.

A young person with no dependents and a long career runway might sit at 85. A retiree drawing income probably sits much lower. There’s no lookup table that tells you which asset mix corresponds to an 85, but the exercise forces clarity. After you set your normal posture, the next question is whether you stay there permanently or vary it modestly with the cycle.

Don’t fiddle, but don’t never-fiddle either

Marks recounts a recent dinner where Nick Sleep (the legendary Nomad Investment Partnership co-founder) told William Green to “stop fiddling” with his portfolio and let drawdowns happen. Marks’s view sits a step away from Sleep’s purism. He thinks Sleep is “a little too idealistic.” There are occasions, rare, where a posture shift makes sense.

How rare? Marks made five major market calls in 50 years: 2000, 2004-07, 2008, 2012, 2020. His son Andrew (also at Oaktree) noted that the calls looked good “because you did it five times in 50 years.” If Marks had tried to make a buy/sell call every four days for 56 years, his record, he says, would be 50/50. Restraint is what gave the few real calls their accuracy.

He cites the apocryphal Fidelity study of accounts whose owners had died, which supposedly outperformed the active accounts. The study can’t actually be located, but the lesson stands: most trading is counterproductive, especially because emotional buying happens at highs and emotional selling at lows.

Taking the temperature, not predicting the weather

Marks doesn’t predict the future. He observes the present. His five market calls weren’t forecasts; they were temperature readings. When everyone is carefree, P/E ratios are high, credit spreads are narrow, and risk is being ignored, the market is running a fever and the odds tilt against you. When everyone is depressed and convinced the world is ending, prices are usually low enough to tilt the odds in your favor.

He quotes Buffett: “The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs.” And: “We never know where we’re going, but we sure as hell ought to know where we are.”

The subtitle of his second book, “Mastering the Market Cycle,” was “Getting the Odds on Your Side.” Marks prefers the subtitle. The book’s actual point is that you can’t know what will happen, but you can sometimes know whether the odds are stacked for or against you.

Why bureaucracy kills good investing

When David Swensen wrote that great investing requires “uninstitutional behavior from institutions,” Marks took it personally and structurally. He spent 16 years at Citibank, sat on five committees that met for 16 hours a week at one point, and concluded that committees and idiosyncratic insight don’t mix. By definition, an idiosyncratic call is one most people would oppose. You can’t get a 10-person committee to greenlight it.

This is why Oaktree, even at $218 billion in assets, is run with as little internal democracy as possible on actual investment decisions. The clearest example is the fall of 2008. Oaktree had pre-raised a $10 billion distressed debt fund. When Lehman collapsed, Bruce Karsh deployed an average of $450 million per week for 15 weeks. $7 billion in a single quarter, into a market everyone else thought was ending. A committee, Marks says, would never have approved it. Pre-raising the capital was the structural trick that meant they didn’t have to convince clients in the moment. Investors freeze in crises. The money has to already be there.

Bruce Karsh, and what makes a good partnership

Marks’s portrait of Karsh is affectionate. A chess player by hobby and disposition, analytical, low-key, “really focused, a great executor.” They’ve worked together 38 years. Marks compares the relationship to Buffett and Munger, drawing on Buffett’s recent retirement letter, which noted that Munger was the wise philosopher, Buffett the analytical implementer, and “the words ‘I told you so’ were never mentioned.”

That phrase struck Marks. The partnership at Oaktree, he says, has worked because each acknowledges the other can do things he can’t, and neither has ever said “I told you so” after a mistake. Spending $7 billion in Q4 2008 required psychological cover from a partner. You can’t do those moves alone.

Inefficient markets are where edge lives

Marks is dismissive of the “I’m just smart” defense for active management. Everyone is smart. Everyone went to a good school. Everyone has the same data, by SEC mandate. Edge has to come from somewhere specific: a better approach implemented consistently, better insight applied to the same data, or working in markets where the information genuinely isn’t evenly distributed.

His coin-toss analogy makes the point. If a bookmaker wanted to predict football coin tosses, no number of PhDs and supercomputers would help. The market is fully efficient. Investing in widely-followed large-cap U.S. stocks is closer to the coin toss than people admit. Distressed debt in 1988, high-yield bonds in 1978, emerging-market equities in 1998, were all markets nobody respectable would touch. Those are the markets where work pays off.

The 1969 Nifty 50 reminds him of the same lesson from the loser’s seat. Citibank loaded up on the “greatest stocks in America” right when everyone else did. Five years later, those stocks had lost 95% of their value. Consensus enthusiasm is usually the worst entry signal in any market.

Humility as portfolio defense

Marks circles back to his Mark Twain quote: “It ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true.” No sentence beginning “I don’t know, but” or “I could be wrong, but” has ever blown up a portfolio. The damage comes from “I’m 100% sure that X.”

Even the best calls, he says, shouldn’t be assumed to be more than 80/20 or even 70/30. The future is a probability distribution. Only one outcome will happen, but many could. Building a portfolio around a single confident outcome is how you end up with the six-foot-tall person face-down in the five-foot stream.

His favorite fortune cookie: “The cautious seldom err or write great poetry.” The choice you can’t avoid is whether you’re trying to write great poetry or trying to make sure you don’t err. You can lean one way or the other. You cannot do both at maximum.

The life around the work

The episode closes on something other than investing. William asks how Marks built a life that included tennis, backgammon, card games, decorating houses, and family time, while still running a $218 billion firm. Marks’s answer is direct. Charlie Munger used to call people who only cared about working and making money “maniacs.” Marks isn’t one. “Nobody on their deathbed ever said, I wish I worked more.”

His advice to young people comes from the writer Christopher Morley: “There is only one success, to be able to live your life in your own way.” The hard part is figuring out what your way is. People change. The 22-year-old’s vision of what would make the 70-year-old happy is often wrong. But the goal is to arrive at the end and be happy with the choices, made consciously rather than by drift or imitation.

Key Takeaways

Avoiding disasters compounds better than chasing winners. The General Mills pension fund finished in the 4th percentile over 14 years by never finishing in the top quartile.
“Fewer losers or more winners” is a real choice and most people never make it consciously.
Calibrate your normal risk posture (0 to 100) based on age, wealth, dependents, time horizon, and intestinal fortitude. Vary modestly around it, rarely.
Don’t predict the future. Take the temperature of the present. Five major calls in 50 years; if you tried 5,000, your record would be 50/50.
The man who drowned in the five-foot-deep stream. Survive every day. Leverage destroys the ability to do that.
Idiosyncratic insight cannot survive committees. Pre-raise the capital so you don’t need permission in a crisis.
Edge comes from inefficient markets, better approach, or better insight on the same data. It does not come from being smart.
Humility is portfolio defense. “I’m 100% sure” is the sentence that ends careers.

Claude’s Take

This is Marks at his most distilled. None of the ideas are new, several are repeated almost verbatim from his memos, and that’s exactly the point. Investment wisdom doesn’t have to be novel to be valuable. The repetition is the medicine. He’s been saying “if you can avoid the losers, the winners will take care of themselves” since 1990, and people still need to hear it because the temperamental pull in the other direction is permanent.

What elevates this above a greatest-hits compilation is the structural piece on Oaktree itself. The Lehman week story is the load-bearing example. Pre-raising $10 billion meant Oaktree could deploy $450 million a week into the worst market in living memory without needing client permission or committee approval. That’s not investment skill, that’s organizational design serving investment skill. Most firms set themselves up so that they’re institutionally incapable of doing the right thing during a crisis. Marks built one that wasn’t. The lesson generalizes beyond finance: structure determines what’s possible under stress.

The 9/10 score reflects density and quality of frameworks per minute. The interviewer William Green is also unusually well-prepared — he’s done 16 years of reading the memos and quotes them back accurately, which lets Marks go deeper than he can with most podcast hosts. The one place I’d push back is the framing that Marks’s calls were observations rather than predictions. The line is real but a little too clean. “The market is overheated, sell” is still a probabilistic claim about the future, dressed in the language of present-tense observation. Marks half-acknowledges this when he says even the best calls are 80/20 at best. The temperature-taking framework is genuinely useful, but it doesn’t escape the prediction problem, it just lowers the confidence bar.

The closing section on life design is the part most likely to stick after the investment frameworks fade. The Christopher Morley line about figuring out your own way of living is doing real work, and Marks’s openness about how the 22-year-old version of himself would not have predicted the 87-year-old version is the kind of admission you rarely get from people at this level.