High-profile veteran investor Howard Marks tells finews.asia why investors should approach finance – and their bankers – with caution, what he thinks of Donald Trump, and what risk-shy investors can do to seek returns with interest rates at record lows.
Howard Marks, the stock market's been on a «Trump bump». What’s happening?
I think the market is responding to the short-term things: the idea of deregulation, tax reform, infrastructure spending and lower tax rates is appealing on the surface, and the market’s been going gangbusters.
What about beyond that?
I think everything else is very much up in the air, but it’s hard to separate one’s political opinions from that assessment. Was the election of Donald Trump good news for society? I don’t think it necessarily was. Is it good news for business? Maybe in the short run. The market has cast its vote. Whether he does the right things and whether they work is another thing.
You’re quite pessimistic in your view of the wider world too.
I would turn that around and ask you, what’s good in the world? Do you feel good about the rate of economic growth? No, I don’t think so – certainly not in Europe. Do you feel good about the political environment, is it conducive and stable to prosperity?
«Do you feel the world will be peaceful?»
Are you sanguine about the prospects for European cohesion? What do Brexit, Trump, Le Pen signify? Do you feel the world will be a peaceful place over next few years? Are you happy with the solution to the Middle East and immigrant problems?
Not really.
The world is a very uncertain place. A lot of things can happen, many of them bad. When uncertainty is high, and bad things can happen, that’s risk. When risk is high, asset prices should be low to compensate, but they’re not.
What about the U.S. stock market?
By any measure, stock prices are full relative to normal standards. They may not be bubbly high, but they are full. There is nothing you can buy today demonstrably below its intrinsic value, and thus I think people should be cautious. That doesn't mean sit in cash, but there are lots of ways to exercise caution without disinvesting.
Why are you so defensive?
We have high uncertainty, high asset prices, low prospective returns, and because they’re so low, investors are engaging in risky behavior in search of return– those four elements sum up today’s environment. I think it calls for defense, not aggressiveness.
«There'll be better times to put money to work»
Eight years ago, the Standard & Poor's index was probably trading at 11x earnings, now it's at 19x – almost double. This is not a time to put money to work aggressively. There’ll be better times.
How can investors «move forward with caution», as Oaktree has been advising since August 2011, without sitting in cash?
If you want to be defensive, you might own more bonds than stocks, and defensive or value stocks. You hold a portfolio of higher quality assets, and you don’t use much leverage. In every asset class, there are ways to limit risk.
«Safe assets that produce high returns? Not an option.»
The one thing investors don't have the option of today is saying «I’d like safe assets that produce a high rate of return». That’s not available in a low-return world like today's.
What needs to happen for you to take on more risk?
Today’s problems that I mentioned before are not going to be easily resolved: the world one to two years from now is not going to be a more certain, faster-growing place. So what’s the other way that my concerns can be ameliorated?
I don’t like stocks much because the P/E ratio on the S&P is 19x. If the ratio is too high, there are two ways for it to come down: increase earnings or decrease prices. I don’t think the earnings outlook two years from now is going to be that different from today.
«Stocks going from unattractive to attractive isn't a happy time for holders»
Thus for the P/E ratio to fall, prices have to come down. If prices came down or even held still while earnings grew, that would be a way to render the situation more attractive, but not a happy way. The process of stocks going from unattractive to attractive is not a happy experience for those who hold at the time.
Many investment managers here, where clients have been holding a lot of cash, have been urging their clients to invest.
There’s an old saying: “Never ask a barber if you need a haircut.” Similarly, never ask most people in the investment business if you should invest. We trust physicians to tell us the truth, and not what is in their best economic interest. We should ask ourselves whether our financial advisors are doing what’s in their best interest or ours.
You’ve been vocal about the fiduciary standard in the U.S., which it looks like Trump is going to roll back.
If we don’t have a fiduciary standard, it means that if your investment manager has two similar funds, it's fine for him to recommend the one with the higher fees. That’s really terrible.
«Is the advisor a barber pushing haircuts?»
It all comes down in this business to trust: does the financial professional deserve and earn the trust of the client? Is he a barber pushing haircuts or is he a fiduciary giving advice professionally? I’ve tried to be the latter for my career, which is approaching 50 years, and I look back with great satisfaction at having done that.
«An advisor should be able to speak against his interests»
I think Oaktree has a reputation for going to its clients sometimes and saying, «you know what, you shouldn't invest now.» That’s the acid test: does the individual ever speak against his own short-term interest?
That’s a difficult proposition when your salary depends on it.
One of the most important criteria for a high-functioning adult is the ability to delay gratification: to do what is good in the long run but may hurt you in the short run. Maybe you’ve heard of the marshmallow test, where kids were offered one marshmallow immediately, or two after a period of delay.
«Our society consists of people who want the marshmallow today.»
Fifty years ago people, said «I want two tomorrow», and they worked hard their whole lives and retired with financial security. Today, our society consists more of people who prefer one marshmallow right now.
«Everyone now says, 'if not know, then when?'»
Everybody says “if not now, then when?” The financial advisor should build his long-term earnings power by giving advice to his clients in the short run that's best for them, not the advisor.
Howard Marks is co-chairman of Oaktree Capital Management, which he co-founded. in 1995. He has a near 50-year track record as a stock, bond and distressed debt investor, first for Citicorp and TCW before co-founding Oaktree, which manages $101 billion in assets. The 70-year-old Marks is known to the wider public for penning plain-spoken investment memorandums woven with folksy wisdom and humor. He has published several books, including «The Most Important Thing: Uncommon Sense for the Thoughtful Investor».
Marks is a graduate of the Wharton School of the University of Pennsylvania and the Booth School of Business of the University of Chicago. Forbes magazine has estimated his personal wealth at nearly $2 billion. This interview was conducted in Zurich, where Marks appeared at an event organized by the Cancer Support Charity Fund.
