Howard Marks Interview Best Ideas Conference 2015

Could you share the reasons that led you to become more aggressive an investor recently?

No matter how hard I try to do something else, my thinking always goes back to Buffett. The single most

important question for an investor is at any given time whether to be emphasising offense or defence

aggression or caution. If you get that right, the other stuff doesnt matter that much picking managers,

strategies or individual securities. If you get it wrong, the other stuff doesnt help that much. So the single best

way to augment performance in general is to be right on the question of offense vs. defence.

I end up always thinking about what Buffett said, the less prudence with which others conduct their affairs,

the greater the prudence with which we must conduct our affairs. Contrarianism is an important virtue

amongst value investors. How do you buy things for less than they are worth? You need someone to sell it for

less than it is worth. Who wants to do that? People who are afraid, disheartened, disillusioned and depressed.

On the other hand, going back to Spring of 2011, most people have been if not optimistic in outlook

willing to invest optimistically because they could not get the returns they want by being cautious. Investing

has not been prudent. This is especially true in the credit area in which Oaktree works. My comments are only

relevant to portions of the equity markets.

When the price of oil was on the slow decline then collapsed, that converted a lot of optimistic people into

becoming pessimistic. Ive said before in oil and other markets that there had been a bull market in

complacency. You should never confuse brains with a bull market. When prices are rising, everyone feels

very smart and that all their wonderful returns are the result of their astuteness. In other words, they feel as if

they are in complete control. Then, something dislocates and they start to think just a minute, maybe I didnt

really know what I was doing, maybe I took risks I didnt know about, and maybe I should lighten up my

positions and take on less risk. There is a conversion from I know to maybe I dont know.

Thats why when things like this happen, we get excited because we can buy things from people who arent so

confident and cocky.

When oil was going up there was the peak oil story, when it crashes there is the glut of oil story. How

does one actually go about getting an understanding of the supply/demand picture of oil?

This is a very difficult question. Oil is a necessity of life, there is a fixed amount, we cant change the amount

we use etc. In theory, therefore, the supply, the demand and thus the price should be stable. Then you look at

oil prices and they go crazy!

[Reaches for report on oil] somebody sent me this report on oil. In March 4 1999, what do you think the price

of oil was? Take your wildest guess? Answer: $10. 10 bucks! The point is in the last decade weve seen it at

$35, $110, $147 and now we see it at $45. It fluctuates like mad so, number 1: it is unstable. If the existence

of the supply and demand are so stable, then why should it be so unstable in price? In part, its priced at the

margin. In part, its because its not a free price. Its manipulated. Its manipulated high, sometimes they run

out of the ability to price it high and it falls further than it should.

I would tend to think the price of oil is not predictable. We should acknowledge it and accept it. You might

not accept that because you think it impacts your portfolio or the economy. But no matter how important it is

to know something, if it is unknowable, then accept it. Im not here to convince you on the price of oil. Mark

Twain once said, it aint what you know that gets you into trouble, its what you know for certain that just aint

true. Strongly held beliefs that turn out to be wrong is the main way you lose money in the investment

business. If you cant know something, then you shouldnt bet on it.

I believe that assets that do not produce cash flow cannot be priced. Anything you say today to justify its price

higher or lower, cannot be turned into a price. There is no methodology to turn your outlook into price. You

cant invest in from a value point of view. You can gamble. You can gamble on gold. Lots of people do it. Do

it if you want, but dont fool yourself into thinking its value investing.

Most experts themselves were baffled by this recent movement in oil

then, we should wonder about the use of the word expert. You really ought to say, so-called experts.

Isnt not having a view on the oil price more bullish than what these same so-called experts are

predicting - that it will go much lower? Some E&P companies or service companies have crashed as if

the price is knowable and is, in fact, going lower. Is there a place to say I accept I dont know

something, but I can find value in this company?

Sure, the point is when the price of an E&P company crashes then maybe an emotionally stable analyst can

incorporate a range of prices from, say, $20 to $60 and see how the company operates. Does it have hedges,

does it have to drill to maintain leases etc.? The point is: analysis. If you dont know one variable, doesnt

mean you cant invest in it. You can make a wide range of assumptions. In theory, perhaps there is a company

that no matter what you assume for oil prices, it is still attractive.

Predicting the price of something precisely is stupid. How about predicting the probability distribution shape

of all the possible prices it can take?

People liked it at $110 but now it has no floor at $40 for these same people, usually this is a good area to look

into.

What advice would give a young investor apparently your son is starting a hedge fund?

My son would come to me and say Ford is coming out with a Mustang and so you should buy Ford stock!

The first thing you should ask is who doesnt know that? You should always think about if what you are

looking at has been incorporated into the market price.

I support my sons decision to be concentrated in his portfolio. You have to concentrate if you add value as an

analyst.

What is your view on European equities or Europe in general?

The outlook for growth, cohesion and governance are different. Parts of Europe are not pro-business as much

as required to have an exciting market. On the other hand, valuations are low. They are on sale relative to the

US. They might be cheap for a valid reason, but on the numbers you have to say they look cheap.

Do you see opportunities in the banking industry?

We dont invest in financial institutions so I cant give you an answer.