howard marks investing in uncertain times 021313

credit suisse financial services forum february 13, 2013

Investing in Uncertain Times Howard Marks, Chairman Oaktree Capital Management, L.P


On Uncertain Ground

The world seems more uncertain today than at any time in my experience

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On Uncertain Ground

The Economy

• The U.S. economy is sluggish

• A recovery is underway, but it is slow, unsteady and not dynamic

• Less support can be anticipated in the future from growth in the use of credit

• Confidence is contributing less than usual

o Consumer confidence is moderate

o Business is hesitant to expand

o Washington is failing to provide a reliable setting

• The problems are bigger elsewhere – perhaps the U.S. is “the best house on a bad block”

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On Uncertain Ground

Black Swans, Landmines and Long-Term Problems

The Majors

• The future of Europe is impossible to discern

• U.S. fiscal problems are less immediate but not much less significant

• Elected officials around the globe appear unable to produce solutions

• The landing in China still could be a hard one

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On Uncertain Ground

Black Swans, Landmines and Long-Term Problems

The Minors

• The economy is highly reliant on stimulus, which will have to end some day

• The U.S. infrastructure is deteriorating

• Income inequality is a growing problem

• There are geopolitical problems worldwide

• Despite all this, prospective returns appear low to moderate

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On Uncertain Ground

The Positives

• I may turn out to be overstating the negatives

• Asset valuation metrics appear reasonable

o Equity p/e ratios are below average

o High yield bond spreads are generous

o Real estate prices are down

• Investor psychology is very moderate

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On Uncertain Ground

The Lack of Euphoria

• Much of the risk in investing comes from the behavior of the participants

• The riskiest thing is the belief that there’s no risk – this was a major contributor to the crisis

• No one feels that way today – everyone is aware of the litany of negatives

• Sufficient risk consciousness can render a risky world less risky

• Watch out, though – low yields are forcing even wary investors into pro-risk behavior

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On Uncertain Ground

Attention to the Macro

• Investors have turned to “risk-on, risk-off “ behavior to cope

• This is unlikely to work

• Risk on, risk off is all about timing – getting timing right is impossible

• Keeping your eye on the long-term goal of buying value is much more likely to be effective

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On Uncertain Ground

Setting Strategy

• Do you expect prosperity or not?

o Yes? – equities, growth, cyclicals, risk, leverage

o No? – debt, value, stability, safety, less leverage

• Which risk should you worry about more?

o The risk of losing money?

o The risk of missing opportunity?

• Which attributes should you favor?

o Aggressiveness and risk bearing?

o Caution, conservatism, selectivity and risk control?

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On Uncertain Ground

Choosing Your Direction

Move Forward

• The U.S. economy is recovering

• Psychology is restrained

• Prices are moderate

• Safety is priced too high to pursue it to the exclusion of risk bearing

Apply Caution

• The level of uncertainty is very high

• The economic recovery is sluggish

• There’s the possibility of highly significant negative developments

• Providers of capital are exhibiting risk-tolerant behavior

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On Uncertain Ground

A Prescription for an Uncertain World

• Make sure your expectations are moderate

• Emphasize corporate investments

• Commit to active decision making – “even doing nothing is doing something”

• Remember that the reasons for caution aren’t imaginary – “the improbable disaster” isn’t impossible

• Balance the many pros and cons – “it’s not supposed to be easy”

The outlook certainly isn’t so propitious (and assets aren’t so cheap) as to call for investing

aggressively. But at the same time, conditions aren’t so bad and prices aren’t so high that it’s time

for extreme risk aversion.

• My bottom line: move forward, but with caution

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Disclosures

• This presentation may not be copied, reproduced, republished, posted, transmitted, disclosed, distributed or disseminated, in

whole or in part, in any way without the prior written consent of Oaktree Capital Group, LLC (together with its affiliates,

“Oaktree”) or as required by applicable law.

• This presentation and the information contained herein are for educational and informational purposes only and do not

constitute and should not be construed as an invitation, inducement or offer to sell or solicitation of an offer to buy any

securities or related financial instruments in any jurisdiction in which such offer or solicitation, purchase or sale would be

unlawful under the securities, insurance or other laws of such jurisdiction. Responses to any inquiry that may involve

attempting to effect transactions in securities will not be made absent compliance with relevant broker-dealer, investment

advisor, broker-dealer agent or investment advisor representative registration requirements, or applicable exemptions or

exclusions from such requirements.

• Certain information contained herein concerning economic trends and performance is based on or derived from information

provided by independent third-party sources. Oaktree believes that the sources from which such information has been

obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the

accuracy or completeness of such information or the assumptions on which such information is based.

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howard marks investing in uncertain times 021313

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