Jason Stipp: You say that "buying based on strong value, low price relative to value, and depressed general psychology is likely to produce the best results. Even then, however, things can go against us for a long time before turning as we think they should."
This is a question I think of time horizon. So, some of the best deals you find don't always pay you back right away. So my question for you is, a lot of our readers are nearing retirement, they are in retirement. They may have shorter time horizons for their portfolios overall, and they can't always wait for the market to come around. In your opinion, is there a way that such investors can still practice a value approach like you describe, given a portfolio that maybe won't be a perpetual portfolio, but one that they may have to draw down in 5 or 10 years?
Howard Marks: Well, that’s a great question. If you look on Page 34 of the original edition of my book, the paper edition, for those of you, who still read on paper, you will see a chart which tries to convey the meaning of increased risk. And basically what it shows is that as you move up the risk curve, your expected return increases, but low returns become more possible and the range of outcomes becomes wider.
So the point is, that somebody who is approaching, for example, retirement, might say, you know what, everybody loves to have higher returns, I'd love to have higher returns rather than lower ones, but the pursuit of higher returns requires me to accept greater uncertainty and a wider range of outcomes and a higher probability of some negative outcomes, whether for the short-term or the long, and I just can't do that right now. So, I'm going to move to the left, I’m going to move somewhat down the risk curve and pull in the range of my outcomes. I'm going to give up the possibility of some of the better ones in order to avoid the risk of some of the worst ones.
The one thing that I'm pretty sure of is, unless you are the next Warren Buffett, and a few of us are, the pursuit of higher returns normally requires the acceptance of the possibility of lower returns. And there are stages in life for which that's more and less appropriate, and one of the most important things is to get that decision right.
The new edition of the book that you mentioned has a chapter, which says "the most important thing is reasonable expectations," and anybody who expects high returns without risk, or thinks they can pursue higher returns without some increment in risk is doing themselves a disservice, and that's one of the prime ways that people get in trouble.
So the investor who is approaching retirement, and in retirement, and concludes that in retirement he or she can accept only reduced uncertainty should act accordingly, and probably pursue a somewhat lower return.
Stipp: Howard Marks, Chairman of Oaktree Capital, and also the author of The Most Important Thing: Uncommon Sense for the Thoughtful Investor, thanks for your insights today, for giving us the temperature of the market, and for calling in.
Marks: Well, it's a great pleasure, and I hope it was helpful for the listeners.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.