Howard Marks is a pre-eminent billionaire investor, who writes memos regularly, sharing investing insights and views. A recent one, which ran over 17 pages, ended with the essence below. Mr Marks is co-founder and co-chairman of Oaktree Capital Management, the largest investor in distressed securities worldwide. In 2020, his net worth was estimated to be US$2.1 billion.
To end, I'll pull together what I consider the key conclusions:
Howard Marks, 75, Co-founder and co-chairman of Oaktree Capital Management• Value investing doesn't have to be about low valuation metrics. Value can be found in many forms. The fact that a company grows rapidly, relies on intangibles such as technology for its success and/or has a high p/e ratio shouldn't mean it can't be invested in on the basis of intrinsic value.
• Many sources of potential value can't be reduced to a number. As Albert Einstein purportedly said, "Not everything that counts can be counted, and not everything that can be counted counts." The fact that something can't be predicted with precision doesn't mean it isn't real.
• Since quantitative information regarding the present is so readily available, success in the highly competitive field of investing is more likely to be the result of superior judgments about qualitative factors and future events.
• The fact that a company is expected to grow rapidly doesn't mean it's unpredictable, and the fact that another has a history of steady growth doesn't mean it can't run into trouble.
• The fact that a security carries high valuation metrics doesn't mean it's overpriced, and the fact that another has low valuation metrics doesn't mean it's a bargain.
• Not all companies that are expected to grow rapidly will do so. But it's very hard to fully appreciate and fully value the ones that will.
• If you find a company with the proverbial license to print money, don't start selling its shares simply because they've shown some appreciation. You won't find many such winners in your lifetime, and you should get the most out of those you do find.
I once asked a well-known value investor how he could hold the stocks of fast-growing companies like Amazon - not today, when they're acknowledged winners, but rather two decades ago. His answer was simple: “They looked like value to me." I guess the answer is "value is where you find it."
My conversations with Andrew over the ten months of the pandemic have represented a "voyage of discovery" and culminated in this memo. I think we came to some important realizations regarding the question of value versus growth investing, and in the process, I learned a lot about myself.
I don't mean to suggest that anything I've written here pertains to all value or all growth investors. There's a lot of generalizing, and we know how imperfect generalizations can be. I also don't insist that it's correct. It's just the current state of my thinking. Not only do I not insist that my version is the only one possible, but I expect it to evolve further as the world changes and I continue to learn. I hope you'll find this memo interesting and helpful, and I wish you all the best in 2021.
Check out the memo here.