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How Top Investors Like, Howard Marks, Approach Recessions
Market fluctuations have reached fever pitch in 2020. Many investors are grappling with how to respond—whether to retreat or whether to double down on making investments. Howard Marks, co-founder and co-chairman of Oaktree Capital Management—the largest investor in distressed securities worldwide—recently sat down with Harry Stebbings, founder of The Twenty Minute VC—the world's largest VC podcast—to share his top advice for investing during downturns. The key takeaway: You can’t call yourself a great investor if you don't invest in downturns.
This too shall pass.
While we tend to think of recessions as unique and rare events, this isn’t the case. Research by Gabriel Lenz, a political scientist at the University of California, Berkeley has found that people underestimate the number of recessions that have occurred in recent history. In reality, since the Articles of Confederation, there have been as many as 47 recessions in the United States. While recessions typically happen cyclically, we are biased by recent times. The 2010s marked the first time when we entered and exited a decade without a recession.
In his 2008 letter to the shareholders of Berkshire Hathaway, Buffett explained that America has consistently overcome challenges. He writes,
In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21½% prime rate in 1980; and a Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has no shortage of challenges.
Without fail, however, we’ve overcome them. In the face of those obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.
During September and October of 2008, Buffett made a staggering $15 billion in investments. He shares Marks’ view that downturns can make for great investment opportunities. In a recent interview with CNBC, Buffett said, “The real question is: Has the 10-year or 20-year outlook for American businesses changed in the last 24 hours or 48 hours?" This is a good question to put things in perspective. Even amidst unprecedented uncertainty, it’s difficult to argue with the fact that the answer to this question, for many people, is still “no”.
Focus on the long term.
Marks, like Buffett, emphasizes the importance of focusing on the long term. Buffett is famous for investing in stocks like Coca-Cola and GEICO that are reliable and generate consistent profits. In a recent interview with CNBC’s Becky Quick, Buffett reflected on the COVID-19 crisis and, especially, the importance of investing for the long term. He stated, “It is scary stuff. I don’t think it should affect what you do with stocks…We’re buying businesses to own for 20 or 30 years. We buy them in whole, we buy them in parts ... and we think the 20 and 30-year outlook is not changed by the coronavirus.”
Embrace a contrarian view.
In his conversation with Stebbings, Marks emphasizes the value of adopting a contrarian view. If you engage in conventional behavior and follow the crowd, you can expect conventional performance. If, however, you want to stand out from the crowd and achieve above-average performance, you must adopt a contrarian view and deviate from the crowd. Sure, you may have unconventional below-average returns, but this is your only shot at achieving unconventional above-average returns. As Marks explained,
“To be a superior investor, which is the goal of a professional—not to do average, not to do as well as everybody else, but to be superior—you have to deviate from the behavior of the crowd. You have to do things that are different from what they're doing. You, generally speaking, at the extremes have to be a contrarian. Human nature makes us excited at the highs and people buy at the highs, and then they get depressed at the lows and they sell. Clearly, we want to buy low and sell high, not the opposite. So we have to try to do what's called contrarian behavior.”
In the podcast, Marks reminds us, “Experience is what you get when you didn't get what you wanted.” He adds, “You learn the most from tough times.” During these tough times, the investors that will prevail are the ones that embrace the opportunity to adopt a contrarian view and the potential to capitalize on challenging times.