Speech Notes: Howard Marks at NYSSA

Via Distressed Debt Investing:

On April 5, Howard Marks, legendary investor and Chairman of Oaktree Capital Management, spoke at New York Society of Securities Analysts. He is also the author of the book, “The Most Important Thing: Uncommon Sense for the Thoughtful Investor.” Distressed Debt Investing was in attendance as he presented his views on the topic of “Human Side of Investing.”

According to Howard Marks, the discipline that is most important is not accounting or economics, but psychology. He started off with a quote from Yogi Berra, “In theory, there is no difference between theory and practice; but in practice, there is.” And this difference is what is at the essence of the human side of investing.

Even though the business schools teach that the markets are objective and efficient, and generally follow the “Capital Market Line (CML) curve (“riskier assets always provide higher returns”), it was handily disproved in both contrasting time periods of Q2 2007 and Q4 2008. Essentially, the upward sloping CML does not work in practice. In practice, riskier assets must appear to provide higher returns, else they won’t attract capital. But that does not mean that those promised returns arrive in reality. If the risky assets provided higher returns, then they can’t be deemed risky after all. In Q2 2007 the risk premium was very inadequate, whereas in Q4 2008 it was overly excessive. The truth is that market is made up of people with emotions, insecurities, and foibles, and they often make mistakes. They tend to swing to erroneous extremes.