Howard Marks, the co-founder and co-chairman of $122 billion Oaktree Capital, made a fortune by loading up on distressed corporate debt during the depths of the financial crisis.
In an exclusive interview with Business Insider, Marks explains how his overall investment philosophy and views on market cycles enabled him to make that legendary trade.
Marks also explains why he’s continuing to buy more every day, and lays out the scenario that would prompt him to get more defensive.
Back in late 2008, in the deepest throes of the financial crisis, everyone in the market was running scared.
Not Howard Marks.
As co-founder and co-chairman of Oaktree Capital, which currently oversees $122 billion, Marks smelled opportunity.
He and his partner, Bruce Karsh, came up with a daring plan — one that would fly in the face of investors who refused to touch the market with a 10-foot pole. They were going to start buying cheap assets. Billions of dollars worth.
They began purchasing distressed corporate debt at a clip of about $650 million a week, something they continued throughout the last 15 weeks of the year, Marks told Business Insider in an exclusive interview. When all was said and done, Marks and Karsh had amassed a whopping $10 billion position.
Their approach proved prudent — and wildly profitable. That debt rebounded, and the trade made about $6 billion for Oaktree investors and $1.5 billion for Marks, Karsh, and their partners, according to a New York Times report.
However, summarizing the trade so neatly hardly does it justice. At the time, it was a massive risk for Marks and his associates to make a wager of that size, considering the dire market environment.
Marks and his team did loads of diligence around the value of the debt they were buying, and saw that it had considerable upside potential. But what ultimately sold him on the trade was how overwhelmingly negative sentiment was all across the market.
He recalls a conversation he had with a chief investment officer. Every time he posed a negative assumption, the CIO would ask about an even worse scenario.
“I could not propose a scenario negative enough to satisfy her,” Marks told Business Insider.
That signaled to Marks that the market cycle was completely bottomed out, and that it was time to start buying.
“Psychology was absolutely as negative as it could’ve been,” he said. “When you can’t come up with a scenario negative enough on the downside, you know that pessimism is rampant. That’s important. It really exemplified our strategy at its best.”
It’s this investment strategy — assessing where we are in the market cycle, and investing accordingly — that’s the focal point of Marks’ new book, “Mastering the Market Cycle,” which was released on October 2.
Simply put, when emotions are riding high at either extreme, that’s when it’s best to take immediate action.
If confidence is oozing out of investor pores and risk-taking is abundant, it might be time to get defensive. And if nobody can …read more
Source:: Business Insider – Finance