Wednesday, April 9, 2014

Oaktree's Howard Marks: "Dare To Look Wrong, It's Not Supposed To Be Easy"

Following up on Sunday's "Knowledge@Wharton Visits With Oaktree's Howard Marks" we have another, quite different, look at Mr. Marks' thinking.
From ZeroHedge:
Echoing Charlie Munger, Oaktree's Howard Marks warns today's institutional and retail investors that "everything that’s important in investing is counterintuitive, and everything that’s obvious is wrong." These words seem critically important at a time when the world and his pet rabbit is a self-proclaimed stock-picking export. Be "uncomfortably idiosyncratic," Marks advises, noting thaty most great investments begin in discomfort as "non-conformists don’t enjoy the warmth that comes with being at the center of the herd." Dare to be different is his message, "dare to be wrong," or as Charlie Munger told him, "it’s not supposed to be easy. Anyone who finds it easy is stupid." While Marks philosophically adds that "being too far ahead of your time is indistinguishable from being wrong," he warns the lulled masses that "you can’t take the same actions as everyone else and expect to outperform."
The more I think about it, the more angles I see in the title Dare to Be Great. Who wouldn’t dare to be great? No one. Everyone would love to have outstanding performance. The real question is whether you dare to do the things that are necessary in order to be great. Are you willing to be different, and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both.
Dare to Look Wrong
This is really the bottom-line: not whether you dare to be different or to be wrong, but whether you dare to look wrong.
Most people understand and accept that in their effort to make correct investment decisions, they have to accept the risk of making mistakes. Few people expect to find a lot of sure things or achieve a perfect batting average.
While they accept the intellectual proposition that attempting to be a superior investor has to entail the risk of loss, many institutional investors – and especially those operating in a political or public arena – can find it unacceptable to look significantly wrong. Compensation cuts and even job loss can befall the institutional employee who’s associated with too many mistakes.
As Pensions & Investments said on March 17 regarding a big West Coast bond manager currently in the news, whom I’ll leave nameless:
. . asset owners are concerned that doing business with the firm could bring unwanted attention, possibly creating headline risk and/or job risk for them...

One [executive] at a large public pension fund said his fund recently allocated $100 million for emerging markets, its first allocation to the firm. He said he wouldn’t do that today, given the current situation, because it could lead to second-guessing by his board and the local press.

"If it doesn’t work out, it looks like you don’t know what you are doing,” he said.
As an aside, let me say I find it perfectly logical that people should feel this way. Most “agents” – those who invest the money of others – will benefit little from bold decisions that work but will suffer greatly from bold decisions that fail. The possibility of receiving an “attaboy” for a few winners can’t balance out the risk of being fired after a string of losers. Only someone who’s irrational would conclude that the incentives favor boldness under these circumstances. Similarly, members of a non-profit organization’s investment committee can reasonably conclude that bearing the risk of embarrassment in front of their peers that accompanies bold but unsuccessful decisions is unwarranted given their volunteer positions....MUCH MORE