Marks argues investors should tailor strategy to whether they fear losing money or missing opportunities, and says research advantage is hard to gain since many smart people already do it.
“ [ 4 ] Marks focuses on risk management and says that investors should set investment strategy according to their personal situations and ask themselves whether they worry more about the risk of losing money or the risk of missing an opportunity. [ 4 ] Marks believes that it is hard to gain an investment advantage through research since so many smart people are doing it already; the ways to get an advantage are through better inferring the consequences implied by current company data, managing the psychology of investing, and assessing the present stage of the business / market cycle. He hopes to have average returns during a bull market , while minimizing losses during bear markets due to his belief that losses do more harm than any benefit investors obtain from gains. Marks does favor using market timing strategies to have cash available to be invested during a downturn. [ 5 ] Marks notes that it is important for investors to admit what they don't know instead of believing something is certain. He aims for a ”
Marks launched the first distressed debt fund in 1988, investing in bonds of bankrupt or near-bankrupt companies.
“we brought out the first distressed debt fund. Now we're not investing in companies that have a risk of default. We're investing in bonds that are either in default or sure to be.”
Marks reveals fund averaging 37th percentile yearly ranked fourth over fourteen years because managers blow up spectacularly.
“What percentile do you think that fund was in for the whole fourteen years? Four. Four. And if you think about it, it's really almost mysterious. Why the fourth, not the thirty seventh?”
Marks quotes London Business School professor defining risk as more outcomes being possible than will actually occur.
“risk means more things can happen than will happen. And again, this is profound in my opinion. In the economic world, people generally make their decisions based on something called expected value,”
Marks states the secret to investing is buying assets for less than intrinsic worth, not buying quality.
“So if you buy a high quality asset and I say in the book, there's a guy on the radio when I lived in LA,”
Marks argues investors must not assume likely outcomes will occur, unlike in physical sciences where determinism applies.
“you should not act as if the things that should happen are the things that will happen. Again, in the world of the physical sciences, you can probably bet that that's true.”
Marks illustrates how zero yields on safe investments drive investors mindlessly into riskier assets.
“He gets a statement from Fidelity. He opens it up, and it says, the yield on your fund is now zero. He grabs the phone.”
Marks argues outcomes cannot determine decision quality because randomness causes good decisions to fail and bad ones to succeed.
“you can't tell from an outcome whether a decision was good or bad. It's very important. Most people don't understand this. Totally counterintuitive.”
Marks launched the first distressed debt fund in 1988, investing in bonds already in default.
“in 'eighty eight, we brought out the first distressed debt fund. Now we're not investing in companies that have a risk of default.”
Marks cites definition that risk means more things can happen than will happen.
“There's a professor at the London Business School who put it succinctly. He said risk means more things can happen than will happen. And again, this is profound in my opinion.”
Marks says good decisions fail and bad decisions succeed frequently due to randomness in investing.
“good decisions fail to work all the time. Bad decisions work all the time. The investment business is full of people who are, quote, right for the wrong reason.”
Marks cites buying America's best companies from 1968 to 1973 lost 90% due to overpricing.
“if you bought the bonds of Hewlett Packard, PerkinElmer, Texas Instruments, Merck, Lilly, Xerox, IBM, Kodak, Polaroid, AIG, Coca Cola, and Procter and Gamble, and if you bought them all in 'sixty eight and you held them until 'seventy three, you lost 90% of your money. Why? Because they were overpriced.”
Marks argues that at cycle extremes investors need money and nerve to spend it, not selectivity.
“you don't need conservatism, caution, risk control, discipline, patience or selectivity. You need money and the nerve to spend it.”
Marks defines exceptional investors as those achieving good returns disproportionate to risk taken.
“I think that an exceptional investor is someone who has a good return disproportionate to the risk born. A good return with the risk under control.”
“And if you bought those stocks, the day I got there in '69, and you held them firmly for five years, you lost almost all your money.”
Marks states risk cannot be quantified in advance and historical volatility is not a good risk indicator.
“risk is unquantifiable in advance. You can make reference to the historical volatility, the historical standard deviation, but number one, that's not a very good indicator of risk.”
Marks argues the belief that there is no risk is the riskiest thing because it encourages dangerous behavior.
“the riskiest thing in the world is the belief that there's no risk. Because when police when people believe there's no risk, they act in very risky ways, which makes the world a risky place.”
Marks explains how the absence of prior nationwide mortgage defaults led investors to view mortgage securities as safe before 2008.
“prior to the subprime crisis, the fraudulent mortgages that gave rise to the global financial crisis, there had never been a nationwide wave of mortgage defaults.”
“Even when it's over, you can't tell. Was that a safe investment that it was sure to produce a double? Or was it a risky investment where you got lucky?”
Marks argues that risk cannot be quantified even after the fact, citing an example of a doubled investment.
“You buy something for 100. A year later, sell it for 200. Was it risky? You can't tell. Even when it's over, you can't tell.”
Marks argues risk is hidden because it only becomes visible when negative events occur, like flaws exposed by earthquakes.
“I also believe that risk is hidden and deceptive. This is really important. Loss is what happens when risk, the potential for loss collides with negative events.”
Marks states that price, not asset quality, determines risk, and good investing means buying things well, not buying good things.
“B, that good investing is not a matter of buying good things, but buying things well. And the difference is not only grammatical.”
Marks challenges the risk-return line saying if higher returns are certain from risky assets, they aren't risky.
“if you can count on higher returns from a risky asset, then by definition, it's not risky. So it's kind of an oxymoron. And I was never comfortable with this graphic.”
Marks argues average returns with below-average risk are equally significant but overlooked because only returns are visible.
“achieving an average return with below average risk is an equally significant accomplish, but easily overlooked because only the risk is evident, only the return is evident.”
Marks invokes Einstein's quote that not everything that counts can be counted and not everything that can be counted counts.
“Einstein, there's a great quote from Einstein, who said that not everything that counts can be counted, and not everything that can be counted counts.”
Marks uses a probability metaphor: investment outcomes are like drawing one ticket from many possible outcomes in a bowl.
“the outcome of pulling a ticket from the bowl, the outcome of which investment performance will occur, never amounts to one ticket picked from among many.”
Marks says high-quality assets can be risky if overpriced, citing nifty-fifty stocks that lost almost everything from 1969 to 1974.
“A high quality asset can be priced so high that it's risky. I started work at Citibank in September 1969, when I got out of Chicago Booth.”
“I think that one of the things you're taught here is that volatility is a measure of risk. Volatility is risk.”
Marks contends that the belief that there's no risk is itself the riskiest thing because it drives risky behavior.
“I believe that the riskiest thing in the world is the belief that there's no risk.”
Marks argues that average returns with below-average risk are a great accomplishment but easily overlooked because only returns are visible.
“I believe that achieving an average return with below average risk is an equally significant accomplish, but easily overlooked because only the risk is evident, only the return is evident.”
Marks argues risk cannot be quantified even after the fact, using a doubling investment as example.
“Or was it a really clever thing that nobody else had figured out where you were sure to double your money? And the answer is you can't tell.”
Marks says when any company can raise money on any basis, that's a danger signal in the market.
“I'd hold up an article from the news, I said, Look at this piece of crap that got issued yesterday. If a company can raise money on this basis, there's something wrong in the market.”
Marks explains Oaktree's logic for buying during the Lehman crisis: if the system melts down, nothing matters anyway.
“Either the financial system is going to melt down or it's not. If it melts down, it doesn't matter whether we bought or not, because it's, you know, it's game over for everything.”
Marks says great investors are right only 60-80% of the time; those needing certainty should avoid investing.
“The great investors are right 60%, 70%, maybe 80% of the time. If you're the kind of person who has to be right all the time, you shouldn't be in in investing.”
Marks argues security prices depend on people's reactions to events, not the events themselves.
“it's not just whether the event was positive, it's how people reacted to the event that determines the impact on the security prices.”
Marks says sharing investment wisdom poses little risk because most people cannot implement the concepts even if they know them.
“So I'm not putting myself at risk, because some people are gonna say, well, that's what he says. I'm not into that.”
Marks states that controlling risk while making money is the real investment accomplishment, not just returns.
“To me, the real accomplishment is making money with the risk under control. And that's what thinking about risk, I think, helps you do. So, you know, Bernstein's, writing is very important.”
Marks defines real investment accomplishment as making money with controlled risk, not just returns.
“To me, the real accomplishment is making money with the risk under control. And that's what thinking about risk, I think, helps you do.”
Marks quotes Rick Kane saying everything interesting in finance happened outside two standard deviations, not within them.
“My friend Rick Kane once said that 96% of financial history has occurred within two standard deviations, but everything interesting has happened outside of two standard deviations.”
Marks argues risk control should follow soccer's continuous play model, not American football's discrete offense-defense switches.
“I think the right model for thinking about whether we need risk control isn't American football, it's soccer. In American football, the team with the ball has the offense on the field.”
Marks asserts risk is not a function of asset quality, opposing conventional belief about quality and safety.
“One of the most important things for every investor to learn is that risk is not a function of asset quality. This too sounds counterintuitive.”
Marks argues imprecise expert judgment about loss probability beats precise but irrelevant volatility numbers.
“I believe imprecise qualitative expert opinion about the probability of loss is far more useful than precise but largely irrelevant numbers concerning past and projected volatility.”
Marks argues no asset is so good it cannot be overpriced or so bad it cannot become attractively cheap.
“There are no assets that are so good that they can't become overpriced and dangerous. There are very few assets that are so bad that they can't be cheap enough to be attractive as investments.”
Marks says risk is hidden and deceptive; loss occurs when potential for loss meets negative events.
“I think it's important to grasp a concept. Risk is hidden, and risk is deceptive. Loss is what happens when risk, the potential for loss, collides with negative events.”
Marks argues academics chose volatility as risk measure because it was quantifiable, not because it was accurate.
“I think that volatility can be an indicator of the presence of risk, a symptom if you will, but it's not risk itself.”
Marks refutes the idea that riskier assets produce higher returns, arguing they only offer higher expected returns to induce participation.
“Very simply, if it were true that riskier assets produce higher returns, then they wouldn't be riskier, would they? So that can't be the right explanation.”
Marks defines risk as the probability of loss, not volatility as academics measure it.
“So if risk is not volatility, then what is it? And in my opinion, and in the real world sense, risk is the probability of loss.”
Marks says buying at highs and holding through declines eventually recovers as new highs exceed old highs.
“The fact that you experienced a downward fluctuation might have been uncomfortable for a little while. But by the time the new high is achieved, you're you're you're back to to your cost and more.”
Marks says risky assets must offer higher expected returns to attract investors, but do not have to deliver them.
“What the upward sloping line, the positive correlation, means is that investments that are perceived as being risky have to be perceived as offering higher returns to induce people to make those investments.”
Marks realized in 2006 that risk cannot be quantified even after the fact, not just in advance.
“I was writing my first memo about risk in 2006. I wrote about my belief that risk is not quantifiable in advance.”
Marks argues investment success comes from buying things well, not buying good things, as any asset can become overpriced.
“My conclusion was it's not what you buy, it's what you pay. And investment success doesn't come from buying good things, but from buying things well.”
Marks argues academics adopted volatility as the risk measure largely because it was quantifiable, not because it was accurate.
“The academics developing investment theory, largely at the University of Chicago in the early sixties, just a couple years before I got there, adopted volatility as their measure of risk.”
Marks warns that at PE ratio of 23, historical S&P returns over next decade were always between 2% and -2%.
“And it showed that historically, you bought the S and P when the PE ratio was 23, in every case, there were no exceptions.”
Marks explains his logic for investing during 2008 crisis despite apocalyptic fears.
“But if I don't invest it and the world doesn't melt down, then we didn't do our job. QED, you have to move forward.”
Marks raised $8 billion in early 2007, took only $3.5 billion, held rest in standby fund.
“But we would like to have the remainder of your interest in a standby fund that will implement if the stuff hits the fan.”
Marks asserts that following the crowd guarantees you will not outperform the market.
“The only thing I'm sure of is if you zig when they zig, you're not gonna outperform.”
Marks states that 99% of startups and 90% of venture capital investments fail despite high return potential.
“something like probably 99% of all startups fail, probably something like 90% of all the investments that venture capital funds make fail.”
Marks clarifies that risky assets must appear to offer higher returns to attract investors, not guarantee them.
“assets that are expected to be riskier have to appear to offer a higher return or nobody will make those investments. That makes a 100% sense, doesn't it?”
Marks warns that assuming you are smart and others are dumb is a major investing mistake.
“One of the biggest mistakes you can make in life, but especially in investing, is to assume that you're smart and everybody else is dumb.”
Marks explains why the claim that riskier investments have higher returns is logically incoherent.
“if it were true that taking more risk is the surefire path to a higher return, then it wouldn't be risky. Can't be right. So I was always unsatisfied with that.”
Marks argues that if risky investments guaranteed higher returns, they would not be risky by definition.
“if riskier investments could be counted on to produce higher returns, then by definition, they're not risky. So that can't be right.”
Marks clarifies that risky assets must appear to offer higher returns, not that they deliver them.
“assets that are expected to be riskier have to appear to offer a higher return or nobody will make those investments. That makes a 100% sense, doesn't it? So that's what this relationship means”
Marks defines bubbles primarily as psychological excess where no price seems too high.
“To me, the main ingredient in bubbles is psychological excess. There's no such thing as a price too high.”
Marks says S&P valuation suggests very low single-digit returns over the next ten years based on historical PE ratios.
“Historically, if you bought at this PE ratio, your return over the next ten years averaged in the very low single digits.”
Marks characterizes Fed interventions as price controls that induce excessive risk-taking when money is artificially cheap.
“And the Fed manipulations are a form of price controls. You know, they control the price of money. And if Fed puts money artificially cheap, then it induces behavior like risk taking.”
Marks argues lending to high-risk activities creates unlimited downside with limited upside, making it the wrong risk-reward combination.
“You certainly shouldn't do that in in in activities that have a high probability of not paying off at all because then you have unlimited downside and limited upside.”
Marks calls Fed rate setting a form of price controls that forces investors into riskier activities.
“And the Fed manipulations are a form of price controls. You know, they control the price of money.”
Marks cites Buffett principle that imprudent market behavior should increase investor caution and worry.
“So when other people are acting imprudently and mindlessly and carefree, we should be worried.”
Marks says smart lending requires good visibility on repayment likelihood, not purely conjectural outcomes.
“I mean, in order to be a smart lender, you have to have good visibility on the extent to which the thing has is likely to repay interest and principal.”
Marks argues artificially cheap Fed money forces investors into riskier activities when safe returns are too low.
“And if Fed puts money artificially cheap, then it induces behavior like risk taking. It forces people into riskier activities because the returns on safe activities are so low.”
Marks cites Buffett's principle that investor imprudence requires greater personal prudence and should signal worry.
“Buffett says, the less prudence with which others conduct our affairs, the greater the prudence with which we must conduct our own affairs.”
Marks says General Mills achieved fourth percentile over fourteen years by staying between twenty-seventh and forty-seventh annually.
“for the fourteen years overall, they were in the fourth percentile. Now that's incredible math. You would say, well, if you bounce back in '40 between '27 47, on average, you're probably about 37.”
“And when we started Oaktree in 1995, I wrote that down, and that became our motto and still is.”
“And the answer turns out to be that most investors, shoot for the stars and occasionally shoot themselves in the foot and wreck their record.”
Marks says Oaktree's founding motto is that avoiding losers lets winners take care of themselves.
“And when we started Oaktree in 1995, I wrote that down, and that became our motto and still is. If you can avoid the losers, the winners will take care of themselves.”
Marks cites math where consistently staying between 27th and 47th percentile for fourteen years produced overall fourth percentile performance.
“So solidly in the second quarter for fourteen years in a row. But interestingly, as a result, for the fourteen years overall, they were in the fourth percentile.”
Marks adopted if you avoid the losers, the winners take care of themselves as Oaktree's founding motto in 1995.
“in equities, if you can avoid the losers and losing years, the winners will take care of themselves.”
Marks explains that most investors wreck their records by occasional big losses that take years to recover from.
“most investors, shoot for the stars and occasionally shoot themselves in the foot and wreck their record. And once you have a big loss, it takes a long time to get back to scratch.”
Marks argues the future is a probability distribution of possibilities, not a single predictable outcome.
“It's a probability distribution. It's a range of possibilities in each thing, whether it's GDP growth next year or inflation next year, or who's going to win the next election,”
Marks frames the AI investment choice as binary moonshot bets versus incremental gains in established tech companies.
“Or do you want to invest in a great tech company, which is already existing and making a lot of money where AI could be incremental, but not life changing?”
Marks contrasts binary AI startup bets versus investing in established tech companies with AI upside.
“If they have the low probability of success, you should accept that that means chances are good of unsuccessful.”
Marks cites Dimson saying the future is a probability distribution, not a single outcome that can be predicted.
“The future is not a set single thing that if you're smart enough, you can figure it out what it's going to be and it's going to materialize and make you right.”
Marks distinguishes risk control from risk avoidance, emphasizing intelligent risk-bearing is integral to good returns.
“Exposing yourself to the risk of loss is integral in trying to have a good investment return. So, you know, even though our investment philosophy, stresses, risk control, we're not talking about risk avoidance.”
Marks argues feeling uncomfortable when investing during crisis is normal and necessary for good investing.
“If you committed to spend money as we did on September 19 and you're not uncomfortable, there's something wrong with you.”
Marks argues people's asymmetric response to gains versus losses warps their ability to bear necessary risk.
“Most people care a little about a dollar made and a lost. Exposing yourself to the risk of loss is integral in trying to have a good investment return.”
Marks quotes Buffett preferring a lumpy 15% return over a smooth 12%, challenging excessive focus on volatility.
“And I would say to people, if you'd rather have a smooth 12 than a lumpy 15, you have to ask yourself what's going on.”
Marks explains risky assets must appear to offer high returns but do not have to deliver them.
“If a risky asset can be counted on to have a high return, then it's not risky. So it can't be true. It's incorrect on its face.”
Marks argues it's desirable to learn investment lessons early when there's not much money at stake.
“And so that was very informative and it's very desirable to learn your lessons early and also preferable to learn your lessons when there's not a lot of money at stake, which I did.”
Marks defines risk as the probability of an undesirable outcome, not volatility or fluctuation.
“Risk, in my opinion, and my view has evolved, risk is the probability negative outcome, of an undesirable outcome.”
Marks quotes Buffett preferring lumpy 15% returns over smooth 12% if you can survive volatility.
“And if you can survive long enough to enjoy the long term benefit of the lumpy 15, it beats the hell out of the smooth 12.”
Marks argues good investing is not just buying good things but buying things well at the right price.
“it's not what you buy, it's what you pay. And good investing is not just a function of buying good things, but of buying things well.”
Marks admits his risk aversion was costly since 1980 when optimism consistently paid off.
“And given the, if you think about it, from 1980 when the inflation was solved, essentially to date, generally speaking, the more optimistic you were, the more money you made.”
Marks defines risk as the probability of an undesirable outcome, not volatility.
“Risk, in my opinion, and my view has evolved, risk is the probability negative outcome, of an undesirable outcome. It is not the volatility of the stream.”
Marks says good investing is not just buying good things but buying things well at the right price.
“And good investing is not just a function of buying good things, but of buying things well.”
Marks explains risky assets must appear to offer high returns, but don't have to deliver them.
“What the relationship means is that an asset that appears to be risky has to appear to offer a high return or else nobody will buy it.”
Marks says if you think you know what will happen with AI, you don't understand what's going on.
“I think it was Walter Cronkite who said if you're not confused, you don't know what's going on. I would say if you think you know what's gonna happen,”
Marks warns AI may move faster than society can adjust, creating a formula for disruption.
“one of my concerns is that AI moves faster than the ability of society to adjust to it. And that and that is a formula for disruption.”
Marks describes AI as the first inning of a long unpredictable game with unknown rules.
“We're at the we're in the first inning of a very long unpredictable game. We don't know what the rules are or or have any idea how many innings there are”
Marks notes the S&P 500 has doubled since September 2022 while intrinsic values have not, discouraging analysis.
“I mean, company values haven't doubled, intrinsic values, but prices have doubled, so it's been a great time, and great times encourage the desire to put money to work and discourage analysis,”
Marks argues AI makes the world more unpredictable than any time in his lifetime, challenging investment decision-making.
“the changes that are underway today, and in particular the introduction of AI, render the world much less predictable than at any time, probably any time ever, and certainly any time in my lifetime.”
Marks says holding nifty fifty stocks for five years from September 1969 resulted in 95% losses.
“So if you bought the stocks the day I got there, I think it was 09/22/1969, if I'm not mistaken, and if you held them tenaciously for five years, the greatest company is America, you lost about 95% of your money.”
Marks says optimism and credulousness dominate today's market, making excess returns harder to achieve.
“I think you would have to say, optimism, not pessimism, credulousness, not skepticism, are in the ascendancy today, and when optimism and credulousness are in the ascendancy, it gets hard to make return investments that will produce what we call excess returns,”
Marks recalls nifty fifty stocks in 1969 where banks believed nothing could go wrong at any price.
“These were the 50 best and fastest growing companies in America, where nothing could go wrong and there was no price too high.”
Marks observes yield spreads at low end of range indicate no fear or compensation for elevated defaults.
“if the yield spreads are at the low end of normal range, you would have to say that the fear of elevated defaults is not present and compensation for an elevated default rate is not available.”
Marks notes worst loans are made in best times, citing seventeen years of good times since March 2009 bottom.
“one of the long standing sayings in the banking business is that the worst of loans are made in the best of times, and it's for this reason.”
Marks recalls Citibank and money center banks invested in the nifty 50 in 1969, believing no price was too high.
“Well, know, when I started Citibank in September sixty nine, the bank and most of the money center banks, it's an old fashioned expression, invested in what we call the nifty 50.”
Marks explains excess returns require buying at unfair prices, not fair ones.
“We want to get returns that are more than commensurate with risk. And to do that, you have to buy assets not at fair prices, but are unfair prices.”
Marks observes a 17-year period without profound low points led people to forget leverage risks.
“And from March of o nine until, let's say, January '26, there generally were not profound low points. And when good times roll on that long, people forget about the possibility of bad times.”
Marks argues government can replace paychecks but not the sense of purpose and structure that work provides.
“And and the government, in theory, can make up the paycheck, but they can't make up the sense of purpose and the reason to get out of bed and the structure for your day.”
Marks argues private credit managers took in too much money and invested it too fast, making bad decisions.
“There's nothing wrong with lending money to companies. The question is, do you do it wisely?”
Marks defines proper private asset valuation as the price an intelligent, unemotional buyer would pay today.
“I think it should be valued at what an intelligent, unemotional buyer would pay for it today.”
Marks identifies the biggest investor mistake as believing something can outperform forever, leading to overvaluation.
“The the biggest I thought I've spent a lot of time thinking about the biggest mistake that investors make. It is the belief that something can go up more than something else forever.”
Marks argues good investing comes from buying things well, not buying good things; price determines outcomes.
“it's not what you buy, it's what you pay that counts. Good investing doesn't come from buying good things, it comes from buying things well.”
Marks quotes Jamie Dimon saying when you see one cockroach there are probably more.
“Jamie Dimon of JPMorgan says a lot of things best. He said, you know, when you see one cockroach, there are probably more. So, people started to say, well, maybe there's something wrong here.”
Marks states Oaktree's default rate over 40 years was one-third the market average of 3.6-3.7% annually.
“over the last forty years, on average, something like 3.6 or 3.7% of all high yield bonds have gone into default every year, and our default rate has been roughly a third.”
Marks quotes trader Wally Deemer: When the time comes to buy, you won't want to.
“And there was a guy named Wally Deemer, was an old time trader, who had some great quotes and he turned them into”
Marks argues you can protect against extreme tail risks but won't like the premium cost.
“I'm concerned that there could be nuclear war, and I'm concerned that there could be inflation at 20%. Mhmm. Well, can protect yourself against that.”
Marks states the riskiest condition in markets is when people believe there is no risk.
“The scariest thing in the world, the riskiest thing in the world is the belief there's no risk.”
Marks notes only 3 percent of 700 direct lending managers existed before the financial crisis.
“of the 700, roughly 3% were in business before the global financial crisis. So we don't know how many of them are have what it takes to deal with a harsh environment.”
Marks notes only 3% of 700 direct lending managers existed before the financial crisis, questioning their ability to handle adversity.
“I'm told that of the 700, roughly 3% were in business before the global financial crisis. So we don't know how many of them are have what it takes to deal with a harsh environment.”
Marks argues making money in a favorable environment proves nothing, as it can result from luck rather than skill.
“To make money in a salutary investment environment, you can do it on the basis of good judgment and hard work and skill, or you can do it on aggressiveness and getting lucky.”