HOWARD MARKS’ LATEST INTERVIEW HIGHLIGHTS

Billionaire cofounder and co-chairman of Oaktree Capital Management, Howard Marks recently joined Trey Lockerbie in an interview in We Study Billionaires. Here the highlights from Howard Marks’ latest interview.

Howard Marks formerly had an extremely negative opinion about it back in 2017, saying Bitcoin does not produce any cash flow or return, and cannot be valued like other assets.

His son Andrew who he had been living with in the past year throughout the pandemic, helped him change his mind about bitcoin. “The first thing I was informed of by him is, and I accept this, is that at that time, and even today, I don’t know enough to have a strong opinion about Bitcoin.”

In his latest interview with Trey Lockerbie, he shared his new found understanding and thoughts on Bitcoin.

1. Marks highlighted the limited supply of Bitcoin:

“And what I missed in 2017, looking for intrinsic value and cash flow production, I missed the supply-demand case. The supply-demand case is that the software limits the issuance of Bitcoin by the creation of Bitcoin to 21, I think 21.5 million, whereas the demand can grow for a long time.”

2. Marks acknowledged Bitcoin’s role as a medium of exchange to the unbanked:

“People who live in places where you can’t get to a bank, where you don’t trust the banks, where you don’t trust the government, where you don’t trust the currency, a lot of these people are going to, maybe, turn to cryptocurrency.”

3. Marks highlighted Bitcoin’s similarities and advantages compared to gold:

“The other thing is that there’s a big argument that it’s, they call it digital gold, that it has some of the qualities of gold in the sense of being inflation resistant, and maybe crisis resistant… But relative to gold, it has advantages, which is you don’t have to pay to store it, it’s not challenging to send it someplace, move it around, and you can spend it, which you can’t do with gold. So, those are the arguments in favor of Bitcoin.”

In the coming years, Marks is set to keep an eye and learn more about Bitcoin, “We are probably not finished learning all there is to learn about Bitcoin, and we’ll see in the future whether it turns out to be a legit asset class and hold value. But as the years go by, it gets harder to say there’s nothing to it.”

Related episode: Credit Cycles w/ Billionaire Howard Marks

Jeremy Grantham had previously highlighted that although a lot of people were calling this market a bubble for a long time, in his mind, we’ve only recently seen bubble activity. Trey asked Howard Marks if he is seeing similarities between the mid-2000s bubble territory and the recent market days.

“There certainly are similarities that cause Jeremy Grantham and others to say ‘bubble territory’ and to blow the whistle of caution.” Marks said.

Adding that one of the greatest indications of a bubble is that “if investors can think of an asset class and say, oh, you know what, for that, there’s no price too high. That’s a bubble, because, by definition, it’s irrational.”

Related episode: The Top of the Cycle w/ Jeremy Grantham

Ray Dalio recently said that he’d rather own Bitcoin than a bond, because you’re guaranteed to lose on a real basis. 

And Marks agrees to this. “Ray is certainly right that today’s bonds are very unattractive.” 

Marks think of bonds today as “a way to store money safely from which you don’t expect much.”

“Nobody who invests in the bond market today is going to make much, but hopefully, they’ll make a little income and their position will be steady if interest rates don’t go up much, which is an important caveat.”

Rather than giving a short answer, whether to buy or sell, Marks says every investor should have a view of what their normal risk posture should be.

Here are some pointers to look at when determining your normal risk posture:

• Age
• Income
• Current earnings
• Relationship between your current income and your needs
• Amount of money that you have in the bank, or in a portfolio
• Number of dependents you have
• Level of your aspirations.
• Your ability to live with volatility

“Do you have the ability to ride out the ups and downs? Or are you likely to panic at the low and sell out, which is the worst wealth killer in history? You think about all those things, you mesh them together. The way I say it is from zero to 60. Zero is all cash, 60 is maximum risk plunging into aggressive investments may be using leverage. Zero to 100, where should you be?” Marks explained.

Three ways to increase your caution in investing according to Howard Marks:

1. Go to cash, in whole or in part.

“It’s a two-decision action. You have to get out, but then you have to get in at a more propitious time, or else it wasn’t worth it. Charlie Munger says it’s actually a three-decision process because you have to get out, you have to get in, and while you’re out, you have to figure out what to do with the money.”

2. Change your asset allocation.

“We all know which asset classes are supposed to be more defensive than others. Bonds are supposed to be more defensive than stocks. So, you can move from aggressive assets into defensive assets. And the trouble with that is you have to really transform your portfolio. You have to do a lot of selling and a lot of buying.”

3. At the margin, make changes in your portfolio that biases in a certain direction.

“So, for example, you say, well, I have a 30% commitment to, let’s say, high yield bonds. There are high yield bond funds out there, which make the most in the good times, but lose the most in the bad times. There are other high yield bond funds that lose the least in the bad times but don’t keep up in the good times. So, you can switch managers within your high yield bond commitment, switching from aggressive managers to defensive managers. And that’s the one that I think most people should look at.”

Related episode: Future of the Financial Markets w/ Howard Marks

In the interview, Trey asked Marks if he could package a portfolio for his grandkids that they couldn’t touch for 30 years, what allocations would make up the portfolio.

“You want to have exposure to China and perhaps the other emerging markets. So, I think my advice is a variety of equity index funds, which complement and round out each other, and then leave it alone.

My job is to create a portfolio for them and keep them from putting their hands on it. I think that that is a formula that is sure to work in the long run. And anything you do in the short run, to try to outthink the market is probably going to reduce your likelihood of achieving your long-run goals,” Marks explained.

Marks also gave important advice to the listeners of the show, “The most important thing is to start an investment program while you’re young, continue it as you grow, and don’t screw it up. That’s my most important recommendation. How do you screw it up? You tamper with it too much. And of course, as I mentioned, some time ago, the biggest screw-up you can do is to sell out at the bottom.”

Related: Howard Marks Stock Portfolio