Eye2theLongRun

A recent memo from investment guru Howard Marks provides – almost as an aside – a helpful example of how Charlie Munger’s persistent invocation to “always invert” (when problem solving) as applied to investment.

Marks explains the six principles which have been applied by Oaktree Investments since its inception. Four of the six may be seen as clear instructions on what NOT to do rather than piecemeal fragments of supposed elixir.

The principles are:

1. Risk control is the primary objective. It is number one for a reason which ought to be obvious and must be prioritised;
2. Consistency for clients. The rapid flights from highs to lows and all their associated emotions are to be strenuously avoided since clients are happiest with a smooth ride;
3. Explore and focus on the less efficient markets which have not been picked over by the masses, and which may, therefore, offer mispricing which can be exploited;
4. Specialisation – which allows concentration on depth of knowledge and understanding rather than a thin spread of superficial knowledge of many markets and opportunities;
5. No reliance on macro forecasting. The entire fools package of this activity can be usefully avoided so that relevant value drivers can be pursued; and,
6. No reliance on market timing. If profitable returns rely on ability to time the markets the chances of disaster are high and the opportunity has little going for it.

This list of what not to do implicitly highlights what you do have to be some sort of expert or at least have a palpable edge in. Lead by sufficient understanding and discipline to control risk. Marks – who is hard to touch for sustainable high performance – adheres studiously to these canons. While this gives little clue as to his knowledge of and tools used in risk control, it does ensure that the focus is not on the irrelevant if ever present temptation to become enmeshed in troublesome noise.