Howard Marks Destroys the Myth of High-Risk, High-Reward | Talks at GS 2022

[Transcript]

KATIE KOCH: I want to ask you one follow-up question on that around risk. So, and I actually want to go back to the very first memo you wrote, October 12th, 1990. And I'm going to just quick recap. I might not get it perfectly right. But you had an observation. There was a Midwest pension fund manager who was in the top couple of percentile.

HOWARD MARKS: He was in—every year for 14 years in a row, he was between the 27th and the 47th percentile measuring from the top. So, he was solidly in the second quartile every year for 14 years in a row. Where did he come out for all 14? Fourth percentile.

That's crazy math. Because in most walks of life if you stick between 27 and 47, your average is probably 37. His average was fourth.

KATIE KOCH: So, what was the lesson that you—and there's actually really, yeah, not really any other industry I can think of where you get around median over a long enough time at the top. So, what lessons do you take from that?

HOWARD MARKS: Well—and then, the reason I wrote the memo, what made me write that first memo was the juxtaposition to some guy in New York who was running an investment management firm that had a horrible year because they were a value firm and they bet heavily on the banks, which did terribly. And so, he comes out and he says, "If you want to be in the top 5 percent of money managers, you have to be willing to be in the bottom five." My reaction was, I like the first guy better. I like the consistently a little above average as the route to performance, which was the title of the memo, The Route to Performance. I don't like this idea of shooting for the top and being willing to hit the bottom. I'm not interested in being in the top 5 percent in any one year. I'm absolutely unwilling to be in the bottom 5 percent. And my clients feel exactly the same. So, why should I do that?

We don't swing for the fences. Oaktree does not swing for the fences. Consistent batting average. And what I say is, if you look at the normal distribution read from your direction, most people say, "I'm going to get here. I'm going to get into the upper tail. I'm going to shoot for the upper tail. I'm going to swing for the fences. And I'm going to have these huge winners."

Our approach is very simple. Cut off the bottom tail. That's what this guy in the Midwest did. And Ben Scotton [PH] was his name. Cut off the bottom tail. So that if you cut off the bottom tail and your total experience consists of fabulous, excellent, very good, good, not so good, so so, but never terrible, you'll be one of the best. Not after one year. Somebody else will swing for the fences and hit it exactly right and will be lionized for her performance that one year. Who can do it for 30 years?

Source: https://www.youtube.com/watch?v=wkJXQ46ma8I&ab_channel=GoldmanSachs

 

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