Month: September 2014

Oaktree Capital Chairman Howard Marks Memo – Risk Revisited

Oaktree Capital’s Chairman Howard Marks just recently released a memo to his clients, titled “Risk Revisited”.

I’ve yet to see a better essay written that defines Risk in practical terms, the list of different Risks every investor faces, and the solutions to dealing with it. It’s the most concise yet paradoxically comprehensive essay I’ve seen that covers pretty much what everything else you can find online that talks about regarding risk.

One of the biggest takeaways for me was defining Risk as two major aspects, the possibility of loss of permanent capital and also the possibility of missing opportunities, which is one of the biggest reasons why Howard Marks quotes Charlie Munger thoughts on investing, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” To beautifully navigate between risk and return is truly one of the hardest things to do in investing.

Another eye opener for me was the rationale behind the strategies Oaktree Capital employs in an ultra low interest yield environment to confidently generate ~10% returns for its clients.

Such confidence is truly reserved for the most skilled investors since Howard Marks details three types of risks Oaktree Capital is willing to bear and manage in order for its strategies to work, namely credit risk, illiquidity risk, concentration risk and leverage risk.

To do what the investing public on aggregate dislikes is the only way an investor is able to find the few opportunities that permits better than market performances at relatively low risk.

Which leads to another food for thought, which is the topic of probability distribution. Prudence is of utmost importance when choosing which investments to make because even with the most unlikely odds, as long as the odds aren’t zero, you bear the risk of permanent loss of capital.

As Howard Marks mentions, “I always say I have no interest in being a skydiver who’s successful 95% of the time.”

Howard Marks goes really in-depth in explaining how probability distribution analysis intertwines with reality, which makes statements such as Warren Buffet always avoiding catastrophe risk or why Berkshire Hathaway holds at least 20 billion USD cash or why he always advises against over-leveraging make much more sense besides just nodding in agreement to statements that seem to make sense when first heard.

Last but not least, Howard Marks summary of the two major ways an investment fails, which is fundamental risk and valuation risk, explains perfectly why a hefty margin of safety should be demanded for every investment – It’s the only possible way an investor can manage both fundamental risk (quality of business) and valuation risk (market pricing of business) since you ensure never overpaying, even if the business quality turns out to be worse than expected.

You can read the full memo at Oaktree Capital’s website.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)