Private Equity’s ‘Philosopher King’ Charts Cautious Course in Uncertain World

Considering his outsized success as an investor and money manager, Oaktree Capital Co-founder and Co-chairman Howard Marks claims his goals for investing success have long been modest ones.

Keynoting the Fifth Annual Darden Private Equity Conference — an event hosted by the Darden Private Equity Club at the University of Virginia Darden School of Business that featured sessions on private equity operators, prominent pension fund managers who invest heavily in private equity and venture capitalists — Marks said he had built a successful career out of largely avoiding disastrous bets, even if that meant occasionally missing out on outsized returns.

“Consistent, moderate success and a total absence of failure is the greatest achievement in the investment business,” Marks said. “It’s not so easy.”

Introduced as the “philosopher king” of the private equity world whose writings are read by “every Chief Investment Officer in the industry,” Marks said his career path unfolded before him as he simply followed work that he found to be interesting.

After receiving his MBA, Marks took a position at Citicorp, a place where he had previously held an “enjoyable” summer job. Describing investing as far less of an industry than it is today, Marks said he was pleased to find himself engaged in work that was “interesting and required thought.”

His career trajectory changed in 1978, however, when a superior instructed him to figure out what “some guy named Milken”— referring to junk bond pioneer Michael Milken — was doing with high-yield bonds.

“It set my career on a certain path,” Marks said. “Almost everything that’s been interesting has gone through high-yield bonds.”

After stints at Citicorp and The TCW Group, Marks founded Oaktree Capital in 1995. The firm specializes in high-yield bonds, convertible securities and distressed debt, among other investments, and held nearly $97 billion in assets under management at the end 2015.

The firm seeks superior investment performance for its clients, of course, but declares superior performance with less than commensurate risk to be among its founding philosophies.

Marks said Oaktree built its business not by focusing on hitting winners, but on not hitting losers.

Given what he described as a world that was “more uncertain than at any other time in my life,” Marks described his current philosophy as “move forward but with caution.”

Hewing to his bias toward risk minimization, Marks said that, while he was not convinced there was currently a “great opportunity” he was currently missing out on given “an uncertain world and full asset price,” he did have to worry about losing money.

The effective investor always seeks to take positions that balanced “offense” and “defense” in a portfolio, with defensive positions guarding against the risk of losing money and offensive positions lessening the risk of missed opportunity, Marks said.

Marks also noted the difficulty, if not the impossibility, in attempting to accurately time a market, particularly an equity market that seemed to wildly fluctuate based on vague sentiment.

Through Marks’ keynote, Darden students received what may be described as a philosophical operating framework as opposed to answers to the current thorny investment environment.

“Risk means more things can happen than will happen,” Marks said. “The future is a range of possibilities. It cannot be known.”