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For Howard Marks, Investing Is Like a Game

According to the Oaktree chief, hidden information, skill, and luck affect one’s gameplay — and investment returns.

Investors can take apply lessons from games like backgammon and poker to their day jobs, according to Oaktree Capital Management’s Howard Marks.

Marks — who has enjoyed pursuits like Old Maid and gin rummy since childhood — shared those lessons in his latest memo, published Monday.  

According to Marks, three factors can help win games and increase investment returns: hidden information, skill, and luck. 

“Investing is a game of skill – meaning inferior players can’t expect to be above average winners in the long run,” he wrote in the memo. “But it also includes elements of chance – meaning skill won’t win out every time.” 

Some games, like chess, simply require skill, Marks argued. There is no hidden information, as players can see every possible move on the board. And there is no luck of the draw. Meanwhile, roulette relies solely on luck.  

The games where all three factor in – such as Blackjack and poker – are the ones that are most apt comparisons to active investing involving public companies, according to Marks. 

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While the Securities and Exchange Commission compels companies to provide investors with all relevant information, the time delay related to quarterly earnings ensures that there almost always is hidden intel, the memo asserted.  

“Random, unpredictable, often-exogenous events” affect publicly-traded companies on a regular basis, making luck a factor when it comes to investing, according to Marks.  

Skill allows investors to “better assess revenue and profit potential, where we stand in the cycle, the fairness of an asset’s price and the margin of safety it affords.” According to Marks, superior investors get these things correct more frequently than their lesser peers.  

“The presence of luck doesn’t necessarily preclude a role for skill,” Marks wrote. “In fact, making intelligent decisions when future events are uncertain is one of the greatest forms of skill.” 

According to Marks, skill is most important in less efficient markets, where there is a greater chance for alpha. But in a highly efficient space, tracking the index makes much more sense, as it’s not worth paying someone who is unable to use their skill to achieve higher returns, according to Marks.

Whether in card games or in investing, the goal is not only figuring out who the favorite is, Marks wrote. Instead, skillful gameplay and investing requires determining whether the odds of winning or achieving high returns are fair.  

“The goal is to find situations where the odds are generous to one side or the other, whether favorite or underdog,” according to Marks. “In other words, a mispricing.”

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