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Howard Marks’s Latest Warning
“At some point, the camps of value and growth developed nearly the same fervent adherence as rival political factions,” the Oaktree co-founder said in his memo to clients.
Oaktree Capital Management co-founder Howard Marks sees a “false dichotomy” in the value-versus-growth debate, likening the two investment approaches to rival political factions.
“There are arguments for a resurgence in value investing and arguments for its permanent impairment,” Marks said in a new memo to Oaktree clients. “But I think this debate gives rise to a false and unhelpful narrative.”
In their hunt for bargains, value investors have a bias toward mean reversion, according to the memo. They should keep an open mind, Marks suggested, saying their search for value in low-priced securities should be one of many important tools as opposed to “a hammer constantly in search of a nail.”
Marks drew on conversations held during the pandemic with his son Andrew, a professional investor who focuses on growth companies. The Oaktree co-founder noted how the investing world has evolved from when he started working in 1969 — during the “Nifty Fifty bubble” that crashed around him — when information was hard to gather in what was then a “cottage industry.”
“The focus on value versus growth doesn’t serve investors well in the fast-changing world in which we live,” Marks wrote in the memo. “I don’t believe the famous value investors who so influenced the field intended for there to be such a sharp delineation between value investing, with its focus on the present day, low price and predictability, and growth investing, with its emphasis on rapidly growing companies, even when selling at high valuations.”
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Broad observations about historic valuations are insufficient to form market opinions today, according to the memo.
Marks warned that “at some point, the camps of value and growth developed nearly the same fervent adherence as rival political factions.” He said he was inclined to take a value approach as a result of “natural conservatism,” having grown up with parents who experienced the Great Depression. While his “bargain hunter” persona has served him well in the field of credit, Marks said his son has a “considerably different mindset.”
The Oaktree co-founder handles the conservative investing for the Marks family money, and his son Andrew — who helps manage venture capital firm TQ Investors — steers the “‘upside-oriented investments’ with great results,” according to the memo.
While Marks said he was offering no opinion on growth stocks, he wrote that investors should consider “the fundamentals underpinning the small number of companies that currently drive a huge percentage of the market, instead of top-down conclusions on purely historical valuation comparisons.”
Marks said it doesn’t make sense for value investors to bar companies because they are “high-tech” and widely believed to have “unusually bright futures.” The goal, he said, should be “to figure out what all kinds of things are worth and buy them when they’re available for a lot less.”
Again, Marks pointed to discussions with his son.
“Andrew insists that when you’re talking about today’s great growth companies, the approach of ‘buy in cheap, set a target price, sell as it rises, and exit fully when it reaches the target’ is dead wrong,” Marks said. “Instead, as he says, you have to talk yourself out of the selling.”
The rapid pace of innovation and technical adoption today needs to be factored into investing decisions, according to the memo. “The basic equations of finance were not built to handle high-double-digit growth as far as the eye can see, making the valuation of rapid growers a complicated matter.”
GMO’s Ben Inker told Institutional Investor last month that the firm, co-founded by legendary value investor Jeremy Grantham, had to take a careful look at the profitability of fast-growing companies before launching the GMO Equity Dislocation Strategy. As the long-short strategy is designed to profit from the growth bubble the firm sees in the stock market, Inker said GMO needed to understand which companies may be only “mildly” overvalued and therefore not bet against.
“Skepticism keeps investors safe and helps them avoid things that are ‘too good to be true,” Marks said. “But I also think skepticism can lead to knee-jerk dismissiveness.”
Marks considered the rise of stock indexes including the S&P 500, which has become more tech-heavy over the years. “As Andrew repeatedly reminds me, it’s hard to make a convincing case that today’s market is too high if you can’t explain why its tech leaders are overvalued.”
The Oaktree co-founder said that Warren Buffett, “the patron saint of value investors,” was convinced by his partner Charlie Munger to broaden his definition of value and shift his focus on “great businesses at fair prices.” That has led Buffett to invest in growing companies such as Coca-Cola, GEICO and the Washington Post, he told Oaktree clients.
“Intriguingly, Buffett allows that his recent investment in Apple has been one of his most successful,” said Marks, noting in the memo that value and growth investing are not mutually exclusive.