Guru to the Stars
Howard Marks has made a killing on distressed debt. So, what does he think of the bond bubble? It's in only the "fifth inning."
Howard Marks is a study in contrasts. On the one hand, he has the undeniable mien of an academic, with his clear horn-rim glasses, conservative dress, and close-cropped, spiked hairstyle. His manner during a long interview with Barron's is both diffident and didactic, though a certain intensity crackles just beneath the surface.
Yet, over his four decades on Wall Street, the trim 67-year-old co-founder and chairman of Oaktree Capital Management has acquired true star power -- partly because the size of his firm ($77 billion in investments), partly because of his returns (solidly into the double digits), and partly because of the hundreds of long memos he sends to clients and others; they're larded with astute commentary on financial markets and perceptive disquisitions on investor psychology.
One of his biggest fans is Warren Buffett, who encouraged him to gather his memos into a book, The Most Important Thing. Buffett's blurb says it all: "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something."
Other admirers include Christopher Davis of Davis Funds, Seth Klarman of Baupost Group, and Joel Greenblatt of Gotham Capital -- all of whom offer commentary throughout a new, annotated version of the book, The Most Important Thing Illuminated, published in January. Though they quibble with him at times, this trio of giants mostly marvel at Marks' observations. "I love this thought," Greenblatt exclaims in the middle of a chapter about contrarianism. "This is extremely simple and extremely insightful," adds Davis. It's almost as if Marks is their guru.
MARKS FOCUSES on the rough-and-tumble world of distressed corporate debt, and his memos provide a window into his real-time thinking during some of the most convulsive periods in financial history. By late 2007, for example, Marks became convinced that the unraveling of the subprime-mortgage sector was just a symptom of much greater malaise in U.S. credit markets. He pointed to private-equity buyouts of companies done at absurdly high prices and bloated levels of debt. Those deals would make sense "only if nothing untoward happened," he wrote. And that, he believed, was anything but a safe assumption.
In December of 2007 -- less than a year before the crisis hit -- he warned that banks were lending money promiscuously. Debt was being issued in veritable buckets with virtually none of the standard protections. And various "fairy tales," he observed, such as the claim that investment risk was a thing of the past, had wide currency. Many believed that central banks, through adroit management, had tamed the normal economic cycle.
The foreboding evinced in the memos was more than literary flourish. In 2007 and early 2008, Oaktree prepared for what it saw as an impending apocalypse by raising the largest distressed-debt fund ever, totaling $11 billion. Then, in the three months after Lehman Brothers collapsed in September 2008, Oaktree pounced. It spent more than $6 billion scooping up senior secured debt in overleveraged companies like the utility TXU, auto-parts maker Delphi and casino concern Harrah's, generally around 50 cents on the dollar....MUCH MORE
