Sunday, April 6, 2014

Knowledge@Wharton Visits With Oaktree's Howard Marks

For the longest time we were one of the few blogs that seemed aware of the little gem of a publication coming out of UPenn and the Wharton School and I found it hard to believe no one else was using this resource.

They were on top of both the trendy, for example our March '07 link "It's Not Easy Going Green..." and the crucial e.g. December of that year's "The Subprime Drama Continues, but for How Long?".

They were insightful (Apr. 2008's "Gaming the System: Are Hedge Fund Managers Talented, or Just Good at Fooling Investors?") and instructive (that same month's "'Bear Raid' Stock Manipulation: How and When It Works, and Who Benefits") and I'd read every post while thinking of them as the piano player you hear in some hotel bar at 2 a.m.-"Hey, you're really good, what are you doing playing here?"

From Knowledge@Wharton:

Investor Howard Marks on Luck, Risks and the Job that Got Away
In 1969, Howard Marks — armed with degrees from Wharton and the University of Chicago’s Booth School of Business – was still unsure what career he wanted to pursue. He interviewed for “literally seven different jobs in seven different fields,” including consulting, accounting, treasury management and investment banking, among others. There was one job, Marks said, that he wanted more than all the others. He did not get it.

“Thirty years later, I happened to correspond with the guy from that firm who was the recruiter back in 1969,” Marks recalled. The recruiter remembered him and offered to reveal why he was not hired. “He told me, ‘The partner in charge came in that morning hung over and made the wrong call.’” Then Marks delivered the punch line: “If it hadn’t been for that bit of bad luck, I could have spent 30 years at Lehman Brothers,” the defunct banking giant whose catastrophic 2008 collapse marked the beginning of the subprime mortgage crisis.

Marks clearly felt much luckier to have become co-founder and chairman of Oaktree Capital Management, L.P. He founded Oaktree in 1995, and according to Forbes’ profile of Marks in “The World’s Billionaires,” the firm — which went public in April 2012 — has $76 billion in assets under management, including money from 75 of the 100 largest U.S. pension plans.

Marks’ speech inaugurated Wharton’s Howard Marks Investor Series, slated to bring high-profile investors to the school to share real-world investment perspectives with graduate and undergraduate students.

Why the ‘Nifty 50s’ Weren’t So Nifty
According to Bloomberg, Oaktree holds the distinction of being the world’s largest distressed-debt investor, an area that the firm entered in 1988. Distressed debt, or distressed securities, is the debt on companies that are bankrupt or almost certain to become bankrupt. Marks described how he came to this type of investing as a reaction to the environment of his early career.

When Marks joined Citibank in 1969, the company — along with other big New York banks like Chase and JP Morgan — practiced ‘Nifty 50′ investing, he said. They emphasized buying the stocks of the 50 highest-quality, fastest-growing companies in America, which at the time included Xerox, IBM, Kodak, Polaroid, Merck, Textron and Coca-Cola. “The official dictum was if you were buying the stock of a good enough company, it didn’t matter how high a price you paid.” But it did matter, Marks noted, and people were paying about five times what the stocks were worth. “By 1973, the people who held those stocks had lost 90% of their money.” The Nifty 50 stocks eventually became an often-cited example of unrealistic investor expectations.

“Then in September of 1978, Citibank asked me, ‘There’s some guy named Milken or something in California. He deals in high-yield bonds. Can you figure out what that means?’” Marks recalled. Meeting with controversial financier Michael Milken proved a pivotal moment for Marks. He started Citibank’s successful portfolio of high-yield bonds in 1978 and stayed until 1985.

What his career experience so far had told him was that with its Nifty 50 policy, Citibank had invested in “the best companies in America and lost a lot of money.” Then it invested in “the worst companies in America and made a lot of money,” Marks noted, adding that “it shouldn’t take you too long to figure out that success in investing is not a function of what you buy. It’s a function of what you pay.” ...MUCH MORE
Nowadays though, with a blog as highly trafficked as The Reformed Broker enjoying their stuff, I think they're past any need for our tiny promotional efforts.