Howard Marks, Chairman of Oaktree Capital Management, a renowned investor with over fifty years of industry experience, expressed the importance of taking an open-minded investing approach. Marks’s keynote presentation at the Ben Graham Centre for Value Investing conference focused on the cornerstones for finding value in an evolving age of information and innovation. Here is a look at many of the key points from his presentation “Value Investing: A New Look”:
What are the essential principles of a value investor?
“The understanding of securities as stakes in a business. The focus on true worth as opposed to price. The use of fundamentals to calculate intrinsic value. The recognition that attractive investments come when there is a wide divergence between the price at which something is offered and the fundamental worth you’ve determined. And the emotional discipline to act when such opportunities are presented and not otherwise.”
Cornerstone principles of finding value
“’Value companies are generally thought to be marked by a high degree of predictability, limited uncertainty and a narrow range of possible outcomes. Usually, the businesses are seen as having strong defensive qualities; that’s why you don’t have to speculate too much about whether they’ll still be in business, or still be as profitable, in a couple of years. And low valuation relative to fundamentals. Low valuations is a cornerstone of value investing today.”
In the age of available information where does investing superiority come from?
“It just doesn’t make any sense in this new environment to think it’s possible to get an investing edge on the basis of readily available, current quantitative information -- everyone else has it, too….Thus I believe we have to look further. Investment superiority has to come from either a better understanding of the significance of current qualitative factors - the things that everybody doesn’t see the same – or a better understanding of the likelihood of success in the future.”
Avoid simple value or growth assumptions
“The fact that a company is expected to grow rapidly doesn't mean it's unpredictable, and the fact that another has a history of steady growth doesn't mean it can't run into trouble and deviate from predictions. Not all companies that are expected to grow rapidly will do so, but it's very hard to fully appreciate and fully value the ones that will.”
Putting a value on open-mindedness
“What I’m saying is that open-mindedness is something we should strive for. There shouldn’t be a big distinction between value and growth, certainly not as wide a gulf as there is today. That without attaining real knowledge of the investment and fully understanding the positive case, it’s impossible to justify the dismissiveness that many of us exhibit in the face of innovation. And stocks should not be automatically excluded just because they’re from tech companies or rapidly growing companies, or because they carry above average valuations.”
Coming to grips with cryptocurrencies
“I came out very negative in 2017, before I knew much about them. The important story about cryptocurrencies is not a value investing story. There’s no intrinsic value, no cash flow generation. Thus, you can’t say what crypto is intrinsically worth. Rather it's a supply/demand story. There could be rising demand for coins because of what you can do with them, even if they don’t have cash flow properties. And the supply is limited by the software. So, while I’m not positive on crypto coins, I now view my past negativism as kneejerk skepticism and thus premature.… I’m not making pronouncements on the subject at this time, but I did get smarter over the past four years.”
