Howard Marks is the co-founder of Oaktree Capital Management, which is the largest investor in distressed securities worldwide. Marks is admired in the investment community for his 'memos', which highlight his investment strategies and insights into the economy and are posted publicly on Oaktree's website. In this investor insight, we share his 2021 talk on value investing at Ben Graham Centre (https://bit.ly/35t9BaL).
The value lies in cash generation
Can you value a diamond necklace? As per Marks, you can't value it but only price it. He says, "Stocks, bonds, buildings and companies have cash flow-generating capabilities and can be valued intrinsically but paintings, oil, diamonds and art do not have intrinsic value because they don't produce cash flow." So remember, next time when someone says the value of some painting is good, it is not the value but the pricing.
Finding an investment edge
In today's connected world, it is very difficult for an investor to have any information edge and thus, Marks recommends, "In this environment, we have to look further ahead and that investment superiority has to come from either a better understanding of the significance of the current qualitative factors or a better understanding of the likelihood of success in the future." Intangible assets, workforce knowledge, technological disruptions and other qualitative factors have become important.
Rapid technological changes are fast diluting competitive advantages, also known as a moat of companies. Marks remarks, "The moats as we say have evaporated and many businesses have fallen prey to tech-savvy newcomers." The newspaper business is a prime example of technological changes.
Something never changes
Bull markets tend to make even a lousy business appear as a great one. Marks contends, "Some things certainly haven't changed; one is the tendency of the bull markets to value all competitors as if they'll be successful." The current bull market in India is painting almost all chemical companies with the same paint, however, for investors, it's important to discern the good ones from the average ones.
High P/E doesn't mean rejection
As value investors, we have a filtering process, at least mentally, which automatically filters out companies having a high P/E. Marks advises otherwise, "If you see a company, a growth, technology or an innovative company with an absolutely high P/E ratio that in itself is not a reason for dismissing, maybe the potential of technology is as great as something."
Nothing as value vs growth
As investors, we have conditioned ourselves to belong to a certain camp. These camps range from value investors to growth investors and from small caps to large caps. However, Marks says, "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."
Lifelong learning, along with changing perspective, is what separates a good investor from a great one. Warren Buffett's investment in Apple (a tech company) bears testimony to that.