From the rise of junk bonds to the dot-com collapse to today’s economic crisis, Howard Marks has ridden the ups and downs of the financial markets. From the day he began his professional career in 1969, Marks has been deeply immersed in sophisticated financial instruments. As the high-yield bond manager for Citibank starting in the late 1970s, he was one of Michael Milken’s first customers. In 1985, he became chief investment officer of investment titan TCW Group Inc., based in downtown Los Angeles. And with several decades of experience under his belt, Marks set out on his own in 1995 and founded Oaktree Capital Management LLC with a handful of TCW executives. The firm, which now boasts a $55 billion investment portfolio, has become one of the elite investment firms in the Western United States. In building Oaktree into an investment powerhouse, Marks has amassed his own fortune. On the Business Journal’s annual list of the wealthiest Angelenos, Marks ranked No. 29 with an estimated net worth of $1.5 billion, though he acknowledges he’s taken a major hit as a result of the financial crisis. These days, the 62-year-old Marks is more interested in dispensing his wisdom on the markets than in actively managing portfolios. He oversees the direction of the firm, but spends a good deal of his time penning closely watched memos on the state of the financial industry. Marks recently met with the Business Journal in the firm’s downtown offices to discuss his life, career and the chaos in the markets.
Question: In the article “The Memo All the Investment World Should Read,” the Wall Street Journal said the financial community anticipates your memos as much as Warren Buffet’s annual shareholder letter. How did that make you feel?
Answer: It makes you raise your game. I’ve had a very favorable response and I want to keep that going, which means that I have to make them interesting and pithy. The nicest comments I get on the memos are that I make complex things clear. So I want to keep doing that.
Q: You recently sent out a memo called “The Long View” with your thoughts on the turmoil in the financial markets. What do you think was the cause?
A: If you have to single out one thing, (leverage) was probably the greatest part. There’s an old saying in Las Vegas that the more you bet, the more you win when you win. But they always leave out the part about the more you lose when you lose. That’s what leverage is. Leverage does not add value to an investment it doesn’t make it a better investment; it only magnifies the outcomes.
Q: And the long view?
A: These things never change. It will always be the case that when borrowed money is too easily available and people do not concern themselves with the downside, they will leverage their activities to levels where if something goes wrong they won’t survive. One of my favorite quotes in the world is from John Kenneth Galbraith. He says that one of the outstanding characteristics of financial markets is “the extreme brevity of the financial memory.”
Q: How is all of this impacting Oaktree?
A: Well, our clients have lost a bunch of money and we’re not happy when that happens. This constrains their activities, including their ability to invest with us. On the other hand, they generally lost far less with us than with others, and we’re very fortunate that our main investment areas, which are distressed debt and credit generally, are the areas which I think are perceived now as the areas where people should invest. So that’s a plus for us.
Q: Has this affected your wealth?
A: By far, my main asset is my ownership of Oaktree, which went down by 50 percent last year. So that’s my way of saying yes.
Q: The Business Journal estimated your wealth last year at $1.5 billion. Care to comment on exactly what that number should be?
A: I’d really rather not go into that.
Q: Fair enough. But do you at least live the billionaire lifestyle?
A: I don’t think so. I’ve been driving a Mercedes since 1977 and it’s not particularly flamboyant. And I don’t have a yacht.
Q: Do you travel much?
A: Oaktree is expanding significantly in Europe at this time, so my wife and I spend four months a year living in London overseeing the international expansion. Usually two months in the spring and two in the fall. It permits us to have a more diverse life. My favorite travel is in Europe.
Q: What does your wife do?
A: She’s very versatile. She wrote and published a children’s book. She’s an artist. She does portraits, primarily just for a hobby. Now she actually is writing magazine articles.
Q: Are you involved in philanthropic activities?
A: We are supporters of lots of things, but my main interest is the University of Pennsylvania. I’m a trustee; I’m chairman of the investment board; I’m a big supporter of scholarships and financial aid for college students. I have endowed some scholarships at Penn, but also at University of Chicago and Brown. I’m just an enormous believer in sharing opportunities. Providing an education to people who otherwise wouldn’t have it is the greatest thing you can do.
Q: Let’s talk about your career. As the high-yield, or junk, bond manager for Citibank you crossed paths with Michael Milken. What was that like?
A: Mike was the preeminent market maker and issuer as investment bank and I was just one of the customers. Milken among others, but he was obviously the leader popularized the notion that if a bond paid a high enough interest rate to cover its risk, it was perfectly prudent to invest in bonds even if they were risky. He started talking about that in the early ’70s, I think, and then it gained some momentum in the late ’70s. The liftoff of that movement in ’77 or so, maybe ’78, coincided with my being asked to run high-yield bond portfolios for Citibank. That was my big break.
Q: How significant was that for your career?
A: High-yield bonds became this, really, front-row seat on the financial developments of the last 30 years, including the buyout trend and so forth. So that was very significant. That assignment got me coming out here to visit Mike Milken and Drexel-Burnham that was responsible for my move out here because I decided Los Angeles would be a nicer place to live than New York.
Q: Were you friends with Milken?
A: Yeah, oh, yeah.
Q: What is he like?
A: He’s very interesting. He’s what I think you would call a polymath. He’s knowledgeable and interested in many, many areas. He has a very fertile mind and thinks about things that most people don’t.
Q: Why did you decide to stay in Los Angeles? Is there a benefit to being away from a financial center like New York?
A: The main reason that I stayed is because this is a great place to live. But we often theorize, especially at times of chaos, that it’s a help to be outside New York because you can see the real outline of things better from the outside than from the inside. New York is so overwhelmingly an investment community that I think it’s easier to have a broad perspective if you’re observing it rather than in the middle of it.
Q: When did you first know you wanted to go into finance?
A: I always thought I’d be an accountant. My dad was an accountant. And I was comfortable with arithmetic and numbers. Accounting, with the symmetry of debits and credits, made a lot of sense to me. I went off to Wharton as an undergraduate; however, there I was exposed to finance and I switched my concentration to finance.
Q: You later got your MBA at the University of Chicago, which spearheaded the movement of free market libertarianism. But you have been known to donate to the Democratic Party. How do you reconcile that?
A: Well, I’m not a free market libertarian. I believe somewhat in markets, but not unregulated, and I’m not opposed to having some kind of societal organization. I don’t believe that untrammeled free markets hold the answer to everything in life.
Q: You, along with other high-profile L.A. figures such as Eli Broad, recently donated to the presidential inauguration. Did you attend?
A: Yes.
Q: What was it like? Care to discuss it?
A: I’d rather not. Politics is so personal.
Q: You said you intended to follow in your father’s footsteps, but it just didn’t work out. Do you think your kids will follow in your footsteps?
A: I’m sure my daughter is not. She’s a member of the art world. I’m sure that my son is. He’s going to start a job in investment management when he graduates this summer.
Q: What does it take to excel in investment management?
A: You obviously need to be to some degree numerically facile. You have to have a certain perceptiveness and an ability to look at a picture and see more than the average person sees. It’s so easy to see that the average person will do average. And if a client wanted to do average, they can put their money in an index fund. You just can’t swallow the same story that the average investor swallows and expect to be above average.
Q: Are you involved on the ground floor at your firm these days or do you have a different role?
A: I don’t actively manage any portfolios anymore. I run the firm and hopefully lead the professionals and write what I do in the memos, which hopefully keeps everybody in the firm on the same page. I think that I have enough experience and big-picture vision to see when the crowd is wrong. Buffett says, “The less prudence with which others
conduct their affairs, the greater prudence with which we should conduct our own affairs.” That’s being a contrarian. That’s what I believe in and I think that I have enough distance and experience to be able to do that.
Q: What is the best advice you have ever received?
A: I would not say advice, because I cannot remember sitting down on anybody’s knee and them saying, “Now, Howard, you must do this,” but I think I learned important lessons. You learn through experience and I have a lot of experience. I’ve seen markets go up and down for 40 years. But the other thing is you read things and certain things just resonate.
Q: Like what?
A: For one example, there’s an article by Charlie Ellis that I think was called “Winning the Loser’s Game.” What I took from that article was the way to succeed in investing just like the way to succeed at being a B-level tennis player, which I am is to not make mistakes. The champs win by hitting winners; the B player at a country club wins by not hitting losers. So that resonated with me and that’s one of the things we do. Oaktree’s motto is that if we avoid the losers, the winners take care of themselves.
Q: What is your take on the Bernard Madoff scandal?
A: I never heard of him until he was exposed. And the interesting thing is that almost everybody in the industry never heard of him. He was not part of the industry; he was not part of the investment mainstream. He was a little cottage industry that practiced at the country club level.
Q: Cottage industry? $50 billion was allegedly lost.
A: A good fraud like Madoff is probably an inescapable part of the favorable trends taken to the extreme. You go through periods where people start thinking about success and stop thinking about the risk of failure. They become less skeptical and cynical. They tend to accept the dream when it is spun for them and they stop insisting on transparency.
Howard Marks
Title: Co-founder and Chairman
Company: Oaktree Capital Management LLC
Born: 1946; New York
Education: Bachelor’s degree in finance, Wharton School of the University of
Pennsylvania; M.B.A. in accounting, University of Chicago
Career Turning Point: Being asked to manage high-yield bonds for Citibank in 1978
Most Influential Person: Citibank executive Peter Vermilye, who assigned Marks to the high-yield bond fund
Personal: Lives in Brentwood with his wife, has two older children
Hobbies: Tennis, traveling
