Howard Marks on Patience

The tariff announcement of April 2025 produced immediate pressure on leveraged positions and on assets whose value depended on the prior globalization regime. Some investors were forced to sell at exactly the moment when patient capital could buy at dislocations. This is the recurring pattern of crises: forced sellers provide liquidity to patient buyers, and the buyers who have the capital and the conviction to act during the panic capture returns that are unavailable in any other environment. The patience required to act in such moments is harder than it sounds. To deploy capital aggressively when the news is worst and the prices are falling requires a tolerance for being wrong in the short run and a confidence in the underlying mathematics of the assets being purchased. The mathematics of distressed credit — buying senior secured claims at deep discounts to par, with coupons that recover cost basis quickly — typically work even when the macro path is uncertain. What I have learned across three Nobody Knows memos is that the most important preparation for crisis is structural. The capital must be raised and committed before the crisis, the team must be in place, the underwriting muscles must be exercised, and the mandate must be clear. When the crisis arrives, there is no time to assemble the apparatus; there is only time to deploy it. The firms that have done the preparation in advance are the ones able to act, and the firms that act are the ones that capture the returns.

There’s no such thing as foreknowledge here, just complexity and uncertainty, and we must accept that as true. This means that if we insist on achieving certainty or even confidence as a precondition for action, we’ll be frozen into inaction. Or, I dare say, if we conclude we’ve reached decisions with certainty or confidence, we’ll probably be mistaken. We must make our decisions in the absence of those things. But we also have to bear in mind that deciding not to act isn’t the opposite of acting; it’s an act in itself. The decision to not act – to leave a portfolio unchanged – should be scrutinized as critically as a decision to make changes. The old saws that are the refuge of terrified investors – “we’re not going to try to catch a falling knife” and “we should wait for the dust to settle and the uncertainty to be resolved” – cannot in themselves be allowed to determine our behavior.market

Under easy-money conditions, long-dated bonds may appear particularly desirable; since the yield curve usually slopes upward, they typically offer higher yields. It should be noted, however, that long bonds are more rate-sensitive than short ones, meaning their prices change more in response to a given change in interest rates. As a result, the higher yields on more- volatile long bonds can attract capital in times of low rates, just when the odds usually favor a subsequent increase in yields (and thus a rapid decline in long bond prices). It seems to me that there’s often a similar movement of capital toward “long stocks” when interest rates are low. By this I mean the stocks of companies believed to have many years of rapid growth ahead. For these companies, more of the projected cash flows are, by definition, in the distant future. Yet, investors may become more attracted to these stocks when rates are low because they want the higher returns that such rapid growth would bring, and there’s less opportunity cost associated with the long wait for the relevant cash flows. (These sound like Hayek’s “projects with more distant payoffs.” See the quote on the previous page.) Just as the prices of longer bonds fluctuate more in response to a given change in interest rates, so-called “growth stocks” usually rise more than others in times of easy money and fall more when money dries up. The former was certainly the case in late 2020 and in 2021 . . . and the latter in 2022.

Second-level thinking in a regime-shifted environment is uncomfortable because it requires questioning what worked. Many investment processes were optimized for the prior regime — the spread compression trade, the multiple-expansion trade, the duration trade, the illiquidity premium trade. Each of these worked not because of skill but because the macro wind was at the back of anyone who applied them. Now that the wind has shifted, processes need to be re-examined. Patience is the virtue most needed at moments like this. The temptation is to act decisively — to declare the bottom is in or that the bear market has only just begun. Both impulses are usually wrong. The prudent posture is to deploy gradually, retain optionality, and resist the urge to commit capital in size until prices reflect the new regime's risk premium. I am often asked whether I think we are in a new bull or bear market. My honest answer is that I do not know, and that the question is less important than the question of whether current prices compensate for the risks that are now visible. If they do, deploy gradually; if they do not, wait. Sea Change is not a forecast of direction; it is a framework for asking better questions.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: So, one key is to avoid making macro calls too often. I wouldn’t want to try to make a living predicting the outcome of coin tosses or figuring out whether the favorite will cover the point spread in every football game over the course of a season. You have to pick your spots – as Warren Buffett puts it, wait for a fat pitch. Most of the time, you have nothing to lose by abstaining from trying to adroitly get in and out of the markets: you merely participate in their long-term trends, and those have been very favorable. My readers know I don’t think consistently profitable market calls can be manufactured out of macroeconomic forecasts. Nor do I believe you can beat the market simply by analyzing company reports. On both subjects, as Andrew puts it (see my memo Something of Value, January 2021), “readily available quantitative data regarding the past and present” can’t hold the secret to superior performance since it’s available to everyone. When markets are at extreme highs or lows, the essential requirement for achieving a superior view of their future performance lies in understanding what’s responsible for the current conditions. Everyone can study economics, finance, and accounting and learn how the markets are supposed to work. But superior investment results come from exploiting the differences between how things are supposed to work and how they actually do work in the real world.

Patience as an investment virtue is widely praised and rarely practiced. The reason it is rarely practiced is that patience requires accepting underperformance for periods that feel like eternities. The institutional investor who is patient through a multi-quarter period of underperformance faces career risk; the individual investor who is patient through a multi-year period of underperformance faces self-doubt. Both impulses push toward action when inaction would serve better. The contrarian case for patience is that the dislocations which produce the best returns are typically resolved over years, not weeks. The investor who buys a distressed credit at sixty cents on the dollar may wait two or three years for the restructuring to play out. During that period the position will appear to do nothing, and the temptation to sell into a slightly better bid will be constant. The investor who sells captures a small mark-to-market gain; the investor who holds captures the recovery. What I have observed across cycles is that the patient investor's outperformance comes in lumps. There are long stretches of little or no apparent progress, followed by short stretches in which the prior patience is vindicated all at once. The return stream is not smooth; the conviction that the work will pay off is what carries the investor through the dry stretches.

In fact, just as continued buying of appreciated assets can eventually turn a bull market into a bubble, widespread selling of things that are down has the potential to turn market declines into crashes. Bubbles and crashes do occur, proving that investors contribute to excesses in both directions. In a movie that plays in my head, the typical investor buys something at $100. If it goes to $120, he says, “I think I’m onto something – I should add,” and if it reaches $150, he says, “Now I’m highly confident – I’m going to double up.” On the other hand, if it falls to $90, he says, “I’m going to think about increasing my position to reduce my average cost,” but at $75, he concludes he should reconfirm his thesis before averaging down further. At $50, he says, “I’d better wait for the dust to settle before buying more.” And at $20 he says, “It feels like it’s going to zero; get me out!” Just like those who are afraid of surrendering gains, many investors worry about letting losses compound. They might fear their clients will say (or they’ll say to themselves), “What kind of a lame- brain continues to hold a security after it’s gone from $100 to $50? Everyone knows a decline like that can foreshadow further declines. And look – it happened.” Do investors really make behavioral errors such as those I’ve described? There’s plenty of anecdotal evidence. For example, studies have shown that the average mutual fund investor performs worse than the average mutual fund.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: famous for saying he likes hamburgers, and when hamburgers go on sale, he eats more hamburgers. My roughly quarterly memos pale when compared to the output of Doug Kass, who writes at least daily. His March 11 note had a terrific title: “When the Time Comes to Buy, You Won’t Want To.” The best time to buy generally comes when nobody else will; other people’s unwillingness to buy tends to make securities cheap. But the factors that render others averse to buying will affect you, too. The contrarian may push through those feelings and buy anyway, even though it’s not easy. As I put it, “All great investments begin in discomfort.” One thing we know is that there’s great discomfort today. Latest Update – to clients March 19, on website March 24 This memo was issued with the S&P 500 down 29% and within a few days of the low (down 34%) that would be reached on March 23. The panic we were observing, and the great purchases we made that week, convinced me to take a firmer tone in arguing for buying. I took the position that it would be a mistake to wait for an ascertainable bottom before doing so. What do we know? Not much other than the fact that asset prices are well down, asset holders’ ability to hold coolly is evaporating, and motivated selling is picking up. I’ll sum up my views simply – since there’s nothing sophisticated to say: • “The bottom” is the day before the recovery begins.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Cautious positioning in recent years has served its purpose. Investors who favored defense over offense have experienced smaller losses this year, have the satisfaction that comes from relative outperformance, and are able to spend more of their time looking for bargains than dealing with legacy problems. Thus, I feel it’s a time when previously cautious investors can reduce their overemphasis on defense and begin to move toward a more neutral position or even toward offense (depending on how sure they want to be of grasping early opportunities). I’m not saying the outlook is positive. I’m saying conditions have changed such that caution is no longer as imperative. With part of the crisis-related losses having already taken place, I’m somewhat less worried about losing money and somewhat more interested in making sure our clients participate in gains. My 2018 book, Mastering the Market Cycle, carries the subtitle Getting the Odds on Your Side. In that vein, I now feel the odds are more in investors’ favor or, at a minimum, somewhat less against them. Portfolios should be calibrated accordingly. Looking for the Bottom Before I close, just a word on market bottoms. Some of the most interesting questions in investing are especially appropriate today: “Since you expect more bad news and feel the markets may fall further, isn’t it premature to do any buying? Shouldn’t you wait for the bottom?

” To me, the answer clearly is “no.” As mentioned earlier, we never know when we’re at the bottom. A bottom can only be recognized in retrospect: it was the day before the market started to go up. By definition, we can’t know today whether it’s been reached, since that’s a function of what will happen tomorrow. Thus, “I’m going to wait for the bottom” is an irrational statement. If you want, you might choose to say, “I’m going to wait until the bottom has been passed and the market has started upward.” That’s more rational. However, number one, you’re saying you’re willing to miss the bottom. And number two, one of the reasons for a market to start to rise is that the sellers’ sense of urgency has abated, and along with it the selling pressure. That, in turn, means (a) the supply for sale shrinks and (b) the buyers’ very buying forces the market upward, as it’s now they who are highly motivated. These are the things that make markets rise. So if investors want to buy, they should buy on the way down. That’s when the sellers are feeling the most urgency and the buyers’ buying won’t arrest the downward cascade of security prices. Back in 2008, on the heels of Lehman Brothers’ September 15 bankruptcy filing, Bruce Karsh and his team embarked on an unprecedented program to buy the debt of companies in distress. They invested an average of roughly $450 million per week over the last 15 weeks of the year, for a total of nearly $7 billion.

But since most investors haven’t reduced their required or targeted returns, they have to engage in elevated risk in order to pursue them. In my view, the low interest rates represent the dominant characteristic of the current financial environment, creating the dominant consideration for investors: the lowest prospective returns in history (for the reasons described on pages 4-6). Thus I’ve dusted off a presentation I’ve been giving in recent years called “Investing in a Low-Return World.” At its end, after laying out much of the above, I conclude by enumerating the strategic alternatives for investors: • Invest as you always have and expect your historic returns. Actually, this one’s a red herring. The things you used to own are now priced to provide much lower returns. • Invest as you always have and settle for today’s low returns. This one’s realistic, although not that exciting a prospect. • Reduce risk in deference to the high level of uncertainty and accept even-lower returns. That makes sense, but then your returns will be lower still. • Go to cash at a near-zero return and wait for a better environment. I’d argue against this one. Going to cash is extreme and certainly not called for now. And you’d have a return of roughly zero while you wait for the correction. Most institutions can’t do that. • Increase risk in pursuit of higher returns. This one is “supposed” to work, but it’s no sure thing, especially when so many investors are trying the same thing.

The relatively muted reaction of financial markets suggests that Wall Street viewed the move [i.e., no change in rates on June 19 but foreshadowing likely cuts later in the year] as appropriately balanced. The stock market was up, but only a little, which helps reduce the sense the Fed is just acting to prop up stocks, while bond yields fell further as markets became more confident that rate cuts were on the way. So in terms of the narrow goal of getting through Wednesday without either markets falling apart or the Fed’s credibility being shredded, it was a good day for Mr. Powell. But the flip side of that is that some lingering questions have been put off to another day. Deciding to wait for more evidence is a decision, too. Waiting might buy the Fed more time to make sure it’s getting the decision right, but at the cost of losing the opportunity to show it is aggressive and willing to get ahead of a potentially serious problem. Put differently, if you wait until there is completely compelling evidence of an economic shift before doing something about it, you’re probably too late. On the other hand, if the Fed later judges that the recent bad news really was just a temporary blip and that rate cuts were actually not needed, they will face the reality of rate cuts even more baked into the prices of Treasury bonds. It would be a doozy of an adjustment to bring them into alignment. If the sharp drop in rates that has © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: In the low-return world I described in the memo, the options are limited: 1. Invest as you always have and expect your historic returns. 2. Invest as you always have and settle for today’s low returns. 3. Reduce risk to prepare for a correction and accept still-lower returns. 4. Go to cash at a near-zero return and wait for a better environment. 5. Increase risk in pursuit of higher returns. 6. Put more into special niches and special investment managers. It would be sheer folly to expect to earn traditional returns today from investing like you’ve done traditionally (#1). With the risk-free rate of interest near zero and the returns on all other investments scaled based on that, I dare say few if any asset classes will return in the next few years what they’ve delivered historically. Thus one of the sensible courses of action is to invest as you did in the past but accept that returns will be lower. Sensible, but not highly satisfactory. No one wants to make less than they used to, and the return needs of institutions such as pension funds and endowments are little changed. Thus #2 is difficult. If you believe what I said in the memo about the presence of risk today, you might want to opt for #3. In the future people may demand higher prospective returns or increased prospective risk compensation, and the way investments would provide them would be through a correction that lowers their prices.

ETF-like vehicles, sometimes known as “tracking shares,” began to appear in the early 1990s, and they proliferated significantly after 2000. According to Wikipedia, “As of January 2014, there were over 1,500 ETFs traded in the U.S., with over $1.7 trillion in assets.” (Several years ago I cited Wikipedia in a memo, and Oaktree co-founder Richard Masson – a stickler for correctness – told me in no uncertain terms that it wasn’t a respectable source. I think things have changed enough since then, Richard: I’m citing it!) ETF’s have become popular because they’re generally believed to be “better than mutual funds,” in that they’re traded all day. Thus an ETF investor can get in or out anytime during trading hours, whereas with mutual funds he has to wait for a pricing at the close of business. “If you’re considering investing,” the pitch goes, “why do so through a vehicle that can require you to wait hours to cash out?” But do the investors in ETFs wonder about the source of their liquidity? Here’s what Wikipedia has to say about the liquidity of ETFs: An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. . . . Consider the possibility that many of the holders of an ETF become highly motivated to either buy or sell.

The bonds will be paid off at par upon maturity, and if the other assumptions above are met the 5% return will be achieved. While we believe spreads are attractive given the risks we see in our portfolios, it is true that there is little room for price upside, making the reward for risk taking limited. (This is in essence what Howard concluded in his most recent memo, “Ditto.”) In this type of environment, superior returns are more likely to be earned through minimizing mistakes than through stretching for yield. Rather than behaving aggressively, the search for return should involve risk control, caution, discipline and selectivity. Of course, this is what we emphasize in our portfolios. Considering these factors, should investors sell their high yield bonds and wait for a better time to invest? We don’t think so, as market timing is next to impossible to do right and costly to attempt in less liquid markets like high yield bonds. February 21, 2013© OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

As a result of holding a highly idiosyncratic portfolio, Penn experienced performance that deviated – unfavorably – from that of its peers to an extent that became intolerable. This necessitated change. Do It Now? Upon starting in on the job, I was immediately confronted by one of the truly classic investment dilemmas: You take on the management of a portfolio, and you just know it’s structured wrong in principle. In Penn’s case, it was clearly unwise – probably in terms of optimizing risk and return, and certainly in terms of keeping up with peers, and thus expectations – to completely omit the things that had been excluded from Penn’s portfolio. I knew right away that Penn’s portfolio should include some exposure to growth, tech, buyouts and venture capital. But the reason their exclusion had become so painful is that they had done so well for a half-decade. So in principle you should own something, but its price is sky- high. Should you hold your nose and buy at what may be excessive prices? Or should you wait for a correction, at the risk of continuing to underperform if it goes higher (since we know how often things that are overpriced can continue upward)? Whenever I’m presented with this dilemma, I trot out a 1957 cartoon from The New Yorker Magazine that was reproduced in the Financial Analysts Journal in 1975. It’s my absolute favorite, and I’ve been waiting for an opportunity to share it with you: © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

When asset prices are high, there’s more risk to be aware of and less opportunity to worry about missing. On the other hand, when prices are low, it’s appropriate to worry less about the risk of loss and more about missing out on the opportunities created by those low prices. Third, what are the right investing attributes for today? Three years ago, at the depths of the post-Lehman crisis, you only needed two things to achieve big gains: money and the nerve to spend it. With prices so low, you didn’t need caution, prudence, conservatism, risk control, patience or selectivity. In fact, the more of those things you had, the more you were held back and the less money you made. In that crisis climate, “money and nerve” was enough. Does that mean money and nerve is always a surefire formula for success? Absolutely not. Think about 2005-07: money and nerve was a recipe for disaster. Then you needed caution, prudence, conservatism, risk control, patience and selectivity. Only if you had a good dose of those things might you avoid the full brunt of the financial crisis that lay ahead. The formula for success in investing changes, based largely on the conditions in the environment. What are the right attributes for today? Money and nerve, or risk control and selectivity? These three questions are interrelated and overlapping, and in sum they come down primarily to the choice between offense and defense.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved declines: 6.4% in 1977, 4.2% in 1981, and 2.8% in 1990. In order to have experienced a bear market, an investor had to have been in the industry by 1974, when the index lost 24.3%, but the vast majority of 1999’s investment professionals doubtless had less than the requisite 26 years of experience and thus had never seen stocks suffer a decline of real consequence.  Second, the human mind seems to be very good at suppressing unpleasant memories. This is unfortunate, because unpleasant experiences are the source of the most important lessons. When I was in army basic training, I was sure the memories would remain vivid and provide material for a great book. Two months later they had disappeared. After the fact, we may remember intellectually but not emotionally: that is, the facts but not their impact.  Finally, the important lessons of the past have to fight an uphill battle against human nature, and especially greed. Memories of crises tell us to apply prudence, patience, moderation and conservatism. But these things seem decidedly outdated when the market’s in a bull phase and risk bearing is paying off, and if practiced they appear to yield nothing but opportunity costs. Charlie Munger contributed a great quote to my recent book, from Demosthenes: “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.

At the depths of the markets in the fourth quarter of 2008, after Lehman Brothers’ bankruptcy filing and other events had unnerved the world, great assets were on sale at irrationally low prices. The result – as always in crashes – was that high prospective returns were available with low attendant risk. Just two ingredients were required in order to take advantage: capital and the nerve to invest it. Today some assets are fairly priced and others are high, but there are no bargains like those of 2008. Capital and nerve can’t hold the answers in such an environment. We’re no longer in a high-return, low-risk market, especially in light of the inability to know how today’s many macro uncertainties will be resolved. Instead of capital and nerve, then, the indispensable elements are now risk control, selectivity, discernment, discipline and patience. December 1, 2010 © Oaktree Capital Management, L.P.Reserved

It’s obvious in retrospect that all one had to do was take heed and lean in the opposite direction. But observations regarding the past are no help for purposes other than education. For observations to be profitable, they must relate to the present and the future. Investors have made a substantial move back in the direction of pre-crisis behavior. That behavior has to be recognized and monitored. The pendulum has moved away from the depression, panic, skepticism and excessive risk aversion we saw in the fourth quarter of 2008, and with the disappearance of those characteristics have gone the great bargain opportunities. Uncertainty and fundamental weakness at the depth of the crisis were offset by irrationally low prices and the potential for a rebound in risk tolerance, making most assets a screaming buy. With most of the great bargains gone – along with excess risk aversion – macro uncertainties should no longer be overlooked. Thus the caution, discipline, patience, selectivity and discernment that were so unnecessary in 2009 are absolutely essential today. © Oaktree Capital Management, L.P.Reserved

© Oaktree Capital Management, L.P. All Rights Reserved Now it’s clear that both Bernanke and Treasury Secretary Hank Paulson envision possible consequences justifying the strongest possible action. Last weekend, for example, Paulson said in an interview, “I don’t like the fact that we have to do this. I hate the fact that we have to do it. But it’s better than the alternative.” (Emphasis added) What is the alternative? As I suggested last week in “Nobody Knows,” there really is no outcome so negative that it can’t be imagined. That doesn’t mean terrible things will happen if no action is taken, but the possibilities are there, causing fear. Obviously, Bernanke and Paulson feel some of them could come to pass, and I respect their opinion. So what is that alternative Paulson alludes to? Cascading bank failures? Interlocking dependence on counterparties in the derivatives markets who lack the ability to make good on their liabilities? Ultimately, reduced faith in U.S. Treasury securities and the dollar? As I said last week, I don’t know. But it’s not unreasonable to respect these possibilities. Our leaders want to justify the strongest action in history without spooking the market by enumerating the possibilities, so they’re not being too specific. The Great Depression is our only model. I believe it justifies strong action. Let me take a moment to say we’re enormously lucky to have the right team in place at this time.

© Oaktree Capital Management, L.P. All Rights Reserved Nevertheless, I do think we’re in the early going: the pain of price declines hasn’t been felt in full (other than perhaps in the mortgage sector), and it’s too soon to be aggressive. Things are somewhat cheaper (e.g., yield spreads on high yield bonds went from all-time lows in June to “normal” in November) but not yet on the bargain counter. Thus, I’d recommend that clients begin to explore possible areas for investment, identify competent managers and take modest action. But still cautiously, and committing a fraction of their reserves. “Don’t try to catch a falling knife.” That bit of purported wisdom is being heard a lot nowadays. Like other adages, it can be entirely appropriate in some instances, while in others it’s nothing but an excuse for failing to think independently. Yes, it can be dangerous to jump in after the first price decline. But it’s unprofessional to hang back and refuse to buy when asset prices have fallen greatly, just because it’s less scary to “wait for the dust to settle.” It’s not easy to tell the difference, but that’s our job. We’ve made a lot of money catching falling knives in the last two decades. Certainly we’ll never let that old saw deter us from taking action when our analysis tells us there are bargains to be had. In the period leading up to the current crisis, investors acted like they were loaded down with too much cash and desperate to put it to work.

© Oaktree Capital Management, L.P. All Rights Reserved I think the credit cycle that began around 2002 will go down as one of the most extreme on record and be the subject of discussion for years to come. It is one of the most important, potentially most serious financial episodes I’ve witnessed, and it presents a great learning experience. (Of course, it’s said that “experience is what you got when you didn’t get what you wanted.”) People were blindsided this summer when the financial markets went wobbly in just a few weeks on the basis of unhappiness in a remote corner of the mortgage market. But nothing that happened should have come as a surprise. While the details of each financial crisis may seem new and different, the major themes behind them are usually the same, and several were repeated in the current cycle. Not one of the following twelve lessons is specific to 2007 or to subprime mortgages or CDOs. And each one is something I’ve seen at work before. 1. Too much capital availability makes money flow to the wrong places. When capital is scarce and in demand, investors are faced with allocation choices regarding the best use for their capital, and they get to make their decisions with patience and discipline. But when there’s too much capital chasing too few ideas, investments will be made that do not deserve to be made. 2. When capital goes where it shouldn’t, bad things happen. In times of capital market stringency, deserving borrowers are turned away.

We never know whether a little jiggle is the start of the swing back and, if so, how far it will go. But we always should be aware that reversion will occur. The last 4½ years have been carefree, halcyon times for investors. That doesn’t mean it’ll stay that way. I’ll give Warren Buffett the last word, as I often do: “It’s only when the tide goes out that you find out who’s been swimming naked.” Pollyannas take note: the tide cannot come in forever. Time, tide and cycles wait for no man.2007

The first is that people care more about return and are more titillated by it. But the second is that it can be far from obvious who did the best job of risk management. Different investors can define investment risk differently, but if it isn’t the same as inter-month or inter-year volatility – and I’m convinced it’s not – then it can’t be easily observed and quantified. This is especially true in good years, when risk remains invisible. One portfolio manager makes 10% and another makes 15%. Who did the better job? When I attended the University of Chicago in 1967, I was taught that in order to decide how well a portfolio had performed, you have to assess how much return was achieved UandU how much risk was borne. That still makes sense to me. How much risk did a manager take? Which manager’s risk-adjusted return is higher? It can be hard to judge these things, but investors shouldn’t wait for a down year to attempt an answer. Modern portfolio theory and the efficient market hypothesis define risk as volatility and tell us that markets price assets so they’ll offer returns that are proportional to their risk, no more and no less. For this reason, they say, superior risk-adjusted returns cannot be achieved. The beauty of inefficient markets – to the extent they exist – lies in the belief that this rule need not hold: that you can get more return than is justified by the risk.

© Oaktree Capital Management, L.P. All Rights Reserved but I think this one stacks the cards in your favor. As Sir John Templeton put it, “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage but provides the greatest profit.” The most important thing is patient opportunism. At Oaktree we try to sit on our hands. We don’t go out with a “buy list”; rather, we wait for the phone to ring (while we do our research and analysis). If we call the owner and say, “You own x and we want to buy it,” the price will go up. But if the owner calls us and says, “We’re stuck with x and we’re looking for an exit,” the price will go down. Thus, rather than initiating transactions, we react opportunistically. One of our mottos is “we don’t look for our investments; they find us.” In general, that means investing from the bottom up, not from the top down – from the list of things that are available cheap, not in things we think it’d be great to have a position in. When you’re a top-down investor, you predetermine that a given percentage of the portfolio should be invested in a certain sector, and then you proceed to look for the best bargains in that sector. The bottom-up investor has no such preconception; he looks for the best bargains, regardless of where they can be found. Sector allocation falls out largely of its own accord (but hopefully with concentrations held to tolerable levels).

” Of course, even with that knowledge, he couldn’t wait all day for the perfect pitch; if he let three strikes go by without swinging, he’d be called out. Way back in the November 1, 1974, issue of Forbes, Buffett pointed out that investors have an advantage in that regard, if they’ll just take advantage of it. Because they can’t strike out looking, investors needn’t feel pressured to act. They can pass up lots of opportunities until they see one that’s terrific. Investing is the greatest business in the world because you never have to swing. You stand at the plate; the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There’s no penalty except opportunity. All day you wait for the pitch you like; then, when the fielders are asleep, you step up and hit it. Buffett’s approach, like that of Williams, rewards patience, selectivity and a superior understanding of the underlying process. These are some of the things Oaktree likes to emphasize.

© Oaktree Capital Management, L.P. All Rights Reserved  Bookstaber says “the principal reason for intraday price movement is the demand for liquidity .... In place of the conventional academic perspective of the role of the market, in which the market is efficient and exists solely for informational purposes, this view is that the role of the market is to provide immediacy for liquidity demanders.....By accepting the notion that markets exist to satisfy liquidity demand and liquidity supply, the framework is in place for understanding what causes market crises, which are the times when liquidity and immediacy matter most.”  “Liquidity demanders are demanders of immediacy.” I would describe them as holders of assets in due course, such as investors and hedgers, who from time to time have a strong need to adjust their positions: When there's urgency, “the defining characteristic is that time is more important than price .... they need to get the trade done immediately and are willing to pay to do so.”  “Liquidity suppliers meet the liquidity demand.” They may be block traders, hedge fund managers or speculators with ready cash and a strong view of an asset's value who “wait for an opportunity when the liquidity demander's need for liquidity creates a divergence in price [from the asset's true value]. Liquidity suppliers then provide the liquidity at that price.