Howard Marks, Chairman of Oaktree Capital Management gave the keynote address to a sold-out audience at the annual CFA Society of Minnesota Economic Dinner on January 23. The title of the presentation was “The Human Side of Investing: the Difference Between Theory and Practice”.  Some of the highlights of the speech were as follows:

• If riskier assets always equaled higher returns, they would not be riskier assets.
• In theory the market is efficient, clinical and risk averse. In practice it is filled with emotions, insecurities, foibles, mistakes and risks—but the returns may never arise.
• Why is there a discrepancy between market theory and market practice?

–The “happy medium” (i.e. what happens on average) is rarely seen, the market can    and does go to extremes.

–Errors of herd behavior among investors.

• The three stages of a bull market

1) Few people realize things will get better.

2) Most recognize improvement.

3) Everyone thinks things will improve forever.

• The secret of investing is not what you buy, but what you pay for it. One example he gave was how in the 1970s everyone was seemingly buying the “Nifty 50” but ignoring underpriced high yield bonds, which was where opportunity laid at the time.
• The conclusion of this topic was “What the wise man does in the beginning, the fool does in the end.” Mr. Marks then brought up contrarian investing.
• What will enable you to be a good contrarian investor? Be analytical and unemotional.
• Memory and prudence always come out the loser when pitted against greed.
• Overestimating what you know about the future encourages further risk taking. Mr. Marks does not take much stock in macro forecasts.
• Risk means more things can happen than will happen. Don’t invest for the likely outcome (which is what everyone else is doing); instead we investors need to look at all potential outcomes.
• Avoid the twin impostors of short term out- and under-performance. It is important for us to remember what really matters is the long-term.
• Being too far ahead of your time is indistinguishable from being wrong.
• Conclusion: don’t forget that buying assets well matters most, and to be successful investors need to be disciplined, objective and unemotional.