Howard Marks of Oaktree Capital has one of the best investment records. In his shareholder letters, he’s frequently willing to reveal some of the steps an investor needs to take to achieve such results. He’s willing to give the advice, because he knows few people will take it. In this shareholder letter, he explains that to achieve better investment results than the average, you have to be different from most other investors. For many people, that’s too uncomfortable and it also means taking the risk of being both different and wrong. That’s why so many investors follow the headlines and invest with the pack. They find it comfortable to achieve average results. That can be okay in a bull market,but it doesn’t work out well when markets aren’t doing well.
Most great investments begin in discomfort. The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy – are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.
But it isn’t easy to do things that entail discomfort. It’s no coincidence that distressed debt has been the source of many successful investments for Oaktree; there’s no such thing as a distressed company that everyone reveres. In 1988, when Bruce Karsh and I organized our first fund to invest in the debt of companies seemingly at death’s door, the very idea made it hard to raise money, and investing required conviction – on the clients’ part and our own – that our analysis and approach would mitigate the risk. The same discomfort, however, is what caused distressed debt to be priced cheaper than it should have been, and thus the returns to be consistently high.