For many investors, Oaktree Capital is a household name, the $164 billion USD alternative fixed income manager headed up by legendary investor Howard Marks.

Much like the following built around Berkshire Hathaway’s annual letters, there is a sizable collective of investors, market enthusiasts and researchers who follow Howard’s notes, the culmination of decades of experience in asset classes most people have never looked at let alone traded.

His latest memo, ‘What Really Matters?’, is an insightful reflection into some of the nuances about the psychology, risk management and discipline of long-term investing. Today, we would like to provide you with a summary of his memo, touching upon some of the key points which resound strongly with our own philosophy.

What Doesn’t Matter

Short-Term Events

The key takeaway from this point was that very few investors can sustainably make profit with a short-term focus because it’s very difficult to know which expectations are already priced in.

Howard outlines why short-term events don’t matter by listing what he does know about them:

  • Most investors can’t do a superior job of predicting short-term phenomena like these.
  • Thus, they shouldn’t put much stock in opinions on these subjects (theirs or those of others).
  • They’re unlikely to make major changes in their portfolios in response to these opinions.
  • The changes they do make are unlikely to be consistently right.
  • Thus, these aren’t the things that matter.

As many clients know we encourage a longer-term view of investing for clients, within reason for each individual’s liquidity or income requirements – very few investors can maintain a competitive advantage operating in the short term, and positioning a multi-asset portfolio based on random events is fraught with danger.

Short-Term Performance

Another thing which doesn’t matter is putting large emphasis on performance less than a year as an indication of investment ability – and the memo makes particular reference to ogling at short-term outperformance in a period which is already ‘good times’ in the market.

This may be going against any sort of marketing effort, given our short-term performance has been ahead of most competitors, but we concur with Howard’s point that short term performance is seldom an indicator of long term success.

We particularly found this quote resonated well with our own approach to analysing the managers who make up our portfolios:

“Deciding whether a manager has special skill – or whether an asset allocation is appropriate for the long run – on the basis of one quarter or year is like forming an opinion of a baseball player on the basis of one trip to the plate, or of a racehorse based on one race.”


In this point, Howard objects to how academics (and the investment community as a whole) consider volatility as a measure of risk. This was largely born of necessity when economists and academics in the 1960s required some quantifiable way to measure risk, and chose volatility as the only available proxy.

“I define risk as the probability of a bad outcome, and volatility is, at best, an indicator of the presence of risk.  But volatility is not risk.”

This was a particularly interesting section, which absolutely aligns with a long-term, robust view of portfolio construction – but also doesn’t necessarily gel with the reality faced by many advisers and individual investors.

We agree that volatility does not equal risk, and our own process incorporates that view – and yet we still focus on smooth, consistent returns for clients due to one simple reason:

If you need to pull out a significant percentage of your portfolio to pay for a medical procedure, a down-payment on a home, help a grandchild and so on, having volatility in your portfolio can be the difference in pulling those funds out on a 10% swing – up or down – this is commonly known as minimising ‘sequencing risk’, and maximises the ability of compounding to work in your favour.

Of course, as Howard puts it, “protection from volatility generally isn’t a free good” – generally lower volatility assets offer lower returns. This is the beauty of robust portfolio construction, where you can find the best ways to generate excess returns for investors whilst your asset allocation and the dynamic between your securities dampens risk – a “free lunch”, if you will.

What Matters

You may have read this far and thought, well what DOES matter then?

As is characteristic of Howard’s memos, his point is built up to with great detail, and then is delivered in stunning brevity.

“What really matters is the performance of your holdings over the next five or ten years (or more) and how the value at the end of the period compares to the amount you invested and to your needs.”

Howard’s closing remarks relate strongly to individual securities, however much of the wisdom can be translated across to a multi-asset context (which we will include as “Translations” below, as well as their link to our Core Beliefs):

  • “Study companies and securities, assessing things such as their earnings potential”
    • Translation: analyse and develop evidence for a thesis on individual asset classes, sectors and baskets of securities representing the areas with which you want, or don’t want, exposure[1]
  • “Buy the ones that can be purchased at attractive prices relative to their potential”
    • Translation: be disciplined around valuations and invest in assets which are either attractive relative to their own history/forecast return, or attractive relative to another sector[2]
  • “Hold onto them as long as the company’s earnings outlook and attractiveness of price remain intact”
    • Translation: maintain a robust, repeatable process which takes a long-term focus, rather than reacting to each new trend which presents itself[3]
  • “Make changes only when those things can’t be reconfirmed, or when something better comes along”
    • Translation: constantly evaluate your thesis, test your evidence, change your mind only when the data changes or a better use of capital is available[4]

As a final note, Howard touches on a concept that we very much keep front of mind in our own investment approach, “asymmetry”, which can be broadly defined as finding investment opportunities and structures which deliver a disproportionate level of expected return to the level of risk/loss potential taken.

To end this note, we’ll leave you with a powerful quote from Howard regarding this concept:

In my opinion, “excellence” lies in asymmetry between the results in good and bad times.

[1] Core Belief 3: Asset class risks are driven by their underlying risk factors. Understanding the earnings potential, price, earnings trend, susceptibility to GDP or interest rate changes are all part of assessing a securities attractiveness

[2] Core Belief 2: Price drives long-term returns

[3] Core Belief 7: Diversify when it makes sense, not merely for the sake of it. We don’t buy or sell assets just because they’re in a benchmark, instead we invest where we see superior long term returns for the risk taken, and so this systematically and repeatably

[4] Core Belief 7 and 2: Don’t stay diversified if your evidence suggests doing so will lead to a deterioration in the portfolio outlook, such as when the rising price of an asset, or deteriorating growth prospects cause its future returns and risks to look unattractive compared to other assets