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Fewer Losers, or More Winners?:
- Howard Marks' memos were inspired by two events: a dinner with David Van Benskoten, head of the General Mills Pension Fund, and a value investing firm reporting terrible results.
- The General Mills Pension Fund consistently ranked in the second quartile for equity returns but ended up in the fourth percentile overall. This influenced Marks to prioritize risk control and consistency in his investment philosophy.
- Marks believes that avoiding losers is key to success in equities. If you can avoid losing years, the winners will take care of themselves.
- This principle also applies to Oaktree's opportunist niches. Avoiding disasters is crucial for above-average long-term performance.
- Marks adopted the phrase "If we avoid the losers, the winners will take care of themselves" as Oaktree's motto when it was formed in 1995.
- In 2005, while working on an update of Benjamin Graham and David Dodd's Security Analysis, Marks discovered that their description of fixed income investing aligns with his motto. Bond investors improve their performance not through what they buy but by avoiding defaults.
- Jesse Livermore published a similar idea in 1940: "Winners take care of themselves, losers never do."
- While initially focused on high-yield bonds, Oaktree expanded into distressed debt funds where finding or creating winners became important for generating higher returns.
- Risk control remains the first tenet of Oaktree's investment philosophy. They emphasize assessing potential losses and considering downside scenarios when reviewing securities.
- The tennis analogy illustrates different approaches to investing. Professionals play a winner's game by hitting shots their opponents can't return. Amateurs play a loser's game by minimizing unforced errors and waiting for opponents to make mistakes.
- Active investors need winners to keep up with equity indices dominated by a few stocks. Selling winners too early or reducing holdings relative to index weightings can lead to underperformance.
- Risk-bearing is essential in investing, but risk avoidance can result in return avoidance. Investors must bear some losses to achieve attractive returns.
- Alpha refers to individual investing skill and the ability to modify probability distributions to have more upside than downside. Some investors excel at producing stunning returns with tolerable risk, while others focus on producing good returns with minimal risk.
- The choice between emphasizing aggressiveness or defensiveness depends on an investor's skill, return aspiration, and risk tolerance. There is no right answer; it's a matter of personal choice.