I can’t tell you how many thousands of hours I have spent, over the years, thinking about, reading about, and talking about how to be a consistently successful investor; but I can tell you this: I’m still working at it. And once in a while – less frequently as the years pass, it seems – I come across investment advice that strikes me as fundamentally strong, innovative, and worth assimilating.
I feel that way about today’s Outside the Box. It’s a client memo sent last week by Howard Marks, founder and chairman of Oaktree Capital Management. He calls it “Dare to Be Great II,†since it’s a follow-up to the famous memo by that name he wrote in 2006.
The first thing we need if we’re to become superior investors, says Howard, is an explicit investing creed. What do we believe in? What principles will underpin our process? He suggests that we ask ourselves questions like the following – and be willing and able to come to agreement on them with our colleagues.
- Is the efficient market hypothesis relevant? Do efficient markets exist? Is it possible to “beat the market� Which markets? To what extent?
- Will you emphasize risk control or return maximization as the primary route to success (or do you think it’s possible to achieve both simultaneously)?
- Will you put your faith in macro forecasts and adjust your portfolio based on what they say?
- How do you think about risk? Is it volatility or the probability of permanent loss? Can it be predicted and quantified a priori? What’s the best way to manage it?
- How reliably do you believe a disciplined process will produce the desired results? That is, how do you view the question of determinism versus randomness?
- Most importantly for the purposes of this memo, how will you define success, and what risks will you take to achieve it? In short, in trying to be right, are you willing to bear the inescapable risk of being wrong?
Now that’s what I call a worthwhile list of questions.
If we’re going to dare to be great, Howard asserts, we have to dare to be different.
Speaking of which, one of my personal heroines is Ayaan Hirsi Ali. Her courage in confronting the oppression of women at the risk of her own life is inspiring. In person she is a quiet, reserved, formidable force of nature. This last week she suffered an unjust, cowardly affront to her courage and her work dedicated to helping those who can’t help themselves.
Brandeis University decided to offer Ayaan an honorary doctorate for her efforts on behalf of women in Muslim societies. When the decision was announced, a group of students, faculty members, and the usual politically correct pressure groups campaigned to have the university withdraw the honor. Brandeis president Frederick Lawrence quickly capitulated. Not even bothering to sign his own notice, he offered that Ayaan’s story is “compelling,†whatever that means. But, he added, “That said, we cannot overlook certain of her past statements that are inconsistent with Brandeis University’s core values. For all concerned, we regret that we were not aware of the statements earlier.â€
That is simply Academic Bullshit. First of all, no one requested or forced Brandeis to offer the degree in the first place; it was their own clear choice. Secondly, after two best-selling books and hundreds of public appearances, Ayaan has made her views well-known. That she has criticized certain aspects of Islamic culture is no secret. For the Brandeis administration to say that they were unaware of her views stretches one’s sense of credulity beyond the limit. In Texas we would simply call it a lie.
I would be interested in the views of those who opposed her. Precisely which of the practices she condemns would they like to see maintained? Female genital mutilation, honor killings, forced marriage, or Sharia law? Perhaps treating women as property is deemed appropriate by some people.
The simple fact is, there is a portion of the academic community that is so politically correct that they are socially useless. In the name of being tolerant they tolerate acts so despicable as to be worthy of shunning. They have the discernment of a fruitfly. And that is probably an insult to fruitfly-kind.
Even more interesting is that just a few years ago Brandeis awarded an honorary degree to playwright Tony Kushner, who had been quoted as saying, “The biggest supporters of Israel are the most repulsive members of the Jewish community.†At the time the Brandeis president justified the award saying, “Just as Brandeis does not inquire into the political opinions and beliefs of faculty or staff before appointing them, or students before offering admission, so too the University does not select honorary degree recipients on the basis of their political beliefs or opinions.†So which is it, President Lawrence? Or is it just that women cannot hold strong beliefs?
If I were Brandeis graduate, I would be profoundly embarrassed. But a good way to voice your displeasure might be to write a check to Ayaan’s foundation at http://theahafoundation.org/, send a copy of it to President Lawrence, and say that until he personally apologizes for his cowardly behavior and ungentlemanly conduct in disparaging the character of a person so courageous as Ayaan Hirsi Ali, no more checks to Brandeis will be forthcoming. This whole distasteful event is especially galling when you realize that Brandeis was founded as a nonsectarian Jewish coeducational institution to counter oppression and a lack of tolerance.
The rest of my readers may also want to click on the link and make donations. There are tens of thousands of young girls around the world who face severe oppression that is justified in the name of culture and religion. Someone has to stand up and say no more. Ayaan does that, and perhaps we should stand with her. Think of your daughters and granddaughters and decide what kind of world you want them to grow up in.
I am back in Dallas and enjoying being home and next to my gym. I was not in the gym enough in South Africa, and I can feel it. I’m going to have to get better at scheduling workout time when I’m on the road. Have yourself a great week, and really sit and think through some of the questions that Howard Marks challenges us with. They are at the heart of the investing portion of our lives. Without clear answers to them, we are wandering aimlessly and can expect unsatisfying results.
Your back just in time to pay my higher-than-ever taxes analyst,
John Mauldin, Editor
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And now for Dare to be Great II:
Memo to:Â Â Â Â Â Â Â Oaktree Clients
From:Â Â Â Â Â Â Â Â Â Â Â Â Â Howard Marks
Re:Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Dare to Be Great II
In September 2006, I wrote a memo entitled Dare to Be Great, with suggestions on how institutional investors might approach the goal of achieving superior investment results. I’ve had some additional thoughts on the matter since then, meaning it’s time to return to it. Since fewer people were reading my memos in those days, I’m going to start off repeating a bit of its content and go on from there.
About a year ago, a sovereign wealth fund that’s an Oaktree client asked me to speak to their leadership group on the subject of what makes for a superior investing organization. I welcomed the opportunity. The first thing you have to do, I told them, is formulate an explicit investing creed. What do you believe in? What principles will underpin your process? The investing team and the people who review their performance have to be in agreement on questions like these:
- Is the efficient market hypothesis relevant? Do efficient markets exist? Is it possible to “beat the market� Which markets? To what extent?
- Will you emphasize risk control or return maximization as the primary route to success (or do you think it’s possible to achieve both simultaneously)?
- Will you put your faith in macro forecasts and adjust your portfolio based on what they say?
- How do you think about risk? Is it volatility or the probability of permanent loss? Can it be predicted and quantified a priori? What’s the best way to manage it?
- How reliably do you believe a disciplined process will produce the desired results? That is, how do you view the question of determinism versus randomness?
- Most importantly for the purposes of this memo, how will you define success, and what risks will you take to achieve it? In short, in trying to be right, are you willing to bear the inescapable risk of being wrong?
