In this episode of China Money Podcast, guest Howard Marks, co-founder and chairman of Oaktree Capital Management, reveals his thoughts on China’s economy and its investing environment. He also gives a surprisingly frank evaluation of Oaktree Capital Management’s performance in China.
Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: You’ve just completed a trip in China, and Oaktree has had an office in Beijing since 2007. How would you rate China’s investment environment?
A: I have a lot of respect for China’s long-run economic outlook. But this is a period when (China’s economy) is slowing. There are some questions about how it will land – whether it’s hard or soft – of course you know I don't claim to know the answers.
Also, China’s customers – the U.S. and Europe – have been growing very slowly themselves. So that will have a retardant effect on China’s economy as well. The combination of the two suggests that China is in for a slow period.
On the other hand, valuations in China have corrected quite a bit from two or three years ago when everybody assumed China’s outlook was flawless for eternity. Prices have come down considerably both relative to valuations in other countries and in absolute terms. That’s very healthy for the investment outlook.
Q: What unique challenges do you face investing in China?
A: A controlled economy probably has the ability to do better in the short term. In the long run, there is not much experience with that. Many (such experiments) in the past haven’t lasted. Of course, China is making a compromise between a controlled economy and a less controlled one.
The world has yet to see how it is to do business in China dealing with issues such as property rights: whether foreign private investors can do well as owner of businesses. It’s important that people do not assume that business-as-usual in China is the same with business-as-usual elsewhere.
So if you don’t know how property rights will be treated, then you should try to avoid situations that pivot on that issue. For example, in our distressed debt investing, we often invest in the debt of the companies that fail to pay for their debts because we have creditor rights that can give us access to the value of the company. We don’t know how creditor rights will be treated in China, so we probably won’t invest in (this method).
Q: Is that why Oaktree’s operations in China has been in private equity?
A: (Yes,) in private equity and slow going. We raised a fund a few years ago. We invested slowly. It’s not fully invested yet, and probably won’t get fully invested. It did not invest in distress-for-control or loan-to-own situations for the reasons we discussed. We will continue to move carefully.
Q: So can we look at Oaktree’s presence in China as first, to be there, secondly to learn how to handle those challenges?
A: We of course try to make money. But you are right, it’s important for Oaktree to plant its flag and learn the way. As we gain experience in China, hopefully, we will perfect our methods. One thing I want to stress is that we are not going to go in and assume that the methods we applied in U.S. and Europe will work there.
Q: How would you score Oaktree’s performance in China?
A: First, let me say that it’s hard for me to talk about Chinese investments as opposed to Asian (investments). We haven’t done that much in China properly to have a meaningful sample.
I would say it’s been about a C+, in absolute terms. We haven’t lost money, but I don’t know how others have done. So maybe the answer is “as good as anyone,” but I really don’t know, and I wouldn’t venture to guess.
Q: Now onto your book, which you just launched the Chinese version last week. This is a book that contains your secret recipe for success accumulated during your 44 years of investment career. Why write about it and share it with other investors?
A: I’m interested in ideas, not just making money. I like the idea of having ideas that other people haven’t had, and share them. I enjoy writing and speaking. As I said in the introduction of the book: If people read the book and say, “Gee, I’ve never thought of that,” then I think I’ve succeeded.
Q: They say “Gee, I’ve never thought of that,” but of course, they can’t copy that (what you did)?
A: It’s not so easy to copy. Investing can’t be reduced to an algorithm, a process or a recipe that everybody can follow. In addition to having the ideas, a lot of them are emotionally challenging to implement because you have to go contrary to the market and the cycle.
The other thing is some of them are very difficult to implement intellectually. It takes a really good brain to be a superior investor. My efforts to write the book notwithstanding, there will still be opportunities to make money. They will not all be arbitraged away.
Q: Of the 18 “most important things” in your book, one is very relevant to China, that is your dismissal of technical investing. Technical investing has a large following among China’s millions of small individual investors. Why do you not believe in technical investing?
A: There are a lot of reasons. I don’t think a stock price has a memory that remembers what happened and tells it what to do in the future.
Secondly, there has been a lot of academic research. For example, Eugene Fama who wrote about the “Random Walk” that says stock prices are of random movements. What happens today says nothing about tomorrow. I personally find that very easy to believe.
The thing that gets most people excited is that prices have been rising steeply. When I look at something like that, it has become more expensive and is more likely to fall than raise. So I don’t take anything that’s been rising as a buy signal. If anything, it’s a sell signal.
About Howard Marks:
Howard Marks is the co-founder and chairman of Oaktree Capital Management, a Los Angeles-based investment firm with US$78 billion under management. He is the author of “The Most Important Thing,” a collection of investment principles accumulated during his 44-year investing career. Mr. Marks was previously at The TCW Group and Citicorp Investment Management.