Howard Marks, co-chairman of Oaktree Capital Management, told Bloomberg Television’s Stephanie Ruhle and Matt Miller today that loose rule of law is a major concern for investors who are considering buying assets in Russia. Marks said: “In order to make investments, you have to believe that you will benefit from the rule of law…The underlying question about Russia is whether you will. The question is, if you put your money in the bank will you get it back in the end?”
Marks also said that he is “working on a memo…about the lessons of oil. And one of the lessons that we’re learning again now is how fast things can change in the investment world…now all of a sudden a few months into this oil slide that has evaporated and in some corners we’re seeing panic. Weak deals that could get done because the markets were complacent and generous now are being exposed as having been overleveraged, et cetera. So of course when that happens we go from being extremely reticent to being aggressive.”
Full transcript below.
MATT MILLER, BLOOMBERG: I want to talk more about what’s going on overseas, the currency there, the interest rate aspect of it, which I find fascinating, the investment play. Let’s bring in Howard Marks right now. He’s our co-host for the hour. He’s the co-chairman of Oaktree Capital Management, which has $93 billion under management. He’s using the plunge in crude prices to buy up energy company debt, which would be the most interesting thing we could talk to him about today except for the fact that the central bank in Russia did this. Howard, what does it say to you that you can make 17 percent on your money right now? Are you sending it all to Moscow?
HOWARD MARKS, CO-CHAIRMAN, OAKTREE CAPITAL: I think that in order to make investments you have to believe that you will benefit from the rule of law. And the underlying question about Russia is whether you will. You (inaudible) used the expression a minute ago, he’ll steal it.
The question is if you put your money in the bank to make 17 percent, which sounds like a lot of money, will you get it back at the end? We like to make investments where the range of outcomes is from here to here. In Russia the range of outcomes is probably from here to here.
STEPHANIE RUHLE, BLOOMBERG: Is that because you simply can’t trust the rule of law?
MARKS: That’s one of the most important reasons. That’s right. And does — will Russia according — operate according to international norms?
MILLER: So you have to assume that Vladimir Putin knows this. Even if he’s unpredictable he’s an intelligent, educated, thinking man. Why would he —
MARKS: And thus he would never invade another country and (inaudible).
MILLER: Well exactly.
RUHLE: Ding, ding, ding, ding.
MILLER: Well unless he thinks that he has the right to do it and that it’s somehow by birthright his country. He might also think that he has the right to take $20 billion from Yukos and Mikhail Khodorkovsky and throw him in jail for a decade. He might think that he can do these kind of things without repercussion. So is this going to change his mind?
MARKS: Well and in fact what your correspondent just said is that he remains extremely popular. The popular masses in many countries like to see the leader behaving powerfully, especially when the country has been suffering economically. It’s a great distraction from economic suffering to operate strongly nationalistically.
RUHLE: All right. Well if not in Russia let’s talk about where you do see opportunity right now, these falling energy prices, oil.
MARKS: Well the — it may not surprise you, Stephanie, to know that I’m working on a memo. And it’ll be not about oil, but it will be about the lessons of oil. And one of the lessons that we’re learning again now is how fast things can change in the investment world. There was an economic philosopher, Rudiger Dornbusch, who said it takes a lot longer for things to happen than you think that it can, but then they happen much faster than you thought they would. And that’s the way things go in the investment world.
For a couple years now I’ve been visiting you. We’ve been talking about a high level of confidence and complacency. And now all of a sudden a few months into this oil slide that is — has evaporated and in some corners we’re seeing panic. Deals that — weak deals that could get done because the markets were complacent and generous now are being exposed as having been overleveraged, et cetera. So of course when that happens we go from being extremely reticent to being aggressive. It has —
MILLER: Do you not see — so for the ruble for example there may be no floor, right? But for oil there is definitely a floor.
MARKS: And that is, Matt?
MILLER: But I’m just saying do you see a slightly higher level here, for example $50, something where you’re feeling fairly confident oil is not going to be cheaper than that?
MARKS: Well you can’t say. You can say that, but then you —
MILLER: Or will stay cheap.
MARKS: — quickly have to retract it. In ’80 people probably said, well it couldn’t go below $70.
MARKS: And now at $60 people say it couldn’t go below $50.
MARKS: We’ve talked about gold. Gold is kind of similar to oil in many ways. It’s hard to put a price on gold, or on oil or on any other asset which is not income producing. We can say what a bond is worth because we say it in terms of its income, ditto for a stock, a P/E ratio, but for an asset that doesn’t produce cash it’s hard to say what a fair price is or a price that can’t be exceeded on the downside.
RUHLE: So where does the opportunity set lie? When people look at oil prices falling, how should they view it?
MARKS: Well I guess having said what I said, in deference to Matt’s comment, there is some point at which you have to say it’s probably not going to go lower. And if you can buy the bonds of a company which became over levered because the capital markets were too accommodative at a price in which you’ll do okay if oil goes to $35 you probably should step up and do it, especially when other people are selling. My favorite cartoon I think was from the ’60s, has the Stephanie Ruhle of the day in front of the TV reading his script. And he says, everything that was good yesterday is bad today. And that’s the way markets go. And there’s analytical and then there’s emotional. And when panic takes over and markets stop being discerning that’s the time for the bargain hunter to get active.
RUHLE: Are we reaching that point, because six months ago everybody loved the credit markets, everybody loved high yield, forgetting that it’s called junk for a reason. Is this a moment when we should start getting worried about that asset class?
MARKS: I don’t think — I would turn it around.
RUHLE: Well you’re distressed, and so you like it.
MARKS: I’d say we should start getting interested in the asset class. Declines are not a reason to get worried. Declines are a reason to get excited. The investing public like things better at high prices than at low prices. The professionals like things better at low prices than at high prices.
MILLER: Now let me ask you.
RUHLE: Hold on, one more time. Say that one more time because it’s such a good point.
MARKS: Well the public, people who and who don’t understand how investing works like things, feel better at things when they’re at high prices, and lose confidence as the price falls. Warren Buffett says, I like hamburgers and I eat more of them when they go on sale. The investment professional who understands the intrinsic value of the things he’s looking at, hopefully, likes things better when the price converges to or falls below the intrinsic value.
MILLER: You want to buy when there’s blood on the streets. Let me ask you about that in mind, Jay Wintrob, you recently brought him in as CEO of Oaktree. And he’s trying to attract more money from insurers. He came from an AIG unit that managed obviously the insurers’ money. And they sent some of it, less than five percent to private equity and hedge funds, but you want to now as one of those investment places attract more of that kind of capital. How can you do that?
MARKS: Well Oaktree has had an investment, insurance company clientele for many years. We want to increase that. We’ve been doing that. It is not one of Jay’s principle mandates to do that. His mandate is to apply professional management. Oaktree has been stuck with me and with —
RUHLE: Stuck. Oaktree has been stuck with Howard.
MILLER: And been blessed with you.
MARKS: And with my partner, Bruce Karsh, neither of us are professional managers. We hopefully we’re good investors. Then we had John Frank as managing principal, who was and very good at minding the store, but he’s not a professional manager. He’s a lawyer. Now we’ve brought in somebody we’ve known for over 30 years who has real bona fide he’s as a professional manager. And when you get to 1,000 people in 20 businesses with almost $100 billion under management I think it’s time to have professional management.
RUHLE: Have you learned something different now that you’re offering products for retail investors? When I think about Howard Marks I feel like you really hone in on the psychology of investing. Have you learned anything different about how retail investors like to invest?
MARKS: Well what I believe I’ve learned over my years in this business is that the best service we can provide the retail investor is education, is to make him understand what we’re doing, and why and thus what he should do about it, and convince him not to invest, make investment decisions emotionally.
RUHLE: And in 2015 if there’s one lesson you can teach, what do you want it to be in terms of investing?
MARKS: I can’t say one, well to have reasonable expectations and to like things better as the prices fall.
RUHLE: Stop crying about oil. Listen to Howard.
MILLER: Very interesting. Can we keep him for the hour?
RUHLE: I would love it if he would stay. Howard, thank you.
MILLER: Howard Marks, always a pleasure.
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