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Howard Marks on the unpredictability of commodity prices

Howard Marks of Oaktree Capital Management gave Cuffelinks exclusive permission to reproduce this presentation on risk in September 2014, following a meeting with Chris Cuffe.

He spoke at the Goldman Sachs Financial Services Conference in New York on 9 December 2014 to update his views. Oaktree Capital is a major distressed-debt investor, and Marks told the conference that he is buying bonds of energy companies as the oil price falls. High-yield bonds of energy companies have fallen by about 12% in the last few months, although he acknowledged that some leveraged companies will struggle to service their debt.

At the New York conference, Marks said:

"Six months ago, you wouldn’t have said there are opportunities to invest in the energy industry. It looked like a booming industry. Today, there clearly are, and they may get better from our standpoint ... I pretty much tend to the big picture. And I think that the most important single question that any fund manager or portfolio strategist has to answer at any point in time is whether to be on offense or defense and how aggressive, how defensive. And I believe that if you get that question right, then you don’t have to get security selection and selection of strategies and managers exactly right. And vice versa, if you get that wrong all the security selection you do in the world isn’t going to help you, probably. So, I tend to spend my time on the big picture. And while one of the tenets of our philosophy is that you can’t see the future, we believe that by judging from what’s going on around us at the present time we can make some appropriate adjustments.”

As Marks said in his previous presentation on risk, he prefers to stay out of positions with a higher likelihood of unforeseen risk. “The world can adjust to the things it can think about, but there’s always the possibility of the unforeseen. And I’m the dead-set against the efficacy of forecasting. And if you need any evidence, think back six months. Where were the people who predicted that oil would go down 40%? I would imagine that oil was $110 and the bulls said it would go to $112, and the bears said it would go to $108, where are the people who said it could go down 40%? We shouldn’t think we know what’s going to happen in the future. Mark Twain said, “It’s not what you don’t know that gets you into trouble; it’s what you know for certain that just ain’t true" ... I put out a memo on gold about this time in 2010, and I said there’s nothing intelligent that can be said about the price of gold. And you can’t predict the price level of a good that does not produce income. And I think it’s true in gold and I think it’s true in oil. And what’s a low price for oil? What’s a high price for oil? Who knows? Why was oil at $110 six months ago? And aren’t those reasons still true today, with it at $60? And the people who at $110 said, oh, I missed my chance to buy oil at $100. I’m kicking myself. I hope it gets backs there. Have they bought oil at $65? The answer is, no, because there’s no place you can get comfort on the price of a commodity, in my opinion."

 

Comments taken from a transcript of the talk. This extract is for general information purposes only and does not address any investor's personal circumstances. 


 

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