The Magnificent Seven, the Nifty Fifty and the Border - Part 1

Mark Twain and Howard Marks

Mark Twain: It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.’ ”

Barron’s: What will a Trump presidency be like? I asked [Howard] Marks* on Thursday. After noting that Trump will be pro-business.

Howard Marks: Many of the things he wants to do or that he talked about doing would be inflationary, like lower interest rates and cutting taxes.” Trump’s tariffs “are an attempt to repeal the laws of economics.”

“Probably 98% of the things Trump will do can’t be predicted, and even the consequences of the things we know he’ll do probably can’t be predicted,” he continues. “Anybody who tells me what they think the world’s going to look like two years from now, I’ll bet all my money that they’re wrong. The future is just too damn indeterminate to hang your hat on. John Kenneth Galbraith said, ‘We have two kinds of forecasters, the ones who don’t know and the ones who don’t know they don’t know.’ ”

Risk is the probability of losing money, [but] there is no number you can use for that because there’s no place you can look to find out what the probability of a bad outcome is today or what it was six months ago when you made the investment.

So, you can be quantitative but not accurate, or accurate but not quantitative. You can’t do both.”

Barron’s: That means a higher rate environment, right?

Marks: “I think we’re going to be in a normal rate environment. The emergency rates of zero are no longer called for. When rates are too low, they subsidize asset owners and borrowers and penalize savers and people living on fixed income and lenders. The Fed and the Treasury should let interest rates occur naturally through negotiation between borrower and lender, and I don’t think when the lender and the borrower sit down to negotiate, they’re going to agree on half a percent or zero.”

Barron’s: One of my favorite Marksisms is: “There are no bad assets, only bad prices.” I asked him to expound upon that.

Marks: “A good asset is not synonymous with a good investment,” he says. “It’s not what you buy, it’s what you pay that determines a good investment. You have to be price-conscious. It’s not a matter of buying good things, but buying things well. You have to understand that difference. It’s more than grammatical.

“I started working in this business 55 years ago, and the banks invested in the Nifty Fifty—stocks of the 50 best companies in America—companies so great, there was no price too high,” he says. “If you bought those stocks the day I started work and held them tenaciously for five years, you lost over 90% of your money. Why? Because they were too expensive.”

Barron’s: Does that thinking apply to the Magnificent Seven? “

Marks: “You can’t make meaningful observations about assets unless you know them extremely well, and I don’t,” he says of that group. “They have high price/earnings ratios, but sometimes a high-priced car is worth it and a low-priced car isn’t. Everybody thinks these are great companies. They may be. I don’t think people should have a knee-jerk reaction on that subject. I try not to.”

A Little History of Economies

Marks: "History is littered with command economies that didn’t succeed.…Eighty years ago, Korea was a single country. Then, following World War II, it was split in two…South Korea has operated as a capitalist democracy and North Korea as a communist dictatorship [North Korea’s] GDP in purchasing power terms is estimated at $2,000 per person versus $50,000 in South Korea. North Korea’s citizens are described as impoverished, but at least it doesn’t have a border problem, since nobody’s trying to sneak in…I think it’s fair to say capitalism has won.”

Barron’s: I laughed out loud at North Korea’s non-border problem and then realized that Russia, Cuba, and Venezuela don’t have border problems either. And of course, we do. And the reason people clamor to come here is because our country is a beacon. Yes, our soon-to-be full-throttle capitalism is part of it, but underpinning it is our gold standard rule of law.

Lady Liberty and Lady Justice

Barron’s: If our legal system degrades and, for instance, litigants can habitually influence the legal process, that would be tantamount to removing Lady Justice’s blindfold.?

*Howard Marks

Since the formation of Oaktree in 1995, Mr. Marks has been responsible for ensuring the firm’s adherence to its core investment philosophy; communicating closely with clients concerning products and strategies; and contributing his experience to big-picture decisions relating to investments and corporate direction.? From 1985 until 1995, Mr. Marks led the groups at The TCW Group, Inc. that were responsible for investments in distressed debt, high yield bonds, and convertible securities.? Previously, Mr. Marks was with Citicorp Investment Management for 16 years, where from 1978 to 1985 he was Vice President and senior portfolio manager in charge of convertible and high yield securities.? Between 1969 and 1978, he was an equity research analyst and, subsequently, Citicorp’s Director of Research.? Mr. Marks holds a B.S.Ec. degree cum laude from the Wharton School of the University of Pennsylvania with a major in finance and an M.B.A. in accounting and marketing from the Booth School of Business of the University of Chicago.? He is a CFA? charterholder.? Mr. Marks is an Emeritus Trustee and Advisory Member of the Investment Committee at the Metropolitan Museum of Art.? He is a member of the Investment Committee of the Royal Drawing School in London.? He also serves on the Shanghai International Financial Advisory Council and the Advisory Board of Duke Kunshan University and is an Emeritus Trustee of the University of Pennsylvania, where from 2000 to 2010 he chaired the Investment Board.

Next: Tariffs, Inflation and the Border

Disclaimer: I have intercalated images. titles. subtitles, comments and highlights so as to more effectively deliver this article. Attribution is made for everything that is not originally mine, especially the ideas of others. Otherwise, the intuitions and disciplined inspirations are mine.

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