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When Genius Succeeded

Michael Olsen, CFA
June 30, 2011

This article is part of our Rising Star Portfolios series.

Despite his humble, soft-spoken ways, Howard Marks' rigorous focus has made him perhaps the most iconic investor in distressed opportunities.

For Marks' firm, Oaktree, that discipline has paid off. With $80 billion under management, it's become one of the largest investment management firms. Marks owns one-sixth of the business, and announced plans a few weeks back to list Oaktree publicly on the New York Stock Exchange. In perusing the firm's prospectus, I found a few great acorns of wisdom that illuminate Oaktree's guiding philosophies -- and perhaps help to explain its great success.

Mighty oaks from little acorns grow

  • "At our core, we are contrarian, value-oriented investors focused on buying securities and companies at prices below their intrinsic value and selling or exiting those investments when they become fairly or fully valued."

    Basically, Oaktree seeks great prices, and prizes contrarian thinking. For me, that comes with a caveat.

    Investors tend to restrict contrarian investments to narrow categories like "value" or "distressed." But in truth, real contrarian opportunities defy such simple classifications. A "contrarian investment" simply involves finding something that most of the rest of the market dislikes or doesn't  understand. Likewise, most companies aren't inherent outperformers -- just good investments only at the right price. Investors make money by recognizing what the majority of the market's getting wrong, and figuring out what that insight's really worth.
  • "We neither make nor rely on macro predictions about the economy, interest rates or financial markets. However, we believe it is critical to take into account our view of where we are in the economic cycle and to size our investment capital accordingly. When we believe opportunities are scarce, we limit the amount of capital we raise to avoid jeopardizing returns."

    We'll never know exactly where the economy's going; we often won't know when it'll shift, either. Nonetheless, value investors need to remember that the big picture still matters.

    The credit crisis provided painful proof of this lesson for investors in financials like Bank of America (NYSE: BAC  ) or Citigroup (NYSE: C  ) , or homebuilders such as Pulte Homes (NYSE: PHM  ) and Toll Brothers (NYS