There are good and bad times to buy stocks, but there is no bad time to start thinking about which stocks you'd buy if you could get them at a lower price. No one knows when the next bear market will come, but it will happen, and it makes sense to have a list ready to buy with both hands.
The best in distressed
Oaktree Capital Group earns its income managing other people's money. But whereas most asset managers are really just disguised bets on stock prices going higher and higher, Oaktree Capital Group does best when markets plunge.
Oaktree runs many different types of funds, but distressed debt is its specialty. Think of debt issued by companies that have filed for bankruptcy, or companies that are likely to file in the near future. These special situations aren't for the faint of heart, but for those who have the requisite skill, as Oaktree does, they can lead to really remarkable returns. (Since 1988, its distressed debt funds have earned returns of 22% before fees, and 16.2% after fees.)
Like many alternative asset managers, Oaktree's fee structure allows it to take a slice of the returns it earns on behalf of its clients. It typically collects a fee equal to 20% of returns when its funds generate a return in excess of 8% per year. That means when it does well, its shareholders win, too.
But none of these things are proprietary to Oaktree. There are many alternative asset managers that invest in unique corners of the investment universe and collect incentive fees based on their returns. That's not what makes Oaktree an interesting investment to me.
What makes Oaktree interesting is that it doesn't need incentive fees to be profitable; they're just the icing on the cake. In an industry where many companies seemingly operate for the benefit of employees, not shareholders, Oaktree does well to retain employees and pay its owners, too.
Oaktree has roughly $20 billion of "dry powder," or assets that clients have committed to its funds that it hasn't yet invested. This cash represents future opportunity to snap up bargains for its investors, and lay the groundwork for a large profit haul in the years that follow.
But don't take that to mean that Oaktree is limited to just $20 billion of uninvested cash. Thanks to its impressive record, it's one of just a handful of managers who can capably raise billions of dollars with just a few phone calls. That's what happened late 2007 and early 2008, when Oaktree raised the then-largest distressed debt fund with $11 billion of committed capital. From that one fund, Oaktree collected more than $1.5 billion of incentive fees, not bad for a few years' work.
Warren Buffett has not-so-quietly piloted Berkshire Hathaway as if he's expecting some bargains to come his way. The conglomerate, which owns everything from utility companies to Dairy Queen, has $116 billion of cash on its balance sheet. Its vice chairman, Charlie Munger, said he believed Berkshire could acquire a business worth as much as $150 billion at last year's annual meeting.
Berkshire is no stranger to making big investments at cheap prices. In the early 2000s, Buffett bought billions of dollars of junk bonds in a matter of weeks. In the turmoil around the 2008 Financial Crisis, he made bargain basement deals to invest in GE, Goldman Sachs, Bank of America, and Harley Davidson. These "sweetheart" investments come with favorable terms because Buffett can inject more than just cash -- his stamp of approval is a valuable asset by itself.
Berkshire hasn't found many bargains in the current environment. Businesses of all types are pricier today than they were just a few years ago, but even as deal flow dries up, Buffett is chasing down opportunities to add to Berkshire's piggy bank, which suggests to me that he's loading up his "elephant gun" in anticipation of what's to come.
Last year, Berkshire Hathaway Reinsurance struck a deal with AIG that gave it $10 billion of premium upfront, money it will be able to invest for years, if not decades. It struck me as interesting, since Berkshire already had plenty of cash sitting around when it took that wager -- Buffett was just adding to his treasure chest. The Oracle of Omaha is prepared for a downturn, and I can't think of anyone better to deploy more than $100 billion of capital than the market's greatest ever investor.
Themes for bear markets
There aren't many companies that stand to improve when things turn for the worse. It takes a rare combination of being able to buy when everyone else wants to sell, and having the capital on hand to do a deal when no one else does.
Having just one thing -- cash on hand, or the mental fortitude to buy in times of panic -- isn't enough. Berkshire Hathaway and Oaktree Capital Group have both, which makes them my favorite stocks for when this multi-year bull market comes to an end.