Howard Marks
Co-founder of Oaktree Capital Management
Born 1946
Known for widely read investor memos on risk, market cycles, and the role of psychology in markets.
Photo: Kelly Writers House, CC BY 2.0 · Wikimedia Commons
Biography
Howard Marks has written a public memo to investors since 1990, and that habit, more than any single position, is what he is known for. Born in New York in 1946, he spent his early career running high-yield bond and distressed-debt strategies, work that starts from what can go wrong rather than from what might go right, and he co-founded Oaktree Capital Management in 1995 around the same premise.
Marks is widely read for the investor memos he has published since 1990. In them he writes about risk, market cycles, and investor psychology, often in plain language and with a willingness to admit what cannot be known in advance.
He argues that controlling risk, rather than chasing the highest possible return, is what separates durable investors from lucky ones. He also stresses second-level thinking: going beyond the obvious view to ask what the crowd may be missing and what is already reflected in prices.
Marks has gathered these ideas in books including The Most Important Thing and Mastering the Market Cycle. He is careful to say that he cannot predict the future, but believes investors can prepare by understanding where the market may sit in its cycle.
Career timeline
- 1946Born in New York City.
- 1967Graduates from the Wharton School, where he studied finance and, unusually, Japanese studies.
- 1969Completes an MBA at the University of Chicago and joins Citibank as an equity research analyst.
- 1978Moves to Citibank's bond department and is asked to look at high-yield debt, the accident that redirected his career toward what can go wrong.
- 1985Joins TCW to run high-yield and convertible strategies, later adding distressed debt.
- 1990Writes his first investor memo. He receives no response of any kind for roughly a decade and keeps writing anyway.
- 1995Leaves TCW with five colleagues to co-found Oaktree Capital Management around a risk-first mandate.
- 2000A memo written in January on the technology bubble draws widespread attention shortly before the market turns, establishing his public reputation.
- 2008Commits large sums to distressed debt during the financial crisis, the clearest test of the cycle framework in practice.
- 2011Publishes The Most Important Thing, assembled from two decades of memos.
- 2018Publishes Mastering the Market Cycle, the fullest statement of how he reads market conditions.
- 2019Brookfield acquires a majority stake in Oaktree while Marks remains co-chairman.
Investment philosophy
Marks believes risk is the probability of permanent loss, not the degree to which a price moves around. Everything in his approach follows from refusing the standard definition. Volatility can be measured and permanent loss cannot, so the industry measures the convenient thing and then quietly treats it as the important one. On his definition risk is highest exactly when it feels lowest, because that is when prices already assume things go well and buyers have stopped demanding compensation for being wrong.
He arrived at this through credit rather than equities. High-yield and distressed debt were the accident of his early career, and they impose a particular discipline: the best outcome on a bond is that you are repaid, so the entire analysis is about what could stop that happening. An investor trained on the downside asks what has to go right for a loss rather than what has to go right for a gain, and Marks has said plainly that he would not think this way had he stayed in equity research.
In practice he does not forecast and says so repeatedly. What he claims is possible is reading where a market currently stands, which is a question about the present rather than the future: whether lenders are competing to lend, whether bad news is being shrugged off, whether caution is being described as timidity. That reading does not tell you when the pendulum turns, but it tells you what you are being paid to accept for money committed today, and he calibrates aggressiveness against it rather than against a prediction.
The mental discipline he calls second-level thinking is what stops this becoming a slogan. A first-level judgment stops at whether a company is good; a second-level one asks what price the crowd has already attached to that same judgment, because a widely shared view is by definition in the price already. Superior results require a view that is both different from the consensus and correct, and he is direct that this is uncomfortable and uncommon rather than a technique anyone can apply on demand.
His influences are unusually specific for a practitioner. The efficient market theory he encountered at the University of Chicago convinced him that beating the market is genuinely hard, which pushed him toward the inefficient corners of credit where the theory holds least well. Nassim Nicholas Taleb's writing on alternative histories gave him the language for judging decisions by their reasoning rather than their outcome. John Kenneth Galbraith supplied the observation about the extreme brevity of financial memory that runs through his cycle work.
His influence runs almost entirely through the memos rather than through Oaktree's returns. He wrote them for about a decade with no response before Warren Buffett said publicly that he reads them first when they arrive, which turned a private correspondence into required reading across the industry. The vocabulary of second-level thinking, of the pendulum, and of risk as permanent loss rather than volatility has spread well beyond credit investors and is now common in how professionals describe market conditions.
Key ideas
Tap any idea to expand a plain-English explanation, why it matters, and where to learn more.
Risk control
Treating the management of risk, not the pursuit of maximum return, as the central job of an investor.
Avoiding severe losses keeps an investor in the game, and Marks argues that controlling risk is what makes good long-run results repeatable.
Choosing investments where the downside is understood and survivable, rather than reaching for the highest possible payoff.
Market cycles
The idea that markets and economies swing between optimism and pessimism rather than moving in a straight line.
Having a rough sense of where the market sits in its cycle can help an investor lean against extremes instead of following the crowd.
When optimism and prices look stretched, a cycle-aware investor grows more cautious rather than more confident.
Second-level thinking
Going beyond the first, obvious reaction to ask what others may be missing and what is already priced in.
If everyone already shares a view, it is likely reflected in the price, so better results come from seeing what the crowd does not.
First-level thinking says a good company is a good stock; second-level thinking asks whether its price already assumes that.
Contrarian discipline
Being willing to act differently from the crowd when the evidence supports it, while accepting that this is uncomfortable.
The best opportunities often appear when most people are fearful, and the biggest risks build when most people are confident.
Buying carefully during periods of fear, or holding back during euphoria, runs against the crowd by design.
Margin for error
Building in room for being wrong, because the future is uncertain and even careful analysis can miss.
Leaving a buffer means a single mistake or surprise is less likely to cause lasting damage.
Sizing positions so that an unexpected loss is bearable is one way to leave a margin for error.
Major contributions
- Co-founded Oaktree Capital Management, a major firm focused on credit and distressed-debt investing.
- Made risk control and market psychology accessible through decades of widely read investor memos.
- Popularized the idea of second-level thinking for a broad investing audience.
- Wrote influential books on risk and cycles, including The Most Important Thing.
Major successes
- Has published investor memos continuously since 1990. The value is in the format: because each one is dated and public, his reasoning can be checked against what actually happened, which is a standard almost nobody else in the industry has accepted for three decades.
- Wrote a memo in January 2000 arguing that technology valuations had detached from any defensible basis, shortly before the market turned. It mattered because it was specific, timed and on the record, and it converted the memos from a private habit into required reading.
- Co-founded Oaktree Capital Management in 1995 with five colleagues, built around a mandate that put avoiding loss ahead of maximising return. Founding a firm on an explicitly defensive premise, and raising money for it, was not an obvious commercial proposition at the time.
- Raised a large distressed-debt fund before the 2008 crisis and deployed it while credit markets were effectively closed to other buyers. This is the cycle framework doing real work: the capital was gathered when caution was unfashionable so it existed when nobody else had any.
- Turned three decades of memos into two books that carried risk and cycle thinking to readers well outside institutional credit investing, where the ideas had previously stayed.
- Kept writing for roughly ten years without a single reply before Warren Buffett said publicly that he reads the memos first. Persisting that long with no evidence anyone was reading is a large part of why the record exists at all.
Important books
- The Most Important Thing2011
Assembled from two decades of memos and organised around the ideas he treats as non-negotiable, with risk and second-level thinking at the centre. Its structure is unusual: each chapter is called the most important thing, which is his way of saying that no single idea works alone. The annotated edition adds commentary from four other investors, including Joel Greenblatt and Seth Klarman, arguing with him in the margins. It became the standard introduction to thinking about risk as something other than volatility.
- Mastering the Market Cycle2018
On reading where a market currently sits between fear and enthusiasm, and adjusting exposure without claiming to know when the turn arrives. It is more repetitive than the first book and more practical, working through credit conditions, investor psychology and valuation as separate readings of the same cycle. The central claim is modest and easy to miss: you cannot forecast, but you can calibrate.
Influence on investors
Marks's memos are read closely by both professional and individual investors, and his framing of risk and cycles has become part of how many people discuss markets.
His emphasis on humility, on preparing rather than predicting, has influenced how careful investors talk about uncertainty.
Criticisms and debates
A balanced view includes the main criticisms and open debates, presented neutrally.
- The framework may not be actionable. Critics argue that knowing a market is expensive tells you nothing about when it stops being expensive, so an investor who acts on the reading can be early by years, which is indistinguishable from wrong while it is happening. Supporters answer that he never claims otherwise and prescribes calibrating exposure rather than exiting. The 2000 memo is the strongest evidence for him and also illustrates the problem, since a similar caution expressed two years earlier would have been costly.
- A defensive style has a real price in rising markets. Critics note that an approach organised around avoiding loss will lag during long expansions, and that most years are expansions. Supporters reply that the arithmetic of compounding rewards avoiding severe losses more than capturing every gain, and that credit investors face genuinely asymmetric outcomes. Both are true, and the honest framing is that this is a trade-off matched to a temperament rather than a free lunch.
- The memos are hard to score. Critics point out that writing which emphasises uncertainty and avoids specific predictions is close to unfalsifiable, and that readers remember the calls that landed while the hedged passages leave no trace. Supporters counter that the memos are dated, public and unedited, which is more accountability than the industry norm. What can be said is that the record is genuinely open to inspection and genuinely difficult to convert into a score.
- Almost none of it is executable by an individual. Critics observe that distressed debt requires scale, credit analysis, legal resources and access to private markets, so a retail investor can adopt the philosophy while having no way to act on it. Supporters argue the transferable part was always the thinking rather than the asset class. That is fair, though it means the practical content of the memos is aimed at a reader who is not most people.
- Second-level thinking is easier to admire than to practise. Critics note that everyone believes they are doing it, that the instruction to hold a view both different from consensus and correct provides no method for arriving at one, and that in practice it can license contrarianism for its own sake. Supporters say Marks is explicit about the difficulty and repeatedly warns against being different merely to be different. The concept has nonetheless been widely adopted as a compliment people pay their own reasoning.
Lessons for investors
Plain-English takeaways. Context for learning, not advice to buy or sell anything.
- 1Spend as much time on what can go wrong as on what can go right.
- 2Have a rough sense of where the market sits in its cycle.
- 3Second-level thinking means asking what the crowd is missing.
- 4Luck and emotion shape outcomes more than most of us admit.
Notable quotes
“Risk means more things can happen than will happen.”
“You cannot predict. You can prepare.”
“The most important thing is not what you buy, but what you pay for it.”
Frequently asked questions
How does Howard Marks define risk?
As the probability of permanent loss, not as how much a price fluctuates. He rejects volatility as a proxy because it is measurable rather than because it is meaningful. On his definition risk is highest when it feels lowest, since confident prices already assume good outcomes and have stopped compensating buyers for the possibility of being wrong.
What is second-level thinking?
First-level thinking asks whether a company is good. Second-level thinking asks what price the crowd has already attached to that same conclusion, because a widely shared view is by definition in the price. Marks argues that superior results require a view that is both different from consensus and right, and that this is rare and uncomfortable rather than a technique.
What are Howard Marks's memos?
Public letters he has written to Oaktree clients since 1990, covering risk, cycles and investor psychology. They are dated and unedited, so his reasoning can be checked against what followed. He wrote them for roughly a decade with no response before Warren Buffett said publicly that he reads them first.
Can you tell where you are in a market cycle?
Marks argues you can read the present even though you cannot forecast the future. The evidence is observable now: whether lenders compete to lend, whether bad news is shrugged off, whether caution is being called timidity. That reading tells you what you are being paid to accept today, not when conditions will change.
What is the pendulum in Marks's writing?
His image for how investor psychology swings between greed and fear, and between treating risk as something to be avoided and something not worth worrying about. His point is that the pendulum spends very little time at the midpoint, so an average level of caution is rarely the appropriate one.
What did Howard Marks say about the 2000 technology bubble?
He wrote a memo in January 2000 arguing that valuations had detached from any defensible basis and that the enthusiasm resembled previous manias. The market turned shortly afterwards. It is the most cited of the memos and the one that established his public reputation, though he has cautioned against reading a single well-timed call as evidence of foresight.
Why does Marks invest in distressed debt?
Because it enforces the discipline he thinks matters. The best outcome on a bond is being repaid, so the analysis is entirely about what could prevent that, and the market is inefficient enough that careful work is rewarded. He has said he would not think about risk the way he does had he stayed in equity research.
Can an individual investor apply Howard Marks's approach?
The thinking transfers and the asset class does not. Distressed debt requires scale, legal resources and access to private markets. What an individual can take is the definition of risk as permanent loss, the habit of asking what is already in the price, and the practice of adjusting caution to conditions rather than to forecasts.
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