A Bear's Eve View.

Investment Chief Howard Marks Believes That Caution Is the Best Approach in These, and Other, Times

HOWARD Marks, whose downtown Los Angeles-based Oaktree Capital Management LLC manages a $20 billion investment portfolio, is one of L.A.'s most highly regarded investors. His specialty is buying high-risk debt, including distressed debt of companies on the brink of collapse, and generating steady returns for Oaktree's institutional clients.

While Wall Street reopened to a frenzied sell-off last week, and investors worldwide struggled to make sense of it all, Marks remained confident in his firm's investment approach. Where others see doom and gloom, Marks - the consummate contrarian - sees opportunity.

Question: Being an ardent bear, as you are considered to be, do you expect to see more investment opportunities in the months ahead?

Answer: There is nothing very bright to do right now. Investing is a process of making judgments about the future - informed judgments - and discounting those to present-day prices. There are not a lot of informed judgments that one can make about the future right now. Prices are lower, but are they lower by enough? It seems clear that the future is not as good as what it was expected to be (before the attacks), but has the percentage decline been sufficient to reflect that? Anybody who thinks they know what the future will be, and in what direction, knows more than I do.

Q: How is all this affecting Oaktree's $20 billion investment portfolio?

A: Oaktree and its people are not directly affected. We don't deal with stocks. Our instruments are not that liquid or volatile.

Q: What message would you give to nervous investors right now?

A: The important thing is to keep calm and not do anything precipitous and silly. I'm a Cassandra by nature. I'm never bullish. But I would say that any prosperity-oriented investments are worrisome. Venture capital, the things that do best when the economy is doing well, are things you don't want to be in right now. Of course, the trouble with listening to somebody like me is you'll miss the ups. But you'll be prepared for the downs and you'll be less likely to be carried off the field.

Q: Some market watchers are saying now is a good time to buy. Others say that's just part of Wall Street's nonstop self-promotional pitch, aided by the financial media. Which is it?

A: Let's look at the recent past - the tech bubble and subsequent sell-off. As a result of all these talking heads on CNBC, people started to believe that there was somebody who actually knew what was going to happen. And that gave people a feeling of well being and security, which enabled them to make these disastrous investments. The two things I've never heard on CNBC are "I'll be darned if I know" and "beats the hell out of me."

Q: Are bears like you generally feeling more bullish now that markets have sold off?

A: Bears don't think of themselves as bears. I'm a cautious person who thinks he never has all the answers. You just don't see a lot of people who go from bullish to bearish. There are optimists and pessimists. There are biases in how people see events. Likewise, people in the investment world tend to see things as positive or negative. The people who are positive today were certainly positive before these terrorist attacks. They may be right or wrong. I don't think I know what the future will be and I didn't think I did a week ago.

Q: Let's talk about your firm's growth. When you and your partners bolted from Trust Company of the West in 1995, and took $7 billion in client accounts with you, did you have any idea you'd be sitting on $20 billion six years later?

A: Obviously, we left TCW because we thought we would be successful on our own, but we didn't think we would reach this magnitude so soon. We didn't really have a plan. We didn't have any projections - I don't believe in projections. I'm a man who manages by mottos and adages, and about half of them are about the uselessness of trying to see the future.

Q: Who are your clients?

A: Our main customers are corporate pension funds (Fortune 100 type companies), public pension funds (17 of the states, along with cities and counties), and foundations and endowments (colleges, universities, charities).

Q: I would think those types of clients would be averse to investing in Oaktree's high-risk asset classes.

A: Not really. If you have a portfolio of low-risk investments, the kind you'd characterize as being normal for these kinds of clients, and you add another strategy, a risky strategy that's low in correlation with the other things in the portfolio, it tends to reduce the risk of the whole portfolio.

Q: Can individuals invest in your funds?

A: Yes. The minimum investment is $3 million, and high-net-worth individuals account for about $1 billion of our $20 billion portfolio. But we don't market to individuals. We don't have salesmen calling on individuals. They call us. It's word of mouth.

Q: One of your asset classes involves buying distressed debt for the purpose of gaining control of the debt-issuing company, a rather notorious strategy used by the corporate raiders of the 1980s.

A: When we started to do this, when others were doing leveraged buyouts and breakups, laying people off, closing factories and all that stuff, a lot of our clients were sensitive to whether we would be part of that. We successfully explained to them that we are not the problem. We are the solution. These companies are defaulting on their debt. They are insolvent. Whether we come along or not, they're going to go into bankruptcy.

Q: Probably your largest asset class is high-yield bonds, better known as junk bonds. Is that term offensive to you?

A: Actually, I kind of enjoy it. If you think back to the tech bubble, what were people saying about those companies.? Impregnable. Unstoppable. Irresistible. When the common view is too good, people pay prices that are too high, and that's how you lose a lot of money. I would rather buy asset classes that people are saying bad things about. When my asset classes -- junk bonds, distressed debt and nonperforming mortgages - are viewed by people as being great, then the game will be over.

Q: Were you a "Gloomy Gus" as a kid?

A: Maybe I was. But the most important thing is that I lived through the early '70s. At that time, there was the same mantra about the Nifty 50 that there was about tech companies a couple years ago. "These are the best companies in America; they're changing the world." So people overpaid. Then companies that had been selling at 90 times earnings suddenly were selling at 9 times earnings. Beginning in '73, the average investor lost 2 percent of their money every month for 24 months in a row - that's no fun. Stockbrokers were driving cabs in New York.

Q: You were one of Michael Milken's first junk bond customers. How did that happen?

A: In '78 I was working in the bond department at Citibank and Bache (before it was Prudential-Bache) said they wanted to create a mutual fund family called the Chancellor Funds, and they wanted Citibank to run it. The first fund they wanted to be a high-yield, bond fund. So Citibank asked me to run it and said I should call some guy named Michael Milken who works for some small brokerage firm in California. I called him up, and we started it up from scratch. I consider myself very fortunate because that was prologue to everything that has happened since.

Howard Marks

Title: Chairman

Organization: Oak-tree Capital Management LLC

Born: 1946, New York

Education: Bachelor's degree in finance, Wharton School; MBA in accounting, University of Chicago

Career Turning Point: Being assigned to run a high-yield bond fund for Bache in 1978

Most Admired People: Warren Buffett, John Kenneth Galbraith, John Maynard Keynes, Peter L. Bernstein 

Hobbies: Tennis, art history, architecture

Personal: Married; two children