Given some of Howard Marks' more recent comments, as well as some of Oaktree's recent investments in the distressed energy space, this excerpt from The Most Important Thing seemed worth revisiting:
Skepticism is usually thought to consist of saying, “no, that’s too good to be true” at the right times. But I realized in 2008—and in retrospect it seems so obvious—that sometimes skepticism requires us to say, “no, that’s too bad to be true.”
Most purchases of depressed, distressed debt made in the fourth quarter of 2008 yielded returns of 50 to 100 percent or more over the next eighteen months. Buying was extremely difficult under those trying circumstances, but it was made easier when we realized that almost no one was saying, “no, things can’t be that bad.” At that moment, being optimistic and buying was the ultimate act of contrarianism.
Certain common threads run through the best investments I’ve witnessed. They’re usually contrarian, challenging and uncomfortable—although the experienced contrarian takes comfort from his or her position outside the herd. Whenever the debt market collapses, for example, most people say, “We’re not going to try to catch a falling knife; it’s too dangerous.” They usually add, “We’re going to wait until the dust settles and the uncertainty is resolved.” What they mean, of course, is that they’re frightened and unsure of what to do.
The one thing I’m sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left . When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain. Thus, a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron.
It’s our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling—and if our view turns out to be right—that’s the route to the greatest rewards earned with the least risk.