"When I see memos from Howard Marks in my mail,
they're the first thing I open and read." –Warren Buffett
Few (if any) money managers are better than Howard Marks of Oaktree Capital, in our opinion. I mean, can you get a bigger endorsement than Warren’s quote above? If you are not familiar with Howard's work, you can read his memos here.
In 2022, Howard perhaps unintentionally made a case for systematic investing generally, and trend following specifically, that we would be hard-pressed to match. From his July memo titled, “I Beg To Differ”:
“You can’t take the same actions as everyone else and expect to outperform.”
“If your behavior and that of your managers is conventional, you’re likely to get conventional results – either good or bad. Only if the behavior is unconventional is your performance likely to be unconventional …and only if the judgments are superior is your performance likely to be above average.
The consensus opinion of market participants is baked into market prices. Thus, if investors lack insight that is superior to the average of the people who make up the consensus, they should expect average risk-adjusted performance.”
Now, to my knowledge, Howard Marks is not a trend follower. So reading his works will not reveal such a label. However, I think he expertly pinpointed the characteristics of a timelessly successful investing approach and how it differs from conventional thinking. From there, investors must judge for themselves what approach is best for them.
Our assertion from reading and sharing Howard’s work is two-fold:
The accessibility of trend following is self-evident. Because it focuses only on market prices, it can be implemented on essentially any instrument that has publicly available data. ETFs, mutual funds, and individual securities are all suitable liquid candidates on which to deploy such a strategy. Moreover, the advent of commission-free, electronic trading has eliminated the two most meaningful barriers to partnering with a trend following asset manager: ability and cost to trade with trend.
To describe an ideal model for superior investment performance, Howard leverages the work of longtime Yale University endowment, David Swensen. He’s another investor and author the team at Blueprint Investment Partners greatly admires. In his book, “Pioneering Portfolio Management,” David describes institutional investing in a way that Howard considers “sheer investment poetry”:
“...Active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel. Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.”
Howard bolded the key two-word phrase and further defined:
“Idiosyncratic – When all investors love something, it’s likely their buying will render it highly priced. When they hate it, their selling will probably cause it to become cheap. Thus, it’s preferable to buy things most people hate and sell things most people love. Such behavior is by definition highly idiosyncratic (i.e., “eccentric,” “quirky,” or “peculiar”).
Uncomfortable – The mass of investors take the positions they take for reasons they find convincing. We witness the same developments they do and are impacted by the same news. Yet, we realize that if we want to be above average, our reaction to those inputs – and thus our behavior – should in many instances be different from that of others. Regardless of the reasons, if millions of investors are doing A, it may be quite uncomfortable to do B.”
Systematic investing strategies that use trend following are often uncomfortably idiosyncratic because they can buy both when prices SEEM too high AND too low. The human mind might be saying, “I’m not so sure…” but if the price data signals a purchase, that’s all that matters.
The same goes for selling. Price trends are the chief input for decision making.
Further, systematic investing’s ability to act quickly means that buys and sells can at times happen in relatively quick succession. One must look no further than the last several weeks to see what I mean.
After two months of sharp declines, U.S. stocks rallied quickly in October, with a continuation of that nascent upward momentum in November to such a degree that an intermediate-term uptrend was triggered. Blueprint dutifully increased exposure to U.S. equities as a result.
Increasing exposure to U.S. stocks when the S&P is in a months-long drawdown and as negative news and economic reports swirled likely meets the standard of idiosyncratic, in our view, but certainly meets the definition of uncomfortable.
One of the positive attributes of systematic investing is that it removes emotion from the decision-making process. It is the willingness to follow the rules, even when it feels uncomfortable or the financial news is saying it’s the wrong move, that we think increases the likelihood of achieving high exposure to increasing markets and limited exposure to declining markets.
We could go on and on about the insights Howard provides and how we think they make a case for financial advisors to use a systematic trend following approach in some or all of their client accounts. At the end of the day, advisors must determine what approach is best for their clients and their practice.
If you’re an advisor who’d like to further discuss how systematic investing might fit into your practice, please reach out.