Billionaire Howard Marks’ Remarks on Fed Frustrations

Brett Owens, Chief Investment Strategist
Updated: October 27, 2015

Earlier this week, Oaktree Capital Group’s billionaire co-founder Howard Marks had some sharp words for the Fed. He told Bloomberg:

“I wish the government would get out of the business of setting rates, and I wish rates would stop being unnaturally low.”

Marks is probably the richest and smartest money manager that individual investors have never heard of. He has a cool $100 billion under management and he’s been a regular on Forbes’ World Billionaires list for several years running.

Oaktree is famous for a number of gutsy, profitable moves – many of which have involved distressed debt. The firm has earned its clients an astounding 19% after fees on its distressed debt funds – helping make Marks himself a billionaire twice over.

With that kind of money and track record, why is Marks so worked up about interest rates? He’s mad because he can’t bet profitably on them.

But He Will Bet You $100 That You Won’t Forecast Oil Prices

In the same interview, Marks shared a wager he’s opened to everyone in his life (but only had one taker so far). He’ll bet you $100 that you won’t be able to predict what the actual price of oil will be one year from now, give or take $5.

That’s a range of more than 20% on oil prices. Why is he willing to give us a wide range of our choice, and bet his money on the field – no matter what the field is?

He alluded to why in a September 2014 investor memo:

“The probability of loss is no more measurable than the probability of rain. It can be modeled, it can be estimated (and by the experts pretty well), but it cannot be known.”

In other words, Marks may not know where oil will be this time next year. But he’s modeled the probabilities, and he knows that the odds are in favor of it being more than $5 away from any price you can name.

His secret is that he assesses risk based on actual probabilities rather than perception.

Which is why low interest rates are driving him nuts. Sure, he may not like that savers are getting penalized. But I can guarantee he loathes the fact that he has nothing to model. As long as rates stay in the basement, there’s no range of outcomes for him to calculate – and bet on.

But We Aren’t Beset With Marks’ “Problem”

Marks needs big hits to generate meaningful returns on the war chest he manages. Like the $10.9 billion distressed debt fund he raised in 2008, still the largest to date. If he doesn’t make a big bet, it’s not worth making a bet at all.

Fortunately you and I aren’t “cursed” with billions of dollars that we need to deploy. And we can actually employ Marks’ strategy ourselves. There are great opportunities for individual investors seeking income today – ironically, thanks to the Fed.

The Vanguard REIT Index Fund (VNQ) has doubled over the last seven years, but it’s down 11% from its January highs. It pays 4%, but investors decided this yield wasn’t good enough – because they were worried the Fed would raise rates this year.

Marks would call this classic first-level thinking – taking what Yellen said at face value, and acting on it. To be successful in the markets, he believes you need to employ second-level thinking. Which would reason:

“Everyone thinks Yellen is going to raise rates. And they’re blindly selling high yielding issues like REITs. But I think there’s a chance she won’t raise rates as soon or as high as she says. So I’m going to buy the best quality REITs while they’re cheap.”

What are the best quality REITs? My favorites operate in the booming healthcare market. There’s a bull market in elderly Americans unfolding, and it will run for at least two or three more decades. Here are two REITs poised to profit – and off their own January highs by 16% and 29% respectively:

Welltower (HCN) owns and operates senior housing and medical care facilities. Since inception as the first healthcare REIT in 1970, HCN has returned more than 15% annually to shareholders. It pays a 4.7% annual yield today and has increased its dividend every year since 2010, including two raises this year.

Ventas (VTR) plays in the same space as HCN and has likewise delivered its investors a 15% return over the last 10 years, thanks to steady dividend payouts and increases. Ventas yields 5.1% today and has plenty of upside with a current 65% payout ratio.

While it’s a good time to consider HCN and VTR, it’s a great time to buy my favorite healthcare REIT – which actually pays more than 7% today. It’s cheap thanks to the Yellen worries, and its current obscurity (only one analyst follows it, thought that will change soon). Click here and I’ll share the company with you and show you how I used Marks’ strategy to find it.