What to do when stocks come into vogue: a lesson from an investor Buffett trusts

An important lesson to learn for successful investing is to avoid assets that other people like too much, Howard Marks said in an Oaktree Capital Management podcast about the company's recent client conference.

Marks, co-founder of investment firm Oaktree Capital, is known for his "memoranda" (memos) describing his views on the stock market. He attracted the attention of investors in 2000 when, in a Bubble.com memo, he predicted the imminent collapse of technology stocks just three months before the dot-com bubble began to deflate. Warren Buffett said he always reads Marks' newsletter and always gets something new out of it.

"If you want to be a bargain hunter and make super profits, which is what we strive for, you can't buy popular assets," Marks said on the podcast. - Because if they're popular, that means they're probably overvalued and they're worth too much to make super profits."

The investor says he learned that lesson as a young man when he first got into the investment business in 1969. "I was 23 years old. The world loved the Nifty Fifty - they were America's biggest companies. Exorbitant prices were paid for them because they were too loved," he said. - "If you bought their stock the day I started and held it for five years, you would have lost about 95% of your money - even though they were the best companies in the country.

This experience shows that investors should "care not what to buy, but how much to buy it for," Marks emphasized. In order to get super-profits, it is necessary to buy assets "not at fair value, but at unfair value". And here, he said, it is important to be able to capitalize on the mistakes of others - to find and exploit situations where the seller, for whatever reason, sells an asset for less than it is worth. For example, when the seller used a loan to buy the asset, but found himself at a loss and wants to close the position as soon as possible.

"We want to buy from sellers who make mistakes <...> Such opportunities must exist. We must be able to find them and then reflect better than the seller - that is, capitalize on his mistake," Marks concluded.

The informal name Nifty Fifty was used for a group of stocks that were investor favorites on the New York Stock Exchange in the late 1960s and early 1970s, comprising about 50 of the largest companies in the U.S., including Coca-Cola, McDonald's and Procter & Gamble. These stocks were thought to be so safe and promising that investors need only buy them at any price and never sell, Barron's wrote. But after the energy crisis and the start of the U.S. recession in 1973, Nifty Fifty shares collapsed more than 19%, outperforming the broad market (minus 14%).In addition, the S&P 500 recovered faster and returned about 2.5% a year to investors from 1973 through 1977, while the Nifty Fifty's average annual return during that period was minus 4.4%, Bridgeway Capital Management analysts calculated.

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