Howard Marks: There’s Only One Way To Forecast

During this interview at the 2023 Value Investing Conference, Howard Marks discussed the one way to forecast. Here’s an excerpt from the interview:

Marks: One of the most insightful questions that I get, and I’ve gotten it a few times since writing that memo, is you make investment decisions with regard to companies and properties based on forecasts of earnings primarily.

There’s a lot else but it’s subsumed under earnings, cash flow, and so forth.

Don’t you need a macro forecast to be able to predict earnings for a company?

And I say, aha that’s it, you got me, because you do. We have to make forecasts of earnings for companies but we can’t rely on macro forecasts. It’s a great challenge.

The answer is in my opinion that we make what I call neutral forecasts with regard to the macro.

Which is essentially we predict that the macro will be like it always has been on average. I know that’s probably wrong, but I don’t think I can improve upon it.

If I predict… the US economy’s grown in a little under two percent a year for a long time now. I can predict three or I could predict one, I’m probably wrong, it’s probably going to be two.

Now if I predict three and I’m right I’m going to make more money than other people. if I predict one and I’m right I’m going to make more money than other people.

But most of the time it’s going to be two and the predictions of one and three are going to be fruitless.

So we make a neutral assumption and this is especially important I think if you look at a company or a property or an asset where the decision to buy it would have to be predicated on a a non-neutral forecast.

Well now you’ve bet your outcome on whether that non-neutral forecast is right and we don’t want to do that. We don’t bet on forecasts.

OakTree runs according to an investment philosophy which has six tenets, one of which is that our decisions are not predicated on macro forecasts.

You can watch the entire discussion here: