Editor’s Note: This article has been updated with additional details.
Howard Marks, co-chairman of Oaktree Capital Management, frequently employs analogies to demystify complex investment strategies, believing that “Oftentimes, we're best able to understand something we're interested in through analogies that clarify the matter by establishing connections between it and other parts of life.”
His latest memo draws from a compelling chess article, underscoring the strategic similarities between the game and investing.
Marks cites the article “Chess Teaches the Power of Sacrifice,” which resonated with him due to its discussion on strategic sacrifices necessary in chess — a concept he equates to making investment decisions.
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Marks quotes chess grandmaster Maurice Ashley, “Many positions cannot be won or saved without something of value being given away, from a lowly pawn all the way up to the mighty queen,” to highlight that strategic losses in chess mirror the sacrifices made in high-stakes investing.
He relates this to buying U.S. Treasury notes, describing them as a “modest or ‘sham’ sacrifice,” where the risk is low but so are the returns.
The philosophy of risk is central to Marks’ investment strategy. He emphasizes, “No risk, no reward,” a principle vital in chess and financial markets.
Marks also incorporates the wisdom of five-time world chess champion Magnus Carlsen, asserting, “Not being willing to take risks is an extremely risky strategy.”
This idea supports Marks’ view that managing risk intelligently is crucial for achieving substantial returns. Quoting Kenny "The Jet" Smith, he adds, “You have to give yourself a chance to fail,” underlining the inevitability of risk in pursuit of success.
Marks also highlighted the strategy behind Berkshire Hathaway’s achievements, led by Warren Buffett and Charlie Munger: “a lot of investments in which they did decently, a relatively small number of big winners that they invested in heavily and held for decades, and relatively few big losers.”
This approach underscores the importance of a balanced portfolio over chasing perpetual high performers.
Marks concludes by reflecting on the broader implications of risk, stating, “The only sure way to achieve that is by not taking any risk. But … risk avoidance is likely to result in return avoidance.”
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Image generated using artificial intelligence via Midjourney.
