Every investment approach, even if skillfully applied, will run into environments for which it is ill-suited. Buy and hold, growth stocks, value stocks, small stocks, large stocks, foreign, domestic. And that means that even the best of investors will have periods of poor performance. Nobody performs great all the time.
Buffett was considered over with. Now, even if you are correct in identifying a divergence of popular opinion from eventual reality, that variant perception that I mentioned, it can take a long time for the price to converge with value and it can require something that acts as the catalyst. Underpriced does not mean going up tomorrow. Overpriced does not mean going down tomorrow. And everybody has to know that. And in order to be able to stick with an approach or decision until it proves out, which can be a long time, investors have to be able to weather periods when the results are embarrassing. This can be very difficult. Lord Keynes said, 'The market can remain irrational longer than you can remain solvent.' That's especially true of leveraged investors. That's the danger of leverage. And being too far ahead of your time, I was told back in the 70s, is indistinguishable from being wrong. So the point is the more you try to be a superior investor, the more idiosyncratic positions you have to take, invariably they will be unsuccessful for a while, the worse you'll look and the greater pressures to succumb. So everybody has to really invest in a way which is consistent with their personality and for a mild-mannered person to be a big risk-taker in the market is bound to lead to failure. And to succeed you have to survive. How's that for an axiom? And in particular that means avoiding selling at the bottom.
It is not enough to survive on average. You have to survive on the worst days. So you have to have a portfolio that fits with your personality and with your client's realities. Selling at the bottom, which people are often forced to do especially if they operate on leverage, and as a consequence failing to participate in the subsequent recovery, is in my opinion the cardinal sin of investing.
And you know having a security that goes down isn't the worst thing in the world if your analysis is right and it's going to recover. Participating in a market which declines is not the worst thing in the world. Invariably the market eventually recovers. The worst thing is to have something which goes down and sell it at the bottom because then you don't get to participate in the recovery and then you lose two ways. You participate in the loss and you miss the gain. The ability to persevere requires consistent adherence to a well-thought-out approach, control over emotion, and a portfolio built to withstand declines. You have to have some combination of those three.
And I always say never forget the six-foot tall man who drowned crossing the stream that was five feet deep on average. It's not sufficient to survive on average. The concept of averages is highly misleading. You and your clients have to survive on the worst of days. And that introduces an interesting challenge which is how bad is the worst day going to be? We don't know. We know how bad the worst day in history was, but we don't know whether the next day will be worse.
Now, risk is an inescapable part of investing. You should not expect to make money without bearing risk. I think that's as true as you can get. Any approach, strategy, or investment that promises substantial gain without risk is too good to be true, and we have to accept that. But you also should not expect to make money just for bearing risk. And you know when people look at the capital market line and it slopes like this and you have return here and risk there and most people draw the conclusion number one that riskier assets offer higher returns and that number two if you want to make more money the way to do so is to take more risk. Can't be true. Can't be true. Why not? Because if riskier assets could be counted on for higher returns they by definition wouldn't be risky. And that's the bottom line on that. I believe that controlling risk is just as important as identifying opportunities for profit.
Most people, their condition is such that a desirable approach strikes a balance between offense and defense. And I go through an explanation here of American football. Anybody understand American football here? Well, I don't understand cricket. That's okay. But in American football, the offense is on the field and has the ball and the defense is trying to stop them. The offense has four attempts to go 10 yards. And if they go 10 yards, they get four more attempts to go 10 more yards. And if they keep moving the ball down the field, eventually they score. The defense tries to stop them. If the defense is successful in stopping the offense on four tries, then the referee blows the whistle. The play stops. The offense goes off the field and they send in the defense. The defense goes off the field, they send in the offense, they get the ball. And now they have four tries to go this way. And if you think that's investing, you're crazy. Because in investing, there are no stoppages. The referee doesn't blow the whistle. You never know whether you should have the offense on the field or the defense. And you have to live with the ambiguity. And so as I say here, well maybe I don't say it but the point is that investing is really more like soccer or the football they play outside the United States where the team has to embody offense and defense. You know, you can put the greatest defense in history on the field and you'll always hold the other team to one goal, but you won't score any. So, you lose every game or nothing. You can put the world's greatest offense on the field, you'll score 10 goals, but without defense, the other guys will always have 11 and you'll lose every game. You have to have the balance of the two. And you have to decide for you, for your clients, for your asset class, for your business realities, which is the style for me. At Oaktree, our style is embodied by the motto, if we avoid the losers, the winners take care of themselves. Consistent. Now, remember that we are primarily investors in credit. And if you buy credit, you get a contractual interest payment every six months. You don't have to have winners. All you have to have is companies that survive, and you'll get that check every six months. So the success in credit comes purely from avoiding losers. In the 1940 edition of Graham and Dodd, they call fixed income investing a negative art in the sense that you succeed not by what you buy but what you exclude from your portfolio. If you exclude the losers, you get paid on everything in your portfolio.
