Socialism vs. Capitalism: Karl Marx vs. Howard Marks

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This past week, I spent some time with two famous men named Marx and Marks.

The first is the infamous Karl Marx, who authored “The Communist Manifesto.” Published in February 1848, Marx’s short book came just in time for the revolutions that swept across the European continent that year. My visit with Karl Marx took the form of a walking tour of Soho in central London where he lived in exile starting in 1847.

The second is Howard Marks, founder and CEO of Oaktree Capital. Marks is the author of a very different book: “The Most Important Thing: Uncommon Sense for the Thoughtful Investor.” I saw Howard Marks speak at King’s College Business School last week just across the street from the London School of Economics.

Despite their similar names, these two figures could hardly be more different.

Karl Marx evokes the image of a bushily bearded intellectual. Even today, the image of the impoverished philosopher Marx — along with Che Guevara — is the global icon of the Left.

In contrast, Howard Marks is the very embodiment of a Wall Street institutional fat cat. This self-made billionaire is a living, breathing example of Marx’s argument for revolution.

Karl Marx

Karl Marx is one of the best-known figures in history. Between 1851 and 1856, Marx and his family lived at 28-29 Dean Street in Soho, London. Ironically, this is the same building where a future capitalist, George Soros, worked as a waiter at the Quo Vadis Club 100 years later.

Our tour guide called “The Communist Manifesto” the most influential text in history following the Bible and the Koran.

Here’s why…

Thirty years ago, in 1987, one-third of the world’s population lived in a Communist country. Two-thirds lived in nations governed by political parties inspired by Marx’s socialist ideals. Even today, the Chinese Communist Party — which lords over 1.3 billion of the world’s citizens — pays homage to Karl Marx in its official celebrations.

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Howard Marks

Howard Marks cuts a different figure from Karl Marx.

Not only is Marks a co-founder of the $100 billion investment firm Oaktree Capital, his net worth of $2 billion places him on the Forbes 400 list of America’s wealthiest people.

Since 1990, Marks has shared his investment views with Oaktree’s clients through memos that have garnered a devoted readership among some of the world’s leading value investors. As the website Business Insider has written: “the letters read like Michael Lewis ghostwriting for Warren Buffett: insightful, direct, homespun, expert and sharply pointed.”

It’s little wonder that Warren Buffett is one of Marks’ biggest fans. Buffett contacted Marks out of the blue in 2011. He told Marks that if he ever writes a book, Buffett would be the first to endorse it. Thus, Howard Marks’ book was born.

What do Marx and Marks Have in Common?

Despite last names that are homonyms, Marx and Marks have little in common.

Karl Marx’s “Communist Manifesto” was revolutionary and inspirational. It changed the course of history and the lives of billions in both the 19th and 20th centuries.

Howard Marks’ book — “The Most Important Thing” — is a well-written, pithy summation of a value investor’s creed. The tenets of this doctrine are familiar: a search for bargains, managing risk, no belief in prediction, skepticism about market efficiency and an appreciation for psychology.

Here is what these two very different thinkers share.

Both Marx and Marks believe they offer a comprehensive worldview. They not-so-secretly believe that their book is really the only one you need to read.

I’m always suspicious of anyone who thinks he has it all figured out. I just don’t believe anyone is that smart — no matter how rich or famous he or she may be.

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In my view, both Marx and Marks also suffer from some remarkable blind spots.

Most notably, Karl Marx got the unfolding of history all wrong. Marx’s utopian vision of socialism did not rise inevitably from the ashes of capitalism, and what did arise in the name of socialism turned out to be a cover for bloody dictatorships that have cost tens of millions of people their lives since Marx penned his first works.

Marx also was a hypocrite. This leading critic of capitalism lived off the generosity of Frederick Engels, co-author of “The Communist Manifesto.” Engels was a rich kid who ran his father’s factory in Manchester and funded Marx’s anti-capitalist writings from the proceeds of his family’s venture. Even Karl Marx had to live in the real world.

Howard Marks, who bought an apartment in 2012 on New York City’s Park Avenue for $52.5 million, doesn’t have such worries.

Yet, as a value investor and Buffett disciple, Marks also has his blind spots.

Marks uses what he calls “second-level thinking” — unique insights he and other value investors have — to decide which stocks to buy.

However, Marks’ description of the investment process is incomplete at best.

Marks writes nothing about when to sell. Nor does Marks ever address the issue of position size, that is, how much he is willing to invest in a position and how important this is to his superior investment returns.

This is ironic. Oaktree’s 13F disclosure statements to the Securities and Exchange Commission (SEC) confirm that Marks often makes huge bets on particular stocks. As any designer of a trading system knows, it is bet size that matters the most to your investment returns. It is, literally, “the most important thing.”

Marks is also disdainful of alternative investment approaches, such as trend following.

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As Marks puts it: “There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite.”

Marks also writes: “investing can’t be reduced to an algorithm and turned over to a computer.”

Both statements by Marks are patently untrue.

There are dozens of investment firms whose methodology is based both on trend following and computer-driven algorithms. Firms like Winton Capital, AQR and Dunn Capital have managed tens of billions of dollars profitably using these methods for decades.

That leads me to what the unlikely duo of Karl Marx and Howard Marks have in common.

Both developed a comprehensive philosophy, which they believe provides all the answers.

In Karl Marx’s case, it is socialism that is the be all and end all of political systems.

In Howard Marks’ case, it is that value investing is the only way to generate better-than-average returns in the market.

Also, neither philosophy brooks any dissent from their received wisdom.

Here’s the reality…

Neither Karl Marx nor Howard Marks offers the only answer to politics and investing.

The world is a much more complicated place than either Marxists or value investors would have you think.

In case you missed it, I encourage you to read my e-letter from last week about a mutual fund manager’s big bet on Florida real estate.

P.S. Howard Marks’ most recent big bet is the latest recent recommendation in my monthly investment service, Smart Money Masters. He’s committed a whopping 21.23% to this single position.

Smart Money Masters is where I recommend the latest and best “smart money” of the world’s leading investors. The current Smart Money Masters portfolio includes Warren Buffett’s, George Soros’ and hedge fund manager Bill Ackman’s top investment bets. One recommendation follows a strategy that is beating Buffett at his own game. You can read about it here.

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