Howard Marks's risk lesson: survive the cycle before chasing the upside (2026)

Who & why

Howard Marks is worth studying because his investing career is built around the part beginners usually notice last: what can go wrong. He co-founded Oaktree Capital Management in 1995 and remains its co-chair; Brookfield's official profile says he has helped keep the firm's investment philosophy consistent and communicated it to clients. 1

Oaktree specializes in credit and distressed investing, where a bad decision can mean more than a disappointing price chart. A borrower may fail to pay. A complicated deal may hide losses. A fund may need cash before an asset recovers. Marks's beginner lesson is therefore narrower than "be conservative": control the risks that can permanently damage your plan before you reach for a higher return.

The core idea

Marks separates risk from volatility. A price moving up and down is visible and easy to measure. The more important question is whether the investment can leave you with less capital, less flexibility, or a forced sale when recovery is impossible. In a 2025 memo, he wrote that "the risk of permanent loss is the most important investment risk," while also acknowledging that volatility can be a real-world risk for investors who cannot tolerate it. 2

That distinction changes the first question you ask. Instead of "How much might this earn?" ask: What would make this loss permanent, and could I stay invested through the ugly part?

Marks does not argue that investors should avoid all risk. Oaktree's own summary of his 2006 memo Risk says investors must bear risk to pursue profit, but should understand it and demand compensation for taking it. 3 Risk control means choosing risks you can survive, not pretending a portfolio can be made risk-free.

His second point is about time. A strategy that looks brilliant in a rising market may simply be carrying more downside that has not arrived yet. Marks's standard is a full cycle: judge whether a process can handle both good and bad environments, not only the years that flatter it. That is a better test than asking whether you beat a benchmark last quarter.

In their own words

Marks's writing is unusually direct about the limits of prediction:

"We may never know where we're going, but we ought to know where we are."

He uses that line in his summary of You Can't Predict. You Can Prepare. The point is not to build a macro forecast and trade every headline. It is to notice whether investors are relaxed or fearful, whether lending standards are loose or strict, and whether prices leave room for disappointment. 3

He also describes the goal of long-term investing as "a string of consistently good returns and an absence of poor years," rather than occasional brilliance interrupted by damaging losses. 3 In plain English: avoiding one ruinous decision may matter more than finding one spectacular winner.

The story that proves it

In mid-2000, Marks was asked to chair the University of Pennsylvania's investment committee. The endowment had lagged peers during the 1990s because it was heavily underweight in growth, technology, venture capital, and private equity. With markets still elevated, people asked whether Penn should become more aggressive to close the gap. 2

Marks advised against chasing the missed boom. He later summarized his reasoning in blunt terms: it was too late to start chasing a horse after it had left the barn, and the risk of participating in a bust after missing the boom was greater than the risk of continuing to underperform.

This was not a heroic market call. It was a decision about the institution's ability to survive a bad outcome. Penn ranked low in endowment per student, so a large loss would have had consequences beyond a temporary performance ranking. The committee had to choose between the embarrassment of lagging a hot market and the possibility of compounding that mistake by taking more risk at an expensive point.

The case is historical, not a signal to copy Marks's decision. Its value is the order of operations: assess what you can afford to lose, notice when fear of missing out is driving the decision, and only then consider whether more risk is justified.

What this means for you

Use Marks's principle as a pre-decision filter. Three habits make it concrete:

Name the permanent-loss scenario. For every investment you are considering, write one sentence explaining how the capital could be impaired for good: business failure, excessive debt, fraud, forced selling, or a price you paid that assumes perfection. If you cannot name the mechanism, you do not yet understand the risk.
Separate ability from willingness. Your account balance is not your risk capacity. Consider when you need the money, how stable your income is, whether you have emergency savings, and whether a large drawdown would make you sell. An investment can be tolerable for someone with a long horizon and intolerable for someone funding a near-term goal.
Review across a full cycle. When judging a strategy, do not rely on its recent return. Look for how it behaved in both strong and weak markets, and ask what risks produced the result. A portfolio that wins only when optimism is high may be more fragile than its track record suggests.

Where it breaks

Marks's framework can be misused in at least three ways. First, "permanent loss" is not the only loss that matters. If you need money next month, a temporary 30% decline can become permanent for you because the calendar forces a sale. Marks makes that distinction himself: volatility may be a material risk when an investor has withdrawals, institutional obligations, or a low tolerance for losses. 2

Second, risk cannot be reduced to a tidy score. A low-volatility asset can still lose money through weak credit, leverage, fraud, inflation, or a price that leaves no margin for error. A calm chart is not proof of safety.

Finally, caution can become an excuse for never acting. Marks's message is not "hold cash forever" or "avoid every uncertain investment." His own philosophy says profit requires bearing risk consciously and skillfully. The useful boundary is simple: do not take a risk merely because everyone else is taking it, and do not confuse a recent winning streak with proof that the risk was small.

For a beginner, the most durable takeaway is not a forecast. It is a sequence: survive first, understand the downside, then decide whether the possible return is worth the risk. This is an educational framework, not a current buy or sell recommendation.

References

1
Howard Marks | Brookfieldbrookfield.com
2
A Look Under the Hoodoaktreecapital.com
3
The Best of . . .oaktreecapital.com