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Howard Marks LIVE (Replay) with Barry Ritholtz (Podcast) · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
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Speaker 1: This week we have an extra special show. On Monday,
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Speaker 1: we did Masters in Business Live and my guest was
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Speaker 1: the incomparable Howard Marks of oak Tree Capital. They run
0:23
Speaker 1: about a hundred and twenty billion dollars and have put
0:28
Speaker 1: up numbers that have been quite astonishing for their entire
0:33
Speaker 1: twenty four year history. This is the second Masters in
0:38
Speaker 1: Business Live we've done. The first one was Ray Dalio.
0:42
Speaker 1: We're going to continue doing these every few months and
0:45
Speaker 1: we have an interesting list of guests coming up. If
0:49
Speaker 1: you were anywhere near the New York City headquarters on
0:53
Speaker 1: the day we do one of these, I strongly advise
0:57
Speaker 1: you to get tickets. Not only is it live so
1:00
Speaker 1: anything can happen, but it's really a fascinating conversation and
1:05
Speaker 1: in both cases, um our guests stick around, chat with
1:12
Speaker 1: the audience, um take questions, signed books. It's very informal
1:17
Speaker 1: and how often you get to really hang around and
1:22
Speaker 1: and have that sort of interaction with legends in finance
1:27
Speaker 1: like that. Plus, Bloomberg is a great place to come
1:30
Speaker 1: to an event. They always serve drinks and appetizers. They
1:34
Speaker 1: really roll out the red carpet. It was. It was
1:37
Speaker 1: a lovely and delightful evening. Everybody who attended had a
1:41
Speaker 1: great time. Rather than me continue to babble with no
1:46
Speaker 1: further ado, my masters in business live with oak Tree
1:52
Speaker 1: Capitals Howard Marks, and once again I get to start
1:59
Speaker 1: out by announcing, um that I am cheating. By bringing
2:04
Speaker 1: someone like Howard here makes my job really easy. Uh.
2:08
Speaker 1: If you're not familiar with his background, I'm going to
2:11
Speaker 1: give you just a really short uh CV of Howard Marks.
2:15
Speaker 1: He's the co chairman and co founder of oak Tree Capital,
2:19
Speaker 1: which now manages over a hundred and twenty billion dollars
2:22
Speaker 1: in assets. Howard formed oak Tree to run high yield bonds,
2:26
Speaker 1: distress debt, in private equity, and other strategies back They
2:31
Speaker 1: run seventeen separate distress debt funds unless It's Risen two more,
2:35
Speaker 1: which have averaged annual gains of after fees for the
2:42
Speaker 1: past about seven hundred basis points above its peers in
2:47
Speaker 1: the fixed income space, and handily beating a lot of
2:50
Speaker 1: equity funds over the same time period. He is the
2:53
Speaker 1: author of the Most Important Thing, Uncommon Sense for the
2:56
Speaker 1: Thoughtful Investor, his new book, which everyone here will get
3:00
Speaker 1: copy of is Mastering the market cycle, getting the odds
3:04
Speaker 1: on your side. Howard Marks, Welcome to Bloomberg Life. Mary,
3:07
Speaker 1: it's great to be here. So I'll get to the
3:11
Speaker 1: books um in a few minutes. But I want to
3:13
Speaker 1: start with an interesting question that I think people may
3:16
Speaker 1: not be aware of your background. You began as an
3:20
Speaker 1: equity analyst. How does one of the world's most famous
3:24
Speaker 1: bond managers being in his career as an equity analyst. Well,
3:27
Speaker 1: I think that, I think that certainly at that point
3:31
Speaker 1: in time, Uh, the starting off as an equity analyst
3:34
Speaker 1: was there was the normal course. Uh No, bonds at
3:38
Speaker 1: that time were considered a backwater that nobody was interested in.
3:42
Speaker 1: They had two old uh European refugees in the research
3:46
Speaker 1: department of City Bank, and I remember, uh they would
3:49
Speaker 1: publish a bi weekly bond summary, and I remember at
3:54
Speaker 1: one point one came around with the black box in
3:56
Speaker 1: the upper right hand cornersay, is the last issue because
3:59
Speaker 1: everybody lost interest in stocks were doing so well. You
4:02
Speaker 1: know how it works. Stocks were doing so well, bonds
4:04
Speaker 1: were doing so poorly that people lose interest. Now, Uh,
4:08
Speaker 1: what the contrarian says is I want to get out
4:10
Speaker 1: of the thing that's been doing well and into the
4:12
Speaker 1: things that that's doing poorly. But contrarianism hadn't become invented
4:16
Speaker 1: yet at that point in time. But anyway, so I
4:19
Speaker 1: started off in the equity research as you say. I
4:22
Speaker 1: had a summer job in sixty eight, came back full
4:25
Speaker 1: time after grad school in sixty nine, became UH senior analysts,
4:30
Speaker 1: the United head director of Research from seventy to seventy
4:33
Speaker 1: eight UH. And then I got my lucky break in
4:36
Speaker 1: seventy eight when I switched to UH what was called
4:40
Speaker 1: the bond Department. But I wasn't ever managing straight fixed income.
4:44
Speaker 1: I was started with convertible bonds. And then in the
4:47
Speaker 1: summer of seventy eight, I got the phone call that
4:50
Speaker 1: changed my life. The head of the bond department called
4:52
Speaker 1: me and he said, there's some guy in California named
4:54
Speaker 1: Milken or something and he deals in something called hi bonds.
4:58
Speaker 1: Can you figure out what that mean? Because the client
5:01
Speaker 1: had come in and asked for Ohio bond portoyo, and
5:03
Speaker 1: I was smart enough to say yes. So that's the
5:07
Speaker 1: transition from equities to regular bonds to high yield bonds.
5:12
Speaker 1: How do you end up over at Trust Company of
5:14
Speaker 1: the West in UH. In the first business trip of
5:19
Speaker 1: my life in January nineteen seventy, I went to California
5:22
Speaker 1: and UH I was stuttering studying a group that doesn't
5:26
Speaker 1: exist anymore called the Conglomerates. And after the doing, the
5:31
Speaker 1: company visits my boss and I. His in laws lived
5:34
Speaker 1: in uh Laguna Beach, so he went down there and
5:38
Speaker 1: spent the weekend. I fell in love with California, and
5:40
Speaker 1: I spent the seventies trying to figure out a way
5:43
Speaker 1: to get to California, which I did in nineteen eighty.
5:46
Speaker 1: UH City, I got City back to move me in
5:48
Speaker 1: nineteen eighty and then in eighty five, Trust Company the West,
5:52
Speaker 1: which was in l a company, approached me because they
5:55
Speaker 1: wanted to expand into my asset classes. And that's how
5:59
Speaker 1: I moved there in eighty five. So it's worth mentioning
6:02
Speaker 1: in passing that when you were working at Trust Company
6:05
Speaker 1: of the West, you were supervising a young whiz kid
6:08
Speaker 1: named Jeff Gunlock or working with tell us what it
6:12
Speaker 1: was like writing herd on him. He seems to be
6:16
Speaker 1: a person that doesn't lend himself to UH being told
6:19
Speaker 1: what to do well. I never kidded myself into thinking
6:22
Speaker 1: that that I was actually supervising him. Uh, but you know,
6:27
Speaker 1: uh I was. I was asked to, well, you used
6:33
Speaker 1: the term right herd, which is as good as any
6:36
Speaker 1: and uh, you know he uh kind of respected me
6:42
Speaker 1: intellectually and so and so we got along. And uh
6:47
Speaker 1: and I think with Jeff that's the key, um, you know.
6:52
Speaker 1: And uh, he was very innovative in his approach. He
6:55
Speaker 1: he was managing mortgage backed securities from the late eighties, uh, um,
7:00
Speaker 1: which was innovative. And you know he would he would
7:05
Speaker 1: figure out strategies and then share them with me in
7:08
Speaker 1: the hope that I would understand. So so fast forward
7:12
Speaker 1: and I would assume you you probably did understand pretty well. Um.
7:15
Speaker 1: Fast forward a couple of years you launched oak Tree.
7:18
Speaker 1: And then a decade or so after that, Jeff decides
7:23
Speaker 1: the part ways with Trust Company of the West, and
7:25
Speaker 1: he comes to you for some career advice. How did
7:28
Speaker 1: that work? Well, of course, he didn't decide to part ways.
7:31
Speaker 1: I mean they decided to part ways with him. Um,
7:35
Speaker 1: and he got canned is the technical term. And and
7:38
Speaker 1: and I think it was December oh nine, if I'm
7:41
Speaker 1: not mistaken, and uh, you know he hey, he had
7:45
Speaker 1: a great following among his clients and among his his staff,
7:50
Speaker 1: and as soon as he got let go, I think
7:54
Speaker 1: the rest of him all quit and his whole team,
7:57
Speaker 1: I think his whole team. And then, through a brokerage
8:02
Speaker 1: firm or they nowadays they say, investment bank approached us
8:07
Speaker 1: and said would you, uh, would you help us get
8:10
Speaker 1: started in exchange for fift of our company? And so
8:15
Speaker 1: we were again smart enough to say yes. And it
8:19
Speaker 1: wasn't a matter of finances. It was a matter of infrastructure,
8:23
Speaker 1: back office, tax, legal registration, all those things. And there's
8:29
Speaker 1: a you know, when we started oak Tree, people would say,
8:32
Speaker 1: what's been the biggest surprise. I said, the biggest surprise
8:34
Speaker 1: is how much non investment stuff there is in an
8:37
Speaker 1: investment management job. So we helped him with that. He's
8:41
Speaker 1: in our building in California and we just meet and
8:46
Speaker 1: chat periodically. But as I say, we started with fifteen
8:49
Speaker 1: percent of the company. Then we realized that under accounting rules,
8:53
Speaker 1: in order to bring in our share of their profits,
8:56
Speaker 1: we would have to uh, so we bought another seven
9:01
Speaker 1: percent and we got de looted down to twenty which
9:05
Speaker 1: is where we are now. We have delution protection. Were
9:08
Speaker 1: extremely happy to be owner of Double Line, and I
9:12
Speaker 1: want to say Double Line is the fastest growing asset
9:15
Speaker 1: management firm to reach all. I wouldn't swear to it,
9:20
Speaker 1: but I believe that's right. So let's talk a little
9:23
Speaker 1: about the Chairman's Memos, which you're somewhat um infamous for. Um.
9:29
Speaker 1: I'm gonna quote Warren Buffett when I see memos from
9:33
Speaker 1: Howard Marks in my mailbox that the first thing I
9:35
Speaker 1: opened and read, I always learned something. Tell us what
9:39
Speaker 1: led you to publishing the Chairman's Memos? When when did
9:43
Speaker 1: they start? And why did you feel the need to
9:45
Speaker 1: write them they started? So this is the thirtieth year, um,
9:49
Speaker 1: and thank you. And I don't remember uh thinking that
9:54
Speaker 1: if I wrote him I'd get more business or anything
9:56
Speaker 1: like that. But uh, there were events that happened in
10:01
Speaker 1: my environment, the juxtaposition of which was I thought extremely informative,
10:07
Speaker 1: and so I wanted to write it up and share
10:09
Speaker 1: it with my clients. Now it is all and and
10:13
Speaker 1: you're you're well known for them today. Buffett had has
10:16
Speaker 1: lauded them, and other people have tooked so um approvingly
10:21
Speaker 1: of them. But when you first started publishing these, what
10:25
Speaker 1: was the response, like big fat zero zero, literally barry there.
10:32
Speaker 1: It was ten years before I ever had a response.
10:35
Speaker 1: Not only did nobody say, oh that was good, nobody
10:39
Speaker 1: ever said I got it. So it was, you know,
10:41
Speaker 1: and this is this was this is the day of
10:45
Speaker 1: running the xerox machine, folding them up, putting them in envelopes,
10:49
Speaker 1: addressing them, putting stamps on, and then, as far as
10:52
Speaker 1: I knew, tossing him down to this sewer. Because I
10:56
Speaker 1: never had a response for ten years, and so so
10:58
Speaker 1: I kind of remember or what made me right the
11:01
Speaker 1: first one. I have no idea what kept me going.
11:03
Speaker 1: So you said, there's no response for a decade. That
11:07
Speaker 1: response though, I very specifically remember that one, because Barons
11:12
Speaker 1: did a giant cover on it bubble dot com in
11:15
Speaker 1: January two thousand and only were you right? But the
11:19
Speaker 1: timing couldn't have been any better. Tell us about that
11:22
Speaker 1: particular chairmans, Well, of course, uh, in our business, um,
11:27
Speaker 1: it doesn't do any good to be right if the
11:29
Speaker 1: timing is not good. You know, there's an old saying
11:31
Speaker 1: in our business that being too far ahead of your
11:33
Speaker 1: time is indistinguishable from being wrong. So if I would
11:36
Speaker 1: have published the same insight in I'd be forgotten because
11:41
Speaker 1: it would have taken three plus years to work. It
11:43
Speaker 1: happens that only took a few months to work. And
11:45
Speaker 1: basically the premise of the menu memo was that the
11:49
Speaker 1: TMT tech media telecom bubble that had been pushing stocks
11:53
Speaker 1: up for the last few years of the nineties and
11:56
Speaker 1: into two thousand UH was overdone. The subject of excessive
12:04
Speaker 1: optimism and excessive faith in the future, and entirely free
12:12
Speaker 1: of any kind of analytical or valuation rigor. You know,
12:17
Speaker 1: I mean, we're used to paying fifteen times earnings for
12:21
Speaker 1: an average company, and maybe thirty times earnings for what
12:25
Speaker 1: we think is a great company. But how do you
12:27
Speaker 1: value a company that has no earnings? Hold on? How
12:31
Speaker 1: do you value a company that has no sales? You know?
12:34
Speaker 1: I mean you were valuing an idea, and people were
12:38
Speaker 1: you see, and and in the investment business, there's a
12:41
Speaker 1: tendency to succumb to platitudes, generalizations, and so what was
12:47
Speaker 1: going on in nine was the Internet will change the world.
12:54
Speaker 1: And as a consequence, any stock which is Internet or
13:00
Speaker 1: UH e commerce related is the right price is infinity,
13:06
Speaker 1: There's and and as I say in the book. Can
13:10
Speaker 1: I say in the book slight slap slug, But as
13:14
Speaker 1: I say in the book, if you want to understand bubbles,
13:18
Speaker 1: to me, the defining characteristic of the bubble is the
13:25
Speaker 1: belief that quote, there's no price too high, if it's
13:29
Speaker 1: if it's an Internet stock, there's no price too high,
13:32
Speaker 1: if there was the nifty fifty back when I started, Xerox, Kodak,
13:36
Speaker 1: mark Lily, no price too high. And of course it's
13:40
Speaker 1: obvious that everything there is no there's nothing so good
13:47
Speaker 1: that it can't be overvalued. And if you buy something
13:50
Speaker 1: at a price which is excessive for its merits by
13:55
Speaker 1: it's gonna require magic to make it into a successful investment.
14:00
Speaker 1: So uh, that was the theme of the memo, you
14:03
Speaker 1: know I talked about I talked about businesses. And by
14:05
Speaker 1: the way, we still some see some today which which
14:09
Speaker 1: don't have a profit plan, you know, and uh, companies
14:15
Speaker 1: that you know that as I said in the memo, well,
14:18
Speaker 1: people used to say, the great thing about this company
14:20
Speaker 1: is that its costs are almost zero, and I wrote, well,
14:24
Speaker 1: that's great because it's revenues are absolutely zero, you know.
14:28
Speaker 1: And uh, I quoted my dad who was a big
14:31
Speaker 1: joke teller. And he said that the two guys were
14:34
Speaker 1: talking and one guy says, everything I sell, I sell
14:38
Speaker 1: at cost. He said, well, how do you make money?
14:40
Speaker 1: He's why I buy below cost. But but the but
14:44
Speaker 1: the internet business model at that time seemed equally uh irrational,
14:50
Speaker 1: and yet the stocks were selling at sky high prices.
14:52
Speaker 1: And of course, and as I said in a memo
14:56
Speaker 1: which which reviewed this progression later, you know, in my
15:00
Speaker 1: first thirty years in the business, after a bubble popped,
15:06
Speaker 1: we would see a table in the upper right hand
15:08
Speaker 1: corner of the journal, and they show all the stocks
15:11
Speaker 1: that were down. Remember, and then with this they showed
15:16
Speaker 1: all the socks who are down or more. And so
15:22
Speaker 1: the bubble popped. The memo look smart, I said in
15:25
Speaker 1: the in the introduction to my first book. After ten years,
15:28
Speaker 1: I became an overnight success. And that's the story. So
15:32
Speaker 1: so let's talk about that first book, which is the
15:36
Speaker 1: most important thing uncommon sense for the thoughtful investor. You're
15:40
Speaker 1: writing these memos on a regular basis, um what motivated
15:45
Speaker 1: you to say, I know, let's let's now spend three
15:48
Speaker 1: pages and a year writing a book that was simple.
15:51
Speaker 1: I got a letter from Warren Warren Buffett saying saying,
15:58
Speaker 1: if you know I wrote a memo, I think I
16:02
Speaker 1: forget which one it was, um, which was right up
16:06
Speaker 1: his alley. And I wrote him afterwards and I said,
16:09
Speaker 1: did you see this one? He says, yes, it was fine.
16:13
Speaker 1: And he says, by the way, if you'll write a book,
16:15
Speaker 1: I'll give you a quote for the jacket suburb. Enough said,
16:20
Speaker 1: and and you know you don't pass that one. Boy.
16:23
Speaker 1: So I had always thought that I would write a
16:25
Speaker 1: book pulling the philosophy together, um when I retired, and
16:30
Speaker 1: instead it got accelerated. What was the experience of writing
16:34
Speaker 1: a book like? It was great? Um? You know? Um?
16:43
Speaker 1: For me, the challenge is not to think up what
16:46
Speaker 1: to say that the challenges to get it from here
16:48
Speaker 1: to there, you know. And yeah, yeah, the thoughts are
16:51
Speaker 1: coming so fast you're afraid they're going to evaporate, so
16:54
Speaker 1: you have to sit there. And yet, so so let's
16:56
Speaker 1: talk about some of those thoughts which I've pulled from books. Quote,
17:01
Speaker 1: we can make excellent investment decisions on the basis of
17:04
Speaker 1: present observations with no need to make guesses about the future.
17:09
Speaker 1: Doesn't that run kind of contrary to how lots and
17:11
Speaker 1: lots of people invest their capital. Yeah, I mean the
17:16
Speaker 1: the the irony is that what is what is investing
17:20
Speaker 1: investing is positioning your capital to profit from the future
17:26
Speaker 1: that unfolds. And yet in my book, we can't know
17:33
Speaker 1: what the future holds. So I an oak Tree through
17:38
Speaker 1: its investment philosophy. Uh, specifically as true macro forecasts. And
17:44
Speaker 1: I don't believe we ever know enough about the coming economy, markets, currencies,
17:52
Speaker 1: and interest rates to make us a successful and a
17:56
Speaker 1: superior investor. It's very hard to hold the view which
17:59
Speaker 1: is different and from the consensus, and it's very hard
18:02
Speaker 1: to have a non consensus view which turns out to
18:04
Speaker 1: be more correct than the consensus. And so so I
18:08
Speaker 1: don't believe in forecasts. Uh. Now everybody says, but the
18:12
Speaker 1: macro is so important. It's the macro that moves the
18:14
Speaker 1: markets these days, and it it truly does feel, let's say,
18:18
Speaker 1: for the last fifteen or twenty years that yes, the
18:21
Speaker 1: macro is much more important than company news, uh, in
18:26
Speaker 1: moving the market. So they say, well, how can you,
18:28
Speaker 1: how can you not do macro forecasting? And h I
18:36
Speaker 1: was sitting and having dinner with Warren you know who. Uh,
18:40
Speaker 1: that one a few years ago, and he said to me,
18:44
Speaker 1: for a piece of information to be desirable, it has
18:47
Speaker 1: to satisfy two criteria. It has to be important and
18:52
Speaker 1: the macro is extremely important, and it has to be noble.
18:57
Speaker 1: So you can have something which is very important, but
19:02
Speaker 1: if you spend your time trying to figure it out,
19:06
Speaker 1: it could be a waste of time if it's not knowable.
19:09
Speaker 1: And I believe that the macro future is not knowable.
19:13
Speaker 1: So uh. In in the first book the Most Important Thing,
19:18
Speaker 1: there are twenty one chapters, and each one starts off
19:21
Speaker 1: the title the most important thing is, and then it's
19:24
Speaker 1: a different thing because in investing there is no one
19:27
Speaker 1: thing which is the most important. There are in that
19:29
Speaker 1: According to the book, there are twenty one things, all
19:32
Speaker 1: of which are the most important thing um and one
19:36
Speaker 1: of those is knowing where we stand in the cycle.
19:40
Speaker 1: And when it was time to write a second book,
19:43
Speaker 1: I pulled that out and that's what I devoted the
19:45
Speaker 1: book too. So so since you brought that up, let's
19:49
Speaker 1: talk about the second book, Mastering the market cycle. Getting
19:53
Speaker 1: the odds on your side. Of all those twenty one
19:57
Speaker 1: chapters in the first book, why cycles? Why did you
20:01
Speaker 1: pick that um is shooting the other twenty when you
20:06
Speaker 1: really you can write a twenty one volume encyclopedia, each
20:10
Speaker 1: chapter being a book. Well, Barry, I believe of the
20:14
Speaker 1: things of all the twenty one most important things, I
20:17
Speaker 1: think that there are two that are more important than
20:19
Speaker 1: the others, and they are risk and where we stand
20:23
Speaker 1: in the cycle. I believe that risk management, risk control
20:29
Speaker 1: is the mark of an exceptional investor. It's not hard
20:33
Speaker 1: to make money in the market. It's especially not hard
20:36
Speaker 1: when the market goes up. And the market goes up
20:38
Speaker 1: most of the time, and most of the time everybody
20:41
Speaker 1: in the market makes money. But if you don't know
20:44
Speaker 1: what you're doing, if if you're throwing darts, if you're
20:47
Speaker 1: just surfing, uh, you know what we call beata slipping. Uh,
20:53
Speaker 1: that's not an accomplishment. To me. An exceptional investor is
20:58
Speaker 1: someone who makes a lot of money when things go well,
21:02
Speaker 1: but does it with the risk under control so that
21:05
Speaker 1: he or she won't lose a lot of money when
21:08
Speaker 1: the market does poorly. So I think that I devote
21:12
Speaker 1: actually three chapters in the first book to risk, understanding risk,
21:17
Speaker 1: recognizing risk, controlling risk, and I think that is the
21:20
Speaker 1: mark of the superior investor. That's number one, Number two
21:26
Speaker 1: the cycle. There's a connection here because I believe that
21:29
Speaker 1: where the market is in its cycle determines how risky
21:33
Speaker 1: it is. When when everything has been going swimmingly, and
21:38
Speaker 1: as a consequence, the market is elevated in its cycle
21:42
Speaker 1: relative to something we might think of as the midpoint
21:45
Speaker 1: or the intrinsic value, then I think it's risky. And
21:49
Speaker 1: when it's depressed in its cycle and low relative to
21:54
Speaker 1: intrinsic value or the midpoint or the norm, then I
21:58
Speaker 1: think the risk is very low. So understanding, even though
22:02
Speaker 1: we can't benefit from predictions of the future, I believe
22:09
Speaker 1: that where the market is in its cycle can tell
22:13
Speaker 1: us a lot about what the odds are. And that
22:18
Speaker 1: that you mentioned the subtitle of the book, Getting the
22:21
Speaker 1: Odds on your Side, And I actually prefer the subtitle
22:26
Speaker 1: to the title because it conveys, I hope, a sense
22:31
Speaker 1: for my belief that we cannot know what the future holds.
22:36
Speaker 1: The future is nothing but a probability distribution. But if
22:41
Speaker 1: we think and study right, we can have an idea
22:49
Speaker 1: about the shape of the probability distribution and what returns
22:54
Speaker 1: are most likely. It's interesting you say that you prefer
22:58
Speaker 1: the subtitle those the title itself sort of is at
23:02
Speaker 1: odds with some things you've said before about you really
23:07
Speaker 1: have a mantra. Not only can people not predict the future,
23:10
Speaker 1: they can't time the market especially well either. How do
23:15
Speaker 1: you reconcile mastering a market cycle that seems a little
23:19
Speaker 1: contradictory to being able to time it. Well, let me
23:23
Speaker 1: say up front, I believe very firmly that we sometimes
23:31
Speaker 1: have a sense for what's going to happen, we never
23:34
Speaker 1: know when. So when you say timing, the word time
23:39
Speaker 1: is something I just discard. Uh. You know, since I'm
23:44
Speaker 1: a writer. Everybody at oak Tree has the habit of writing.
23:47
Speaker 1: Everybody at oak Tree writes a letter every quarter to
23:50
Speaker 1: his clients. And um, there's a guy there who I
23:55
Speaker 1: was reading, and I review all the letters before they
23:57
Speaker 1: go out, and one of them, the portfolio manager, said,
24:02
Speaker 1: if you name a date, don't name a price. And
24:05
Speaker 1: if you name a price, don't name a date. And
24:08
Speaker 1: if you think about it, if you never name both
24:11
Speaker 1: the date and a price, you can never be wrong.
24:15
Speaker 1: Uh and and but but I do think that you
24:19
Speaker 1: can have an idea about what the future holds you
24:21
Speaker 1: can have an idea whether this is a good time
24:24
Speaker 1: to invest or not, but you you never know when
24:27
Speaker 1: the things you're hoping for will unfold, and if you
24:33
Speaker 1: if you think about it, I believe that everything an
24:38
Speaker 1: investor does, what you do, what I do, falls under
24:43
Speaker 1: one of two headings, assets selection and what I call
24:49
Speaker 1: cycle positioning. In order to avoid using the word timing,
24:53
Speaker 1: what do they mean? Assets election means trying to hold
24:56
Speaker 1: more of the things that will do better and less
24:59
Speaker 1: of the things that will do worse, pretty easy, and
25:02
Speaker 1: psycle positioning means trying to have more of your capital
25:08
Speaker 1: invested and more aggressively when the odds are favorable, and
25:13
Speaker 1: less of your capital invested more defensively when the odds
25:17
Speaker 1: are against you. I think you can we can know
25:20
Speaker 1: something about the odds that doesn't mean we're going to
25:24
Speaker 1: be right or we're gonna be right right away, especially uh,
25:29
Speaker 1: and that can enable us to effectively do cycle positioning
25:36
Speaker 1: h through an understanding of where we stand in the cycle.
25:41
Speaker 1: So you mentioned two things earlier that I have to
25:44
Speaker 1: circle back to. One was the concept of intrinsic value,
25:48
Speaker 1: where assets might be above or below that, and the
25:52
Speaker 1: second is the implication about psychology, which really, Um, we
25:57
Speaker 1: went by too quickly, so I have to come back
26:00
Speaker 1: to that. Um. Intrinsic value clearly refers to paying less
26:06
Speaker 1: for an asset than you think it's ultimately worth. I
26:08
Speaker 1: think you've written extensively about the advantages of being a
26:13
Speaker 1: value investor. But let's let's explore the psychology of that.
26:17
Speaker 1: Because it seems much easier to buy when things are
26:21
Speaker 1: going up than to sell, and conversely, when everything is down,
26:25
Speaker 1: it's much easier to sell with the crowd. Then take
26:28
Speaker 1: the other side of the trade. Well, first of all,
26:32
Speaker 1: intrinsic value. Every every asset that produces cash flow, you
26:37
Speaker 1: can talk reasonably about its intrinsic value. What would you
26:40
Speaker 1: pay to get those cash flows. It might be a company,
26:43
Speaker 1: a stock, a bond, a building. Anything that produces cash
26:46
Speaker 1: flow can be valued. That's what value investors do. We
26:49
Speaker 1: try to figure out the value and buy for less.
26:51
Speaker 1: That makes perfect sense in my opinion. Um. Now, the
26:57
Speaker 1: next question is do assets sell at their intrinsic value?
27:05
Speaker 1: And the answer is no. The asset the prices of
27:08
Speaker 1: assets very very significantly from intrinsic value from time to time. Why, well,
27:16
Speaker 1: you said it, psychology sometimes people are excited and the
27:22
Speaker 1: price goes way above the intrinsic value, and sometimes they're
27:25
Speaker 1: depressed and the price goes below the intrinsic value. Now
27:29
Speaker 1: you the next thing you mentioned was how easy it
27:32
Speaker 1: is to buy things that are going up. You mean
27:35
Speaker 1: easy psychologically, right? Um? Uh? You know. Dave Swenson, who
27:46
Speaker 1: runs the indowminant Yale, which is the probably the best
27:51
Speaker 1: performing endowminant in the country over the last thirty plus
27:54
Speaker 1: years that he's been doing it. Uh, wrote a book
27:58
Speaker 1: in which he said that period performance in investment management
28:02
Speaker 1: requires the adoption of uncomfortably idiosyncratic positions. In other words,
28:10
Speaker 1: if you the job in investing. We'll let me say this,
28:14
Speaker 1: Investing is a funny area because it's really easy to
28:17
Speaker 1: be average, and it's really hard to be above average.
28:23
Speaker 1: But for professional like myself or like Swinson, since it's easy,
28:34
Speaker 1: being average is not what we seek. We seek to
28:38
Speaker 1: be above average. Uh. This may shock you, but professional
28:42
Speaker 1: investors do it for the money and they hope to
28:46
Speaker 1: be paid highly. But clearly, since anybody can be average
28:51
Speaker 1: without any effort or professionalism, the payoff is in being
28:55
Speaker 1: above average. If you think like everybody else, you'll behave
29:00
Speaker 1: like everybody else. If you behave like everybody else, you'll
29:05
Speaker 1: perform like everybody else. So clearly, exceptional performance has to
29:11
Speaker 1: come from diverging from the crowd. And that's what Swenson
29:17
Speaker 1: means when he's when he says uncomfortably idiosyncratic. Because if
29:23
Speaker 1: if you're behaving in an idiosyncratic way, that is to say,
29:28
Speaker 1: everybody else is buying and you say, well, they're buying
29:31
Speaker 1: has raised the price too high relative to the intrinsic
29:35
Speaker 1: value I'm going to sell. If they're all buying and
29:38
Speaker 1: you're selling, believe me, it's uncomfortable. Now we do it
29:43
Speaker 1: because we believe we have performed a competent, intellectual process.
29:51
Speaker 1: Doesn't make it comfortable. What about the flip side when
29:54
Speaker 1: everybody is selling, is that a little I would imagine
29:58
Speaker 1: that's a little more comfortable because the sell off in
30:01
Speaker 1: a panic at least makes it appear things are falling
30:05
Speaker 1: below that intrinsic value. So there's that, Well, there's some
30:09
Speaker 1: truth in that, because the trouble with the difficulty in
30:13
Speaker 1: selling when a market has been rising for several months
30:17
Speaker 1: or years uh comes from the fear that it will
30:20
Speaker 1: continue to rise and you'll miss out fomo, right, And
30:24
Speaker 1: that's a very strong force. You know. There's a book
30:27
Speaker 1: out on Bubbles and Crashes by a guy named Charles Kindleberger,
30:30
Speaker 1: and he says in there something like, there's nothing as
30:32
Speaker 1: injurious for your mental well being as to watch your
30:35
Speaker 1: friend get rich, and you know, and it's that's that's
30:39
Speaker 1: one of these sayings which is captures it all right there,
30:43
Speaker 1: that's human nature. Uh So, so fomo is very challenging. Uh.
30:48
Speaker 1: On the other hand, UH, I don't know if it's
30:51
Speaker 1: any easier on the way down. Uh. I mean, intellectually,
30:56
Speaker 1: you should be able to look at assets like stocks
30:59
Speaker 1: and bonds that have on on sale and say that
31:01
Speaker 1: three day goes the inexpensive. I'm going to jump in.
31:05
Speaker 1: But as I spend a lot of time in the book,
31:07
Speaker 1: uh dissecting a common phrase which is catching a falling knife,
31:14
Speaker 1: and so many people say, I'm not going to try
31:17
Speaker 1: to catch a falling knife. You know, this thing is collapsing.
31:20
Speaker 1: I have no idea how far it's gonna go. I
31:22
Speaker 1: don't want to stand in front of that process. I'm
31:24
Speaker 1: gonna wait until the dust settles and the uncertainty is
31:28
Speaker 1: resolved and believe me, Barry, as I know you know well,
31:32
Speaker 1: when the dust settles and the uncertainty has been resolved,
31:35
Speaker 1: there's no more bargains left. Because what causes great bargains?
31:40
Speaker 1: And by the way, let's diverge for a second. What
31:43
Speaker 1: is a bargain? A bargain is an asset that's selling
31:47
Speaker 1: too cheap. What causes assets to sell it too cheap? Error?
31:53
Speaker 1: If if for you to get a great bargain in
31:57
Speaker 1: the market, somebody else has to be making a big mistake.
32:01
Speaker 1: As if you can buy something that is exceptionally cheap,
32:05
Speaker 1: somebody else has to be selling something which is exceptionally cheap.
32:09
Speaker 1: What makes anybody want to sell something at a price
32:12
Speaker 1: which is exceptionally cheap? And the answer is human nature
32:15
Speaker 1: or what you call psychology. And the answer is that
32:19
Speaker 1: when prices go up, people get excited and buy. When
32:23
Speaker 1: things go down, people get the pressed and sell. They
32:28
Speaker 1: don't say, well, you know it's on sale. It used
32:30
Speaker 1: to be a hundred now at seventy five. I'm a buyer, Warren,
32:34
Speaker 1: you know who says, I like Hamburgers, and when Hamburgers
32:38
Speaker 1: go on sale, I eat more Hamburgers. And that's how
32:42
Speaker 1: value investors try to behave We try to be unemotional,
32:46
Speaker 1: not get down because prices have fallen, even you know,
32:51
Speaker 1: the prices of the things we own have fallen. But
32:53
Speaker 1: we try to say it's a bargain. I'm going to
32:56
Speaker 1: buy more. But but that requires you to get control
33:01
Speaker 1: of your psychology. Let me bring you back to the
33:04
Speaker 1: book for at least one more question, and I want
33:07
Speaker 1: to ask um you write rule number one, most things
33:12
Speaker 1: will prove to be cyclical. Rule number two. Some of
33:15
Speaker 1: the greatest opportunities for gaining the laws come when other
33:19
Speaker 1: people forget rule number one. That's pretty much what you're
33:22
Speaker 1: referring to the people exactly panic selling. And when when
33:25
Speaker 1: things are rising and the stock prices have been rising,
33:28
Speaker 1: like you know in a in a great bull market
33:31
Speaker 1: for five, six, eight, nine years, what do they say,
33:34
Speaker 1: I think it's going to go up forever. And when
33:36
Speaker 1: it's been collapsing and the prices and an asset is
33:40
Speaker 1: a third of what it was a year or two ago,
33:43
Speaker 1: what do they say, I think it's going to zero?
33:45
Speaker 1: And in fact, and so what they what they do
33:49
Speaker 1: is they extrapolate. You need directional trends. Whereas I believe
33:54
Speaker 1: most events are cyclical, and trees don't grow to the
33:57
Speaker 1: sky and very little ghost to zero. So mean, let
34:00
Speaker 1: me bring up one of your pet peeves that I'm
34:02
Speaker 1: I'm amused by, Um, what inning is this? People ask
34:06
Speaker 1: you that question and you you hate that question? Explain why? Well,
34:10
Speaker 1: I don't hate I don't hate it, but I mean,
34:13
Speaker 1: it's it's challenging to know the answer. Right now, I say,
34:19
Speaker 1: I think we're in the ethnic. That's great, Howard. The
34:23
Speaker 1: only trouble is I've been saying the athanning for a
34:25
Speaker 1: couple of years now, and uh, what I realized about
34:32
Speaker 1: a year ago, by the way, that question started to
34:34
Speaker 1: come up really in oh eight when we were in
34:37
Speaker 1: the global financial crisis, and people used to say, what
34:40
Speaker 1: inning are we in? And what they really meant is
34:42
Speaker 1: when is the collapse going to end? Now? They mean
34:46
Speaker 1: when is the up cycle going to end? And most
34:49
Speaker 1: people say, I I realized that it can't go well forever,
34:53
Speaker 1: but I can't imagine what's going to make it come
34:56
Speaker 1: to an end. But the truth is, you know, we
34:59
Speaker 1: are at an advanced stage of the economic recovery and
35:03
Speaker 1: of the bull market, and uh, there are very secure
35:07
Speaker 1: a few securities around that are absolutely cheap, and most
35:12
Speaker 1: investors are happy doing risk investing and have lots of
35:16
Speaker 1: money for the purpose, so they're bidding up asset prices.
35:20
Speaker 1: So let's so. But but so, I think we're in
35:25
Speaker 1: the eighth inning. But I realized about a year ago
35:28
Speaker 1: an important distinction this is in baseball. In baseball, we
35:33
Speaker 1: know that a regulation game has nine innings, and in
35:36
Speaker 1: this game it could go nine or eleven or fourteen.
35:42
Speaker 1: We have no idea. So again, the fact that I
35:45
Speaker 1: think we're in the eighth and that things are extended
35:48
Speaker 1: doesn't mean that the game is just about to end.
35:51
Speaker 1: So let's talk a little bit about that. Um, the FED.
35:55
Speaker 1: Some people have been complaining they've tightened too much. Other
35:58
Speaker 1: people are saying behind the curve. You've been a student
36:02
Speaker 1: of the credit markets for decades. What do you think
36:05
Speaker 1: of what where the FED is and what their future
36:08
Speaker 1: behavior might be. Well, I talked about the FED a
36:10
Speaker 1: little bit in the In the book, Uh, there's a
36:13
Speaker 1: as a as a chapter on the role of government
36:16
Speaker 1: and central banks with regard to the economic cycle. The
36:20
Speaker 1: FED has a tough job. Well it actually it has
36:22
Speaker 1: three tough jobs. Number one, it's supposed to manage inflation
36:27
Speaker 1: and keep it under control, which means that the economy
36:29
Speaker 1: shouldn't get too hot. Number two, it's supposed to support
36:33
Speaker 1: economic growth and employment, for which they would rather the
36:37
Speaker 1: market did get hot. And number three, there are now
36:40
Speaker 1: a lot of people who think that the Fed job
36:42
Speaker 1: is to prevent a recession and the declining stock market.
36:46
Speaker 1: I don't think J. Powell certainly feels the ladder. Uh.
36:51
Speaker 1: But um uh you know, UM, I think that in
36:56
Speaker 1: interest rates. Low interest rates have been the outstanding characteristic
37:00
Speaker 1: of the financial markets for the last ten years. They
37:03
Speaker 1: have dominated behavior over that period. They've been too low.
37:08
Speaker 1: They've been unnaturally low. They were made unnaturally low in
37:11
Speaker 1: order to bring the economy back from the global financial
37:14
Speaker 1: crisis and the abyss of collapse. Uh. There are reasons
37:19
Speaker 1: why rates should be higher. Number one, rates should probably
37:22
Speaker 1: be at their naturally occurring level so that so that
37:25
Speaker 1: the free market will allocate resources prudently. To date, it
37:30
Speaker 1: has been subsidizing borrowers and penalizing savers and lenders. Um.
37:36
Speaker 1: Number two, the Fed wants rates to be high enough
37:41
Speaker 1: so that if the economy slows down, they can drop
37:43
Speaker 1: rates and stimulate the economy. UM and uh. And so forth. Um,
37:49
Speaker 1: so you know, Uh, there's a belief that there's a
37:54
Speaker 1: correlation inverse correlation between unemployment and and uh inflation that
38:00
Speaker 1: when when unemployment gets really low, that target that triggers inflation.
38:05
Speaker 1: That's called the Phillips curve. And uh, everybody, since we
38:09
Speaker 1: now are at a fifty year low and unemployment, everybody's
38:12
Speaker 1: been waiting for inflation to get going, which is the
38:16
Speaker 1: Fed's main concern is that it shouldn't get going too strongly,
38:20
Speaker 1: and so that's why they've been talking about raising rates.
38:22
Speaker 1: But it hasn't happened, and everybody's mystified by why we
38:26
Speaker 1: don't have inflation, And there's no easy answer. I think.
38:30
Speaker 1: Is that a risk factor for a credit investor like yourself? Inflation? Well?
38:34
Speaker 1: The FED inflation? Yeah, well it is, but I also
38:38
Speaker 1: think it's unpredictable. Uh you know, Uh to me that
38:43
Speaker 1: my the question over the last five years or more
38:47
Speaker 1: has been our inflation rates going up or not? And
38:50
Speaker 1: I believed that they would and they have for good reason,
38:54
Speaker 1: as I've explained, Um, and uh not. You know, people
39:01
Speaker 1: people for for years, you remember, people would would talk
39:04
Speaker 1: to you and they say, do you think the rates
39:06
Speaker 1: are going up in January or March, and I would say,
39:09
Speaker 1: what do you care? What's the difference that what month
39:13
Speaker 1: they go up doesn't matter? People were so preoccupied, especially
39:16
Speaker 1: when when they were looking for the first rate increase, remember,
39:18
Speaker 1: and I would say, the only thing that matters are
39:20
Speaker 1: they going to go up? And are they going to
39:23
Speaker 1: go up a lot? And are they going to go
39:24
Speaker 1: up fast? And what month it starts happening in doesn't matter?
39:29
Speaker 1: And of course nobody got it right, proving I think
39:32
Speaker 1: my point uh as to the timing. But they did
39:38
Speaker 1: raise rates, and my guess is that they'll raise them
39:42
Speaker 1: a little more. But I never thought they would go
39:44
Speaker 1: to go up far or fast than I still don't.
39:48
Speaker 1: So at one point in time, UM debt investors were
39:51
Speaker 1: concerned with deficits from the federal government. Seems like we've
39:55
Speaker 1: kind of lost our enthusiasm for for fighting deficits. What
40:00
Speaker 1: are your thoughts on the government balance sheet? Uh? And
40:04
Speaker 1: perhaps modern monetary theory? What or deficits now? Okay? Or
40:10
Speaker 1: my mother's term for that, Barry is passe a rorrying
40:14
Speaker 1: about the debt? The deficit is pass a. Nobody seems
40:18
Speaker 1: to care anymore. When I was a boy, There used
40:20
Speaker 1: to be debates about whether it was okay to have debt,
40:24
Speaker 1: for a nation to have debt. I don't see anybody
40:26
Speaker 1: discussing that anymore. The only question is whether there's such
40:29
Speaker 1: a thing as having too much debt, and some people
40:31
Speaker 1: think there is, but nobody can say what it is.
40:33
Speaker 1: Of course. Uh. Historically, of course, the Democrats believed in
40:38
Speaker 1: tax and spend and I would say deficits, and the
40:41
Speaker 1: Republicans were the fiscal disciplinarians who would fight against deficits.
40:46
Speaker 1: That seems to have gone out the window. Nobody really
40:49
Speaker 1: stands four square for deficit and debt reduction. Uh. And
40:56
Speaker 1: in fact, most recently we start seeing articles ing that
41:01
Speaker 1: it's an old fashioned to worry about deficits and debt
41:05
Speaker 1: and uh, it's much more important too pursue society's needs
41:13
Speaker 1: h even at the cost of a deficit. So it's troublesome.
41:18
Speaker 1: I mean, I think there probably is such a thing
41:21
Speaker 1: as too much um. You know, the bottom line is
41:24
Speaker 1: it probably doesn't matter how much debt you have as
41:27
Speaker 1: long as you can print the world's reserve currency. You know,
41:32
Speaker 1: we were in the debt. It goes up, up, up up,
41:34
Speaker 1: the interest bill goes interest goes up with the debt,
41:37
Speaker 1: or it will go up faster if rates rise as
41:40
Speaker 1: they have been um but and and paying the interest
41:45
Speaker 1: will occupy an increasing and increasing increasing percentage of the
41:50
Speaker 1: federal budget. It doesn't matter as long as you can
41:53
Speaker 1: print money, as long as you can sell an infinite
41:56
Speaker 1: number of UH bonds overseas at the world's lowest rates
42:01
Speaker 1: because of the quality of the credit. And the question
42:04
Speaker 1: is what if that ever stops? So that's the risk factor.
42:06
Speaker 1: What is the risk factor of deficits to fixed income purchasers?
42:11
Speaker 1: It's it's it's well to the nation. It is that
42:15
Speaker 1: someday China says, you know, we have enough treasuries, We're
42:20
Speaker 1: gonna start buying euro But the difficulty is what are
42:24
Speaker 1: you going to buy? If it's not the dollar, You're
42:26
Speaker 1: gonna invest in the in the in the euro that
42:29
Speaker 1: looks precarious. You're gonna invest in the pound. That's difficult.
42:33
Speaker 1: With brexit, are you going to invest in in UH
42:36
Speaker 1: ruble one? Whatever it might be? So it looks like
42:41
Speaker 1: we're gonna you know, this is all this is when
42:43
Speaker 1: you look at the government and how badly it functions.
42:48
Speaker 1: The optimism with regard to the future comes from the
42:52
Speaker 1: belief that we always have modeled through and we will
42:54
Speaker 1: continue to model through, and that we don't have to
42:59
Speaker 1: worry about the at and the deficit because we can
43:01
Speaker 1: always print money to pay the interest until we can't.
43:05
Speaker 1: Until we can't, but the day but the arrival of
43:08
Speaker 1: the date when we can't. It comes under the heading
43:11
Speaker 1: of what I call improbable disasters. It would be a
43:14
Speaker 1: terrible thing. It would have a lot of negative ramifications,
43:21
Speaker 1: but you can't assign a very high probability to it.
43:25
Speaker 1: Next year, the year after, the year after that. You
43:27
Speaker 1: know so, And one of the most interesting dilemmas is
43:30
Speaker 1: what does the investor do about the improbable disaster. Since
43:35
Speaker 1: it's improbable, you can't do enough in your portfolio to
43:39
Speaker 1: prepare for it, and and certainly if it happens, it
43:42
Speaker 1: will have disastrous consequences and it will turn out you
43:45
Speaker 1: didn't do enough. But given that it's improbable, you can't
43:48
Speaker 1: do a lot. That's that's there's a lot of things.
43:52
Speaker 1: Hyper inflation, deflation, all these things fall into that category.
43:57
Speaker 1: So we have two segments left. I want to be
44:00
Speaker 1: able to get save some time to get to some
44:02
Speaker 1: questions from the room, but not yet. The last thing
44:06
Speaker 1: I want to do with you is our speed rounds.
44:09
Speaker 1: Ten questions, five minutes, short answers. Well, by now you
44:13
Speaker 1: probably know I don't know anything about speed rounds or
44:15
Speaker 1: short answers, but um, but I'll try. Well let's let's
44:18
Speaker 1: let's give it a shot. Let's start out. First car
44:21
Speaker 1: you ever owned, year making model N five old cutlass
44:30
Speaker 1: um now Aqua Marine. Uh, my parents paid half. What's
44:36
Speaker 1: the biggest political surprise we might see over the next
44:40
Speaker 1: couple of quarters. Well, it might be the Muller Report,
44:48
Speaker 1: but I mean it's it's a great example of having
44:51
Speaker 1: no idea. What's what's going to happen? It's gonna be
44:54
Speaker 1: a surprise favorite NBA team, I guess the Lakers. I've
45:00
Speaker 1: lived in l A for the last thirty four years
45:02
Speaker 1: until well I came. We moved My wife and I
45:06
Speaker 1: moved back here six years ago because our kids moved here,
45:10
Speaker 1: and she said that we're going to be in New York,
45:13
Speaker 1: so that we are, and I was again, I was
45:15
Speaker 1: smart enough to say, yes, that's the that's a maybe
45:18
Speaker 1: I'll make that the title of my book. Smart enough
45:20
Speaker 1: to say yes, Um, name three of your favorite books
45:24
Speaker 1: about any subject. Um. There's a book called Fooled by
45:32
Speaker 1: Randomness by to leb which you know, when you talk
45:36
Speaker 1: about the limits on fore knowledge, when you talk about
45:40
Speaker 1: the fact that things are unpredictable because of randomness, I think, Uh,
45:45
Speaker 1: this book contains very very important ideas, and I know
45:48
Speaker 1: it was very valuable for me. Uh. Peter Bernstein, who
45:51
Speaker 1: was a great investment stage wrote a book called Against
45:54
Speaker 1: the Gods um and Story of Risk, Story of Risk,
45:58
Speaker 1: and again it all understanding risk at risk is so
46:02
Speaker 1: provocative and so important. And then I would say there's
46:09
Speaker 1: a book by John Kenneth call Braith called A Short
46:12
Speaker 1: History of Financial Euphoria, which talked about introduced me to cycles,
46:17
Speaker 1: the extremes of cycles, the error of cycles. And one
46:20
Speaker 1: of my favorite quotes from gall Braiths it was that
46:23
Speaker 1: we have two kinds of forecasters, the ones who don't
46:25
Speaker 1: know and the ones who don't know. They don't know that.
46:28
Speaker 1: That's a classic quote. What do you do for fun? Uh, Well,
46:33
Speaker 1: spend a lot of time with the kids and their kids. Now,
46:36
Speaker 1: because my wife was prescient, since we've moved back here
46:39
Speaker 1: six years ago, they both got married, they both had children,
46:42
Speaker 1: so you know we're in a great place in that regard.
46:45
Speaker 1: And uh, I like architecture and decorating and that kind
46:51
Speaker 1: of thing. You you actually do a little bit of
46:53
Speaker 1: an architectural tour when you visit other cities. Sure, I
46:58
Speaker 1: recall you talking about that not too long ago. Um,
47:01
Speaker 1: favorite asset for the next decade? Well, I mean, I
47:10
Speaker 1: hate to say that kind of thing because I hate
47:12
Speaker 1: to think of anybody else buying on my say so.
47:16
Speaker 1: But I mean, I'm I'm willing to be a long
47:19
Speaker 1: term investor in the emerging markets, both dead and equity. UM.
47:24
Speaker 1: I think that the you know, the way I put it, Barry,
47:26
Speaker 1: is that Japan and Europe are senior citizens economically speaking,
47:30
Speaker 1: the US is a mature adult, and the emerging markets
47:34
Speaker 1: are teenagers. And if you ever had a teenager in
47:37
Speaker 1: your house, you know it can be chaotic, chaotic and volatile.
47:43
Speaker 1: But you know that the teenagers best decades lie ahead.
47:46
Speaker 1: And that's the way I think about the emerging markets.
47:48
Speaker 1: So so let me ask you the same question, favorite
47:51
Speaker 1: asset for the next century a house high up in
47:59
Speaker 1: a hill. Who is the investor goat the greatest of
48:06
Speaker 1: all time? In the greatest investor of all time, Oh,
48:10
Speaker 1: of all times. Well, I don't know. I mean, I
48:12
Speaker 1: haven't read that much about the personalities, but everybody assumes
48:16
Speaker 1: it is that Warren guy. And you know he has
48:22
Speaker 1: a he has a great record with a lot of money.
48:27
Speaker 1: Uh he And there's a book out called The Warren
48:32
Speaker 1: Buffet Way, and I was asked to write the preface,
48:34
Speaker 1: and I wrote, it's for the like fourth and fifth edition,
48:38
Speaker 1: and I wrote something called what makes Warren Bufett Warren Buffet?
48:40
Speaker 1: And I talked about the fact that he's intelligent and unemotional,
48:43
Speaker 1: and he figures out what's important. He has a quick
48:45
Speaker 1: study on what's important, he ignores the things that are unimportant,
48:48
Speaker 1: and all these different things. And then at the end,
48:50
Speaker 1: I said, and he's not afraid to lose the job.
48:53
Speaker 1: And you know, if you are afraid to lose your job,
48:56
Speaker 1: it's hard to do things that are different and bold,
49:00
Speaker 1: and yet being different in bold is necessary to be superior.
49:05
Speaker 1: And uh, you know, he spends long periods of time
49:10
Speaker 1: in the wilderness. In two thousand, when I wrote the memo,
49:13
Speaker 1: everybody's saying, well, it's too bad about Warren Buffett. But
49:15
Speaker 1: you know he's lost his touch because he didn't have
49:18
Speaker 1: any of the text docks and then of course a
49:21
Speaker 1: year later everybody was saying, you know, what a genius.
49:24
Speaker 1: But you know, there is no approach in the investment world.
49:30
Speaker 1: There is no approach which will always be right. No
49:34
Speaker 1: matter what approach you have, there will be periods when
49:36
Speaker 1: you're in the doghouse. And the more strongly you hold
49:42
Speaker 1: your philosophy, the more strongly you hue to it, the
49:46
Speaker 1: worst those periods in the doghouse will be. And yet
49:50
Speaker 1: what else is there? You certainly can't, especially since we
49:55
Speaker 1: can't time events. It can't work to jump from style
49:59
Speaker 1: to style the style and expect to be had the
50:02
Speaker 1: right style at the right time. You have to hold
50:04
Speaker 1: a style. It has to be the one you believe
50:06
Speaker 1: in you as to be the one you're good at.
50:08
Speaker 1: And then you have to live through and survive the
50:10
Speaker 1: periods in the doghouse. And that's to me, the mark
50:13
Speaker 1: of a great investor. And by the way, it's it's
50:17
Speaker 1: not how well you do while your style is in favor,
50:21
Speaker 1: it's how you do when your style is out of
50:23
Speaker 1: favor that determines whether you're excellent or not. That's a
50:27
Speaker 1: perfect spot to open this up. Um, two questions from
50:32
Speaker 1: the audience before you do. Let's hear it for Howard
50:34
Speaker 1: marks and and sharing his insights. We have we have
50:41
Speaker 1: a microphone. UM, raise your hand if you have any
50:44
Speaker 1: questions and identify yourself by name and company. UM, who
50:49
Speaker 1: has some questions? I right over here? That not a plant.
50:59
Speaker 1: I uh. I work at rid Holds Wealth Management, Barry UM,
51:02
Speaker 1: thanks for coming out, Howard. Quick question, if you had
51:04
Speaker 1: like a crystal ball, I could tell you anything, any question.
51:08
Speaker 1: Do you want to answer about the world? What? What
51:10
Speaker 1: would you want to know? You know? Let me change
51:21
Speaker 1: it a little bit, not crystal ball. If I could
51:26
Speaker 1: get an accurate answer with regard to every security that
51:30
Speaker 1: I'm thinking of buying, it would be how much optimism
51:34
Speaker 1: is baked into the price. Remember that the psychology causes
51:39
Speaker 1: the price to diverge from the intrinsic value. If the
51:43
Speaker 1: optimism is really high, then the price is high relative
51:45
Speaker 1: intrinsic value. That's a dangerous investment. If the optimism is
51:50
Speaker 1: really low, the price is probably depressed and very attractive.
51:53
Speaker 1: So if I could get a measure, and this is
51:55
Speaker 1: something I tried to do, especially with regard to the
51:58
Speaker 1: overall market, rather than individual skill. I tried to do
52:02
Speaker 1: what I call take the temperature of the market, and
52:04
Speaker 1: I would spend my one uh phone of friend question
52:08
Speaker 1: on that, any of the questions right over here, if
52:14
Speaker 1: we can bring the mic over here, I mean Andy,
52:21
Speaker 1: and I'm a paralyxis capital. What was the lowest low
52:23
Speaker 1: when you started oak Tree? The lowest It may not
52:29
Speaker 1: be very interesting, but the lowest low was the day
52:32
Speaker 1: we figured out that we didn't have a publishable record.
52:35
Speaker 1: When I moved from City to tc W, I walked in,
52:40
Speaker 1: I said, here's my record. They published it Bingo. When
52:45
Speaker 1: I went from tc W to oak Tree and nine,
52:48
Speaker 1: I said, here's the record, publish it. They said, well,
52:50
Speaker 1: where's the data you need? You have to have monthly
52:54
Speaker 1: orderable data in order to publish a record. Well, of
52:58
Speaker 1: course we walked out of tc W with out that
53:00
Speaker 1: information and we said, I said, my god, we don't
53:03
Speaker 1: have a record we can publish. How are we ever
53:05
Speaker 1: going to get any business? And uh, and we figured
53:08
Speaker 1: out a solution. It was worked out pretty well because
53:11
Speaker 1: what we said is we we wrote the clients and
53:14
Speaker 1: we said we'd love to have you come over to
53:17
Speaker 1: oak Tree and if you come and give us your
53:22
Speaker 1: monthly statements over the years, we'll audit them and we'll
53:28
Speaker 1: ascertain what your performance really was and and and so
53:32
Speaker 1: it was kind of a bootstrap operation. Uh. The the
53:35
Speaker 1: accounts we got permitted us to develop a record, which
53:39
Speaker 1: which enabled us to get more accounts. It was that
53:43
Speaker 1: was the lowest day. Interesting question, Thank you Andy, anybody
53:46
Speaker 1: else any other questions out of here for Howard marks
53:49
Speaker 1: here in the back. I am a names Richard M.
53:54
Speaker 1: How do you go about spotting the above average investors
53:58
Speaker 1: that you mentioned before before they become one? And do
54:01
Speaker 1: you think you're good at spotting that? Well? Clearly we
54:07
Speaker 1: hide before they have track records. Um, and uh. We
54:14
Speaker 1: look for a high degree of intelligence, a natural contrarian streak,
54:23
Speaker 1: I would say, a willingness to be wrong. We give
54:26
Speaker 1: people cases to analyze, and we look at what they
54:30
Speaker 1: call attention to and hopefully it will be the things
54:34
Speaker 1: that hopefully they'll put a great emphasis on, finding the
54:38
Speaker 1: things that other people haven't figured out. If you figure
54:41
Speaker 1: out what everybody else has figured out, that you have
54:43
Speaker 1: no advantage, so I think. And then the other thing
54:47
Speaker 1: is I use the word inference a lot, use it
54:51
Speaker 1: all over the book. Um not seeing events but figuring
55:00
Speaker 1: out what they mean deeper significance. So we try to
55:04
Speaker 1: hire people like that. In addition, we try to hire
55:06
Speaker 1: good people that other people, including us, will will enjoy
55:09
Speaker 1: working with, and people who want to be part of
55:12
Speaker 1: a long term team rather than maximize for themselves. How
55:16
Speaker 1: and I'm going to give you a fire a follow
55:18
Speaker 1: up question. You've talked in the past about second level
55:21
Speaker 1: thinking or second order thinking. Describe that in a little
55:24
Speaker 1: more detail. What is it when that that's the illusion
55:28
Speaker 1: when you're you're looking to hire somebody, How does second
55:31
Speaker 1: level thinking apply to either that or to invest in Well,
55:34
Speaker 1: you know, Mary, when when I was thinking about writing
55:38
Speaker 1: the first book, and I said, and it was I
55:41
Speaker 1: had been approached by Columbia Business School Press about writing
55:44
Speaker 1: a book, and I told him my idea for the
55:47
Speaker 1: most important thing. They said, we'll send us a sample chapter.
55:50
Speaker 1: And the funny thing is that I sat down at
55:52
Speaker 1: the keyboard and I wrote a chapter that I had
55:54
Speaker 1: never even thought about writing before. And it wasn't even
55:57
Speaker 1: something that that was in front of mind before that,
55:59
Speaker 1: but it was. And so the first chapter in the
56:01
Speaker 1: book says the most important thing is second level thinking,
56:04
Speaker 1: and it goes. I go through the thing that I
56:06
Speaker 1: just said to you, that if you think the same
56:07
Speaker 1: as others, you'll perform, behave the same, behave the same
56:11
Speaker 1: you'll have the same performance. That's clearly in a formula
56:14
Speaker 1: for superiority. So the answer is that you have to performed.
56:17
Speaker 1: You have to think differently. But it's not so easy
56:21
Speaker 1: because most of the time when people think differently, it's
56:24
Speaker 1: the consensus. It's rights of the different thinker is wrong.
56:27
Speaker 1: You have to think differently and better. Those are the
56:30
Speaker 1: two criteria for a second level things and we look
56:32
Speaker 1: for second level thinkers um which requires number one exceptional insight,
56:38
Speaker 1: a number two a willingness to be wrong, because when
56:40
Speaker 1: you diverge from the crowd, you you can't do it
56:43
Speaker 1: with certainty that you're gonna be right. But you know,
56:46
Speaker 1: just to give you a simple idea, Uh, the first
56:51
Speaker 1: level thinker says, this is a great company, we should
56:54
Speaker 1: buy the stock. The second level thinker says, it's a
56:57
Speaker 1: great company as everybody thinks. It's not as great as
57:00
Speaker 1: everybody thinks, we should sell the stock. If you if
57:04
Speaker 1: you get that, like you know, you might say, if
57:07
Speaker 1: you get the joke, then you have an insight that
57:10
Speaker 1: we think is valuable. There are people who just don't
57:13
Speaker 1: get that. There are people who don't understand contrarian thinking.
57:18
Speaker 1: And um, I think it's extremely important that one does. Um.
57:25
Speaker 1: We still have time for one or two more questions
57:27
Speaker 1: over here? How about right over here? This is the
57:32
Speaker 1: up from Stanley. The length of the cycles could be different, right,
57:37
Speaker 1: So some cycles could have prizes to press for one year,
57:41
Speaker 1: two years, three years, five years. So when that happens,
57:44
Speaker 1: for example of the energy industry or anything like that,
57:47
Speaker 1: how do you manage it on that? Oh? You know,
57:52
Speaker 1: I'd love to be able to say I have a
57:54
Speaker 1: brilliant answer to that, but there is no answer because
57:57
Speaker 1: because because as I said, we sometimes know I have
58:00
Speaker 1: an idea. I don't even want to use the word no.
58:03
Speaker 1: We sometimes have an idea for what's going to happen.
58:06
Speaker 1: We never know when we know. We may know that
58:09
Speaker 1: oils looks cheap, we never know when it's going to
58:13
Speaker 1: go up. And I think that everybody has to get
58:19
Speaker 1: rid of this illusion that these things are noble, you know. Uh.
58:25
Speaker 1: Mark Twain said, it ain't what you don't know that
58:30
Speaker 1: gets you into trouble, it's what you know for certain
58:33
Speaker 1: that just ain't true. A lot of my answers start
58:38
Speaker 1: with I have no idea. But and when you say,
58:42
Speaker 1: when you start your answer that way, it's impossible to
58:45
Speaker 1: get into trouble. You get into trouble when you say
58:49
Speaker 1: I'm confident of X, y Z, and you're bed heavily
58:54
Speaker 1: and you're wrong. So if you accept that the that
58:58
Speaker 1: the investment world is is a place where there's a
59:01
Speaker 1: lot of uncertainty, you're gonna stay out of trouble. Uh.
59:04
Speaker 1: Henry Kaupman, who was the chief economist of Solomon Brothers
59:08
Speaker 1: in the nineteen seventies, once said, there are two kinds
59:11
Speaker 1: of people who lose a lot of money, the ones
59:13
Speaker 1: who are nothing and the ones who know everything. And
59:16
Speaker 1: I think it's very important not to be either of those.
59:20
Speaker 1: I saw some more questions over here, how about right?
59:24
Speaker 1: Uh here? Hi, my name is Keith win. Um. I'm
59:32
Speaker 1: an architect by trade, so I'm what I'm what you
59:34
Speaker 1: call a mom and pop investor. So my question is
59:38
Speaker 1: you mentioned that, Um, the macro economics doesn't influence your
59:43
Speaker 1: investment decisions, but how do you know where you are
59:47
Speaker 1: in the cycle without paying attention to or being influenced
59:50
Speaker 1: by the macro economics. For example, you know, the trade
59:53
Speaker 1: war may maybe something that's gonna blow over soon, and
59:57
Speaker 1: we're going to focus on the fundamentals again of you know, investments,
1:00:00
Speaker 1: but then what about China and all that, the kinds
1:00:05
Speaker 1: of things that they're investing in. When I look at
1:00:07
Speaker 1: a country, don't I pay attention to the politics among
1:00:09
Speaker 1: different countries and what they do, what they invest in,
1:00:12
Speaker 1: what they what they want to do in the future. Well,
1:00:17
Speaker 1: the short answer is yes, the long end, but your
1:00:20
Speaker 1: answers are no good. The long answer is that number one,
1:00:24
Speaker 1: the things you're talking about are not cyclical. These are
1:00:28
Speaker 1: one time what we call exogenous events, whether we'll have
1:00:32
Speaker 1: a trade war, etcetera. And uh, this goes back to
1:00:39
Speaker 1: really what I said about the macro what's going to
1:00:43
Speaker 1: happen in these regards China, future growth, trade war, etcetera.
1:00:52
Speaker 1: Is very important? But is it knowable? And if it's
1:00:57
Speaker 1: not knowable, then you just have to understand that it's
1:01:02
Speaker 1: an uncertainty out there. And and and you you may
1:01:07
Speaker 1: you may say, you know, I'm concerned about China. The
1:01:09
Speaker 1: possibility of a trade war raises the uncertainty for me.
1:01:12
Speaker 1: So I'm going to invest conservatively. That's not a sick
1:01:14
Speaker 1: local consideration, but that's a prudent consideration. Um and uh.
1:01:21
Speaker 1: But you know, I keep coming back to this thought
1:01:24
Speaker 1: that it would be nice to know what's going to happen,
1:01:27
Speaker 1: but you don't know, and nobody knows. And you're an architect,
1:01:31
Speaker 1: and what that means is you build buildings and you
1:01:33
Speaker 1: put in enough steel and brick so that it won't
1:01:36
Speaker 1: fall down because it works according to certain physical laws.
1:01:42
Speaker 1: And you have to understand that there are no physical
1:01:46
Speaker 1: laws at work in investing, and the future is uncertain
1:01:52
Speaker 1: and vague and and random. Um and psychology dominates. And
1:02:01
Speaker 1: I say in the book, I quote Richard Feyinneman, who
1:02:03
Speaker 1: was the great physicist, and he said physics would be
1:02:06
Speaker 1: much harder if electrons had feelings. A great quote. You know,
1:02:12
Speaker 1: you come in the room, you'd s flip up the switch.
1:02:14
Speaker 1: The lights go on every time. Why is that because
1:02:17
Speaker 1: the electrons flow from the switch to the lights. They
1:02:20
Speaker 1: never flow this way. They never go on strike, they
1:02:23
Speaker 1: never fall asleep, they never say today, I don't feel
1:02:25
Speaker 1: like flowing from the switch to the light. That's physical science.
1:02:30
Speaker 1: You have to understand the distinction between your field and
1:02:38
Speaker 1: the field of investing, where there are no laws, there
1:02:41
Speaker 1: are only tendencies. We can get the tendencies on our side,
1:02:46
Speaker 1: but we can't. You can't build a bridge that's incapable
1:02:50
Speaker 1: of falling down. I think that's the perfect place to
1:02:54
Speaker 1: leave us off. So before I asked for rental plause,
1:02:57
Speaker 1: I just want to let everybody know they will be
1:03:00
Speaker 1: links and snacks on the other side of those doors,
1:03:03
Speaker 1: as well as uh copies of Howard's book. I know
1:03:07
Speaker 1: you have copies, um, well, somebody paid for them. There
1:03:10
Speaker 1: is there is no free lunch, um. But Howard's gonna
1:03:14
Speaker 1: be able to stick around for another ten minutes. And
1:03:16
Speaker 1: I promised his wife I would not make him late
1:03:18
Speaker 1: for dinner. So let's hear it for Howard Marks. I
1:03:22
Speaker 1: feel