Latest / Masters in Business / Howard Marks Discusses the Interest-Rates Machine

Transcript

Howard Marks Discusses the Interest-Rates Machine · Masters in Business

• 0:02
  Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
• 0:09
  Speaker 1: This week on the podcast, I have an extra special guest.
• 0:13
  Speaker 1: What can I say? Howard Marks is the co founder
• 0:16
  Speaker 1: and co chairman of oak Tree Capital Management. If you
• 0:20
  Speaker 1: are at all interested in everything from bond investing to
• 0:25
  Speaker 1: market cycles, to what matters most and that includes the
• 0:30
  Speaker 1: most important thing, to the importance of human psychology and emotions,
• 0:35
  Speaker 1: to mastering the market cycle, you will find this to
• 0:39
  Speaker 1: be an absolutely fascinating conversation. Rather than have me go
• 0:43
  Speaker 1: on at length, instead, I'm just going to step away
• 0:46
  Speaker 1: and say, with no further ado, my conversation with Howard Marks,
• 0:55
  Speaker 1: I have an extra special guest. His name is Howard Marks,
• 0:58
  Speaker 1: and he is co chairman and co founder of oak
• 1:02
  Speaker 1: Tree Capital, which manages over a hundred and twenty two
• 1:05
  Speaker 1: billion dollars. Howard comes to us by way of the
• 1:08
  Speaker 1: Wharton School at Pennsylvania, where he did his undergraduate got
• 1:12
  Speaker 1: his MBA at the University of Chicago Boost School. He
• 1:17
  Speaker 1: formed oak Tree and after spending about a decade at
• 1:23
  Speaker 1: Trust Company of the West. According to the most recent
• 1:26
  Speaker 1: Bloomberg data, I looked at oak Trees seventeen distressed debt
• 1:31
  Speaker 1: funds have averaged annual gains of nine after fees since inception,
• 1:38
  Speaker 1: about seven hundred basis points better than its peers, according
• 1:44
  Speaker 1: to Boston based consulting firm Cambridge Associates. His first book
• 1:49
  Speaker 1: was called The Most Important Thing, and he has authored
• 1:53
  Speaker 1: a new book called Mastering the Cycle, Getting the Odds
• 1:57
  Speaker 1: on Your Side, returning for his third Masters in Business,
• 2:01
  Speaker 1: Howard Marks, Welcome to Bloomberg. Thank you, Mary. It's great
• 2:04
  Speaker 1: to be here. So I was excited to see your
• 2:08
  Speaker 1: new book because I figured it would be an excuse
• 2:10
  Speaker 1: to get you back in here. Let's talk a little
• 2:12
  Speaker 1: bit about what motivated you to write another book. Um,
• 2:17
  Speaker 1: who's the intended audience? What? What was the thinking behind this?
• 2:21
  Speaker 1: When I wrote the first book, I thought it would
• 2:23
  Speaker 1: sell about three thousand, and I thought it would be
• 2:25
  Speaker 1: die hard professional investors. It has sold about three quarters
• 2:29
  Speaker 1: of a million so far, and uh, and I believe
• 2:33
  Speaker 1: it's uh professionals, uh do it yourself investors, and uh,
• 2:40
  Speaker 1: maybe even some people who just want to hear about
• 2:43
  Speaker 1: a new topic. So the first book came about because
• 2:46
  Speaker 1: some guy named Warren Buffett said, Hey, Howard, why don't
• 2:50
  Speaker 1: you write a book. Why don't you take all these
• 2:51
  Speaker 1: chairman memos and turn them into a book. If you
• 2:54
  Speaker 1: write it, I'll give you a blurb for the front cover.
• 2:58
  Speaker 1: That's pretty good. Motivation was the motivation in this book. Well,
• 3:02
  Speaker 1: as you know, the first book was called The Most
• 3:04
  Speaker 1: Important Thing, and it talked about twenty different things, each
• 3:08
  Speaker 1: of which was labeled the most Important Thing. Because in
• 3:10
  Speaker 1: investing there really are many, many things that are essential,
• 3:13
  Speaker 1: and all of which have to be dealt with simultaneously.
• 3:16
  Speaker 1: But I do believe Barry that UH, recognizing on dealing
• 3:22
  Speaker 1: with risk and understanding where we stand in the cycle
• 3:26
  Speaker 1: are really the two keys to success. UH. And if
• 3:30
  Speaker 1: you're going to be an active investor and active manager,
• 3:34
  Speaker 1: I think those are the two areas in which, UH
• 3:38
  Speaker 1: you can best make a contribution. So let's talk a
• 3:41
  Speaker 1: little bit about cycles. There's a quote of yours that
• 3:43
  Speaker 1: I really like. Rule number one is most things will
• 3:47
  Speaker 1: prove to be cyclical. And rule number two some of
• 3:51
  Speaker 1: the greatest opportunities for gains and losses come when other
• 3:55
  Speaker 1: people forget rule number one. Tell us about that. Well,
• 3:58
  Speaker 1: you know, back in in the early seventies, somebody gave
• 4:01
  Speaker 1: me a great gift they shared with me the three
• 4:05
  Speaker 1: stages of a bull market. The first stage, when only
• 4:09
  Speaker 1: a few incredibly insightful people believe there could be improvement,
• 4:13
  Speaker 1: the second stage, when most people accept that improvement is
• 4:17
  Speaker 1: taking place, and the third stage, when everybody thinks things
• 4:20
  Speaker 1: will get better forever. And you know, it's obvious that
• 4:24
  Speaker 1: if you buy in the first stage, because so few
• 4:28
  Speaker 1: people are optimistic, you can get a real bargain. And
• 4:31
  Speaker 1: if you buy in the last stage, when everybody and
• 4:34
  Speaker 1: his brother is on board, uh, you know you're likely
• 4:37
  Speaker 1: to overpay. It's it's almost as simple as that. So
• 4:40
  Speaker 1: you know, what I try to do in the book
• 4:42
  Speaker 1: is go through understanding where we are in the cycle, why,
• 4:49
  Speaker 1: and what we should do about it. So let's talk
• 4:51
  Speaker 1: a little bit about this cycle. Clearly, oh nine, very
• 4:55
  Speaker 1: few people thought, all right, this is an opportunity where
• 4:59
  Speaker 1: we're at the bottom of this cycle, and those folks
• 5:01
  Speaker 1: have been pretty well rewarded. If we look at I
• 5:05
  Speaker 1: don't know is that a fair assessment for phase two
• 5:09
  Speaker 1: where people felt, hey, things are getting better. Are we
• 5:13
  Speaker 1: at that final stage yet? Have we gotten there? Because
• 5:16
  Speaker 1: so many people have been so negative this whole run up,
• 5:20
  Speaker 1: it makes it a little tricky to figure out where
• 5:22
  Speaker 1: that last stage where everybody thinks, hey, this can't ever stop,
• 5:26
  Speaker 1: it's going to keep going. Sure, Well, you know that's
• 5:29
  Speaker 1: the key question, that's the hard question. Um My approach
• 5:34
  Speaker 1: on these kinds of things is, uh, we never know
• 5:37
  Speaker 1: where we're going. We're sure as hell out or no
• 5:39
  Speaker 1: where we are. What do we know? Barry about this market?
• 5:42
  Speaker 1: As you say, we're not in O eight oh nine
• 5:45
  Speaker 1: when everybody thought we were heading for a meltdown. We're
• 5:51
  Speaker 1: not in twelve or thirteen when things were beginning to
• 5:55
  Speaker 1: lift off. Uh. By some measures, this is the longest
• 6:01
  Speaker 1: bullmarket in history. The S and P has quadrupled from
• 6:05
  Speaker 1: the lows. And uh So I think the first thing
• 6:09
  Speaker 1: I would say is the easy money has been made.
• 6:12
  Speaker 1: We're not in that first stage anymore, where where most
• 6:14
  Speaker 1: people are nonbelievers. That's that's the easy thing to say.
• 6:18
  Speaker 1: Um I think that, And and and lately you get
• 6:23
  Speaker 1: more and more people, you know, the higher things go,
• 6:26
  Speaker 1: the more people say, well I guess it could it
• 6:28
  Speaker 1: could keep on. Uh. It's usually prefaced by those four
• 6:33
  Speaker 1: dangerous world words. It's different this time. You know, the
• 6:37
  Speaker 1: historic rules do not apply. The pe ratio, history doesn't matter,
• 6:43
  Speaker 1: um and and so forth. Uh. But you know, Uh,
• 6:49
  Speaker 1: when you're in the tenth year of her economic recovery,
• 6:52
  Speaker 1: and there's never been one of more than ten years,
• 6:54
  Speaker 1: the only thing you know is that the odds are
• 6:58
  Speaker 1: not really on your side anymore. Nobody can say it's
• 7:01
  Speaker 1: gonna end tomorrow, It's going to end a year from now.
• 7:05
  Speaker 1: In investing, we sometimes know what's going to happen, but
• 7:08
  Speaker 1: we never know when. But you know, Uh, if you,
• 7:13
  Speaker 1: if you, if you accept that the easy money has
• 7:16
  Speaker 1: been made, and that the pe ratios, for example, are
• 7:20
  Speaker 1: higher than the post war norm, and that interest rates
• 7:23
  Speaker 1: are rising, etcetera, then I think you have to conclude
• 7:28
  Speaker 1: that the odds are not strongly in your favor. You
• 7:31
  Speaker 1: have to take some risk off. Makes sense. Back you
• 7:37
  Speaker 1: said you were thinking we were falling into an everything
• 7:40
  Speaker 1: bond bubble? Um, What are your thoughts about that today?
• 7:44
  Speaker 1: Is our bonds still in a bubble? Uh? And how
• 7:47
  Speaker 1: does this resolve itself? You know, at that time, Barry,
• 7:50
  Speaker 1: I think interest rates were the lowest that they've ever
• 7:53
  Speaker 1: been period. And you know, it seemed that with the
• 7:59
  Speaker 1: strength in economy and with the Fed no longer wanting
• 8:03
  Speaker 1: to be so stimulative that interest rates would be rising.
• 8:08
  Speaker 1: Rising interest rates folding bond prices. That's the math. So
• 8:12
  Speaker 1: you know, we've seen eight interest rate increases from the
• 8:17
  Speaker 1: Fed already. Most forecasters think we'll see half a dozen
• 8:21
  Speaker 1: more over the next couple of years. Uh. Clearly, interest
• 8:26
  Speaker 1: rates are no longer the lowest in history. Although still low,
• 8:31
  Speaker 1: they'll probably continue to rise, you know. So you know,
• 8:35
  Speaker 1: a straight high grade bond is nothing but an interest
• 8:40
  Speaker 1: rate machine. And as interest rates go higher, the prices
• 8:46
  Speaker 1: of existing bonds with old fashioned low interest rates go down.
• 8:52
  Speaker 1: I don't think you want to own straight long term
• 8:55
  Speaker 1: bonds in a period of rising interest rates, and the
• 8:58
  Speaker 1: consensus is that rates will rise. So if you don't
• 9:01
  Speaker 1: want to own straight up bonds and we're in a
• 9:04
  Speaker 1: rising rate environment and a lot of people have um
• 9:08
  Speaker 1: fairly substantial exposure to equities, how do you offset that risk?
• 9:13
  Speaker 1: If you want some form of a balanced portfolio, where
• 9:16
  Speaker 1: where is the value on the fixed income side, if anywhere? Well,
• 9:20
  Speaker 1: you know, I think that across the board, what I
• 9:24
  Speaker 1: say about rates has really affected all bonds. Uh. You know,
• 9:29
  Speaker 1: the the impact of of rates on bonds is universal,
• 9:34
  Speaker 1: and uh, you know, at the present time, there are
• 9:36
  Speaker 1: no exceptions. The one thing you want to think about
• 9:39
  Speaker 1: is this, Barry. One of the main reasons that we
• 9:43
  Speaker 1: will probably have rising interest rates is that we will
• 9:47
  Speaker 1: probably have continued prosperity and maybe even a pick up
• 9:52
  Speaker 1: in inflation. Those two things, prosperity and inflation add to
• 9:57
  Speaker 1: the profitability of corporations, and so UH, strengthening corporate profits
• 10:07
  Speaker 1: will translate into a positive influence for corporate bonds. So
• 10:13
  Speaker 1: you'll have the negative influence of rising rates, but the
• 10:16
  Speaker 1: positive influence of improving profitability. And that suggests that corporate
• 10:21
  Speaker 1: bonds are somewhat sheltered UH from the deleterious effects of
• 10:26
  Speaker 1: rates alone. But you know, I believe that most asset
• 10:32
  Speaker 1: classes are fully two U fully value too at the
• 10:39
  Speaker 1: beginning of rich. And this is a time for caution,
• 10:42
  Speaker 1: you know. The book is about trying to figure out
• 10:45
  Speaker 1: what time it is for what and which form of
• 10:50
  Speaker 1: behavior is appropriate. If we're low in the cycle, we
• 10:53
  Speaker 1: should be aggressive. If we're high in the cycle, we
• 10:55
  Speaker 1: should be defensive. I think, on balance, through most asset classes,
• 10:59
  Speaker 1: we are high in the cycle, and I think that
• 11:03
  Speaker 1: calls for defense. So if we were putting this in
• 11:06
  Speaker 1: terms of a baseball game, What what inning are we
• 11:09
  Speaker 1: in in? In that longer cycle? I get that question
• 11:14
  Speaker 1: a lot. They started asking it back in oh eight
• 11:16
  Speaker 1: when they said when will the what inning are we in?
• 11:19
  Speaker 1: In the crisis? Meaning when will the financial crisis enid? Sure,
• 11:23
  Speaker 1: I remember eighth inning fisher of the Fed governor from
• 11:26
  Speaker 1: Texas who basically said, we were in the eighth inning.
• 11:30
  Speaker 1: Turn out we were in the second inning. But still
• 11:32
  Speaker 1: exactly and today when they say what inning are we in,
• 11:36
  Speaker 1: they really mean when will the bull market end? How
• 11:40
  Speaker 1: far are we in the cycle? Exactly? Now? I think
• 11:42
  Speaker 1: we're in the eighth inning, But about a year ago
• 11:48
  Speaker 1: I figured out there's a problem with saying that, which
• 11:51
  Speaker 1: is this is in baseball, right, and we know in
• 11:54
  Speaker 1: baseball that a game is nine innings except except ties,
• 11:59
  Speaker 1: But in investing, we have no idea how many innings
• 12:04
  Speaker 1: there will be in the game. So I think we're
• 12:07
  Speaker 1: in the eighth inning, but this game could go nine
• 12:11
  Speaker 1: or eleven or thirteen. And I think that the outlook
• 12:17
  Speaker 1: is not so poor and the prices are not so high,
• 12:21
  Speaker 1: that this is the time for defense. Our own motto
• 12:24
  Speaker 1: at oak Tree has been moved forward, but with caution
• 12:27
  Speaker 1: and Uh, we're essentially fully invested. That's what moved forward means.
• 12:33
  Speaker 1: But I also think it's time for caution because I
• 12:36
  Speaker 1: do think we are elevated in the cycle. So so
• 12:39
  Speaker 1: how does an investor manage that risk? Is it just
• 12:42
  Speaker 1: staying away from the most expensive, most speculative paper being
• 12:47
  Speaker 1: fixed income or stocks On the equity side, how do
• 12:50
  Speaker 1: you stay fully invested but cautious. Well, I think that's
• 12:53
  Speaker 1: the right idea. Everything you want to do in the
• 12:56
  Speaker 1: investment business, you can do it aggressively or you can
• 13:00
  Speaker 1: do it defensively. As you say, you can be in
• 13:03
  Speaker 1: quality stocks as a post to speculative stocks. You can
• 13:06
  Speaker 1: be in large companies rather than small. You can be
• 13:08
  Speaker 1: in the lower price, not the higher price. Now, usually
• 13:11
  Speaker 1: the higher price has the prettier story. That's why it's
• 13:14
  Speaker 1: higher price. But but but you pay smartly for that.
• 13:18
  Speaker 1: The fangs, the texts, these are the ones that have
• 13:20
  Speaker 1: been selling very high, high in price, great story. But
• 13:24
  Speaker 1: if you want to be defensive, you drop down to
• 13:26
  Speaker 1: a little less glamorous story at a lower price. In bonds,
• 13:29
  Speaker 1: you can go for quality. You can certainly go for
• 13:33
  Speaker 1: UH shorter duration short shorter maturities UM and uh. I
• 13:39
  Speaker 1: would not advocate getting out of the market. It's not
• 13:45
  Speaker 1: so egregious that cash is preferable. I do think that
• 13:50
  Speaker 1: the things you want to do in your portfolio are
• 13:53
  Speaker 1: better done in a cautious way than in an aggressive way.
• 13:57
  Speaker 1: So you talked about corporates, you talked about high grade
• 14:00
  Speaker 1: low grade. Before we came into the studio, we were
• 14:02
  Speaker 1: discussing tips. If we see even modest inflation, is that
• 14:07
  Speaker 1: a bad place to hide or is that a half
• 14:09
  Speaker 1: decent place to think about. There are two risks in bonds.
• 14:15
  Speaker 1: One is the risk of a negative price fluctuation, interest
• 14:19
  Speaker 1: rates up, prices down. The other is the risk of
• 14:23
  Speaker 1: not getting paid. What is a bond. It's a promise
• 14:26
  Speaker 1: of a string of payments, interest, and then principle at
• 14:29
  Speaker 1: the end. So you know, most people should not buy
• 14:35
  Speaker 1: bonds where the risk of being unpaid is substantial. So
• 14:41
  Speaker 1: let's assume that we are our managers can exclude the
• 14:46
  Speaker 1: ones that default. Now we're down to the the ones
• 14:50
  Speaker 1: that pay but could experience a negative fluctuation. We don't
• 14:56
  Speaker 1: know rates, what rates are gonna do, We don't know
• 14:58
  Speaker 1: what how they'll fluctuate. But if you buy bonds that
• 15:01
  Speaker 1: are gonna pay. You buy a bond today. Let's say
• 15:04
  Speaker 1: it's a high yield bond and you can buy it
• 15:06
  Speaker 1: at a six percent yield. If rates go up, there
• 15:10
  Speaker 1: could be a negative price fluctuation, but if the company
• 15:13
  Speaker 1: is credit worthy, it will still pay at the end
• 15:15
  Speaker 1: and you'll get your six percent. And I think that,
• 15:18
  Speaker 1: you know, if somebody, if somebody can live with a fluctuation,
• 15:23
  Speaker 1: and if six percent is good for them, I think
• 15:25
  Speaker 1: they should be buying six percent bonds. The biggest mistake
• 15:29
  Speaker 1: you can make, in my opinion, is to buy six
• 15:32
  Speaker 1: percent bonds in the hope of getting nine because that's
• 15:35
  Speaker 1: probably not in the cards, to say the least. So
• 15:38
  Speaker 1: let's talk a little bit about mastering the market cycle.
• 15:42
  Speaker 1: What is it that most people seem to get wrong
• 15:45
  Speaker 1: with longer term cycles? What is it that makes the
• 15:49
  Speaker 1: market go up and down? When you see a market
• 15:52
  Speaker 1: that's rising, it's usually the news is good. The economy
• 15:57
  Speaker 1: is doing well, the corporations are reporting good or ings,
• 16:00
  Speaker 1: the the investors are happy, the media are putting out
• 16:04
  Speaker 1: positive stories, and prices are rising. Everybody feels good. But
• 16:10
  Speaker 1: if you take those things together, very what they mean
• 16:15
  Speaker 1: is that prices are probably high the enthusiasm to buy
• 16:21
  Speaker 1: thus is the highest when the prices are the highest,
• 16:25
  Speaker 1: which is not when we should be buying the most.
• 16:28
  Speaker 1: So and the reverse is true in the opposite direction,
• 16:31
  Speaker 1: you know, in the in the in the very bad times,
• 16:33
  Speaker 1: people get depressed. The news is for everybody wants to
• 16:36
  Speaker 1: get out, regardless of how the low the prices. So
• 16:40
  Speaker 1: you know, when I was a kid, my mother said, Howie,
• 16:43
  Speaker 1: buy low, sell high. Most people's emotions lead them to
• 16:47
  Speaker 1: buy high, sell low. We want to counter that. So
• 16:51
  Speaker 1: the element that causes the problems in investing is psychology.
• 16:58
  Speaker 1: If we knew that positive news would result in good
• 17:03
  Speaker 1: price performance, life would be very easy. But it would
• 17:07
  Speaker 1: be only true if if we could buy in at
• 17:11
  Speaker 1: a fair price or an attractive price. If the news
• 17:14
  Speaker 1: will be good, but we overpay for the security to
• 17:17
  Speaker 1: get in, then we may be looking at losses despite
• 17:22
  Speaker 1: the good news. So it's all a matter of emotion.
• 17:25
  Speaker 1: And uh, you know, the reason I wrote this book
• 17:29
  Speaker 1: is so that people could understand what it is that
• 17:32
  Speaker 1: contributes to market cycles. Could understand perhaps the mistakes others
• 17:38
  Speaker 1: may perhaps the mistakes they've been making. His darkly and
• 17:41
  Speaker 1: stop it. Get the you know, the subtitle is the
• 17:45
  Speaker 1: key getting the odds on your side. So let's talk
• 17:48
  Speaker 1: a little bit about that in terms of one of
• 17:51
  Speaker 1: your favorite subjects, which is value. And one of the
• 17:54
  Speaker 1: quotes that I really like of yours is the essential
• 17:59
  Speaker 1: character of value is not what you buy, but what
• 18:02
  Speaker 1: you pay. That clearly has a cyclical element to it.
• 18:06
  Speaker 1: If we're talking about the overall market. What what motivated
• 18:09
  Speaker 1: you to phrase that quite in that that way? Very easy?
• 18:13
  Speaker 1: I started in business fifty years ago. Uh and uh,
• 18:19
  Speaker 1: you know, I started a city bank, and all the
• 18:21
  Speaker 1: New York banks adhered to what was called the nifty
• 18:23
  Speaker 1: fifty investing. They brought the stocks of the fifty best
• 18:26
  Speaker 1: and fastest growing companies in America to which nothing bad
• 18:29
  Speaker 1: could ever happen. And in most cases they were right.
• 18:32
  Speaker 1: There were great companies. They went on to great success,
• 18:36
  Speaker 1: but they were valued so high in nineteen eight that
• 18:40
  Speaker 1: if you if you bought them and held them for
• 18:41
  Speaker 1: five years, you lost almost all your money. Because there
• 18:45
  Speaker 1: is no asset which is so good that it can't
• 18:48
  Speaker 1: be overpriced and us dangerous and and uh and the inverse.
• 18:53
  Speaker 1: You know, there are very few assets which are so
• 18:56
  Speaker 1: bad that you can't make money at them if you
• 19:00
  Speaker 1: I am right. So in night ten years, when I
• 19:03
  Speaker 1: had ten years under my belt, I was asked a
• 19:05
  Speaker 1: city bank to start up the fund for high yield bonds.
• 19:09
  Speaker 1: So in the first few years we bought the best
• 19:13
  Speaker 1: companies in America and lost a lot of money. Starting
• 19:17
  Speaker 1: in seventy eight, I bought the debt of some of
• 19:19
  Speaker 1: the worst companies in America and made a lot of
• 19:22
  Speaker 1: money steadily and safely. And that's when I concluded, it's
• 19:26
  Speaker 1: not what you buy, it's what you pay. I've I've
• 19:29
  Speaker 1: always hated the phrase that came out of the financial
• 19:32
  Speaker 1: crisis toxic assets, because it wasn't the assets that were toxic,
• 19:37
  Speaker 1: it was the prices you could buy the worst bond
• 19:39
  Speaker 1: portfolio if you paid a low enough price. Hey, a
• 19:43
  Speaker 1: lot of people bought bout blocks of paper and double
• 19:48
  Speaker 1: and triple their investment because the price they had paid
• 19:50
  Speaker 1: was so low. Exactly, you know, Barry, at the beginning
• 19:53
  Speaker 1: of the hour, uh, you quoted returns for our distressed
• 19:57
  Speaker 1: dead funds. Well, in our distressed debt funds, we're buying
• 20:00
  Speaker 1: securities of companies that are bankrupt or that everybody thinks
• 20:06
  Speaker 1: will become bankrupt. But you've had very consistent returns over time.
• 20:10
  Speaker 1: We've had very good returns buying stuff that was very
• 20:15
  Speaker 1: dubious in its financial merits, but so cheap that the
• 20:20
  Speaker 1: odds were on our side. And and that's all about price,
• 20:24
  Speaker 1: not quality assets exactly. Let's talk a little about one
• 20:28
  Speaker 1: of your more recent chairman's memos and we'll we'll get
• 20:31
  Speaker 1: into the chairman memos in a In a bit, you
• 20:34
  Speaker 1: said something that kind of caught my eye and was
• 20:36
  Speaker 1: was sort of fascinating. You asked about computers. We were
• 20:40
  Speaker 1: discussing computers, and you asked the following questions, Can they
• 20:43
  Speaker 1: sit down with the CEO and figure out whether he's
• 20:46
  Speaker 1: the next Steve Jobs or not? Can they listen to
• 20:49
  Speaker 1: a bunch of venture capital pitches and know what's the
• 20:52
  Speaker 1: next Amazon? So I thought that was really an intriguing question,
• 20:56
  Speaker 1: but it made me stop and ask myself, well, people
• 21:00
  Speaker 1: do that either? Also, I don't know how good humans
• 21:03
  Speaker 1: are at that process. Well, that's exactly the right question, Barry.
• 21:06
  Speaker 1: Certainly not everybody can. Sure certainly the average person can't.
• 21:12
  Speaker 1: There's a few percent at the top, the people with
• 21:16
  Speaker 1: the most foresight who can figure those things out. They
• 21:20
  Speaker 1: can be great investors. They should be paid a lot
• 21:24
  Speaker 1: for their services. But the average person can't do those things.
• 21:30
  Speaker 1: And the computer may be able to do a better
• 21:33
  Speaker 1: job than the average person because it can digest a
• 21:36
  Speaker 1: lot of data. It doesn't make mistakes, you know. One
• 21:40
  Speaker 1: of the themes of the book is that emotions are
• 21:43
  Speaker 1: the investors enemy. Computers are not very emotional. So in
• 21:48
  Speaker 1: many regards, I believe computers can probably do a better
• 21:52
  Speaker 1: job than some very large percentage of investors, but just
• 21:57
  Speaker 1: not as good as the best. And those folks who
• 22:00
  Speaker 1: are the people who can peer into the future and
• 22:03
  Speaker 1: spot the next Steve Jobs on the next Amazon, there
• 22:08
  Speaker 1: really outliers. We're talking about a teeny tiny percentage of investors, exactly.
• 22:14
  Speaker 1: It's not it's not even the best of the average investors.
• 22:18
  Speaker 1: You're talking about, you know, two and three standard deviations
• 22:22
  Speaker 1: away from that normal Bell Bell curve. I don't want
• 22:26
  Speaker 1: people listening to think, well, I could be one of
• 22:28
  Speaker 1: the better. The average person is never going to be
• 22:31
  Speaker 1: a starting player on an NBA team, and most people
• 22:35
  Speaker 1: are not going to be those outlier who can spot
• 22:38
  Speaker 1: the future ten years before it happens. So if you
• 22:40
  Speaker 1: think about it, what your listeners should spend their time
• 22:44
  Speaker 1: doing is, in my opinion, is figure out how they
• 22:48
  Speaker 1: should position themselves in the market. And and that really
• 22:51
  Speaker 1: comes back to the cycle. You know, in this business,
• 22:56
  Speaker 1: there are only really two things we do. We want
• 22:59
  Speaker 1: to select the better securities and avoid the worst ones.
• 23:04
  Speaker 1: And we want to have more risk exposure when the
• 23:07
  Speaker 1: time is appropriate and less when it's not that ladder
• 23:13
  Speaker 1: thing that cycle positioning, and uh, you know that's the
• 23:17
  Speaker 1: reason for the book. That's my main job at oak
• 23:20
  Speaker 1: Tree is to figure out how we should be positioned
• 23:24
  Speaker 1: in those regards. Uh. Most people can't figure out the
• 23:28
  Speaker 1: next Amazon. You're right, they should they should uh bypassive
• 23:33
  Speaker 1: products or hand off their capital to a professional manager
• 23:37
  Speaker 1: who can add value. But I do think that that you,
• 23:43
  Speaker 1: the listener, should be figuring out where are we in
• 23:48
  Speaker 1: the cycle, what does that imply for my behavior, and
• 23:54
  Speaker 1: how do I want to be positioned visa v risk
• 23:58
  Speaker 1: at this time. So let's talk a little bit about
• 24:01
  Speaker 1: the institutional investor versus the individual. We know most mom
• 24:07
  Speaker 1: and pop investors at home can't do the things that
• 24:10
  Speaker 1: these outliers are capable of doing. Your office works with
• 24:14
  Speaker 1: a lot of institutions. What sort of challenges do institutional
• 24:19
  Speaker 1: investors face that perhaps mom and pop don't or are
• 24:23
  Speaker 1: they just human and suffer the same emotional consequences as anybody.
• 24:28
  Speaker 1: Institutions don't make investments. People make investments for institutions, And
• 24:34
  Speaker 1: you're right, those people have emotions too. Those people are
• 24:41
  Speaker 1: bombarded with the same news that the mom and pop
• 24:44
  Speaker 1: investor is. News is good, news is bad, Taxes up,
• 24:47
  Speaker 1: taxes down, this company beat, this company fell short. Uh,
• 24:51
  Speaker 1: end of the world, you know, trees growing to the sky,
• 24:54
  Speaker 1: whatever it is. Everybody gets those same inputs. Everybody has emotions.
• 25:00
  Speaker 1: So it's not true. Now the the institutional investor may
• 25:04
  Speaker 1: be better educated in finance, may have more experience, etcetera.
• 25:10
  Speaker 1: But uh, it's just not that easy. In general, the
• 25:16
  Speaker 1: professional has the advantage of doing these things full time.
• 25:19
  Speaker 1: But guess what, the mom and pop investor has the
• 25:22
  Speaker 1: advantage that they can't get fired. The the institutional investor
• 25:28
  Speaker 1: has to worry about getting fired. And that makes it
• 25:31
  Speaker 1: hard to do the right thing at the extremes. You know,
• 25:35
  Speaker 1: let's go back, Barry to the fourth quarter of oh eight.
• 25:37
  Speaker 1: Lehman Brothers has gone bankrupt. That stock market is get
• 25:40
  Speaker 1: skating down bond prices are collapsing, and you had to buy.
• 25:44
  Speaker 1: But maybe you say, you know what if I buy
• 25:47
  Speaker 1: today and uh and the market goes down further, maybe
• 25:51
  Speaker 1: I'll lose my job, so I can't do it, and
• 25:54
  Speaker 1: and uh, personal concerns make it very hard even for
• 25:59
  Speaker 1: the profession. You know, career risk is certainly presents all
• 26:02
  Speaker 1: the time, exactly. So around that time, UM, I'm doing
• 26:08
  Speaker 1: this off the top of my head. Somewhere in October,
• 26:12
  Speaker 1: we saw the markets that fall about before they recovered
• 26:17
  Speaker 1: in oh eight, you had already raised money from clients
• 26:22
  Speaker 1: for new distress bond funds. Tell us what you were
• 26:25
  Speaker 1: doing during the fourth quarter of oh eight when really
• 26:29
  Speaker 1: I was about as early in the cycle as as
• 26:32
  Speaker 1: anyone could have um thrown a dart and got lucky with. Well,
• 26:36
  Speaker 1: it really goes back to what I've been saying, which
• 26:39
  Speaker 1: is to do the right thing visa VI the cycle,
• 26:42
  Speaker 1: you have to kind of understand what's going on around you.
• 26:45
  Speaker 1: You know, five oh six, we vastly reduce our risk
• 26:48
  Speaker 1: because we felt that that implausible, undisciplined deals we're getting done,
• 26:55
  Speaker 1: and that shows that the market is undisciplined. So we
• 26:58
  Speaker 1: cut our risk first day of eight of oh seven.
• 27:01
  Speaker 1: Excuse me, we thought there was something coming. We went
• 27:03
  Speaker 1: to our investors. We said we'd like to raise a
• 27:06
  Speaker 1: fund for distress debt. We went out for the biggest
• 27:10
  Speaker 1: amount of money we'd ever raised. We got much more
• 27:12
  Speaker 1: than that because I guess we told the story well,
• 27:15
  Speaker 1: our clients, you were looking for three billion dollars, raised
• 27:18
  Speaker 1: something like seven or eight billions. He ended up at fourteen.
• 27:22
  Speaker 1: So we took We took the first three and a half.
• 27:25
  Speaker 1: We put that in a fund. We said, okay, that's
• 27:27
  Speaker 1: her active management today, we're gonna start investing that. But
• 27:30
  Speaker 1: we took the other eleven and we said we're gonna
• 27:33
  Speaker 1: put that on the shelf in a standby fund. We
• 27:36
  Speaker 1: think there'll be a big opportunity. That's when we will
• 27:38
  Speaker 1: invest that money. So the first close was MARCHO seven. UH.
• 27:42
  Speaker 1: We didn't start investing it and then only slowly until
• 27:46
  Speaker 1: June eight, and we had a lot of cash, well
• 27:51
  Speaker 1: money we could call uh when Lehman went under, and
• 27:55
  Speaker 1: then we we concluded that that was the time to
• 27:58
  Speaker 1: spend it. And from September fifteen O eight, which was
• 28:02
  Speaker 1: the Leman bankruptcy, until the end of the year over
• 28:04
  Speaker 1: those fifteen weeks, we invested over half a billion a week.
• 28:08
  Speaker 1: That's amazing that, that's quite quite amazing. So during that period,
• 28:12
  Speaker 1: are you getting any sort of pushback from clients? Howard?
• 28:15
  Speaker 1: What are you doing? It's crazy out there. Can't you
• 28:17
  Speaker 1: just sit on your hands for a few months? And
• 28:19
  Speaker 1: how do you deal with that sort of stuff? Well,
• 28:21
  Speaker 1: I'm proud of my clients because I did not get
• 28:24
  Speaker 1: the pushback. I think they credit us with with doing
• 28:29
  Speaker 1: the right thing, and I think they were perhaps glad
• 28:34
  Speaker 1: to have us behaving in a countercyclical way. You know,
• 28:39
  Speaker 1: so many people were afraid in that fourth quarter that
• 28:43
  Speaker 1: may remember, and these were people who had brought into
• 28:47
  Speaker 1: our story that there was an opportunity coming, had given
• 28:50
  Speaker 1: us money for that occasion. They realized there would be
• 28:53
  Speaker 1: a mistake to try to talk us out of spending.
• 28:56
  Speaker 1: So so the point is, um, you know, the negative
• 29:00
  Speaker 1: civity around us was so great that again it's all
• 29:05
  Speaker 1: about recognizing what's going on in the environment where we
• 29:07
  Speaker 1: are in the cycle. Prices were down so much and
• 29:11
  Speaker 1: there was no limit to people's negativism, no limit. I've
• 29:17
  Speaker 1: never heard anybody quite phrase it that way. Well, I
• 29:20
  Speaker 1: tell a story in the book about a pension fund.
• 29:22
  Speaker 1: I went to see and I talked to the CEO,
• 29:25
  Speaker 1: and every time I made a conservative assumption about what
• 29:28
  Speaker 1: would happen to my bond portflio, the CEO said, well,
• 29:31
  Speaker 1: but but what if it's worse than that? I said, Okay,
• 29:34
  Speaker 1: well what if this happened? No, what if it's worse
• 29:35
  Speaker 1: than that? Okay that this could happen. No, what if
• 29:37
  Speaker 1: it's worse than that? And there was no assumption I
• 29:41
  Speaker 1: could make that would satisfy the c e O s fear,
• 29:46
  Speaker 1: and I ran back to my office literally ran probably
• 29:50
  Speaker 1: and I wrote a memo called the Limits to Negativism.
• 29:53
  Speaker 1: I recall that very specifically, and what I said was
• 29:56
  Speaker 1: a good investor, be it the mom and pop you
• 29:59
  Speaker 1: talk about, be institutional investors. A good investor has to
• 30:02
  Speaker 1: be skeptical. You know, everybody sees the same story. The
• 30:06
  Speaker 1: great investor has to be able to figure out the
• 30:08
  Speaker 1: truth as opposed to the story. Skepticism is an important
• 30:13
  Speaker 1: element in that we all know that that in times
• 30:16
  Speaker 1: of high optimism, the key is to say no, that's
• 30:21
  Speaker 1: too good to be true. People had said that they
• 30:23
  Speaker 1: wouldn't have invested with made off for example, too good
• 30:27
  Speaker 1: to be true. But what I realized when I wrote
• 30:30
  Speaker 1: that memo in at the low point for the credit
• 30:32
  Speaker 1: markets of mid October oh eight was that if we're
• 30:37
  Speaker 1: professionals and if we want to be great investors, we
• 30:41
  Speaker 1: have to be skeptical. And in times of excessive pessimism,
• 30:46
  Speaker 1: it's our job to say, no, that's too bad to
• 30:49
  Speaker 1: be true. And that's the kind of thinking, uh cyclical
• 30:54
  Speaker 1: inference that permitted us to invest aggressively when people were
• 30:59
  Speaker 1: talking about the end of the world. We have been
• 31:01
  Speaker 1: speaking with Howard Marks of oak Tree Capital. If you
• 31:05
  Speaker 1: enjoy this conversation, be sure and come back for the
• 31:08
  Speaker 1: podcast extras. Will we continue discussing all things cyclical as
• 31:11
  Speaker 1: well as distressed debt and other such things. We love
• 31:15
  Speaker 1: your comments, feedback and suggestions right to us at m
• 31:19
  Speaker 1: IB podcast at Bloomberg dot net. You can check out
• 31:22
  Speaker 1: my daily column on Bloomberg dot com. Follow me on
• 31:25
  Speaker 1: Twitter at rit Halts. I'm Barry rid Halts. You're listening
• 31:29
  Speaker 1: to Masters in Business on Bloomberg Radio. Welcome to the podcast, Howard.
• 31:47
  Speaker 1: Thank you so much for doing this. Um. I'm not
• 31:49
  Speaker 1: sure if this is our second or third time around,
• 31:52
  Speaker 1: but every time I sit and have a conversation with you,
• 31:55
  Speaker 1: my email lights up, and people are always so intrigued
• 31:59
  Speaker 1: and fascinated, um by your philosophy. I wanted to spend
• 32:03
  Speaker 1: a little time talking about the arc of your career
• 32:07
  Speaker 1: and some of the really interesting things that you've seen
• 32:10
  Speaker 1: and done and written and all that has to start
• 32:13
  Speaker 1: with memos to clients. But I've been calling them chairman's
• 32:16
  Speaker 1: memos for a long time. And the last time you
• 32:19
  Speaker 1: hear you told me something that I found absolutely fascinating.
• 32:23
  Speaker 1: When you began doing these, you were literally this wasn't
• 32:27
  Speaker 1: just an email or web thing. You were literally printing
• 32:31
  Speaker 1: them out and mailing them to various people. When did
• 32:35
  Speaker 1: the chairman's mamos two clients begin? They started a n
• 32:39
  Speaker 1: okay so kind of pre email, pre website. We carved
• 32:44
  Speaker 1: him in and stop and stones in the cave. But
• 32:48
  Speaker 1: you know, I I observed a couple of facts, the
• 32:52
  Speaker 1: juxtaposition of which I thought really told a great story.
• 32:56
  Speaker 1: I talked about the importance of consistency and investing in
• 32:59
  Speaker 1: risk control. And uh so I wrote it out and
• 33:04
  Speaker 1: I folded it up, and I put it in envelopes
• 33:07
  Speaker 1: and put stamps on and we sent it out to
• 33:09
  Speaker 1: our our clients, and I did one in nineteen nine,
• 33:14
  Speaker 1: and I did one in And you know, I don't remember, ever, uh,
• 33:19
  Speaker 1: making a conscious decision to to make this a regular thing.
• 33:24
  Speaker 1: I never remember saying that I thought it would result
• 33:27
  Speaker 1: in a advantage business wise. I just thought there were
• 33:31
  Speaker 1: interesting observations that I wanted to share with my clients.
• 33:35
  Speaker 1: And they, you know, they went out a few hundred
• 33:37
  Speaker 1: of them at a time. And what was the feedback
• 33:41
  Speaker 1: when you sent the first one out? For ten years, Barry,
• 33:46
  Speaker 1: I never had a response, crickets, just nothing. Not only
• 33:50
  Speaker 1: did nobody say they thought it was good, nobody said
• 33:54
  Speaker 1: I got it. That's amazing. And and and so the
• 33:57
  Speaker 1: interesting question is what kept me going? And I have
• 34:00
  Speaker 1: no idea. And the answer I think is that I
• 34:02
  Speaker 1: was writing for myself. You know. Number one, it's creative.
• 34:06
  Speaker 1: I enjoyed the writing process. Number Two, I thought that
• 34:09
  Speaker 1: two topics are interesting and that I wanted to put
• 34:12
  Speaker 1: them on paper. Number Three, writing makes you tighten up
• 34:15
  Speaker 1: your thinking. That's Daniel Boston's famous quote. I right to
• 34:18
  Speaker 1: figure out what I what I think. And besides, at
• 34:21
  Speaker 1: that hour, the bars are all closed, is what the
• 34:24
  Speaker 1: librarian of Congress once said, but I'm you know, we
• 34:27
  Speaker 1: live in an era where it's immediate feedback. You post
• 34:32
  Speaker 1: a tweet or something to Instagram, immediate likes, immediate up votes.
• 34:36
  Speaker 1: It's just you know that that feedback loop is designed
• 34:41
  Speaker 1: to give you that dopamine hit. It's amazing that you
• 34:44
  Speaker 1: spent a full decade sending these out and not a
• 34:47
  Speaker 1: peep from anybody. So what was the one that that
• 34:51
  Speaker 1: changed it? But you look like you're about to say so.
• 34:53
  Speaker 1: On the first day of two thousand, I put out
• 34:56
  Speaker 1: a memo that I've been working on called bubble dot Com.
• 34:59
  Speaker 1: I recall that also that was a huge balance story.
• 35:02
  Speaker 1: That's right and it not. It had two advantages. Number one,
• 35:06
  Speaker 1: it was right, and number two, it was right fast,
• 35:10
  Speaker 1: because in our business, being too far ahead of your
• 35:12
  Speaker 1: time is indistinguishable from being wrong. Here, you know, I
• 35:18
  Speaker 1: I raised some questions about the text docs, and within
• 35:21
  Speaker 1: two months, a few months, it was January two thousand.
• 35:25
  Speaker 1: By the first or second week in March, it was
• 35:27
  Speaker 1: all over. But the crime they kind of turned over
• 35:31
  Speaker 1: and collapsed. And the way I put it is, after
• 35:36
  Speaker 1: ten years I became an overnight success. And and you know,
• 35:39
  Speaker 1: and and there was a lot of response to that memo.
• 35:42
  Speaker 1: Of course, by that time we did have email and internet,
• 35:46
  Speaker 1: things did go viral. You know. Then I had the
• 35:49
  Speaker 1: opposite experience of the first decade. Then I had the
• 35:53
  Speaker 1: experience of, you know, I'd put out a memo on
• 35:55
  Speaker 1: a Tuesday morning and Tuesday afternoon, Uh, one of my
• 35:58
  Speaker 1: friends would call. Obviously some guy in Russia just sent
• 36:01
  Speaker 1: me this. It's terrific, you know, so so Uh, you
• 36:04
  Speaker 1: know it's been it's been really great. Uh, they're they're
• 36:07
  Speaker 1: well over a hundred memos now, all available by the
• 36:10
  Speaker 1: way at www dot oak Tree Capitol dot com under
• 36:13
  Speaker 1: the heading Insights and uh the price is right there
• 36:17
  Speaker 1: free and uh and uh, you know I take I
• 36:20
  Speaker 1: take great pride and have great fun with it. Well,
• 36:24
  Speaker 1: I know, in my office, whenever a new memo comes out,
• 36:26
  Speaker 1: everybody starts talking about it. It becomes um, lunchtime conversation,
• 36:32
  Speaker 1: or or people will print it out reading on the
• 36:34
  Speaker 1: way home or what have you. Um. I hope you
• 36:37
  Speaker 1: continue to do these for the uh long term, because
• 36:41
  Speaker 1: I've personally found them to be very educational and very
• 36:45
  Speaker 1: thought provoking. Let's talk a little bit about one other
• 36:49
  Speaker 1: thing before I get to the other questions that I missed.
• 36:53
  Speaker 1: You describe the importance of cycles in the new book. Uh.
• 36:59
  Speaker 1: Knowing where you are in the cycle is so crucial
• 37:01
  Speaker 1: for your investment posture. How do you figure out where
• 37:05
  Speaker 1: you are in that cycle? I describe a process that
• 37:10
  Speaker 1: I call taking the temperature of the market. And there's
• 37:15
  Speaker 1: the quantitative, which is looking at you know, for for
• 37:18
  Speaker 1: every investment, there is a valuation parameter. For stocks, it's
• 37:22
  Speaker 1: pe ratio. For bonds, it's the yield and the yield
• 37:25
  Speaker 1: spread over other bonds. For real estate, it's what we
• 37:29
  Speaker 1: call the capitalization rate the income uh. For for companies,
• 37:36
  Speaker 1: it's the profitability. There are all these indices, and so
• 37:41
  Speaker 1: we can figure out quantitatively what's going on or ares
• 37:44
  Speaker 1: things expensive or cheap relative to the past. But the
• 37:47
  Speaker 1: other thing is qualitative, And and what I look at
• 37:51
  Speaker 1: is how are people behaviorally? Are they excited or depressed?
• 37:59
  Speaker 1: Are they greedy or fearful? Are they optimistic or pessimistic?
• 38:03
  Speaker 1: Um are they risk uh tolerant or risk averse? And
• 38:08
  Speaker 1: you know, UH, if I if I looked at a
• 38:11
  Speaker 1: stock or an investment, and if I could only ask
• 38:15
  Speaker 1: one question, Barry, it would be how much optimism is
• 38:18
  Speaker 1: in the price. We want to buy things where the
• 38:22
  Speaker 1: price falls short of the real value, that's called the bargain.
• 38:27
  Speaker 1: And we get that when people are not optimistic about
• 38:30
  Speaker 1: that stock or company. If the if, if everybody thinks
• 38:34
  Speaker 1: it's terrific, could never stumble like the nifty fifty or
• 38:36
  Speaker 1: fifty years ago. Uh, then the optimism is high. The
• 38:40
  Speaker 1: chances are that the price is high relative to the value.
• 38:45
  Speaker 1: So we want to take the temperature to understand where
• 38:48
  Speaker 1: we are in the cycle. And I always say that
• 38:49
  Speaker 1: if I go to a cocktail party and people gather around,
• 38:53
  Speaker 1: I know the markets too high. Some someone else described
• 38:57
  Speaker 1: that as conversational alpha. When people start start chit channing
• 39:02
  Speaker 1: at barbecues and cocktail parties. Hey, that's a that's a
• 39:05
  Speaker 1: sign that we're getting close to the top. Um, how
• 39:09
  Speaker 1: do you identify that when you're talking about individual stocks?
• 39:13
  Speaker 1: Are you thinking about this in terms of the whole market,
• 39:16
  Speaker 1: because there's always stocks that seem to become unhinged and
• 39:21
  Speaker 1: take off. Look at what happened with bitcoin from practically
• 39:25
  Speaker 1: nothing to nineteen thousand. What does that tell us about? Uh,
• 39:29
  Speaker 1: the sentiment that's out there. Well, you know, most of
• 39:33
  Speaker 1: my references are to the market. That's why the book
• 39:37
  Speaker 1: title references the market cycle. Uh. I imagine similar thinking
• 39:44
  Speaker 1: can be applied to individual investments, individual stocks, and as
• 39:48
  Speaker 1: you say, even individual currencies. Uh. But you know the
• 39:52
  Speaker 1: same thing is true when you consider making an investment,
• 39:56
  Speaker 1: whether you're operating at the market level or the individual
• 39:58
  Speaker 1: security level. Hard to figure out. Has this stock or
• 40:04
  Speaker 1: bond been the beneficiary of a buying frenzy, in which
• 40:08
  Speaker 1: case you probably want to avoid, or it has been
• 40:11
  Speaker 1: disrespected and downtrodden, in which case it may be worth
• 40:15
  Speaker 1: a good look. And one of the things they didn't
• 40:17
  Speaker 1: get to before was your time at Trust Company of
• 40:22
  Speaker 1: the West. You worked with a gentleman named Jeff Gunlock,
• 40:25
  Speaker 1: who very famously left and launched Double Line with UH
• 40:30
  Speaker 1: yours and oak Tree's help. I believe at one point
• 40:33
  Speaker 1: in time Outrey was a owner. Is that still the case?
• 40:36
  Speaker 1: We are still owner? And and that was one of
• 40:39
  Speaker 1: the fastest growing funds from zero to a hundred billion,
• 40:44
  Speaker 1: like almost like that. Yes, I think it probably took
• 40:47
  Speaker 1: it felt like a snap of the fingers. It might
• 40:49
  Speaker 1: have taken five years. But as you say, probably for
• 40:53
  Speaker 1: an investment management firm. The fastest zero to a hundred
• 40:56
  Speaker 1: in history. And you know Jeff as a contrarian. Jeff,
• 41:01
  Speaker 1: Jeff marches to his own drummer, does a very good
• 41:04
  Speaker 1: job of managing money. And it's been a great investment
• 41:07
  Speaker 1: for us. And that's owned by oak Tree. So you biotry,
• 41:12
  Speaker 1: you get um, you get Howard Marks, and you get
• 41:14
  Speaker 1: a little bit of a hedge with Jeff Gunlock as
• 41:18
  Speaker 1: UH slug exactly. Huh quite quite interesting. What what was
• 41:22
  Speaker 1: it like when you were working with Jeff at Trust
• 41:25
  Speaker 1: Company and of the West And how did you know
• 41:28
  Speaker 1: he was gonna end up being as successful as he
• 41:31
  Speaker 1: turned out to be? Or the my last year at TCW,
• 41:38
  Speaker 1: UH around February, interest rates rose the fastest they had
• 41:43
  Speaker 1: ever risen in history. And Uh, Jeff was probably seven
• 41:50
  Speaker 1: years of experience at that point in time. His portfolios
• 41:53
  Speaker 1: ran into some problems. UH, and Jeff and I began
• 41:57
  Speaker 1: to work together at that point. Formally, UH I was
• 42:02
  Speaker 1: asked to UH to let him report to me together.
• 42:08
  Speaker 1: We we we verified the values in the portfolios and
• 42:11
  Speaker 1: importantly we were able to convince the clients to stay
• 42:13
  Speaker 1: with it. You know, the cardinal sinuh in investing is
• 42:16
  Speaker 1: not buying something closed down. The cardinal sin is selling
• 42:20
  Speaker 1: out at the bottom and not participating in the recovery.
• 42:23
  Speaker 1: And we were able to enable Jeff's clients to participate
• 42:26
  Speaker 1: in a great recovery. Uh. It was obvious that he
• 42:30
  Speaker 1: was super smart. And uh so when when Jeff left
• 42:33
  Speaker 1: t C W in uh you oh nine, Uh you know,
• 42:37
  Speaker 1: we were very glad to to join forces. So what
• 42:41
  Speaker 1: else are you looking at these days that has you worried?
• 42:44
  Speaker 1: I know you said evaluate that valuations are pretty stocks
• 42:49
  Speaker 1: and bonds are both pretty fully valued on the verge
• 42:52
  Speaker 1: of richness. What else is the potential move forward with
• 42:57
  Speaker 1: caution type of a factor? Well, is unloved today? That's
• 43:02
  Speaker 1: a question. Hardly anything except maybe emerging markets for sure. Okay,
• 43:06
  Speaker 1: maybe China, Uh you know now, Turkey, Argentina, these are
• 43:12
  Speaker 1: pretty terrifying. Uh, but Russia for that matter. But they
• 43:16
  Speaker 1: are unloved, which means you maybe you should start looking there.
• 43:20
  Speaker 1: I'm not saying bye, but but investigate. Uh. But you
• 43:25
  Speaker 1: know the truth of the matter is that, as you say,
• 43:29
  Speaker 1: there's very little today on the bargain counter. And if
• 43:33
  Speaker 1: you're criterion for investing is that you want bargains for
• 43:38
  Speaker 1: the most part, they're not there. You're a decade too late.
• 43:40
  Speaker 1: Exactly now now, Warren Buffett talks about one of the
• 43:44
  Speaker 1: great things about investing is that you know, you can
• 43:47
  Speaker 1: stand at the plate with the bat on your shoulder,
• 43:50
  Speaker 1: and in investing you can't get called out on strikes,
• 43:54
  Speaker 1: so you can you can wait until you get a
• 43:56
  Speaker 1: fat pitch. And today it's very challenging because there are
• 44:00
  Speaker 1: a few fat pitches. At the same time, those of
• 44:03
  Speaker 1: us with money, be at my institutional clients, be at
• 44:06
  Speaker 1: the individual investor with money, the money has to go someplace.
• 44:11
  Speaker 1: You want to get a a credible return, You want
• 44:15
  Speaker 1: to control your risk. And you know, in theory, one
• 44:19
  Speaker 1: could figure out when the markets at are real high
• 44:22
  Speaker 1: and sell. You could figure out when the market's terribly
• 44:25
  Speaker 1: depressed and buy. And these things are exciting and they're
• 44:29
  Speaker 1: extremely rewarding. But much of the time the market is
• 44:32
  Speaker 1: somewhere in between. And what do you do in those
• 44:36
  Speaker 1: times not so obvious, but you know, uh, figuring it
• 44:42
  Speaker 1: out is key. Standing with the bat on your shoulders
• 44:46
  Speaker 1: maybe key. Reducing your risk in the ways we discussed before.
• 44:51
  Speaker 1: These are the keys, but again they all start with
• 44:54
  Speaker 1: figuring out where we stand. That's behind the concept move
• 44:57
  Speaker 1: forward but with caution. That's been our mantra for for
• 45:01
  Speaker 1: a couple of years now. And uh, you know, when
• 45:04
  Speaker 1: you when you apply caution, you don't get the full
• 45:09
  Speaker 1: return of the market when it soars, but you also
• 45:12
  Speaker 1: stay in the game. It makes sense. Let's talk about
• 45:14
  Speaker 1: another chairman's memo. I really liked the title what does
• 45:19
  Speaker 1: the Market Know? Tell us a little bit about the
• 45:22
  Speaker 1: thinking behind that in the market got off to its
• 45:26
  Speaker 1: worst start in history, and I wrote a memo called
• 45:30
  Speaker 1: on the Couch, and I talked about the fact that
• 45:35
  Speaker 1: sometimes the market is nutty and needs a trip to
• 45:39
  Speaker 1: the shrink. And you know, because sometimes the market obsesses
• 45:43
  Speaker 1: about the positives and ignores the negatives and that's dangerous.
• 45:46
  Speaker 1: And sometimes it ignores the positive and obsesses about the
• 45:50
  Speaker 1: negatives and that's the time to move. And that market
• 45:53
  Speaker 1: was collapsing and I didn't see any reason for it.
• 45:56
  Speaker 1: So I talked about the the the non fit between
• 46:01
  Speaker 1: reality and market behavior. I came into Bloomberg TV, as
• 46:07
  Speaker 1: I often do when I write the memos to talk
• 46:09
  Speaker 1: about it, and the anchors were saying to me, well, uh,
• 46:14
  Speaker 1: doesn't the fact that the market is going down is
• 46:17
  Speaker 1: not a cell signal. Again, I ran back to the
• 46:21
  Speaker 1: office to write a memo called what does the market? No,
• 46:26
  Speaker 1: there is no market. There's only a bunch of people,
• 46:31
  Speaker 1: and their decisions are not better than they're The collective
• 46:36
  Speaker 1: decision of the people in the market are not better
• 46:39
  Speaker 1: than the decisions of the individuals, and they are riven
• 46:42
  Speaker 1: with psychology and they are everything in our bodies is
• 46:47
  Speaker 1: directed at making us do the wrong thing. And one
• 46:50
  Speaker 1: of the one of my major themes is how to
• 46:53
  Speaker 1: figure that out and resist it. But you know, you
• 46:56
  Speaker 1: don't want to buy at the top when things are great.
• 46:58
  Speaker 1: You don't want to sell at the bottom when things
• 46:59
  Speaker 1: are terrible. And uh so, uh if the market is down,
• 47:06
  Speaker 1: you can't take that as a cell single. All it
• 47:08
  Speaker 1: tells you is that people have lost faith. But if
• 47:11
  Speaker 1: they've lost faith, maybe that's a buy opportunity. So you
• 47:16
  Speaker 1: you must not let the market give you your signals.
• 47:21
  Speaker 1: Your your investing has to come from place of of
• 47:27
  Speaker 1: an analysis and not emotion. So in other words, the
• 47:33
  Speaker 1: market just doesn't go straight up or straight down if
• 47:35
  Speaker 1: you have a bad January. So what it's one month?
• 47:38
  Speaker 1: Is that the thinking, Well, that's that's for sure. I
• 47:41
  Speaker 1: mean the thinking, Barry, is that the fact that things
• 47:45
  Speaker 1: have gone down is not a cell single. I mean,
• 47:49
  Speaker 1: look at the stores. When they put stuff on sale,
• 47:53
  Speaker 1: people buy more. In the investment business, when they put
• 47:58
  Speaker 1: stuff on sale, people sell when they should be buying.
• 48:03
  Speaker 1: And uh, you know, in order to be an effective investor,
• 48:09
  Speaker 1: one of the themes in the book says you have
• 48:11
  Speaker 1: to develop kind of a contrarian way of thinking. If
• 48:16
  Speaker 1: I said to you, you know, Barry, uh, you should
• 48:19
  Speaker 1: buy this because nobody else is willing to. Well, nine
• 48:22
  Speaker 1: people out of ten probably would say, well, if everybody
• 48:25
  Speaker 1: else is selling, then it's probably not a good thing
• 48:27
  Speaker 1: to buy something. But that one person out of tend says, well,
• 48:32
  Speaker 1: if nine people out attend a selling, uh, it must
• 48:35
  Speaker 1: be cheap. I'm going to be a buyer. That's a contrarian.
• 48:38
  Speaker 1: And uh, you know that's the opposite of letting the
• 48:42
  Speaker 1: market tell you what to do. And believe me, in
• 48:44
  Speaker 1: the long run, it pays off better, even though it's
• 48:48
  Speaker 1: more difficult and more emotionally uncomfortable and more challenging and
• 48:51
  Speaker 1: filling the blank all of that. And you know, uh,
• 48:56
  Speaker 1: I never in my books or any place else, I
• 49:00
  Speaker 1: never want to give people the impression that this is easy.
• 49:04
  Speaker 1: If it was easy, everyone would be wealthy. But uh,
• 49:08
  Speaker 1: but it can be done. That's the point. If you can,
• 49:12
  Speaker 1: if if you can learn the lessons, you can learn
• 49:17
  Speaker 1: to do this thinking. You can learn to assess what's
• 49:20
  Speaker 1: going on in the market, where is in a cycle?
• 49:23
  Speaker 1: What should I do? And uh, you know that was
• 49:26
  Speaker 1: my purpose in writing. That's what I hoped to do
• 49:29
  Speaker 1: with the book. So let me get to my last
• 49:32
  Speaker 1: couple of questions before I jump to my list of favorites.
• 49:36
  Speaker 1: We haven't discussed very much about the FED or the
• 49:40
  Speaker 1: possibility of an inverted yield curve. We watched that spread
• 49:44
  Speaker 1: narrow and tighten, but hasn't quite inverted yet. Let's talk
• 49:48
  Speaker 1: about the cycle with the Federal Reserve, which you reference
• 49:52
  Speaker 1: also in Mastering the market cycle. Where is the FED
• 49:55
  Speaker 1: relative to what's going on? Are they behind the curve
• 49:58
  Speaker 1: or they just are they ahead of the curve? What?
• 50:01
  Speaker 1: What do you think about the U s Central Bank
• 50:03
  Speaker 1: and what they've been doing. We've gone through a unique period,
• 50:09
  Speaker 1: the significance of which is hard to discern. In O
• 50:13
  Speaker 1: eight oh nine, we had the worst crisis since the
• 50:18
  Speaker 1: Great Crash of twenty nine and the following depression. As
• 50:23
  Speaker 1: a result, the FED engaged in the greatest program of
• 50:27
  Speaker 1: stimulus that it ever has. It took interest rates to
• 50:32
  Speaker 1: the lowest level they've ever been. By the way, you
• 50:34
  Speaker 1: mentioned that earlier, and I wanted to tell you. I
• 50:37
  Speaker 1: had Richard sillah In who runs the Museum of Financial History.
• 50:43
  Speaker 1: He said, literally, this is the lowest interest rates since
• 50:47
  Speaker 1: the Babylonians, since the Romans, since the Macedonians, the lowest
• 50:51
  Speaker 1: in human history. I wonder if the Macedonian bank state
• 50:54
  Speaker 1: and business. But so anyway, the point is, we had
• 50:58
  Speaker 1: a terrible financial crisis, we had an ultra strong period
• 51:02
  Speaker 1: of program of stimulus and quantitative easy we had and
• 51:05
  Speaker 1: usually low interest rates, and now we've had a long
• 51:11
  Speaker 1: economic recovery, a long bowl market. Now the Fed, as
• 51:15
  Speaker 1: we said before, is raising rates. It's done at eight
• 51:17
  Speaker 1: times already, they're up to two plus and they're probably
• 51:20
  Speaker 1: gonna go on another half a dozen times and get
• 51:22
  Speaker 1: them into the into the threes. I don't know if
• 51:26
  Speaker 1: they'll get the FED funds rate up to four. But
• 51:31
  Speaker 1: the point is that, uh, this has never been done
• 51:34
  Speaker 1: before on this scale and this duration, and we cannot
• 51:39
  Speaker 1: say for sure what the outcome will be. You know,
• 51:43
  Speaker 1: if you if something is going on that has never
• 51:45
  Speaker 1: been seen before, you certainly can't say that you know
• 51:47
  Speaker 1: how the movie's gonna end. And so uh you know, Uh,
• 51:52
  Speaker 1: can they overshoot? Can they raise rates so high that
• 51:58
  Speaker 1: that the that it results in a recession? Uh? What
• 52:04
  Speaker 1: is the result of the withdrawal so much liquidity from
• 52:08
  Speaker 1: our economy? Uh? Nobody can say they know for sure.
• 52:11
  Speaker 1: And I think that uncertainty over what the FED will
• 52:16
  Speaker 1: do and more importantly, what the consequences will be is
• 52:19
  Speaker 1: one of the great unknowns out there today, one of
• 52:22
  Speaker 1: the great unknowns. So so let's talk a little bit
• 52:24
  Speaker 1: about um for a while. We went about the yield
• 52:27
  Speaker 1: curve for while people were really obsessing about what the
• 52:31
  Speaker 1: tightening spread ment is the yield curve and always accurate
• 52:36
  Speaker 1: forecaster of recession or given that this time is a
• 52:41
  Speaker 1: case of first impression, I'm not saying this time is different.
• 52:44
  Speaker 1: But since we've never experienced this before, Uh, what are
• 52:49
  Speaker 1: we to make about the fears of the inverted yield curve?
• 52:53
  Speaker 1: I'm not sure that's my profound answer. That is a
• 52:56
  Speaker 1: profound answer. Look, because I can't tell you how many
• 52:58
  Speaker 1: people would give me a long winded answer full of
• 53:01
  Speaker 1: confidence in bravado and basically I like your answer better.
• 53:05
  Speaker 1: You know, Mark Twain said, is not what you don't
• 53:07
  Speaker 1: know that gets you into trouble. It's what you know
• 53:10
  Speaker 1: for certain that just ain't true. The best thing you
• 53:12
  Speaker 1: can do in investing and in many walks of life
• 53:16
  Speaker 1: is when you don't know, admitted you know. How many
• 53:19
  Speaker 1: people are there out there whoever say you know what?
• 53:22
  Speaker 1: I don't know? So everybody says that the that the
• 53:26
  Speaker 1: yield spread between long and short interest rates has a significance.
• 53:33
  Speaker 1: It has been observed that that that when the short
• 53:37
  Speaker 1: rate is higher than the long rate, UM, it has
• 53:41
  Speaker 1: always been followed by a recession, sometimes a few months later,
• 53:46
  Speaker 1: sometimes a year or two later, but eventually. So the
• 53:51
  Speaker 1: real question is is it coincidental or is it causal?
• 53:56
  Speaker 1: And if it's causal, what is the linkage? And it
• 54:00
  Speaker 1: does it work every time? UM? I don't know. I
• 54:05
  Speaker 1: don't manage. I don't care that much about rates. I
• 54:09
  Speaker 1: don't I'm not a so called fed watcher. I don't
• 54:13
  Speaker 1: you know. One of the uh one of the six
• 54:16
  Speaker 1: tenets of oak Tree's investment philosophy is that our investment
• 54:18
  Speaker 1: decisions are not governed by this kind of macro UH forecasting.
• 54:23
  Speaker 1: We don't believe in forecasting, Barry. You know, I'm always
• 54:28
  Speaker 1: want to say, we may not know where we're going,
• 54:31
  Speaker 1: but we sure as hell or don't know where we are.
• 54:34
  Speaker 1: And UH, that's that's what I know. So that that's
• 54:38
  Speaker 1: a pretty savvy observation. I wish more investors would would
• 54:42
  Speaker 1: recognize that the making forecasts and then sticking to them
• 54:46
  Speaker 1: despite the evidence that they're not coming to pass is
• 54:51
  Speaker 1: a problem that investors have. UM. I actually love to
• 54:54
  Speaker 1: tell television anchors they ask, where's it down gonna be
• 54:57
  Speaker 1: next year? Say I don't know, and just watch the
• 55:00
  Speaker 1: try and process it. Their their heads explode. So so,
• 55:04
  Speaker 1: given that we were not paying close attention to the FED,
• 55:07
  Speaker 1: we don't really care a whole lot um or try
• 55:10
  Speaker 1: and predict if and when a yield curve is going
• 55:13
  Speaker 1: to invert on the inflation side and on the yield side.
• 55:18
  Speaker 1: What's the most important factors to look at for that
• 55:21
  Speaker 1: longer term cycle? What do we know rates are lower
• 55:24
  Speaker 1: than usual? Current level of rates is not consistent with
• 55:28
  Speaker 1: economic prosperity. UH. Usually in prosperity, we have higher rates.
• 55:38
  Speaker 1: The current level of inflation is unusually low. Usually when
• 55:43
  Speaker 1: we have such a low unemployment rate and such economic growth,
• 55:48
  Speaker 1: we start to get higher inflation. We're not getting it. So, uh,
• 55:54
  Speaker 1: we don't know for sure. You know. One of the
• 55:56
  Speaker 1: things people have to understand is that umnomics is not
• 56:01
  Speaker 1: a science. There is no schematic diagram which says how
• 56:05
  Speaker 1: things work. There are no rules that work all the time.
• 56:08
  Speaker 1: You know, if you if you have an apple in
• 56:10
  Speaker 1: your hand, as Newton said, and you drop it, it's
• 56:12
  Speaker 1: gonna fall down. It never falls up. In the sciences,
• 56:15
  Speaker 1: things work the same every time. But and if you
• 56:19
  Speaker 1: come in this room and you turn on the lights,
• 56:21
  Speaker 1: which the lights go on every time. But in investing
• 56:24
  Speaker 1: that's not true. Sometimes it happens, and B happens. Sometimes
• 56:28
  Speaker 1: it happens and B doesn't happen. Sometimes it happens, and
• 56:31
  Speaker 1: see happens. Uh, you know. Uh. Richard Feyneman, the great physicist,
• 56:37
  Speaker 1: said that physics would be much harder if electrons had feelings.
• 56:43
  Speaker 1: The point is that investing and the markets are dominated
• 56:47
  Speaker 1: by humans. Humans have feelings, so they don't always do
• 56:52
  Speaker 1: what they're supposed to do. That's really the purpose of
• 56:55
  Speaker 1: the book. That's one of the main themes. And uh,
• 56:58
  Speaker 1: you know nobody can tell you answers on these questions
• 57:03
  Speaker 1: which are dependable enough to be investable. That that seems
• 57:08
  Speaker 1: pretty reasonable. I know, I only have you for a
• 57:11
  Speaker 1: finite amount of time. Let's get to some of my
• 57:14
  Speaker 1: favorite questions. Tell us one thing that people who know
• 57:18
  Speaker 1: you don't know about, Howard marks well, I think most
• 57:22
  Speaker 1: people would say that I'm quantitative and financial and analytical,
• 57:28
  Speaker 1: but I really think I have a creative side, and
• 57:30
  Speaker 1: I think that the memos are an expression of the
• 57:32
  Speaker 1: creative side. And in the memos in the book, in
• 57:37
  Speaker 1: in in my work with clients, I do a lot
• 57:39
  Speaker 1: of graphical presentations which I draw by hand, and uh,
• 57:44
  Speaker 1: I think that's an expression of my creative side. Interesting,
• 57:48
  Speaker 1: So what investors influenced your approach to thinking about value
• 57:53
  Speaker 1: and distressed assets and everything else that Oatry does well.
• 57:58
  Speaker 1: A great example is John Kenneth Calbraith. He wrote a
• 58:03
  Speaker 1: book called Short History of Financial Euphoria, which really was
• 58:09
  Speaker 1: probably my first introduction to discussion of cycles and also
• 58:14
  Speaker 1: to an understanding of the need for contrarianism. So that
• 58:18
  Speaker 1: was terrific Charlie Ellis, who's real great investment thinker board
• 58:28
  Speaker 1: as well told the story about the an amateur tennis
• 58:30
  Speaker 1: player if if the game is not within your control,
• 58:33
  Speaker 1: then the win. Then you win a tennis not by
• 58:35
  Speaker 1: hitting winners, but by avoiding losers. And I think I've
• 58:38
  Speaker 1: spent a lot of my career trying to avoid losers.
• 58:42
  Speaker 1: Um and uh, Peter Bernstein was a great stage and uh,
• 58:47
  Speaker 1: you know, he's written a great deal about risk, which
• 58:51
  Speaker 1: which I tried to incorporate into my own thinking. So
• 58:54
  Speaker 1: these are some examples. Bernstein's book, The Story of Risk
• 58:57
  Speaker 1: is really every page is so rich, it's it's astonishing.
• 59:02
  Speaker 1: Speaking of books, tell us about some of your favorite books.
• 59:05
  Speaker 1: What what are you reading? What do you like? What
• 59:06
  Speaker 1: are you fiction? Nonfiction? Finance? What have you I read
• 59:10
  Speaker 1: more on finance, and I tried to read a lot
• 59:16
  Speaker 1: on the behavioral side. So a terrific book which I
• 59:21
  Speaker 1: got a lot out of, which has very important ideas,
• 59:24
  Speaker 1: is fooled by randomness to love exactly. And you know,
• 59:31
  Speaker 1: people see the past and they think that the past
• 59:36
  Speaker 1: expresses a fundamental truth, but in actuality there were many
• 59:42
  Speaker 1: different histories which could have come to pass and only
• 59:48
  Speaker 1: one did. That's a great way to think about the world,
• 59:51
  Speaker 1: because that's really the right way to think about investment risk.
• 59:56
  Speaker 1: So you want to avoid hindsight bias, and you want
• 59:59
  Speaker 1: to avoid thinking that each outcome is the only outcome
• 1:00:03
  Speaker 1: of Elroy Dimpson, who retired from the London Business School,
• 1:00:07
  Speaker 1: said that UH risk means more things can happen than
• 1:00:11
  Speaker 1: will happen. Right, So you know, I think I think
• 1:00:15
  Speaker 1: we we do better thinking about the future if we
• 1:00:19
  Speaker 1: realized that a lot of different possibilities are out there.
• 1:00:24
  Speaker 1: And one of the ways to come to that conclusion
• 1:00:27
  Speaker 1: is by realizing that in the past there were a
• 1:00:29
  Speaker 1: lot of possibilities, only one of which transpired. And one
• 1:00:34
  Speaker 1: has to be careful not to draw a conclusion based
• 1:00:37
  Speaker 1: on what may have turned out to be a random
• 1:00:39
  Speaker 1: outcome and to to something for I always talked about
• 1:00:43
  Speaker 1: the difference between Alexander the Great and George the Unlucky, Right,
• 1:00:49
  Speaker 1: it was that it was the name at birth. Is
• 1:00:51
  Speaker 1: that what what doomed Georgia Unlucky could have been? Um?
• 1:00:55
  Speaker 1: So you mentioned Peter Bernstein and any other books that
• 1:00:58
  Speaker 1: you want to uh make refere So pretty much everything
• 1:01:01
  Speaker 1: he's ever written is well he wrote a book called
• 1:01:04
  Speaker 1: Against the Gods, which talked about the beginnings of UH
• 1:01:10
  Speaker 1: the science of probability, and if you think about it,
• 1:01:14
  Speaker 1: it's only by appreciating probabilities that we can deal rigorous
• 1:01:19
  Speaker 1: rely with risk. UH. The whole creation of the insurance industry,
• 1:01:25
  Speaker 1: for example, is based on UH an understanding of the
• 1:01:30
  Speaker 1: science of probability. I love that book. I thought that
• 1:01:33
  Speaker 1: was just absolutely fascinating. UM. So you mentioned Charlie Ellis
• 1:01:37
  Speaker 1: and tennis. I know you're a bit of a tennis fan.
• 1:01:40
  Speaker 1: What do you What do you do when you're not
• 1:01:42
  Speaker 1: in the office. What do you do for fun? Well,
• 1:01:44
  Speaker 1: I spend a lot of time with my kids now
• 1:01:47
  Speaker 1: my grandkids. UM. And you know, my wife and I
• 1:01:52
  Speaker 1: moved from California to New York at the beginning of
• 1:01:56
  Speaker 1: because our kids came here after college and put down
• 1:01:58
  Speaker 1: roots and we can who they're not going back to California.
• 1:02:01
  Speaker 1: So we've been here. We love it here, but it's
• 1:02:04
  Speaker 1: it's all it's all family centric, great friends, you know, UH,
• 1:02:10
  Speaker 1: California and London, and then again since we moved here,
• 1:02:14
  Speaker 1: we've made fabulous friends here in New York. It's it's
• 1:02:17
  Speaker 1: such an interesting city. UH. And then you know, to
• 1:02:20
  Speaker 1: pass the time. I love to play games. I love
• 1:02:23
  Speaker 1: to play gin. I love to play backgammon. Backgammon, by
• 1:02:27
  Speaker 1: the way, is a great exercise for anybody who wants
• 1:02:30
  Speaker 1: to be an investor, because it's all about probabilities and
• 1:02:34
  Speaker 1: getting the odds on your side. You you know, no
• 1:02:38
  Speaker 1: matter what the layout of the board is, there's a
• 1:02:40
  Speaker 1: move which will optimize your chance of having success. It
• 1:02:43
  Speaker 1: may be improbable. You may be able to pick something
• 1:02:47
  Speaker 1: else which has a higher probability, but it will not
• 1:02:50
  Speaker 1: be so optimal. That's life and that's investing. Quite quite interesting.
• 1:02:55
  Speaker 1: Tell us about a time you failed and what you
• 1:02:58
  Speaker 1: learned from the experience. Well, good one, Barry. Um. I
• 1:03:02
  Speaker 1: don't think it's necessarily failure. But one of the most
• 1:03:05
  Speaker 1: important things is that we each should understand ourselves and
• 1:03:09
  Speaker 1: assess ourselves. And I am a conservative person. Uh slow plotting,
• 1:03:18
  Speaker 1: UH mistake, cautious mistake averse. So for example, uh you know, uh,
• 1:03:27
  Speaker 1: I was the last of my group of my peers
• 1:03:30
  Speaker 1: to leave City Bank. They all left. I said, well,
• 1:03:34
  Speaker 1: what's wrong with me? Why am I hanging around? But
• 1:03:36
  Speaker 1: I think I I ended up with a very very
• 1:03:39
  Speaker 1: sound foundation for my investing, and when I left it
• 1:03:43
  Speaker 1: was it was for a good opportunity at t c W.
• 1:03:45
  Speaker 1: It worked out well, so, uh, you know, it follows
• 1:03:49
  Speaker 1: through into other areas of my life. I'm a cautious investor.
• 1:03:53
  Speaker 1: If if, if if in nineteen seventy eight, City Bank
• 1:03:56
  Speaker 1: would have said to me, we want you to start
• 1:03:57
  Speaker 1: a venture capital fund, I think that would have been
• 1:04:00
  Speaker 1: a disaster. I'm not a seer. I'm not a dreamer
• 1:04:02
  Speaker 1: or a futurist. But instead they said we want you
• 1:04:04
  Speaker 1: to start a heel bond fund. All I had to
• 1:04:06
  Speaker 1: do was figure out which ones wouldn't be able to
• 1:04:09
  Speaker 1: pay and exclude them from my portfolio, and that I
• 1:04:11
  Speaker 1: could do my my my conservatism of caution paid off.
• 1:04:17
  Speaker 1: So I have to push back on your claim that
• 1:04:21
  Speaker 1: you are an inherently cautious person, because as I've prepped
• 1:04:26
  Speaker 1: for this and gone over your whole career, I see
• 1:04:30
  Speaker 1: measured risk, but I see a lot of embracing of
• 1:04:33
  Speaker 1: risk taking. A lot of people would have been presented with, hey,
• 1:04:36
  Speaker 1: there are these new fangled distress bonds. See what we
• 1:04:39
  Speaker 1: can do set up a distress bond funds. When when
• 1:04:43
  Speaker 1: Gunlock left Trust Company of the West, Hey, this guy
• 1:04:46
  Speaker 1: seems to be a budding superstar. There's a lot of
• 1:04:50
  Speaker 1: risk in in launching a new fund, but we want
• 1:04:52
  Speaker 1: to get behind that. And obviously the oh seven oh eight, Hey,
• 1:04:56
  Speaker 1: let's embrace distressed assets because the market is in free fall.
• 1:05:01
  Speaker 1: I see you not as someone who's risk averse, but
• 1:05:05
  Speaker 1: rather as someone who makes intelligent risk based decisions. So
• 1:05:11
  Speaker 1: I want to push back a little. Okay, I think
• 1:05:12
  Speaker 1: I think you got me on that. Uh, you know,
• 1:05:15
  Speaker 1: I think I think that that the key is intelligent
• 1:05:19
  Speaker 1: bearing of risk, not because it's fun, not because you're
• 1:05:22
  Speaker 1: not not out of the spirit that a lot of
• 1:05:24
  Speaker 1: people say. Well, you know in Vegas they say the
• 1:05:26
  Speaker 1: more you bet, the more you win when you win.
• 1:05:28
  Speaker 1: That's not a good spirit for risking. But intelligent risk
• 1:05:31
  Speaker 1: bearing makes a lot of sense. And by the way,
• 1:05:34
  Speaker 1: risk control, not risk avoidance. So in the early eighties,
• 1:05:39
  Speaker 1: one of the first cable uh TV networks interviewed me
• 1:05:44
  Speaker 1: about my work with the hi Eel bonds and they said,
• 1:05:46
  Speaker 1: how can you invest in hiel bonds when you know
• 1:05:48
  Speaker 1: some them are going to go bankrupt? And I said, well,
• 1:05:51
  Speaker 1: how can life insurance companies ensure people when they know
• 1:05:54
  Speaker 1: they're all going to die and and and the answer
• 1:05:57
  Speaker 1: is it's intelligent risk bearing. So so a cop to that.
• 1:06:00
  Speaker 1: But I do think that it that it is my
• 1:06:04
  Speaker 1: caution that makes me insist on intelligence in risk bearing.
• 1:06:11
  Speaker 1: And let's talk a little about the state of the
• 1:06:13
  Speaker 1: industry today. What do you think is um in the
• 1:06:17
  Speaker 1: midst of changing what what? What do you think is
• 1:06:20
  Speaker 1: worth thinking about? As being a person who's been within
• 1:06:24
  Speaker 1: the finance industry for fifty years, rewind this podcast thirty
• 1:06:30
  Speaker 1: or forty five minutes, and we were talking about the
• 1:06:33
  Speaker 1: fact that it's really only the exceptional few who can
• 1:06:37
  Speaker 1: add value by making active decisions. And for many years
• 1:06:44
  Speaker 1: that realization did not dawn. So all money was run
• 1:06:50
  Speaker 1: what we now call actively. There were no index funds,
• 1:06:53
  Speaker 1: there were no passive products. They all had high fees
• 1:06:58
  Speaker 1: and not all of them earned those days right. And
• 1:07:03
  Speaker 1: it was really that combination, I think you'll agree, that
• 1:07:07
  Speaker 1: led to the dawning of the age of passive products.
• 1:07:11
  Speaker 1: And now anybody who wants to invest has the option
• 1:07:14
  Speaker 1: of doing it passively or in an index vehicle at
• 1:07:16
  Speaker 1: a very low fee. And I know you're a believer
• 1:07:19
  Speaker 1: in that. I certainly think a chunk of people's portfolio,
• 1:07:23
  Speaker 1: not necessarily all of it, but some exactly. And so
• 1:07:28
  Speaker 1: now we're in a new era where you're more likely
• 1:07:33
  Speaker 1: to get what you pay for. So you know, uh,
• 1:07:38
  Speaker 1: exceptional people can still make an exceptional contribution and be
• 1:07:42
  Speaker 1: very well paid. But you know, this isn't like Woe
• 1:07:46
  Speaker 1: Begone where everybody's above average, and and nowadays not everybody
• 1:07:50
  Speaker 1: gets paid as if they are above average. So I
• 1:07:52
  Speaker 1: think that's been a big change. Uh. Now they say
• 1:07:56
  Speaker 1: that something like three eighths of all mutual and equity
• 1:08:00
  Speaker 1: capital is now run passively, that's what they said, and
• 1:08:06
  Speaker 1: certainly not and uh, what that means is that there
• 1:08:11
  Speaker 1: are fewer people looking for bargains every day, because by definition,
• 1:08:16
  Speaker 1: a passive vehicle doesn't look for bargains. They just emulate.
• 1:08:20
  Speaker 1: And if if it goes, if that trend goes far enough,
• 1:08:24
  Speaker 1: maybe some inefficiencies what we call them, some bargains will
• 1:08:30
  Speaker 1: come back into the marketplace, maybe active management will begin
• 1:08:34
  Speaker 1: to pay off better. Are you suggesting it's cyclical between
• 1:08:38
  Speaker 1: passive and active? Well said, And um, let's talk about
• 1:08:44
  Speaker 1: about millennials in recent college grads. If someone came to
• 1:08:47
  Speaker 1: you and said they were debating, uh, thinking about having
• 1:08:50
  Speaker 1: a career in finance, What sort of advice would you
• 1:08:54
  Speaker 1: give them? I think the most important thing is to
• 1:08:56
  Speaker 1: figure out what what you're good at and what's good
• 1:08:59
  Speaker 1: for you. My favorite quote is from Christopher Morley, the
• 1:09:02
  Speaker 1: English writer, who said there's only one success, and that's
• 1:09:07
  Speaker 1: to be able to live your life your own way.
• 1:09:09
  Speaker 1: Figure out your way, pursue it, take it on, stick
• 1:09:14
  Speaker 1: to it, keep your head down, work hard, even if
• 1:09:19
  Speaker 1: it's the right thing for you. Don't assume that every
• 1:09:21
  Speaker 1: day is going to be fun. You know, the millennials
• 1:09:25
  Speaker 1: are used to constant stimulus and frequent rewards, and if
• 1:09:31
  Speaker 1: they don't get them, they move on. But I think
• 1:09:34
  Speaker 1: that that being steadfast at something, sticking with it, getting
• 1:09:37
  Speaker 1: good at it, and uh rising to the top is
• 1:09:41
  Speaker 1: a good idea. Do what you love, uh, don't expect
• 1:09:46
  Speaker 1: to love it every day. UM. And you know, my
• 1:09:51
  Speaker 1: ultimate advice is we only get one life. Optimize that life,
• 1:09:59
  Speaker 1: and we probably, other than sleeping, we spent well, maybe
• 1:10:04
  Speaker 1: including sleeping, we spend more time on work than anything else.
• 1:10:08
  Speaker 1: If you look at it that way, isn't it a
• 1:10:10
  Speaker 1: mistake to just do what pays the most? If you
• 1:10:15
  Speaker 1: have the luxury of being able to choose between careers
• 1:10:19
  Speaker 1: and still support yourself and your family. Don't just take
• 1:10:23
  Speaker 1: what pays the most. Take the thing that is good
• 1:10:26
  Speaker 1: for you that you'll enjoy. Maybe that's good for society,
• 1:10:30
  Speaker 1: that will give you a quality of life, but you know,
• 1:10:32
  Speaker 1: not dominate your life. I think, uh, you know, investment
• 1:10:37
  Speaker 1: has done it for me, but it it's certainly isn't
• 1:10:41
  Speaker 1: the right thing for everybody. And our final question, tell
• 1:10:45
  Speaker 1: us something you know today that you wish you knew
• 1:10:48
  Speaker 1: fifty years ago. When you began fifty years ago, forty
• 1:10:52
  Speaker 1: years ago, the world felt like a steady, steady place
• 1:10:58
  Speaker 1: where the environment was stable and events played out in
• 1:11:05
  Speaker 1: front of that backdrop. And now the world changes every day,
• 1:11:11
  Speaker 1: and now we can't imagine how fast it changes. If
• 1:11:16
  Speaker 1: I had known fifty years ago what the world would
• 1:11:21
  Speaker 1: be doing today, maybe I would have gravitated towards technology
• 1:11:25
  Speaker 1: investing instead. Or maybe not because it didn't fit with
• 1:11:29
  Speaker 1: my personality. But clearly, uh you know, the people who
• 1:11:35
  Speaker 1: are who have optimized their benefits from this change in
• 1:11:39
  Speaker 1: the environment, Uh, you know, have have been extremely well situated.
• 1:11:44
  Speaker 1: Um you know, could it have been me? I don't know,
• 1:11:47
  Speaker 1: but clearly that's the most profound change in my lifetime.
• 1:11:51
  Speaker 1: And uh, you know, the world changes so fast, by
• 1:11:55
  Speaker 1: the way, you know, Barry, I was thinking about this
• 1:11:58
  Speaker 1: the other day. Go back long enough, and the number
• 1:12:02
  Speaker 1: one company was probably twice as big as the number
• 1:12:04
  Speaker 1: two company and made three times as much money. And
• 1:12:07
  Speaker 1: now the number one company maybe a hundred times as
• 1:12:09
  Speaker 1: big as the number two company and made two hundred
• 1:12:11
  Speaker 1: times and much money because of these technological advantages. The
• 1:12:15
  Speaker 1: payoffs are enormous. And uh that that's a big change
• 1:12:20
  Speaker 1: in my lifetime, quite quite fascinating. We have been speaking
• 1:12:24
  Speaker 1: with Howard Marks, co chairman and co founder of oak
• 1:12:28
  Speaker 1: Tree Capital Management. If you enjoyed this conversation, we'll be
• 1:12:32
  Speaker 1: sure and looked up an Inch or down an inch
• 1:12:34
  Speaker 1: on Apple iTunes, Bloomberg dot com, Stitcher, or overcast wherever
• 1:12:39
  Speaker 1: final podcasts are sold, and you can see any of
• 1:12:42
  Speaker 1: the other two hundred plus conversations we've recorded over the
• 1:12:45
  Speaker 1: past four plus years. We love your comments, feedback and
• 1:12:49
  Speaker 1: suggestions right to us at m IB podcast at Bloomberg
• 1:12:53
  Speaker 1: dot net. I would be remiss if I did not
• 1:12:56
  Speaker 1: thank our crack staff who helps put these podcasts together.
• 1:13:00
  Speaker 1: Each week. Medina Parwana is my producer, Taylor Riggs is
• 1:13:04
  Speaker 1: our booker. Attica val Bron is our project manager and coordinator.
• 1:13:09
  Speaker 1: Michael Batnick is my head of research. I'm Barry Ritolts.
• 1:13:14
  Speaker 1: You've been listening to Masters in Business on Bloomberg Radio