Howard Marks LIVE (Replay) with Barry Ritholtz (Podcast)

We're going to continue doing these every few months and we have an interesting list of guests coming up. If you were anywhere near the New York City headquarters on the day we do one of these, I strongly advise you to get tickets. Not only is it live so anything can happen, but it's really a fascinating conversation and in both cases, um our guests stick around, chat with

the audience, um take questions, signed books. It's very informal and how often you get to really hang around and and have that sort of interaction with legends in finance like that. Plus, Bloomberg is a great place to come to an event. They always serve drinks and appetizers. They really roll out the red carpet. It was. It was a lovely and delightful evening. Everybody who attended had a

great time. Rather than me continue to babble with no further ado, my masters in business live with oak Tree Capitals Howard Marks, and once again I get to start out by announcing, um that I am cheating. By bringing someone like Howard here makes my job really easy. Uh. If you're not familiar with his background, I'm going to give you just a really short uh CV of Howard Marks. He's the co chairman and co founder of oak Tree Capital, which now manages over a hundred and twenty billion dollars

in assets. Howard formed oak Tree to run high yield bonds, distress debt, in private equity, and other strategies back They run seventeen separate distress debt funds unless It's Risen two more, which have averaged annual gains of after fees for the past about seven hundred basis points above its peers in the fixed income space, and handily beating a lot of

equity funds over the same time period. He is the author of the Most Important Thing, Uncommon Sense for the Thoughtful Investor, his new book, which everyone here will get copy of is Mastering the market cycle, getting the odds on your side. Howard Marks, Welcome to Bloomberg Life. Mary, it's great to be here. So I'll get to the books um in a few minutes. But I want to start with an interesting question that I think people may not be aware of your background. You began as an

equity analyst. How does one of the world's most famous bond managers being in his career as an equity analyst. Well, I think that, I think that certainly at that point in time, Uh, the starting off as an equity analyst was there was the normal course. Uh No, bonds at that time were considered a backwater that nobody was interested in.

They had two old uh European refugees in the research department of City Bank, and I remember, uh they would publish a bi weekly bond summary, and I remember at one point one came around with the black box in the upper right hand cornersay, is the last issue because everybody lost interest in stocks were doing so well. You know how it works. Stocks were doing so well, bonds

were doing so poorly that people lose interest. Now, Uh, what the contrarian says is I want to get out of the thing that's been doing well and into the things that that's doing poorly. But contrarianism hadn't become invented yet at that point in time. But anyway, so I started off in the equity research as you say. I had a summer job in sixty eight, came back full time after grad school in sixty nine, became UH senior analysts, the United head director of Research from seventy to seventy

eight UH. And then I got my lucky break in seventy eight when I switched to UH what was called the bond Department. But I wasn't ever managing straight fixed income. I was started with convertible bonds. And then in the summer of seventy eight, I got the phone call that changed my life. The head of the bond department called me and he said, there's some guy in California named Milken or something and he deals in something called hi bonds.

Can you figure out what that mean? Because the client had come in and asked for Ohio bond portoyo, and I was smart enough to say yes. So that's the transition from equities to regular bonds to high yield bonds. How do you end up over at Trust Company of the West in UH. In the first business trip of my life in January nineteen seventy, I went to California and UH I was stuttering studying a group that doesn't

exist anymore called the Conglomerates. And after the doing, the company visits my boss and I. His in laws lived in uh Laguna Beach, so he went down there and spent the weekend. I fell in love with California, and I spent the seventies trying to figure out a way to get to California, which I did in nineteen eighty. UH City, I got City back to move me in nineteen eighty and then in eighty five, Trust Company the West, which was in l a company, approached me because they

wanted to expand into my asset classes. And that's how I moved there in eighty five. So it's worth mentioning in passing that when you were working at Trust Company of the West, you were supervising a young whiz kid named Jeff Gunlock or working with tell us what it was like writing herd on him. He seems to be a person that doesn't lend himself to UH being told what to do well. I never kidded myself into thinking that that I was actually supervising him. Uh, but you know,

uh I was. I was asked to, well, you used the term right herd, which is as good as any and uh, you know he uh kind of respected me intellectually and so and so we got along. And uh and I think with Jeff that's the key, um, you know. And uh, he was very innovative in his approach. He he was managing mortgage backed securities from the late eighties, uh, um, which was innovative. And you know he would he would figure out strategies and then share them with me in

the hope that I would understand. So so fast forward and I would assume you you probably did understand pretty well. Um. Fast forward a couple of years you launched oak Tree. And then a decade or so after that, Jeff decides the part ways with Trust Company of the West, and he comes to you for some career advice. How did that work? Well, of course, he didn't decide to part ways. I mean they decided to part ways with him. Um,

and he got canned is the technical term. And and and I think it was December oh nine, if I'm not mistaken, and uh, you know he hey, he had a great following among his clients and among his his staff, and as soon as he got let go, I think the rest of him all quit and his whole team, I think his whole team. And then, through a brokerage firm or they nowadays they say, investment bank approached us and said would you, uh, would you help us get started in exchange for fift of our company? And so

we were again smart enough to say yes. And it wasn't a matter of finances. It was a matter of infrastructure, back office, tax, legal registration, all those things. And there's a you know, when we started oak Tree, people would say, what's been the biggest surprise. I said, the biggest surprise is how much non investment stuff there is in an investment management job. So we helped him with that. He's in our building in California and we just meet and

chat periodically. But as I say, we started with fifteen percent of the company. Then we realized that under accounting rules, in order to bring in our share of their profits, we would have to uh, so we bought another seven percent and we got de looted down to twenty which is where we are now. We have delution protection. Were extremely happy to be owner of Double Line, and I want to say Double Line is the fastest growing asset management firm to reach all. I wouldn't swear to it,

but I believe that's right. So let's talk a little about the Chairman's Memos, which you're somewhat um infamous for. Um. I'm gonna quote Warren Buffett when I see memos from Howard Marks in my mailbox that the first thing I opened and read, I always learned something. Tell us what led you to publishing the Chairman's Memos? When when did they start? And why did you feel the need to write them they started? So this is the thirtieth year, um,

and thank you. And I don't remember uh thinking that if I wrote him I'd get more business or anything like that. But uh, there were events that happened in my environment, the juxtaposition of which was I thought extremely informative, and so I wanted to write it up and share it with my clients. Now it is all and and you're you're well known for them today. Buffett had has lauded them, and other people have tooked so um approvingly

of them. But when you first started publishing these, what was the response, like big fat zero zero, literally barry there. It was ten years before I ever had a response. Not only did nobody say, oh that was good, nobody ever said I got it. So it was, you know, and this is this was this is the day of running the xerox machine, folding them up, putting them in envelopes, addressing them, putting stamps on, and then, as far as

I knew, tossing him down to this sewer. Because I never had a response for ten years, and so so I kind of remember or what made me right the first one. I have no idea what kept me going. So you said, there's no response for a decade. That response though, I very specifically remember that one, because Barons did a giant cover on it bubble dot com in January two thousand and only were you right? But the

timing couldn't have been any better. Tell us about that particular chairmans, Well, of course, uh, in our business, um, it doesn't do any good to be right if the timing is not good. You know, there's an old saying in our business that being too far ahead of your time is indistinguishable from being wrong. So if I would have published the same insight in I'd be forgotten because it would have taken three plus years to work. It

happens that only took a few months to work. And basically the premise of the menu memo was that the TMT tech media telecom bubble that had been pushing stocks up for the last few years of the nineties and into two thousand UH was overdone. The subject of excessive optimism and excessive faith in the future, and entirely free of any kind of analytical or valuation rigor. You know, I mean, we're used to paying fifteen times earnings for an average company, and maybe thirty times earnings for what

we think is a great company. But how do you value a company that has no earnings? Hold on? How do you value a company that has no sales? You know? I mean you were valuing an idea, and people were you see, and and in the investment business, there's a tendency to succumb to platitudes, generalizations, and so what was going on in nine was the Internet will change the world. And as a consequence, any stock which is Internet or UH e commerce related is the right price is infinity,

There's and and as I say in the book. Can I say in the book slight slap slug, But as I say in the book, if you want to understand bubbles, to me, the defining characteristic of the bubble is the belief that quote, there's no price too high, if it's if it's an Internet stock, there's no price too high, if there was the nifty fifty back when I started, Xerox, Kodak, mark Lily, no price too high. And of course it's obvious that everything there is no there's nothing so good

that it can't be overvalued. And if you buy something at a price which is excessive for its merits by it's gonna require magic to make it into a successful investment. So uh, that was the theme of the memo, you

know I talked about I talked about businesses. And by the way, we still some see some today which which don't have a profit plan, you know, and uh, companies that you know that as I said in the memo, well, people used to say, the great thing about this company is that its costs are almost zero, and I wrote, well, that's great because it's revenues are absolutely zero, you know. And uh, I quoted my dad who was a big

joke teller. And he said that the two guys were talking and one guy says, everything I sell, I sell at cost. He said, well, how do you make money? He's why I buy below cost. But but the but the internet business model at that time seemed equally uh irrational, and yet the stocks were selling at sky high prices.

And of course, and as I said in a memo which which reviewed this progression later, you know, in my first thirty years in the business, after a bubble popped, we would see a table in the upper right hand corner of the journal, and they show all the stocks that were down. Remember, and then with this they showed all the socks who are down or more. And so the bubble popped. The memo look smart, I said in the in the introduction to my first book. After ten years,

I became an overnight success. And that's the story. So so let's talk about that first book, which is the most important thing uncommon sense for the thoughtful investor. You're writing these memos on a regular basis, um what motivated you to say, I know, let's let's now spend three pages and a year writing a book that was simple. I got a letter from Warren Warren Buffett saying saying, if you know I wrote a memo, I think I forget which one it was, um, which was right up

his alley. And I wrote him afterwards and I said, did you see this one? He says, yes, it was fine. And he says, by the way, if you'll write a book, I'll give you a quote for the jacket suburb. Enough said, and and you know you don't pass that one. Boy. So I had always thought that I would write a book pulling the philosophy together, um when I retired, and instead it got accelerated. What was the experience of writing a book like? It was great? Um? You know? Um?

For me, the challenge is not to think up what to say that the challenges to get it from here to there, you know. And yeah, yeah, the thoughts are coming so fast you're afraid they're going to evaporate, so you have to sit there. And yet, so so let's talk about some of those thoughts which I've pulled from books. Quote, we can make excellent investment decisions on the basis of present observations with no need to make guesses about the future. Doesn't that run kind of contrary to how lots and

lots of people invest their capital. Yeah, I mean the the the irony is that what is what is investing investing is positioning your capital to profit from the future that unfolds. And yet in my book, we can't know what the future holds. So I an oak Tree through its investment philosophy. Uh, specifically as true macro forecasts. And I don't believe we ever know enough about the coming economy, markets, currencies, and interest rates to make us a successful and a

superior investor. It's very hard to hold the view which is different and from the consensus, and it's very hard to have a non consensus view which turns out to be more correct than the consensus. And so so I don't believe in forecasts. Uh. Now everybody says, but the macro is so important. It's the macro that moves the markets these days, and it it truly does feel, let's say, for the last fifteen or twenty years that yes, the macro is much more important than company news, uh, in

moving the market. So they say, well, how can you, how can you not do macro forecasting? And h I was sitting and having dinner with Warren you know who. Uh, that one a few years ago, and he said to me, for a piece of information to be desirable, it has to satisfy two criteria. It has to be important and the macro is extremely important, and it has to be noble.

So you can have something which is very important, but if you spend your time trying to figure it out, it could be a waste of time if it's not knowable. And I believe that the macro future is not knowable. So uh. In in the first book the Most Important Thing, there are twenty one chapters, and each one starts off the title the most important thing is, and then it's a different thing because in investing there is no one

thing which is the most important. There are in that According to the book, there are twenty one things, all of which are the most important thing um and one of those is knowing where we stand in the cycle. And when it was time to write a second book, I pulled that out and that's what I devoted the book too. So so since you brought that up, let's talk about the second book, Mastering the market cycle. Getting the odds on your side. Of all those twenty one

chapters in the first book, why cycles? Why did you pick that um is shooting the other twenty when you really you can write a twenty one volume encyclopedia, each chapter being a book. Well, Barry, I believe of the things of all the twenty one most important things, I think that there are two that are more important than the others, and they are risk and where we stand in the cycle. I believe that risk management, risk control is the mark of an exceptional investor. It's not hard

to make money in the market. It's especially not hard when the market goes up. And the market goes up most of the time, and most of the time everybody in the market makes money. But if you don't know what you're doing, if if you're throwing darts, if you're just surfing, uh, you know what we call beata slipping. Uh,

that's not an accomplishment. To me. An exceptional investor is someone who makes a lot of money when things go well, but does it with the risk under control so that he or she won't lose a lot of money when the market does poorly. So I think that I devote actually three chapters in the first book to risk, understanding risk, recognizing risk, controlling risk, and I think that is the mark of the superior investor. That's number one, Number two

the cycle. There's a connection here because I believe that where the market is in its cycle determines how risky it is. When when everything has been going swimmingly, and as a consequence, the market is elevated in its cycle relative to something we might think of as the midpoint or the intrinsic value, then I think it's risky. And when it's depressed in its cycle and low relative to intrinsic value or the midpoint or the norm, then I

think the risk is very low. So understanding, even though we can't benefit from predictions of the future, I believe that where the market is in its cycle can tell us a lot about what the odds are. And that that you mentioned the subtitle of the book, Getting the Odds on your Side, And I actually prefer the subtitle to the title because it conveys, I hope, a sense for my belief that we cannot know what the future holds.

The future is nothing but a probability distribution. But if we think and study right, we can have an idea about the shape of the probability distribution and what returns are most likely. It's interesting you say that you prefer the subtitle those the title itself sort of is at odds with some things you've said before about you really have a mantra. Not only can people not predict the future,

they can't time the market especially well either. How do you reconcile mastering a market cycle that seems a little contradictory to being able to time it. Well, let me say up front, I believe very firmly that we sometimes have a sense for what's going to happen, we never know when. So when you say timing, the word time is something I just discard. Uh. You know, since I'm a writer. Everybody at oak Tree has the habit of writing. Everybody at oak Tree writes a letter every quarter to

his clients. And um, there's a guy there who I was reading, and I review all the letters before they go out, and one of them, the portfolio manager, said, if you name a date, don't name a price. And if you name a price, don't name a date. And if you think about it, if you never name both the date and a price, you can never be wrong.

Uh and and but but I do think that you can have an idea about what the future holds you can have an idea whether this is a good time to invest or not, but you you never know when the things you're hoping for will unfold, and if you if you think about it, I believe that everything an investor does, what you do, what I do, falls under one of two headings, assets selection and what I call cycle positioning. In order to avoid using the word timing,

what do they mean? Assets election means trying to hold more of the things that will do better and less of the things that will do worse, pretty easy, and psycle positioning means trying to have more of your capital invested and more aggressively when the odds are favorable, and less of your capital invested more defensively when the odds

are against you. I think you can we can know something about the odds that doesn't mean we're going to be right or we're gonna be right right away, especially uh, and that can enable us to effectively do cycle positioning h through an understanding of where we stand in the cycle. So you mentioned two things earlier that I have to

circle back to. One was the concept of intrinsic value, where assets might be above or below that, and the second is the implication about psychology, which really, Um, we went by too quickly, so I have to come back to that. Um. Intrinsic value clearly refers to paying less for an asset than you think it's ultimately worth. I think you've written extensively about the advantages of being a value investor. But let's let's explore the psychology of that.

Because it seems much easier to buy when things are going up than to sell, and conversely, when everything is down, it's much easier to sell with the crowd. Then take the other side of the trade. Well, first of all, intrinsic value. Every every asset that produces cash flow, you can talk reasonably about its intrinsic value. What would you pay to get those cash flows. It might be a company, a stock, a bond, a building. Anything that produces cash

flow can be valued. That's what value investors do. We try to figure out the value and buy for less. That makes perfect sense in my opinion. Um. Now, the next question is do assets sell at their intrinsic value? And the answer is no. The asset the prices of assets very very significantly from intrinsic value from time to time. Why, well, you said it, psychology sometimes people are excited and the price goes way above the intrinsic value, and sometimes they're

depressed and the price goes below the intrinsic value. Now you the next thing you mentioned was how easy it is to buy things that are going up. You mean easy psychologically, right? Um? Uh? You know. Dave Swenson, who runs the indowminant Yale, which is the probably the best performing endowminant in the country over the last thirty plus years that he's been doing it. Uh, wrote a book in which he said that period performance in investment management

requires the adoption of uncomfortably idiosyncratic positions. In other words, if you the job in investing. We'll let me say this, Investing is a funny area because it's really easy to be average, and it's really hard to be above average. But for professional like myself or like Swinson, since it's easy, being average is not what we seek. We seek to be above average. Uh. This may shock you, but professional investors do it for the money and they hope to

be paid highly. But clearly, since anybody can be average without any effort or professionalism, the payoff is in being above average. If you think like everybody else, you'll behave like everybody else. If you behave like everybody else, you'll perform like everybody else. So clearly, exceptional performance has to come from diverging from the crowd. And that's what Swenson

means when he's when he says uncomfortably idiosyncratic. Because if if you're behaving in an idiosyncratic way, that is to say, everybody else is buying and you say, well, they're buying has raised the price too high relative to the intrinsic value I'm going to sell. If they're all buying and you're selling, believe me, it's uncomfortable. Now we do it because we believe we have performed a competent, intellectual process.

Doesn't make it comfortable. What about the flip side when everybody is selling, is that a little I would imagine that's a little more comfortable because the sell off in a panic at least makes it appear things are falling below that intrinsic value. So there's that, Well, there's some truth in that, because the trouble with the difficulty in selling when a market has been rising for several months or years uh comes from the fear that it will continue to rise and you'll miss out fomo, right, And

that's a very strong force. You know. There's a book out on Bubbles and Crashes by a guy named Charles Kindleberger, and he says in there something like, there's nothing as injurious for your mental well being as to watch your friend get rich, and you know, and it's that's that's one of these sayings which is captures it all right there, that's human nature. Uh So, so fomo is very challenging. Uh. On the other hand, UH, I don't know if it's

any easier on the way down. Uh. I mean, intellectually, you should be able to look at assets like stocks and bonds that have on on sale and say that three day goes the inexpensive. I'm going to jump in. But as I spend a lot of time in the book, uh dissecting a common phrase which is catching a falling knife, and so many people say, I'm not going to try to catch a falling knife. You know, this thing is collapsing. I have no idea how far it's gonna go. I

don't want to stand in front of that process. I'm gonna wait until the dust settles and the uncertainty is resolved and believe me, Barry, as I know you know well, when the dust settles and the uncertainty has been resolved, there's no more bargains left. Because what causes great bargains? And by the way, let's diverge for a second. What is a bargain? A bargain is an asset that's selling too cheap. What causes assets to sell it too cheap? Error?

If if for you to get a great bargain in the market, somebody else has to be making a big mistake. As if you can buy something that is exceptionally cheap, somebody else has to be selling something which is exceptionally cheap. What makes anybody want to sell something at a price which is exceptionally cheap? And the answer is human nature or what you call psychology. And the answer is that when prices go up, people get excited and buy. When things go down, people get the pressed and sell. They

don't say, well, you know it's on sale. It used to be a hundred now at seventy five. I'm a buyer, Warren, you know who says, I like Hamburgers, and when Hamburgers go on sale, I eat more Hamburgers. And that's how value investors try to behave We try to be unemotional, not get down because prices have fallen, even you know, the prices of the things we own have fallen. But we try to say it's a bargain. I'm going to buy more. But but that requires you to get control

of your psychology. Let me bring you back to the book for at least one more question, and I want to ask um you write rule number one, most things will prove to be cyclical. Rule number two. Some of the greatest opportunities for gaining the laws come when other people forget rule number one. That's pretty much what you're

referring to the people exactly panic selling. And when when things are rising and the stock prices have been rising, like you know in a in a great bull market for five, six, eight, nine years, what do they say, I think it's going to go up forever. And when it's been collapsing and the prices and an asset is a third of what it was a year or two ago, what do they say, I think it's going to zero? And in fact, and so what they what they do

is they extrapolate. You need directional trends. Whereas I believe most events are cyclical, and trees don't grow to the sky and very little ghost to zero. So mean, let me bring up one of your pet peeves that I'm I'm amused by, Um, what inning is this? People ask you that question and you you hate that question? Explain why? Well, I don't hate I don't hate it, but I mean, it's it's challenging to know the answer. Right now, I say,

I think we're in the ethnic. That's great, Howard. The only trouble is I've been saying the athanning for a couple of years now, and uh, what I realized about a year ago, by the way, that question started to come up really in oh eight when we were in the global financial crisis, and people used to say, what inning are we in? And what they really meant is when is the collapse going to end? Now? They mean

when is the up cycle going to end? And most people say, I I realized that it can't go well forever, but I can't imagine what's going to make it come to an end. But the truth is, you know, we are at an advanced stage of the economic recovery and of the bull market, and uh, there are very secure a few securities around that are absolutely cheap, and most investors are happy doing risk investing and have lots of money for the purpose, so they're bidding up asset prices.

So let's so. But but so, I think we're in the eighth inning. But I realized about a year ago an important distinction this is in baseball. In baseball, we know that a regulation game has nine innings, and in this game it could go nine or eleven or fourteen. We have no idea. So again, the fact that I think we're in the eighth and that things are extended doesn't mean that the game is just about to end. So let's talk a little bit about that. Um, the FED.

Some people have been complaining they've tightened too much. Other people are saying behind the curve. You've been a student of the credit markets for decades. What do you think of what where the FED is and what their future behavior might be. Well, I talked about the FED a little bit in the In the book, Uh, there's a as a as a chapter on the role of government and central banks with regard to the economic cycle. The FED has a tough job. Well it actually it has

three tough jobs. Number one, it's supposed to manage inflation and keep it under control, which means that the economy shouldn't get too hot. Number two, it's supposed to support economic growth and employment, for which they would rather the market did get hot. And number three, there are now a lot of people who think that the Fed job is to prevent a recession and the declining stock market. I don't think J. Powell certainly feels the ladder. Uh. But um uh you know, UM, I think that in

interest rates. Low interest rates have been the outstanding characteristic of the financial markets for the last ten years. They have dominated behavior over that period. They've been too low. They've been unnaturally low. They were made unnaturally low in order to bring the economy back from the global financial crisis and the abyss of collapse. Uh. There are reasons why rates should be higher. Number one, rates should probably be at their naturally occurring level so that so that

the free market will allocate resources prudently. To date, it has been subsidizing borrowers and penalizing savers and lenders. Um. Number two, the Fed wants rates to be high enough so that if the economy slows down, they can drop rates and stimulate the economy. UM and uh. And so forth. Um, so you know, Uh, there's a belief that there's a correlation inverse correlation between unemployment and and uh inflation that when when unemployment gets really low, that target that triggers inflation.

That's called the Phillips curve. And uh, everybody, since we now are at a fifty year low and unemployment, everybody's been waiting for inflation to get going, which is the Fed's main concern is that it shouldn't get going too strongly, and so that's why they've been talking about raising rates. But it hasn't happened, and everybody's mystified by why we don't have inflation, And there's no easy answer. I think. Is that a risk factor for a credit investor like yourself? Inflation? Well?

The FED inflation? Yeah, well it is, but I also think it's unpredictable. Uh you know, Uh to me that my the question over the last five years or more has been our inflation rates going up or not? And I believed that they would and they have for good reason, as I've explained, Um, and uh not. You know, people people for for years, you remember, people would would talk to you and they say, do you think the rates are going up in January or March, and I would say,

what do you care? What's the difference that what month they go up doesn't matter? People were so preoccupied, especially when when they were looking for the first rate increase, remember, and I would say, the only thing that matters are they going to go up? And are they going to go up a lot? And are they going to go up fast? And what month it starts happening in doesn't matter? And of course nobody got it right, proving I think

my point uh as to the timing. But they did raise rates, and my guess is that they'll raise them a little more. But I never thought they would go to go up far or fast than I still don't. So at one point in time, UM debt investors were concerned with deficits from the federal government. Seems like we've kind of lost our enthusiasm for for fighting deficits. What are your thoughts on the government balance sheet? Uh? And

perhaps modern monetary theory? What or deficits now? Okay? Or my mother's term for that, Barry is passe a rorrying about the debt? The deficit is pass a. Nobody seems to care anymore. When I was a boy, There used to be debates about whether it was okay to have debt, for a nation to have debt. I don't see anybody discussing that anymore. The only question is whether there's such a thing as having too much debt, and some people think there is, but nobody can say what it is.

Of course. Uh. Historically, of course, the Democrats believed in tax and spend and I would say deficits, and the Republicans were the fiscal disciplinarians who would fight against deficits. That seems to have gone out the window. Nobody really stands four square for deficit and debt reduction. Uh. And in fact, most recently we start seeing articles ing that it's an old fashioned to worry about deficits and debt and uh, it's much more important too pursue society's needs

h even at the cost of a deficit. So it's troublesome. I mean, I think there probably is such a thing as too much um. You know, the bottom line is it probably doesn't matter how much debt you have as long as you can print the world's reserve currency. You know,

we were in the debt. It goes up, up, up up, the interest bill goes interest goes up with the debt, or it will go up faster if rates rise as they have been um but and and paying the interest will occupy an increasing and increasing increasing percentage of the federal budget. It doesn't matter as long as you can print money, as long as you can sell an infinite number of UH bonds overseas at the world's lowest rates because of the quality of the credit. And the question

is what if that ever stops? So that's the risk factor. What is the risk factor of deficits to fixed income purchasers? It's it's it's well to the nation. It is that someday China says, you know, we have enough treasuries, We're gonna start buying euro But the difficulty is what are you going to buy? If it's not the dollar, You're gonna invest in the in the in the euro that looks precarious. You're gonna invest in the pound. That's difficult. With brexit, are you going to invest in in UH

ruble one? Whatever it might be? So it looks like we're gonna you know, this is all this is when you look at the government and how badly it functions. The optimism with regard to the future comes from the belief that we always have modeled through and we will continue to model through, and that we don't have to worry about the at and the deficit because we can always print money to pay the interest until we can't. Until we can't, but the day but the arrival of

the date when we can't. It comes under the heading of what I call improbable disasters. It would be a terrible thing. It would have a lot of negative ramifications, but you can't assign a very high probability to it. Next year, the year after, the year after that. You know so, And one of the most interesting dilemmas is

what does the investor do about the improbable disaster. Since it's improbable, you can't do enough in your portfolio to prepare for it, and and certainly if it happens, it will have disastrous consequences and it will turn out you didn't do enough. But given that it's improbable, you can't do a lot. That's that's there's a lot of things. Hyper inflation, deflation, all these things fall into that category. So we have two segments left. I want to be able to get save some time to get to some

questions from the room, but not yet. The last thing I want to do with you is our speed rounds. Ten questions, five minutes, short answers. Well, by now you probably know I don't know anything about speed rounds or short answers, but um, but I'll try. Well let's let's let's give it a shot. Let's start out. First car you ever owned, year making model N five old cutlass um now Aqua Marine. Uh, my parents paid half. What's the biggest political surprise we might see over the next

couple of quarters. Well, it might be the Muller Report, but I mean it's it's a great example of having no idea. What's what's going to happen? It's gonna be a surprise favorite NBA team, I guess the Lakers. I've lived in l A for the last thirty four years until well I came. We moved My wife and I moved back here six years ago because our kids moved here, and she said that we're going to be in New York, so that we are, and I was again, I was smart enough to say, yes, that's the that's a maybe

I'll make that the title of my book. Smart enough to say yes, Um, name three of your favorite books about any subject. Um. There's a book called Fooled by Randomness by to leb which you know, when you talk about the limits on fore knowledge, when you talk about the fact that things are unpredictable because of randomness, I think, Uh, this book contains very very important ideas, and I know

it was very valuable for me. Uh. Peter Bernstein, who was a great investment stage wrote a book called Against the Gods um and Story of Risk, Story of Risk, and again it all understanding risk at risk is so provocative and so important. And then I would say there's a book by John Kenneth call Braith called A Short History of Financial Euphoria, which talked about introduced me to cycles,

the extremes of cycles, the error of cycles. And one of my favorite quotes from gall Braiths it was that we have two kinds of forecasters, the ones who don't know and the ones who don't know. They don't know that. That's a classic quote. What do you do for fun? Uh, Well, spend a lot of time with the kids and their kids. Now, because my wife was prescient, since we've moved back here six years ago, they both got married, they both had children, so you know we're in a great place in that regard.

And uh, I like architecture and decorating and that kind of thing. You you actually do a little bit of an architectural tour when you visit other cities. Sure, I recall you talking about that not too long ago. Um, favorite asset for the next decade? Well, I mean, I hate to say that kind of thing because I hate to think of anybody else buying on my say so. But I mean, I'm I'm willing to be a long

term investor in the emerging markets, both dead and equity. UM. I think that the you know, the way I put it, Barry, is that Japan and Europe are senior citizens economically speaking, the US is a mature adult, and the emerging markets are teenagers. And if you ever had a teenager in your house, you know it can be chaotic, chaotic and volatile. But you know that the teenagers best decades lie ahead. And that's the way I think about the emerging markets.

So so let me ask you the same question, favorite asset for the next century a house high up in a hill. Who is the investor goat the greatest of all time? In the greatest investor of all time, Oh, of all times. Well, I don't know. I mean, I haven't read that much about the personalities, but everybody assumes it is that Warren guy. And you know he has a he has a great record with a lot of money.

Uh he And there's a book out called The Warren Buffet Way, and I was asked to write the preface, and I wrote, it's for the like fourth and fifth edition, and I wrote something called what makes Warren Bufett Warren Buffet? And I talked about the fact that he's intelligent and unemotional, and he figures out what's important. He has a quick study on what's important, he ignores the things that are unimportant,

and all these different things. And then at the end, I said, and he's not afraid to lose the job. And you know, if you are afraid to lose your job, it's hard to do things that are different and bold, and yet being different in bold is necessary to be superior. And uh, you know, he spends long periods of time in the wilderness. In two thousand, when I wrote the memo,

everybody's saying, well, it's too bad about Warren Buffett. But you know he's lost his touch because he didn't have any of the text docks and then of course a year later everybody was saying, you know, what a genius. But you know, there is no approach in the investment world. There is no approach which will always be right. No matter what approach you have, there will be periods when you're in the doghouse. And the more strongly you hold your philosophy, the more strongly you hue to it, the

worst those periods in the doghouse will be. And yet what else is there? You certainly can't, especially since we can't time events. It can't work to jump from style to style the style and expect to be had the right style at the right time. You have to hold a style. It has to be the one you believe in you as to be the one you're good at. And then you have to live through and survive the periods in the doghouse. And that's to me, the mark

of a great investor. And by the way, it's it's not how well you do while your style is in favor, it's how you do when your style is out of favor that determines whether you're excellent or not. That's a perfect spot to open this up. Um, two questions from the audience before you do. Let's hear it for Howard marks and and sharing his insights. We have we have a microphone. UM, raise your hand if you have any questions and identify yourself by name and company. UM, who

has some questions? I right over here? That not a plant. I uh. I work at rid Holds Wealth Management, Barry UM, thanks for coming out, Howard. Quick question, if you had like a crystal ball, I could tell you anything, any question. Do you want to answer about the world? What? What would you want to know? You know? Let me change it a little bit, not crystal ball. If I could get an accurate answer with regard to every security that I'm thinking of buying, it would be how much optimism

is baked into the price. Remember that the psychology causes the price to diverge from the intrinsic value. If the optimism is really high, then the price is high relative intrinsic value. That's a dangerous investment. If the optimism is really low, the price is probably depressed and very attractive. So if I could get a measure, and this is something I tried to do, especially with regard to the

overall market, rather than individual skill. I tried to do what I call take the temperature of the market, and I would spend my one uh phone of friend question on that, any of the questions right over here, if we can bring the mic over here, I mean Andy, and I'm a paralyxis capital. What was the lowest low when you started oak Tree? The lowest It may not be very interesting, but the lowest low was the day we figured out that we didn't have a publishable record.

When I moved from City to tc W, I walked in, I said, here's my record. They published it Bingo. When I went from tc W to oak Tree and nine, I said, here's the record, publish it. They said, well, where's the data you need? You have to have monthly orderable data in order to publish a record. Well, of course we walked out of tc W with out that information and we said, I said, my god, we don't have a record we can publish. How are we ever going to get any business? And uh, and we figured

out a solution. It was worked out pretty well because what we said is we we wrote the clients and we said we'd love to have you come over to oak Tree and if you come and give us your monthly statements over the years, we'll audit them and we'll ascertain what your performance really was and and and so it was kind of a bootstrap operation. Uh. The the accounts we got permitted us to develop a record, which which enabled us to get more accounts. It was that

was the lowest day. Interesting question, Thank you Andy, anybody else any other questions out of here for Howard marks here in the back. I am a names Richard M. How do you go about spotting the above average investors that you mentioned before before they become one? And do you think you're good at spotting that? Well? Clearly we hide before they have track records. Um, and uh. We look for a high degree of intelligence, a natural contrarian streak,

I would say, a willingness to be wrong. We give people cases to analyze, and we look at what they call attention to and hopefully it will be the things that hopefully they'll put a great emphasis on, finding the things that other people haven't figured out. If you figure out what everybody else has figured out, that you have no advantage, so I think. And then the other thing is I use the word inference a lot, use it all over the book. Um not seeing events but figuring

out what they mean deeper significance. So we try to hire people like that. In addition, we try to hire good people that other people, including us, will will enjoy working with, and people who want to be part of a long term team rather than maximize for themselves. How and I'm going to give you a fire a follow up question. You've talked in the past about second level thinking or second order thinking. Describe that in a little

more detail. What is it when that that's the illusion when you're you're looking to hire somebody, How does second level thinking apply to either that or to invest in Well, you know, Mary, when when I was thinking about writing the first book, and I said, and it was I had been approached by Columbia Business School Press about writing a book, and I told him my idea for the most important thing. They said, we'll send us a sample chapter.

And the funny thing is that I sat down at the keyboard and I wrote a chapter that I had never even thought about writing before. And it wasn't even something that that was in front of mind before that, but it was. And so the first chapter in the book says the most important thing is second level thinking, and it goes. I go through the thing that I just said to you, that if you think the same as others, you'll perform, behave the same, behave the same

you'll have the same performance. That's clearly in a formula for superiority. So the answer is that you have to performed. You have to think differently. But it's not so easy because most of the time when people think differently, it's the consensus. It's rights of the different thinker is wrong.

You have to think differently and better. Those are the two criteria for a second level things and we look for second level thinkers um which requires number one exceptional insight, a number two a willingness to be wrong, because when you diverge from the crowd, you you can't do it with certainty that you're gonna be right. But you know, just to give you a simple idea, Uh, the first level thinker says, this is a great company, we should buy the stock. The second level thinker says, it's a

great company as everybody thinks. It's not as great as everybody thinks, we should sell the stock. If you if you get that, like you know, you might say, if you get the joke, then you have an insight that we think is valuable. There are people who just don't get that. There are people who don't understand contrarian thinking. And um, I think it's extremely important that one does. Um. We still have time for one or two more questions over here? How about right over here? This is the

up from Stanley. The length of the cycles could be different, right, So some cycles could have prizes to press for one year, two years, three years, five years. So when that happens, for example of the energy industry or anything like that, how do you manage it on that? Oh? You know, I'd love to be able to say I have a brilliant answer to that, but there is no answer because because because as I said, we sometimes know I have

an idea. I don't even want to use the word no. We sometimes have an idea for what's going to happen. We never know when we know. We may know that oils looks cheap, we never know when it's going to go up. And I think that everybody has to get rid of this illusion that these things are noble, you know. Uh. Mark Twain said, it ain't what you don't know that gets you into trouble, it's what you know for certain that just ain't true. A lot of my answers start

with I have no idea. But and when you say, when you start your answer that way, it's impossible to get into trouble. You get into trouble when you say I'm confident of X, y Z, and you're bed heavily and you're wrong. So if you accept that the that the investment world is is a place where there's a

lot of uncertainty, you're gonna stay out of trouble. Uh. Henry Kaupman, who was the chief economist of Solomon Brothers in the nineteen seventies, once said, there are two kinds of people who lose a lot of money, the ones who are nothing and the ones who know everything. And I think it's very important not to be either of those. I saw some more questions over here, how about right? Uh here? Hi, my name is Keith win. Um. I'm an architect by trade, so I'm what I'm what you

call a mom and pop investor. So my question is you mentioned that, Um, the macro economics doesn't influence your investment decisions, but how do you know where you are in the cycle without paying attention to or being influenced by the macro economics. For example, you know, the trade war may maybe something that's gonna blow over soon, and we're going to focus on the fundamentals again of you know, investments, but then what about China and all that, the kinds

of things that they're investing in. When I look at a country, don't I pay attention to the politics among different countries and what they do, what they invest in, what they what they want to do in the future. Well, the short answer is yes, the long end, but your answers are no good. The long answer is that number one, the things you're talking about are not cyclical. These are one time what we call exogenous events, whether we'll have

a trade war, etcetera. And uh, this goes back to really what I said about the macro what's going to happen in these regards China, future growth, trade war, etcetera. Is very important? But is it knowable? And if it's not knowable, then you just have to understand that it's an uncertainty out there. And and and you you may you may say, you know, I'm concerned about China. The possibility of a trade war raises the uncertainty for me. So I'm going to invest conservatively. That's not a sick

local consideration, but that's a prudent consideration. Um and uh. But you know, I keep coming back to this thought that it would be nice to know what's going to happen, but you don't know, and nobody knows. And you're an architect, and what that means is you build buildings and you put in enough steel and brick so that it won't fall down because it works according to certain physical laws.

And you have to understand that there are no physical laws at work in investing, and the future is uncertain and vague and and random. Um and psychology dominates. And I say in the book, I quote Richard Feyinneman, who was the great physicist, and he said physics would be much harder if electrons had feelings. A great quote. You know, you come in the room, you'd s flip up the switch. The lights go on every time. Why is that because the electrons flow from the switch to the lights. They

never flow this way. They never go on strike, they never fall asleep, they never say today, I don't feel like flowing from the switch to the light. That's physical science. You have to understand the distinction between your field and the field of investing, where there are no laws, there are only tendencies. We can get the tendencies on our side, but we can't. You can't build a bridge that's incapable of falling down. I think that's the perfect place to

leave us off. So before I asked for rental plause, I just want to let everybody know they will be links and snacks on the other side of those doors, as well as uh copies of Howard's book. I know you have copies, um, well, somebody paid for them. There is there is no free lunch, um. But Howard's gonna be able to stick around for another ten minutes. And I promised his wife I would not make him late for dinner. So let's hear it for Howard Marks. I feel