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