WEBVTT - Oaktree Howard Marks: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Master's in Business with Barry Ridholets on Bloomberg Radio. 0:00:08.480 --> 0:00:11.480 This week on Master's in Business on Bloomberg Radio, I 0:00:11.600 --> 0:00:15.120 have a very special guest. Yes, I know you're all 0:00:15.160 --> 0:00:17.160 gonna make fun of me once again, I am saying 0:00:17.200 --> 0:00:20.120 I have a very special guest. But when you hear 0:00:20.760 --> 0:00:24.200 my conversation with my guest, you will agree this is 0:00:24.239 --> 0:00:28.960 a very special guest. Howard Mark's chairman, co founder oak 0:00:29.040 --> 0:00:35.760 Tree Capital. His firm has put up an absolutely astonishing 0:00:35.920 --> 0:00:40.400 track record of long term performance in the debt market. 0:00:40.440 --> 0:00:43.360 He's been running the firm for twenty two years. They've 0:00:43.400 --> 0:00:48.360 put up phenomenal numbers. Nobody is really even close to them. Uh. 0:00:48.400 --> 0:00:50.680 And and when you consider that it's in debt and 0:00:50.760 --> 0:00:54.960 not equity, the numbers are even more astonishing. I I 0:00:55.080 --> 0:01:01.880 found Howard to be extremely thoughtful, intelligent, forthcoming individual. Not 0:01:02.040 --> 0:01:06.200 a lot of people who are in his circumstances UH 0:01:06.440 --> 0:01:11.040 tend to be as just transparent and open. And you know, 0:01:11.120 --> 0:01:14.080 he just lays his cards down on the table. Uh. 0:01:14.120 --> 0:01:17.959 I think you'll find his discussion on second level thinking 0:01:18.480 --> 0:01:22.000 to be very worthwhile, as well as his explanation for 0:01:22.560 --> 0:01:27.360 how and why investors become successful. You know, there are 0:01:27.360 --> 0:01:30.399 a lot of people who are smart guys, who are 0:01:30.440 --> 0:01:36.120 hard working, who who apply their their field in the 0:01:36.240 --> 0:01:40.000 um industry of of investing in finance, and they end 0:01:40.080 --> 0:01:43.760 up putting out numbers that are you know, fair at best. 0:01:43.880 --> 0:01:47.680 And Howard explains what you need to do if you 0:01:47.720 --> 0:01:53.480 want to outperform. I especially am fond of his discussion 0:01:53.680 --> 0:01:57.400 on predictions and the folly of forecasts let's a little 0:01:57.440 --> 0:02:00.560 bit of confirmation bias on my time, my my part, 0:02:01.000 --> 0:02:04.720 as well as his discussion on on risk and risk management. 0:02:04.840 --> 0:02:08.079 I found that absolutely fascinating and I think you will 0:02:08.160 --> 0:02:11.520 as well. So, without any further ado, here is my 0:02:11.639 --> 0:02:18.520 conversation with Howard Marks of oak Tree Capital. This is 0:02:18.600 --> 0:02:22.840 Masters in Business with Barry Ridholts on Bloomberg Radio. My 0:02:22.960 --> 0:02:26.880 special guest today is truly a special guest. His name 0:02:26.919 --> 0:02:30.079 is Howard Marks and he runs oak Tree Capital. Let 0:02:30.080 --> 0:02:34.000 me give a short version of Howard's curriculum vita, which 0:02:34.080 --> 0:02:38.160 is quite lengthy. Um graduated from Wharton at the University 0:02:38.160 --> 0:02:41.880 of Pennsylvania cum laude in nine seven, a major in 0:02:41.960 --> 0:02:45.560 finance and a minor in Japanese studies. Got his MBA 0:02:45.760 --> 0:02:50.000 from the University of Chicago Booth School of Business, worked 0:02:50.120 --> 0:02:53.480 as an equity research analyst at City Corps for the 0:02:53.520 --> 0:02:58.639 next decade before he became director of research. Ultimately became 0:02:58.760 --> 0:03:02.639 vice president and senior portfolio manager for convertible and high 0:03:02.680 --> 0:03:07.200 yield securities. Left to lead the distressed asset group at 0:03:07.520 --> 0:03:10.200 Trust Company of the West. Did you lead that group 0:03:10.400 --> 0:03:12.799 or set it up? We'll we'll get into that. We'll 0:03:12.840 --> 0:03:15.720 get into a little more details about that. And then 0:03:16.400 --> 0:03:18.520 he left Trust Company of the West to set up 0:03:18.880 --> 0:03:22.680 oak Tree Capital, which runs a high yeld bond fund, 0:03:22.760 --> 0:03:26.400 distressed debt, private equity, and other strategies, and has put 0:03:26.480 --> 0:03:31.360 up some astonishing performance numbers. The seventeen distressed debt funds 0:03:31.400 --> 0:03:36.720 that oak Tree has ranked up annual gains of after 0:03:36.840 --> 0:03:41.400 fees for the past twenty two years, far outpacing its peers. 0:03:41.440 --> 0:03:45.480 Howard Marks, Welcome to Bloomberg. Thank you, Barry. So let's 0:03:45.480 --> 0:03:49.600 get into a little bit about your background. Obviously Wharton 0:03:49.760 --> 0:03:54.800 and then a MBA suggests you had been thinking about finance. 0:03:54.840 --> 0:03:57.600 Were there ever any plans to do anything besides uh, 0:03:57.800 --> 0:04:01.160 go into asset management. Well, I wasn't one of these 0:04:01.240 --> 0:04:04.880 kids who was reading prospectuses at nine you know. Uh, 0:04:05.080 --> 0:04:08.160 first I wanted to be a high school history professor, 0:04:08.200 --> 0:04:09.960 that I wanted to be an architect. I had lots 0:04:09.960 --> 0:04:12.280 of interest. And then then when I got serious, I 0:04:12.320 --> 0:04:14.520 thought I'd be an accountant because that's what my dad was, 0:04:15.280 --> 0:04:18.760 and I I really enjoyed accounting. But when when I 0:04:18.800 --> 0:04:21.200 got to Warden, I switched from accounting to finance in 0:04:21.279 --> 0:04:23.839 terms of my interest. When I got out of Chicago, 0:04:24.000 --> 0:04:26.000 I still didn't know what I wanted to do. I 0:04:26.080 --> 0:04:28.159 knew it would be in finance, but I applied for 0:04:28.600 --> 0:04:32.039 six different jobs in six different fields of finance. Oh 0:04:32.040 --> 0:04:35.520 that's quite interesting. What other fields were you looking at? Accounting, 0:04:36.240 --> 0:04:41.880 corporate finance, investment, banking, consulting, um, great variety. Well, well, 0:04:41.880 --> 0:04:44.360 you seem to have found your call. And I got 0:04:44.440 --> 0:04:46.720 lucky to say, And by the way, that's something that 0:04:46.920 --> 0:04:50.239 just about every guest I've had has said, never hurts 0:04:50.240 --> 0:04:53.240 to get lucky, and U being smart doesn't hurt either. 0:04:53.360 --> 0:04:56.120 A good combination between the two of them. So you 0:04:56.480 --> 0:04:59.520 began your career. I found this fascinating. You began your 0:04:59.520 --> 0:05:02.760 career as an equity analyst, and yet when you moved 0:05:02.760 --> 0:05:05.440 to the Trust Company of the West, you started covering 0:05:05.600 --> 0:05:09.840 fixed income. How did that transition take place? Well, it's 0:05:09.880 --> 0:05:13.440 not that interesting a story, but but but you know 0:05:13.920 --> 0:05:18.640 at a bank, you progress, uh hierarchically. So I moved 0:05:18.640 --> 0:05:20.680 from being a junior anals so senior analyst, to a 0:05:20.760 --> 0:05:24.000 unit head to director of research. As you described. The 0:05:24.040 --> 0:05:26.280 bank didn't do well in that period because we were 0:05:26.360 --> 0:05:31.080 nifty fifty investors, the fifty biggest, fastest growing, best companies 0:05:31.120 --> 0:05:34.280 in America. UM. And if you bought them in sixty 0:05:34.320 --> 0:05:37.000 eight and you sold him in seventy three, uh, in 0:05:37.040 --> 0:05:40.960 the best companies in America lost any money. Uh. And 0:05:41.040 --> 0:05:43.760 so that that didn't work out well. I was part 0:05:43.800 --> 0:05:48.880 of that UM regime and a new guy came in 0:05:48.920 --> 0:05:52.000 to be chief investment officer and and he wanted his 0:05:52.040 --> 0:05:54.560 own director of research. And he said, I'd like you 0:05:54.600 --> 0:05:57.480 to start a convertible body fund just like just like that, 0:05:57.640 --> 0:06:00.520 And so I did. It was August the first seventy eight. 0:06:00.839 --> 0:06:03.840 And then I got a call later that month from 0:06:03.880 --> 0:06:06.760 from my boss and he said, you know, the there's 0:06:06.760 --> 0:06:09.839 some guy in California named Milken or something, and he 0:06:09.960 --> 0:06:12.360 deals in high yield bonds. Can you figure out what 0:06:12.400 --> 0:06:14.680 that means? Because a client has just asked for a 0:06:14.720 --> 0:06:18.120 hiel bond portfolio. You know, that was part of my luck. 0:06:19.080 --> 0:06:21.599 That was the beginning of the hyl bond industry. I 0:06:21.720 --> 0:06:27.359 was thirty seven years ago. And uh, you know, almost 0:06:27.360 --> 0:06:29.799 everything that's been interesting in finance in the last thirty 0:06:29.800 --> 0:06:32.880 seven years has gone through, uh, the hyal bond market. 0:06:33.160 --> 0:06:35.719 So it's front row seat on history. And you know, 0:06:35.839 --> 0:06:37.640 part of the luck is to get there early, and 0:06:37.720 --> 0:06:39.800 I did. And I also get the sense that you 0:06:39.920 --> 0:06:42.919 very much enjoy having that front seat on history, in 0:06:43.080 --> 0:06:46.440 history and being able to to be more than a spectator, 0:06:46.520 --> 0:06:50.280 but an active partisan, right, an active participant, and and 0:06:50.279 --> 0:06:53.760 and somebody who tries to figure out what's going on, 0:06:53.880 --> 0:06:56.600 not just cope with what's going on, but actually understand 0:06:56.640 --> 0:06:59.480 and fundamentally and and as you know, communicate about it. 0:06:59.560 --> 0:07:02.640 I believe you have described that as second degree thinking, 0:07:03.360 --> 0:07:06.520 second level, second level, second level thinking. Yes, that's right. Uh. 0:07:08.200 --> 0:07:11.760 You know, the real success in investing goes to people 0:07:11.800 --> 0:07:18.280 who who achieve a superior understanding of the things that 0:07:18.320 --> 0:07:21.160 are going on, why they're going on, and what they mean. 0:07:22.520 --> 0:07:26.000 In other words, not just understand what the crowd knows, 0:07:26.040 --> 0:07:30.200 but a whole level beyond that. Well, if you if 0:07:30.240 --> 0:07:32.880 you think the same as everybody else, you'll behave the 0:07:32.920 --> 0:07:35.880 same And if you behave the same as everybody else, 0:07:35.920 --> 0:07:40.440 you can't expect to outperform. You'll get you'll get average results. 0:07:40.920 --> 0:07:46.160 But in investing um success consists of having above average results. 0:07:46.200 --> 0:07:48.400 So you have to get away from the crowd and 0:07:48.440 --> 0:07:50.480 you have to achieve a higher level of thinking. You know, 0:07:50.560 --> 0:07:55.760 for example, very simple uh people say it's a great company, 0:07:55.760 --> 0:07:59.600 you should buy the stock. Second level thinker says, it's 0:07:59.600 --> 0:08:01.720 a great company, but it's not as great as everybody thinks, 0:08:01.760 --> 0:08:05.040 you should sell the stock. So it's kind of uh, 0:08:05.080 --> 0:08:10.760 it's kind of reflexive or counterintuitive. Doug Doug cast We 0:08:10.760 --> 0:08:15.239 were discussing a mutual friend calls that variant perception, looking 0:08:15.280 --> 0:08:18.080 at things a little differently than everybody else does to 0:08:18.200 --> 0:08:21.480 find the opportunity. That's right. So, so speaking of opportunity, 0:08:21.520 --> 0:08:24.280 you end up at Trust Company of the West and 0:08:24.360 --> 0:08:27.240 you created the high EELD bond fund. There a convertible 0:08:27.600 --> 0:08:31.440 securities funds and is this was this the world's first 0:08:31.520 --> 0:08:35.400 distress bond fund. I think it was the first distressed 0:08:35.440 --> 0:08:40.160 debt fund from a mainstream financial institution prior to that 0:08:40.200 --> 0:08:42.199 at just as our high yeld bond fund that city 0:08:42.240 --> 0:08:45.560 and seventy eight was the first one from a financial institution. 0:08:45.640 --> 0:08:49.360 No bank had ever done it before, or trust company 0:08:49.640 --> 0:08:53.320 and UH and the same was true in the distress 0:08:53.400 --> 0:08:56.839 dead field. You know, you had your your, your couple 0:08:56.880 --> 0:09:00.439 of guys at a desk in Grantwitch or on place 0:09:00.480 --> 0:09:02.920 trading for their own accounts, or a few for a few, 0:09:03.320 --> 0:09:05.959 you know, for a small high net worth hedge funds, 0:09:06.280 --> 0:09:09.480 but UH, nobody had ever done it on the institutional scale. 0:09:09.600 --> 0:09:12.240 You're listening to Masters in Business on Bloomberg Radio. My 0:09:12.320 --> 0:09:15.680 special guest today is Howard Marks. He is the founder 0:09:15.679 --> 0:09:19.679 and chairman of oak Tree Capital. And we were discussing previously. 0:09:20.559 --> 0:09:23.120 You had set up what turned out to be the 0:09:23.240 --> 0:09:26.800 largest distressed debt funds right in the midst of the 0:09:27.200 --> 0:09:30.640 financial collapse in oh seven o eight. What was that like? 0:09:30.720 --> 0:09:34.240 What sort of pushback did you get from investors? Well, 0:09:34.280 --> 0:09:37.880 we started to raise UH capital on the first day 0:09:38.040 --> 0:09:41.880 of oh seven and things have been going very well 0:09:41.920 --> 0:09:45.960 in the world. UM. And what happens, of course, is 0:09:46.000 --> 0:09:50.240 that when things go well, UH standards decline. People require 0:09:50.320 --> 0:09:53.720 less credit worthiness, they do riskier deals, they take more risk, 0:09:53.760 --> 0:09:56.200 because what the hell they figure, the more risk you take, 0:09:56.240 --> 0:09:59.720 the more money you make. Uh. We were alarmed at 0:09:59.720 --> 0:10:01.840 that friend, and so we went out to raise a fund. 0:10:01.880 --> 0:10:04.000 On the first day of O seven, we said we'd 0:10:04.040 --> 0:10:05.839 like to raise three billion. Now we had started off 0:10:06.320 --> 0:10:11.120 eight UM with a ninety six million dollar fund. We 0:10:11.160 --> 0:10:14.319 had grown past a billion dollar mark around and here 0:10:14.360 --> 0:10:15.800 we are in O seven. We said we liked that 0:10:15.880 --> 0:10:21.360 three billion UM and uh. Within a month people had 0:10:21.480 --> 0:10:24.360 offered us eight and we said, we can't take eight. 0:10:24.360 --> 0:10:26.240 There's nothing to do with eight. But we'll take three 0:10:26.240 --> 0:10:28.480 and a half and we'll close that fund and we'll 0:10:28.480 --> 0:10:31.720 start investing the three and a half billion. And uh. 0:10:31.920 --> 0:10:34.560 But we asked people to give us the remainder of 0:10:34.559 --> 0:10:38.120 their commitments for a standby fund, that the money that 0:10:38.160 --> 0:10:40.439 we could have in reserve, because we thought there was 0:10:40.480 --> 0:10:42.600 an opportunity coming and if it came, we'd like that 0:10:42.640 --> 0:10:44.520 more money. I think I think that was a little 0:10:44.520 --> 0:10:48.160 bit of an understatement that opportunity came along. It certainly 0:10:48.200 --> 0:10:50.760 did later on it did. So anyway, we had the 0:10:50.800 --> 0:10:53.600 first closing in March of O seven and the last 0:10:53.600 --> 0:10:56.640 closing in March of OH eight, and by the time 0:10:57.040 --> 0:11:00.240 we finished raising money was ten point nine billion, as 0:11:00.240 --> 0:11:02.480 you know, and now is our fund seven B we 0:11:02.559 --> 0:11:07.080 called it, and we we told people that we wouldn't 0:11:07.160 --> 0:11:10.080 raise them invest the money until there was something good 0:11:10.120 --> 0:11:12.120 to do with it, and we wouldn't charge any fees 0:11:12.160 --> 0:11:17.000 until we invested the money. Um So we waited from 0:11:17.000 --> 0:11:20.440 the March oh seven until June of eight to start investing, 0:11:20.760 --> 0:11:23.720 and in June of eight we started to invest gradually 0:11:24.520 --> 0:11:29.320 and the fund was called the Dailyman went under September 0:11:29.400 --> 0:11:33.640 fifteen of eight, and then we really got busy and 0:11:34.360 --> 0:11:38.480 it was se called on December. How long did it 0:11:38.480 --> 0:11:40.760 take to get fully invested at that point, well, the 0:11:40.880 --> 0:11:45.080 last we never invested the last money. It's an interesting story, yes, 0:11:45.120 --> 0:11:50.400 because well we thought that in a real meltdown that 0:11:50.520 --> 0:11:55.200 cash would be king. We would be involved in bankruptcy restructurings, 0:11:55.640 --> 0:11:59.320 and in order to really capitalize on them. You know, 0:11:59.440 --> 0:12:01.880 in a world where nobody has any money, there's a 0:12:01.880 --> 0:12:04.520 great premium on having some cash, and we thought that 0:12:04.600 --> 0:12:08.160 having some cash in reserve could give us real power 0:12:08.200 --> 0:12:10.440 at the bargaining table. So we we said we're going 0:12:10.480 --> 0:12:12.960 to leave the last ten percent of the fund, which 0:12:13.040 --> 0:12:16.520 was a billion one uninvested, so we never did invest that, 0:12:16.760 --> 0:12:20.320 and those restructurings, for the most part, never materialized. The 0:12:20.360 --> 0:12:22.839 world turned around much faster than we would have thought. 0:12:23.440 --> 0:12:27.000 That's quite fascinating. And I mentioned in in the introduction 0:12:27.120 --> 0:12:31.439 that you have about seventeen distress funds, all told different series. 0:12:31.640 --> 0:12:34.880 I think that's right. And the performance numbers on those funds, 0:12:35.280 --> 0:12:39.760 and we rarely tout performance. We don't like to get 0:12:39.800 --> 0:12:42.680 into the details too much, but I have to mention 0:12:42.920 --> 0:12:46.840 these numbers because they're just astonishing. After fees over the 0:12:46.920 --> 0:12:52.400 past twenty two years, your funds of average annually, that's 0:12:52.440 --> 0:12:59.560 just extraordinary. Well, my colleagues are exceptional. Um, you're just 0:12:59.600 --> 0:13:01.640 a buy stand. They're just an innocent boy. Well, the 0:13:02.040 --> 0:13:05.320 day to day the person who really uh you know, 0:13:05.400 --> 0:13:09.439 I I help set the scene and make them big 0:13:09.679 --> 0:13:12.880 tactical decisions. But the person who actually runs that fund 0:13:12.880 --> 0:13:15.640 from day to day is Bruce carsh He's been my 0:13:15.720 --> 0:13:21.200 partner since right as well, right, and uh, and he's 0:13:21.280 --> 0:13:27.080 just he's just an exceptional strategist, you know, competitor, uh, 0:13:27.120 --> 0:13:30.079 you know, chess player, what what have you? And he 0:13:30.240 --> 0:13:33.520 just figures out how to gain these things. We we've 0:13:33.559 --> 0:13:39.120 always had a great UH stable of financial analysts that 0:13:39.200 --> 0:13:41.840 work with us. And so you know, the key is 0:13:41.880 --> 0:13:44.120 to do a better job than others of figuring out 0:13:44.200 --> 0:13:49.319 what the what the company that rises from the ashes 0:13:49.320 --> 0:13:52.160 of bankruptcy is going to be worth, and how to 0:13:52.240 --> 0:13:55.679 get how to get a piece of that cheaply and 0:13:55.880 --> 0:13:58.800 UH and they've been able to do that successfully over 0:13:58.800 --> 0:14:02.080 the years. Now, I agree with you Barry the short 0:14:02.200 --> 0:14:04.679 term that performance numbers, we shouldn't dwell on them too much. 0:14:04.720 --> 0:14:07.680 And I love your reciting hours. But but I would 0:14:07.760 --> 0:14:09.760 remiss if I didn't mention the fact that that is 0:14:09.800 --> 0:14:13.079 an unlevered return. Now that's we don't borrow any money 0:14:13.080 --> 0:14:15.520 to amp up the results. That's just the result of 0:14:15.520 --> 0:14:20.160 our investments making it even even more extraordinary. So so 0:14:20.200 --> 0:14:23.720 the secret to your success is a combination of an 0:14:23.720 --> 0:14:28.640 outstanding team UH, excellent assessment of what's going on, figuring 0:14:28.680 --> 0:14:32.080 out the valuation of what things are worth, and and 0:14:32.120 --> 0:14:36.360 how do you avoid what's been Dick Thaler called the 0:14:36.360 --> 0:14:39.520 failor called the winner's course, the bidding too much to 0:14:39.600 --> 0:14:43.240 actually win, and finding yourself with something that you ultimately 0:14:43.240 --> 0:14:47.520 paid too much for. I think that the secret to 0:14:47.600 --> 0:14:51.640 solving all problems. Starts with awareness of that problem. So 0:14:51.680 --> 0:14:57.160 if you understand that that that winning an auction is 0:14:57.200 --> 0:15:02.760 not necessarily a a boon, uh, then you you can 0:15:02.800 --> 0:15:07.720 develop discipline. Uh and UH you know UH. When we 0:15:07.760 --> 0:15:11.400 started oak Tree, we wrote out the uh the investment philosophy. 0:15:11.400 --> 0:15:13.440 There are six tenants to it. It's on the website 0:15:13.440 --> 0:15:16.040 if anybody wants to look. We've never changed a word 0:15:16.160 --> 0:15:19.560 in over twenty years. And the first tenant says that 0:15:19.600 --> 0:15:22.640 the that they are the most important part of our 0:15:22.720 --> 0:15:26.440 job is risk control. So I'm proud of the performance 0:15:26.520 --> 0:15:30.080 numbers that you reported, but I'm prouder that I believe 0:15:30.160 --> 0:15:33.520 they have been achieved with the risks under control. I 0:15:33.560 --> 0:15:35.680 believe that the first job of the money manager is 0:15:35.720 --> 0:15:37.440 not to make a lot of money, and it's not 0:15:37.520 --> 0:15:39.360 to beat the market, and it's not to be in 0:15:39.360 --> 0:15:42.160 the top quartile. The first job is to control risk. 0:15:43.000 --> 0:15:47.440 And everybody at oak Tree believes that follows that and 0:15:47.880 --> 0:15:53.080 I believe that we always have had an effective emphasis 0:15:53.160 --> 0:15:57.360 on controlling the risk. So now, when you describe controlling risk, 0:15:58.600 --> 0:16:00.720 I want to put a little mean on those bones. 0:16:01.040 --> 0:16:04.600 Are you referring to potential returns relative to the risk 0:16:04.640 --> 0:16:08.400 you're taking. Are you talking about loss of capital? What 0:16:08.600 --> 0:16:12.120 exactly is risk to someone running other people's money? Well, 0:16:12.160 --> 0:16:15.600 to me, you know, the the academics to find investment 0:16:15.680 --> 0:16:19.840 risk as volatility. I do not agree. To me. The 0:16:20.400 --> 0:16:24.960 risk that matters is the risk of of permanent loss. Now, 0:16:24.960 --> 0:16:27.120 there are lots of kinds of risks, and I put 0:16:27.160 --> 0:16:30.080 out a memo in which I think I described twenty 0:16:30.080 --> 0:16:32.320 three or twenty four different kinds of risk. But the 0:16:32.360 --> 0:16:34.600 one that really matters is the risk of permanent laws. 0:16:35.040 --> 0:16:40.240 And we believe that we can mitigate that risk by 0:16:40.360 --> 0:16:44.120 picking in the right industries where the values are lasting 0:16:44.200 --> 0:16:47.760 rather than ephemeral, by buying debt which is at the 0:16:47.800 --> 0:16:51.880 top in terms of priority rather than at the bottom, 0:16:51.920 --> 0:16:57.240 by doing rigorous financial analysis. You know, really, uh, safety 0:16:57.320 --> 0:17:00.520 comes from paying less than things are worth and building 0:17:00.520 --> 0:17:03.800 in a margin of safety. Uh So, only if you 0:17:03.960 --> 0:17:07.639 fully understand what things are worth can you buy for less. 0:17:07.960 --> 0:17:10.880 Welcome to Masters in Business on Bloomberg Radio. My special 0:17:10.880 --> 0:17:13.680 guest today is Howard Marks. He is the founder and 0:17:13.760 --> 0:17:17.000 chairman of oak Tree Capital. And before the break we 0:17:17.040 --> 0:17:20.800 had been talking about your chairman's memos, which I find 0:17:20.800 --> 0:17:25.760 to be not only required reading, but absolutely fascinating. Um, 0:17:25.840 --> 0:17:29.000 why did you start the chairman memos? Chairman's memos? What 0:17:29.080 --> 0:17:32.280 was the thinking beyond that? I wish I knew. You know, 0:17:32.320 --> 0:17:35.880 I started twenty five years ago. I certainly can't remember 0:17:35.920 --> 0:17:40.280 back that long. No legislative history, you don't have any 0:17:40.280 --> 0:17:42.840 notes or anything. It just started. Well, what I would 0:17:42.880 --> 0:17:47.480 guess is that you know, I mean years ago, I 0:17:47.520 --> 0:17:50.520 had twenty years in this industry or twenty two, and 0:17:50.600 --> 0:17:53.600 I was starting to think to develop the philosophy. What 0:17:53.680 --> 0:17:55.600 did I believe in? What did I stand for? And 0:17:55.640 --> 0:17:59.920 what did I reject? Uh? And UH. Two events occurred 0:18:00.960 --> 0:18:03.880 UH where I thought there was something to be learned 0:18:03.880 --> 0:18:09.639 from the juxtaposition. So I wrote the first memo. H 0:18:09.920 --> 0:18:14.520 I had. I had dinner with the chief investment officer 0:18:14.600 --> 0:18:16.639 of a large pension fund, and he explained to me 0:18:16.680 --> 0:18:19.480 that in his fourteen years on the job, his fund 0:18:19.520 --> 0:18:22.359 had never been above the twenty seven percentile or below 0:18:22.400 --> 0:18:25.760 the forty seventh percentile. It was solidly in the second 0:18:25.840 --> 0:18:29.320 quartile of pension funds, and as a result, for the 0:18:29.320 --> 0:18:32.879 fourteen years overall, he was in the fourth percentage. So, 0:18:32.920 --> 0:18:35.760 in other words, by not having any huge blowout years 0:18:35.840 --> 0:18:39.600 which often follows those huge top ten years. He managed 0:18:39.640 --> 0:18:41.840 to just gradually rise to the top. He never had 0:18:41.840 --> 0:18:44.920 a top ten year he was he was solidly just 0:18:44.920 --> 0:18:48.639 just a bit above average. Uh, and in the peculiar 0:18:48.680 --> 0:18:51.320 math of investing, that made him one of the best 0:18:51.320 --> 0:18:54.439 in the world. And then I came back to New 0:18:54.520 --> 0:18:57.520 York and I and I read about the president of 0:18:57.520 --> 0:18:59.960 an investment management firm which was having a particularly bad 0:19:00.119 --> 0:19:03.120 year that year, and he said, well, you know, he says, yes, 0:19:03.160 --> 0:19:05.600 it's unfortunate, but the truth is, if you want to 0:19:05.600 --> 0:19:07.520 be in the top five percent of money managers, you 0:19:07.560 --> 0:19:09.359 have to be willing to be in the bottom five percent. 0:19:10.119 --> 0:19:12.720 And I said to myself, I am absolutely unwilling to 0:19:12.720 --> 0:19:14.920 be in the bottom five percent. I don't care if 0:19:14.960 --> 0:19:17.720 I'm in the top five percent in any given years. Obviously, 0:19:17.760 --> 0:19:21.120 my previous discussion had shown that it's not essential, uh, 0:19:21.160 --> 0:19:22.840 but I sure didn't want to be in the bottom five. 0:19:23.320 --> 0:19:26.560 So that was that was a good look at two 0:19:26.600 --> 0:19:29.040 different ways to think, and it was clear to me 0:19:29.119 --> 0:19:33.080 which one had the appeal. So consistency second quartile over 0:19:33.119 --> 0:19:35.840 long periods of time put you in that top five 0:19:36.280 --> 0:19:38.600 or better, and no blow ups and no blow ups. 0:19:39.119 --> 0:19:43.280 So you start these in this is pre internet. Are 0:19:43.320 --> 0:19:46.560 you faxing these? Are you? How are these going out? 0:19:47.000 --> 0:19:51.680 I'm I'm writing them up and uh, you know, stuffing 0:19:51.760 --> 0:19:55.600 envelopes and and and putting them out on paper and 0:19:55.600 --> 0:19:59.760 and uh putting stamps on him and and and throwing 0:19:59.800 --> 0:20:02.840 them down the drain. Now why do I say down that? Wait? Wait, 0:20:02.880 --> 0:20:06.720 so every quarter the whole staff gets together periodically, so 0:20:06.760 --> 0:20:09.800 it wasn't wasn't that regular in the beginning, but at 0:20:09.840 --> 0:20:11.920 least once a year, I think, just once a year 0:20:11.960 --> 0:20:14.679 in ninety and once a year in ninety one. And 0:20:14.720 --> 0:20:18.200 out they go. And what's the response? Non zero crickets 0:20:18.280 --> 0:20:21.040 zero response. That's why I say throwing him down the drain? 0:20:21.480 --> 0:20:24.560 If for all I knew they were being held up 0:20:24.560 --> 0:20:27.679 by the post office and this was going to investors 0:20:27.720 --> 0:20:31.240 in your funds and clients of the firm and other 0:20:31.280 --> 0:20:37.560 assorted well, yes, clients and friends, and nobody picked up 0:20:37.560 --> 0:20:41.760 the response that because just so you know, in my office, 0:20:42.119 --> 0:20:44.959 you put out a note and my head of research 0:20:45.000 --> 0:20:46.680 comes up to me and said, hey, did you see 0:20:46.680 --> 0:20:49.480 the marks letter? Yeah, of course I saw it this morning. 0:20:49.480 --> 0:20:52.040 I'm on I'm on the list like anybody else. Who's 0:20:52.119 --> 0:20:55.359 half smart has done none of that, you know, you know, 0:20:55.600 --> 0:20:58.200 just crickets. As I recall it, there wasn't a response 0:20:58.240 --> 0:21:01.840 in the first ten years, Akade. So you're just sending 0:21:01.880 --> 0:21:06.360 these out into the void and literally nothing. And I 0:21:06.440 --> 0:21:10.480 have no idea what kept me going, uh you know, 0:21:10.520 --> 0:21:14.920 with that lack of a reward, no feedback, none, none. 0:21:15.040 --> 0:21:17.639 But it had to be a the process itself had 0:21:17.680 --> 0:21:21.159 to be somewhat of a reward of itself, yet enjoy it. 0:21:21.600 --> 0:21:23.920 You clearly are a gifted writer or you like putting 0:21:23.920 --> 0:21:26.879 words on paper. There had to be something, although I 0:21:26.880 --> 0:21:29.359 would tell you it has to be a little funny 0:21:29.400 --> 0:21:31.720 not here. So when did you first start to see 0:21:31.960 --> 0:21:33.520 kind of like if you were on the radio and 0:21:33.520 --> 0:21:35.840 you just spoke and nobody spoke back. By the way, 0:21:36.600 --> 0:21:39.240 nobody is you should know that we're not broadcasting this. 0:21:39.240 --> 0:21:43.040 This is just my own private collection. Uh So, so 0:21:43.400 --> 0:21:47.480 what finally generates a response? When do you finally hear that, hey, 0:21:47.520 --> 0:21:49.480 somebody is reading these thoughts. Well, I was working on 0:21:49.480 --> 0:21:50.920 a memo and I put it out on the first 0:21:50.960 --> 0:21:54.720 day of two thousand and it was called bubble dot com. 0:21:54.760 --> 0:21:57.080 And basically what it said is that there's so much 0:21:57.119 --> 0:22:00.560 buzz and hype around technology that I think it's overdone, 0:22:00.880 --> 0:22:02.800 and I think it's going to cause a problem for 0:22:02.840 --> 0:22:08.280 the people who are following it blindly. And that memo 0:22:08.400 --> 0:22:13.520 had too virtues. It was right, and it was right soon. 0:22:14.760 --> 0:22:16.679 Being right is not enough, because if it takes you 0:22:16.800 --> 0:22:19.240 to three four years to be right, everybody's forgotten you 0:22:19.320 --> 0:22:24.040 by the time the events, Uh comply with your forecast. 0:22:24.280 --> 0:22:30.760 But trading right plus early equals wrong. Right. But you know, 0:22:32.280 --> 0:22:36.399 the the tech stocks collapsed sometime around the second quarter 0:22:36.520 --> 0:22:40.320 of two thousand and and, as I think I wrote 0:22:40.320 --> 0:22:42.639 in the introduction to my book, after ten years, I 0:22:42.720 --> 0:22:45.800 became an overnight success. There you go. You're listening to 0:22:45.880 --> 0:22:49.000 Masters in Business on Bloomberg Radio. My special guest today 0:22:49.160 --> 0:22:52.919 is Howard Marks. He is the founder and chairman of 0:22:53.000 --> 0:22:58.720 Oaktree Capital. We were talking about Wall Streets obsession with forecast. 0:22:58.800 --> 0:23:01.199 Let me let me give you a quote of yours, 0:23:01.400 --> 0:23:06.240 and I'm I'm paraphrasing slightly. Uh. When it comes to investing, 0:23:06.440 --> 0:23:10.480 we are concerned with actually one thing, dealing with the future. 0:23:10.880 --> 0:23:14.919 Yet it's clearly impossible to know anything about the future. 0:23:15.000 --> 0:23:18.640 You can't predict, you can only prepare So the first 0:23:18.720 --> 0:23:21.800 question is why is the financial industry so in love 0:23:21.840 --> 0:23:25.560 with forecasts? And the second question is what can investor 0:23:25.840 --> 0:23:29.000 do about it? Well, if I was competing for a 0:23:29.040 --> 0:23:31.200 piece of business, and I walked into your living room 0:23:31.760 --> 0:23:36.240 and I said, you know, look, very I really have 0:23:36.400 --> 0:23:38.399 no idea what's going to happen in the markets, in 0:23:38.440 --> 0:23:41.200 the economies, or in rates and in the coming year. 0:23:41.240 --> 0:23:43.120 And the next guy comes in he says, I'll tell 0:23:43.240 --> 0:23:45.600