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