WEBVTT - Howard Marks Discusses the Interest-Rates Machine 0:00:02.200 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:09.840 --> 0:00:13.000 This week on the podcast, I have an extra special guest. 0:00:13.280 --> 0:00:16.320 What can I say? Howard Marks is the co founder 0:00:16.360 --> 0:00:20.800 and co chairman of oak Tree Capital Management. If you 0:00:20.840 --> 0:00:25.520 are at all interested in everything from bond investing to 0:00:25.800 --> 0:00:30.200 market cycles, to what matters most and that includes the 0:00:30.280 --> 0:00:35.400 most important thing, to the importance of human psychology and emotions, 0:00:35.720 --> 0:00:39.360 to mastering the market cycle, you will find this to 0:00:39.400 --> 0:00:43.040 be an absolutely fascinating conversation. Rather than have me go 0:00:43.280 --> 0:00:46.440 on at length, instead, I'm just going to step away 0:00:46.600 --> 0:00:51.040 and say, with no further ado, my conversation with Howard Marks, 0:00:55.080 --> 0:00:58.400 I have an extra special guest. His name is Howard Marks, 0:00:58.520 --> 0:01:01.960 and he is co chairman and co founder of oak 0:01:02.000 --> 0:01:05.759 Tree Capital, which manages over a hundred and twenty two 0:01:05.800 --> 0:01:08.800 billion dollars. Howard comes to us by way of the 0:01:08.800 --> 0:01:12.800 Wharton School at Pennsylvania, where he did his undergraduate got 0:01:12.800 --> 0:01:17.039 his MBA at the University of Chicago Boost School. He 0:01:17.280 --> 0:01:23.440 formed oak Tree and after spending about a decade at 0:01:23.640 --> 0:01:26.840 Trust Company of the West. According to the most recent 0:01:26.880 --> 0:01:31.680 Bloomberg data, I looked at oak Trees seventeen distressed debt 0:01:31.720 --> 0:01:38.360 funds have averaged annual gains of nine after fees since inception, 0:01:38.680 --> 0:01:44.040 about seven hundred basis points better than its peers, according 0:01:44.080 --> 0:01:49.720 to Boston based consulting firm Cambridge Associates. His first book 0:01:49.800 --> 0:01:53.480 was called The Most Important Thing, and he has authored 0:01:53.520 --> 0:01:57.440 a new book called Mastering the Cycle, Getting the Odds 0:01:57.680 --> 0:02:01.520 on Your Side, returning for his third Masters in Business, 0:02:01.960 --> 0:02:04.840 Howard Marks, Welcome to Bloomberg. Thank you, Mary. It's great 0:02:04.880 --> 0:02:08.040 to be here. So I was excited to see your 0:02:08.080 --> 0:02:10.080 new book because I figured it would be an excuse 0:02:10.120 --> 0:02:12.840 to get you back in here. Let's talk a little 0:02:12.840 --> 0:02:17.200 bit about what motivated you to write another book. Um, 0:02:17.200 --> 0:02:20.280 who's the intended audience? What? What was the thinking behind this? 0:02:21.680 --> 0:02:23.280 When I wrote the first book, I thought it would 0:02:23.280 --> 0:02:25.400 sell about three thousand, and I thought it would be 0:02:25.440 --> 0:02:29.840 die hard professional investors. It has sold about three quarters 0:02:29.840 --> 0:02:33.840 of a million so far, and uh, and I believe 0:02:33.880 --> 0:02:40.320 it's uh professionals, uh do it yourself investors, and uh, 0:02:40.520 --> 0:02:42.919 maybe even some people who just want to hear about 0:02:43.440 --> 0:02:46.799 a new topic. So the first book came about because 0:02:46.880 --> 0:02:50.480 some guy named Warren Buffett said, Hey, Howard, why don't 0:02:50.480 --> 0:02:51.880 you write a book. Why don't you take all these 0:02:51.960 --> 0:02:54.520 chairman memos and turn them into a book. If you 0:02:54.600 --> 0:02:57.800 write it, I'll give you a blurb for the front cover. 0:02:58.240 --> 0:03:02.320 That's pretty good. Motivation was the motivation in this book. Well, 0:03:02.360 --> 0:03:04.760 as you know, the first book was called The Most 0:03:04.800 --> 0:03:08.080 Important Thing, and it talked about twenty different things, each 0:03:08.080 --> 0:03:10.480 of which was labeled the most Important Thing. Because in 0:03:10.480 --> 0:03:13.840 investing there really are many, many things that are essential, 0:03:13.880 --> 0:03:16.320 and all of which have to be dealt with simultaneously. 0:03:16.919 --> 0:03:22.040 But I do believe Barry that UH, recognizing on dealing 0:03:22.120 --> 0:03:25.480 with risk and understanding where we stand in the cycle 0:03:26.080 --> 0:03:30.519 are really the two keys to success. UH. And if 0:03:30.520 --> 0:03:33.880 you're going to be an active investor and active manager, 0:03:34.320 --> 0:03:38.160 I think those are the two areas in which, UH 0:03:38.320 --> 0:03:41.040 you can best make a contribution. So let's talk a 0:03:41.080 --> 0:03:43.400 little bit about cycles. There's a quote of yours that 0:03:43.480 --> 0:03:47.600 I really like. Rule number one is most things will 0:03:47.640 --> 0:03:51.040 prove to be cyclical. And rule number two some of 0:03:51.080 --> 0:03:55.080 the greatest opportunities for gains and losses come when other 0:03:55.160 --> 0:03:58.720 people forget rule number one. Tell us about that. Well, 0:03:58.760 --> 0:04:01.800 you know, back in in the early seventies, somebody gave 0:04:01.840 --> 0:04:05.960 me a great gift they shared with me the three 0:04:05.960 --> 0:04:09.120 stages of a bull market. The first stage, when only 0:04:09.160 --> 0:04:13.080 a few incredibly insightful people believe there could be improvement, 0:04:13.760 --> 0:04:17.280 the second stage, when most people accept that improvement is 0:04:17.320 --> 0:04:20.479 taking place, and the third stage, when everybody thinks things 0:04:20.520 --> 0:04:24.200 will get better forever. And you know, it's obvious that 0:04:24.279 --> 0:04:28.280 if you buy in the first stage, because so few 0:04:28.320 --> 0:04:31.320 people are optimistic, you can get a real bargain. And 0:04:31.360 --> 0:04:34.080 if you buy in the last stage, when everybody and 0:04:34.120 --> 0:04:37.120 his brother is on board, uh, you know you're likely 0:04:37.160 --> 0:04:40.600 to overpay. It's it's almost as simple as that. So 0:04:40.760 --> 0:04:42.680 you know, what I try to do in the book 0:04:42.920 --> 0:04:49.200 is go through understanding where we are in the cycle, why, 0:04:49.320 --> 0:04:51.760 and what we should do about it. So let's talk 0:04:51.760 --> 0:04:55.440 a little bit about this cycle. Clearly, oh nine, very 0:04:55.440 --> 0:04:59.000 few people thought, all right, this is an opportunity where 0:04:59.040 --> 0:05:01.400 we're at the bottom of this cycle, and those folks 0:05:01.440 --> 0:05:05.039 have been pretty well rewarded. If we look at I 0:05:05.040 --> 0:05:09.880 don't know is that a fair assessment for phase two 0:05:09.920 --> 0:05:13.520 where people felt, hey, things are getting better. Are we 0:05:13.600 --> 0:05:16.280 at that final stage yet? Have we gotten there? Because 0:05:16.880 --> 0:05:19.760 so many people have been so negative this whole run up, 0:05:20.360 --> 0:05:22.600 it makes it a little tricky to figure out where 0:05:22.680 --> 0:05:26.200 that last stage where everybody thinks, hey, this can't ever stop, 0:05:26.240 --> 0:05:29.080 it's going to keep going. Sure, Well, you know that's 0:05:29.120 --> 0:05:33.920 the key question, that's the hard question. Um My approach 0:05:34.000 --> 0:05:37.440 on these kinds of things is, uh, we never know 0:05:37.480 --> 0:05:39.480 where we're going. We're sure as hell out or no 0:05:39.520 --> 0:05:42.920 where we are. What do we know? Barry about this market? 0:05:42.960 --> 0:05:45.160 As you say, we're not in O eight oh nine 0:05:45.200 --> 0:05:51.320 when everybody thought we were heading for a meltdown. We're 0:05:51.360 --> 0:05:55.440 not in twelve or thirteen when things were beginning to 0:05:55.520 --> 0:06:00.640 lift off. Uh. By some measures, this is the longest 0:06:01.040 --> 0:06:05.280 bullmarket in history. The S and P has quadrupled from 0:06:05.320 --> 0:06:09.800 the lows. And uh So I think the first thing 0:06:09.800 --> 0:06:11.720 I would say is the easy money has been made. 0:06:12.040 --> 0:06:14.880 We're not in that first stage anymore, where where most 0:06:14.880 --> 0:06:18.760 people are nonbelievers. That's that's the easy thing to say. 0:06:18.880 --> 0:06:23.400 Um I think that, And and and lately you get 0:06:23.440 --> 0:06:25.960 more and more people, you know, the higher things go, 0:06:26.560 --> 0:06:28.800 the more people say, well I guess it could it 0:06:28.880 --> 0:06:33.680 could keep on. Uh. It's usually prefaced by those four 0:06:33.920 --> 0:06:37.440 dangerous world words. It's different this time. You know, the 0:06:37.560 --> 0:06:42.679 historic rules do not apply. The pe ratio, history doesn't matter, 0:06:43.279 --> 0:06:49.719 um and and so forth. Uh. But you know, Uh, 0:06:49.720 --> 0:06:52.360 when you're in the tenth year of her economic recovery, 0:06:52.400 --> 0:06:54.359 and there's never been one of more than ten years, 0:06:54.960 --> 0:06:58.160 the only thing you know is that the odds are 0:06:58.200 --> 0:07:01.640 not really on your side anymore. Nobody can say it's 0:07:01.680 --> 0:07:04.120 gonna end tomorrow, It's going to end a year from now. 0:07:05.200 --> 0:07:08.159 In investing, we sometimes know what's going to happen, but 0:07:08.240 --> 0:07:13.280 we never know when. But you know, Uh, if you, 0:07:13.440 --> 0:07:16.440 if you, if you accept that the easy money has 0:07:16.480 --> 0:07:20.120 been made, and that the pe ratios, for example, are 0:07:20.400 --> 0:07:23.800 higher than the post war norm, and that interest rates 0:07:23.800 --> 0:07:28.440 are rising, etcetera, then I think you have to conclude 0:07:28.760 --> 0:07:31.880 that the odds are not strongly in your favor. You 0:07:31.960 --> 0:07:37.040 have to take some risk off. Makes sense. Back you 0:07:37.480 --> 0:07:40.840 said you were thinking we were falling into an everything 0:07:40.880 --> 0:07:44.160 bond bubble? Um, What are your thoughts about that today? 0:07:44.280 --> 0:07:47.440 Is our bonds still in a bubble? Uh? And how 0:07:47.440 --> 0:07:50.880 does this resolve itself? You know, at that time, Barry, 0:07:50.920 --> 0:07:53.240 I think interest rates were the lowest that they've ever 0:07:53.320 --> 0:07:59.480 been period. And you know, it seemed that with the 0:07:59.520 --> 0:08:03.520 strength in economy and with the Fed no longer wanting 0:08:03.560 --> 0:08:06.680 to be so stimulative that interest rates would be rising. 0:08:08.040 --> 0:08:11.960 Rising interest rates folding bond prices. That's the math. So 0:08:12.600 --> 0:08:17.320 you know, we've seen eight interest rate increases from the 0:08:17.360 --> 0:08:21.360 Fed already. Most forecasters think we'll see half a dozen 0:08:21.400 --> 0:08:26.720 more over the next couple of years. Uh. Clearly, interest 0:08:26.800 --> 0:08:30.960 rates are no longer the lowest in history. Although still low, 0:08:31.680 --> 0:08:35.200 they'll probably continue to rise, you know. So you know, 0:08:35.440 --> 0:08:40.600 a straight high grade bond is nothing but an interest 0:08:40.679 --> 0:08:46.120 rate machine. And as interest rates go higher, the prices 0:08:46.280 --> 0:08:51.839 of existing bonds with old fashioned low interest rates go down. 0:08:52.600 --> 0:08:55.720 I don't think you want to own straight long term 0:08:55.760 --> 0:08:58.640 bonds in a period of rising interest rates, and the 0:08:58.679 --> 0:09:01.680 consensus is that rates will rise. So if you don't 0:09:01.679 --> 0:09:04.320 want to own straight up bonds and we're in a 0:09:04.440 --> 0:09:08.480 rising rate environment and a lot of people have um 0:09:08.840 --> 0:09:12.960 fairly substantial exposure to equities, how do you offset that risk? 0:09:13.040 --> 0:09:16.280 If you want some form of a balanced portfolio, where 0:09:16.320 --> 0:09:19.839 where is the value on the fixed income side, if anywhere? Well, 0:09:20.480 --> 0:09:24.400 you know, I think that across the board, what I 0:09:24.440 --> 0:09:28.880 say about rates has really affected all bonds. Uh. You know, 0:09:29.000 --> 0:09:33.400 the the impact of of rates on bonds is universal, 0:09:34.000 --> 0:09:36.319 and uh, you know, at the present time, there are 0:09:36.360 --> 0:09:39.839 no exceptions. The one thing you want to think about 0:09:39.920 --> 0:09:43.680 is this, Barry. One of the main reasons that we 0:09:43.760 --> 0:09:47.040 will probably have rising interest rates is that we will 0:09:47.120 --> 0:09:52.080 probably have continued prosperity and maybe even a pick up 0:09:52.200 --> 0:09:56.480 in inflation. Those two things, prosperity and inflation add to 0:09:57.400 --> 0:10:06.640 the profitability of corporations, and so UH, strengthening corporate profits 0:10:07.040 --> 0:10:13.679 will translate into a positive influence for corporate bonds. So 0:10:13.720 --> 0:10:16.440 you'll have the negative influence of rising rates, but the 0:10:16.520 --> 0:10:21.240 positive influence of improving profitability. And that suggests that corporate 0:10:21.240 --> 0:10:26.040 bonds are somewhat sheltered UH from the deleterious effects of 0:10:26.240 --> 0:10:32.439 rates alone. But you know, I believe that most asset 0:10:32.480 --> 0:10:39.280 classes are fully two U fully value too at the 0:10:39.320 --> 0:10:42.080 beginning of rich. And this is a time for caution, 0:10:42.160 --> 0:10:45.440 you know. The book is about trying to figure out 0:10:45.840 --> 0:10:50.320 what time it is for what and which form of 0:10:50.400 --> 0:10:53.840 behavior is appropriate. If we're low in the cycle, we 0:10:53.840 --> 0:10:55.920 should be aggressive. If we're high in the cycle, we 0:10:55.960 --> 0:10:59.720 should be defensive. I think, on balance, through most asset classes, 0:10:59.760 --> 0:11:03.200 we are high in the cycle, and I think that 0:11:03.240 --> 0:11:06.320 calls for defense. So if we were putting this in 0:11:06.480 --> 0:11:09.160 terms of a baseball game, What what inning are we 0:11:09.280 --> 0:11:14.000 in in? In that longer cycle? I get that question 0:11:14.000 --> 0:11:16.840 a lot. They started asking it back in oh eight 0:11:16.840 --> 0:11:19.960 when they said when will the what inning are we in? 0:11:19.960 --> 0:11:23.000 In the crisis? Meaning when will the financial crisis enid? Sure, 0:11:23.200 --> 0:11:26.199 I remember eighth inning fisher of the Fed governor from 0:11:26.200 --> 0:11:28.640 Texas who basically said, we were in the eighth inning. 0:11:30.080 --> 0:11:32.120 Turn out we were in the second inning. But still 0:11:32.760 --> 0:11:36.400 exactly and today when they say what inning are we in, 0:11:36.559 --> 0:11:40.400 they really mean when will the bull market end? How 0:11:40.440 --> 0:11:42.680 far are we in the cycle? Exactly? Now? I think 0:11:42.679 --> 0:11:47.840 we're in the eighth inning, But about a year ago 0:11:48.040 --> 0:11:50.959 I figured out there's a problem with saying that, which 0:11:51.040 --> 0:11:54.880 is this is in baseball, right, and we know in 0:11:54.960 --> 0:11:59.120 baseball that a game is nine innings except except ties, 0:11:59.640 --> 0:12:04.120 But in investing, we have no idea how many innings 0:12:04.120 --> 0:12:07.880 there will be in the game. So I think we're 0:12:07.880 --> 0:12:10.839 in the eighth inning, but this game could go nine 0:12:11.240 --> 0:12:17.240 or eleven or thirteen. And I think that the outlook 0:12:17.320 --> 0:12:21.160 is not so poor and the prices are not so high, 0:12:21.240 --> 0:12:24.280 that this is the time for defense. Our own motto 0:12:24.320 --> 0:12:26.880 at oak Tree has been moved forward, but with caution 0:12:27.440 --> 0:12:32.880 and Uh, we're essentially fully invested. That's what moved forward means. 0:12:33.320 --> 0:12:35.960 But I also think it's time for caution because I 0:12:36.000 --> 0:12:39.240 do think we are elevated in the cycle. So so 0:12:39.280 --> 0:12:42.400 how does an investor manage that risk? Is it just 0:12:42.520 --> 0:12:47.000 staying away from the most expensive, most speculative paper being 0:12:47.160 --> 0:12:50.240 fixed income or stocks On the equity side, how do 0:12:50.280 --> 0:12:53.079 you stay fully invested but cautious. Well, I think that's 0:12:53.120 --> 0:12:56.600 the right idea. Everything you want to do in the 0:12:56.679 --> 0:13:00.559 investment business, you can do it aggressively or you can 0:13:00.559 --> 0:13:03.040 do it defensively. As you say, you can be in 0:13:03.920 --> 0:13:06.520 quality stocks as a post to speculative stocks. You can 0:13:06.559 --> 0:13:08.800 be in large companies rather than small. You can be 0:13:08.880 --> 0:13:11.360 in the lower price, not the higher price. Now, usually 0:13:11.360 --> 0:13:14.360 the higher price has the prettier story. That's why it's 0:13:14.400 --> 0:13:18.240 higher price. But but but you pay smartly for that. 0:13:18.320 --> 0:13:20.800 The fangs, the texts, these are the ones that have 0:13:20.880 --> 0:13:24.240 been selling very high, high in price, great story. But 0:13:24.360 --> 0:13:26.200 if you want to be defensive, you drop down to 0:13:26.280 --> 0:13:29.880 a little less glamorous story at a lower price. In bonds, 0:13:29.920 --> 0:13:32.920 you can go for quality. You can certainly go for 0:13:33.640 --> 0:13:39.160 UH shorter duration short shorter maturities UM and uh. I 0:13:39.200 --> 0:13:44.920 would not advocate getting out of the market. It's not 0:13:45.280 --> 0:13:50.480 so egregious that cash is preferable. I do think that 0:13:50.720 --> 0:13:53.000 the things you want to do in your portfolio are 0:13:53.080 --> 0:13:56.520 better done in a cautious way than in an aggressive way. 0:13:57.000 --> 0:14:00.000 So you talked about corporates, you talked about high grade 0:14:00.080 --> 0:14:02.679 low grade. Before we came into the studio, we were 0:14:02.679 --> 0:14:07.280 discussing tips. If we see even modest inflation, is that 0:14:07.360 --> 0:14:09.840 a bad place to hide or is that a half 0:14:09.880 --> 0:14:14.640 decent place to think about. There are two risks in bonds. 0:14:15.760 --> 0:14:19.560 One is the risk of a negative price fluctuation, interest 0:14:19.640 --> 0:14:23.320 rates up, prices down. The other is the risk of 0:14:23.320 --> 0:14:26.320 not getting paid. What is a bond. It's a promise 0:14:26.360 --> 0:14:29.320 of a string of payments, interest, and then principle at 0:14:29.360 --> 0:14:35.800 the end. So you know, most people should not buy 0:14:35.960 --> 0:14:41.200 bonds where the risk of being unpaid is substantial. So 0:14:41.280 --> 0:14:46.920 let's assume that we are our managers can exclude the 0:14:46.960 --> 0:14:50.560 ones that default. Now we're down to the the ones 0:14:50.600 --> 0:14:56.200 that pay but could experience a negative fluctuation. We don't 0:14:56.200 --> 0:14:58.160 know rates, what rates are gonna do, We don't know 0:14:58.600 --> 0:15:01.480 what how they'll fluctuate. But if you buy bonds that 0:15:01.520 --> 0:15:04.120 are gonna pay. You buy a bond today. Let's say 0:15:04.160 --> 0:15:06.160 it's a high yield bond and you can buy it 0:15:06.200 --> 0:15:10.880 at a six percent yield. If rates go up, there 0:15:10.920 --> 0:15:13.280 could be a negative price fluctuation, but if the company 0:15:13.360 --> 0:15:15.520 is credit worthy, it will still pay at the end 0:15:15.760 --> 0:15:18.280 and you'll get your six percent. And I think that, 0:15:18.480 --> 0:15:22.960 you know, if somebody, if somebody can live with a fluctuation, 0:15:23.280 --> 0:15:25.760 and if six percent is good for them, I think 0:15:25.760 --> 0:15:29.400 they should be buying six percent bonds. The biggest mistake 0:15:29.480 --> 0:15:32.200 you can make, in my opinion, is to buy six 0:15:32.240 --> 0:15:35.120 percent bonds in the hope of getting nine because that's 0:15:35.120 --> 0:15:38.120 probably not in the cards, to say the least. So 0:15:38.360 --> 0:15:41.720 let's talk a little bit about mastering the market cycle. 0:15:42.240 --> 0:15:45.240 What is it that most people seem to get wrong 0:15:45.400 --> 0:15:49.480 with longer term cycles? What is it that makes the 0:15:49.520 --> 0:15:52.320 market go up and down? When you see a market 0:15:52.400 --> 0:15:56.960 that's rising, it's usually the news is good. The economy 0:15:57.040 --> 0:16:00.280 is doing well, the corporations are reporting good or ings, 0:16:00.800 --> 0:16:04.640 the the investors are happy, the media are putting out 0:16:04.680 --> 0:16:10.320 positive stories, and prices are rising. Everybody feels good. But 0:16:10.400 --> 0:16:14.960 if you take those things together, very what they mean 0:16:15.800 --> 0:16:20.880 is that prices are probably high the enthusiasm to buy 0:16:21.040 --> 0:16:25.120 thus is the highest when the prices are the highest, 0:16:25.520 --> 0:16:27.800 which is not when we should be buying the most. 0:16:28.400 --> 0:16:31.400 So and the reverse is true in the opposite direction, 0:16:31.440 --> 0:16:33.760 you know, in the in the in the very bad times, 0:16:33.800 --> 0:16:36.920 people get depressed. The news is for everybody wants to 0:16:36.920 --> 0:16:40.000 get out, regardless of how the low the prices. So 0:16:40.120 --> 0:16:42.880 you know, when I was a kid, my mother said, Howie, 0:16:43.080 --> 0:16:47.160 buy low, sell high. Most people's emotions lead them to 0:16:47.280 --> 0:16:51.600 buy high, sell low. We want to counter that. So 0:16:51.960 --> 0:16:57.520 the element that causes the problems in investing is psychology. 0:16:58.440 --> 0:17:03.640 If we knew that positive news would result in good 0:17:03.760 --> 0:17:07.680 price performance, life would be very easy. But it would 0:17:07.720 --> 0:17:11.200 be only true if if we could buy in at 0:17:11.200 --> 0:17:14.240 a fair price or an attractive price. If the news 0:17:14.280 --> 0:17:17.320 will be good, but we overpay for the security to 0:17:17.359 --> 0:17:22.040 get in, then we may be looking at losses despite 0:17:22.080 --> 0:17:25.280 the good news. So it's all a matter of emotion. 0:17:25.840 --> 0:17:28.840 And uh, you know, the reason I wrote this book 0:17:29.240 --> 0:17:32.600 is so that people could understand what it is that 0:17:32.720 --> 0:17:38.639 contributes to market cycles. Could understand perhaps the mistakes others 0:17:38.640 --> 0:17:41.080 may perhaps the mistakes they've been making. His darkly and 0:17:41.160 --> 0:17:45.639 stop it. Get the you know, the subtitle is the 0:17:45.720 --> 0:17:48.800 key getting the odds on your side. So let's talk 0:17:48.840 --> 0:17:51.240 a little bit about that in terms of one of 0:17:51.280 --> 0:17:54.840 your favorite subjects, which is value. And one of the 0:17:54.960 --> 0:17:58.960 quotes that I really like of yours is the essential 0:17:59.080 --> 0:18:02.480 character of value is not what you buy, but what 0:18:02.560 --> 0:18:06.119 you pay. That clearly has a cyclical element to it. 0:18:06.160 --> 0:18:09.920 If we're talking about the overall market. What what motivated 0:18:09.960 --> 0:18:13.200 you to phrase that quite in that that way? Very easy? 0:18:13.280 --> 0:18:19.560 I started in business fifty years ago. Uh and uh, 0:18:19.600 --> 0:18:21.359 you know, I started a city bank, and all the 0:18:21.400 --> 0:18:23.840 New York banks adhered to what was called the nifty 0:18:23.880 --> 0:18:26.600 fifty investing. They brought the stocks of the fifty best 0:18:26.640 --> 0:18:29.360 and fastest growing companies in America to which nothing bad 0:18:29.400 --> 0:18:32.760 could ever happen. And in most cases they were right. 0:18:32.800 --> 0:18:35.000 There were great companies. They went on to great success, 0:18:36.040 --> 0:18:39.960 but they were valued so high in nineteen eight that 0:18:40.000 --> 0:18:41.800 if you if you bought them and held them for 0:18:41.880 --> 0:18:45.600 five years, you lost almost all your money. Because there 0:18:45.720 --> 0:18:48.280 is no asset which is so good that it can't 0:18:48.320 --> 0:18:53.800 be overpriced and us dangerous and and uh and the inverse. 0:18:53.880 --> 0:18:56.040 You know, there are very few assets which are so 0:18:56.200 --> 0:18:59.840 bad that you can't make money at them if you 0:19:00.040 --> 0:19:03.480 I am right. So in night ten years, when I 0:19:03.520 --> 0:19:05.520 had ten years under my belt, I was asked a 0:19:05.600 --> 0:19:08.560 city bank to start up the fund for high yield bonds. 0:19:09.480 --> 0:19:13.080 So in the first few years we bought the best 0:19:13.760 --> 0:19:17.520 companies in America and lost a lot of money. Starting 0:19:17.520 --> 0:19:19.919 in seventy eight, I bought the debt of some of 0:19:19.960 --> 0:19:22.480 the worst companies in America and made a lot of 0:19:22.520 --> 0:19:26.480 money steadily and safely. And that's when I concluded, it's 0:19:26.560 --> 0:19:29.360 not what you buy, it's what you pay. I've I've 0:19:29.359 --> 0:19:32.159 always hated the phrase that came out of the financial 0:19:32.200 --> 0:19:36.720 crisis toxic assets, because it wasn't the assets that were toxic, 0:19:37.119 --> 0:19:39.560 it was the prices you could buy the worst bond 0:19:39.600 --> 0:19:43.320 portfolio if you paid a low enough price. Hey, a 0:19:43.320 --> 0:19:48.439 lot of people bought bout blocks of paper and double 0:19:48.480 --> 0:19:50.600 and triple their investment because the price they had paid 0:19:50.640 --> 0:19:53.000 was so low. Exactly, you know, Barry, at the beginning 0:19:53.040 --> 0:19:57.080 of the hour, uh, you quoted returns for our distressed 0:19:57.119 --> 0:20:00.520 dead funds. Well, in our distressed debt funds, we're buying 0:20:00.560 --> 0:20:06.560 securities of companies that are bankrupt or that everybody thinks 0:20:06.880 --> 0:20:10.840 will become bankrupt. But you've had very consistent returns over time. 0:20:10.880 --> 0:20:15.400 We've had very good returns buying stuff that was very 0:20:15.480 --> 0:20:20.800 dubious in its financial merits, but so cheap that the 0:20:20.840 --> 0:20:24.399 odds were on our side. And and that's all about price, 0:20:24.480 --> 0:20:28.159 not quality assets exactly. Let's talk a little about one 0:20:28.200 --> 0:20:31.840 of your more recent chairman's memos and we'll we'll get 0:20:31.840 --> 0:20:34.240 into the chairman memos in a In a bit, you 0:20:34.320 --> 0:20:36.560 said something that kind of caught my eye and was 0:20:36.560 --> 0:20:40.359 was sort of fascinating. You asked about computers. We were 0:20:40.400 --> 0:20:43.600 discussing computers, and you asked the following questions, Can they 0:20:43.640 --> 0:20:46.520 sit down with the CEO and figure out whether he's 0:20:46.560 --> 0:20:49.399 the next Steve Jobs or not? Can they listen to 0:20:49.440 --> 0:20:52.240 a bunch of venture capital pitches and know what's the 0:20:52.280 --> 0:20:56.439 next Amazon? So I thought that was really an intriguing question, 0:20:56.520 --> 0:21:00.280 but it made me stop and ask myself, well, people 0:21:00.320 --> 0:21:03.280 do that either? Also, I don't know how good humans 0:21:03.280 --> 0:21:06.560 are at that process. Well, that's exactly the right question, Barry. 0:21:06.800 --> 0:21:11.679 Certainly not everybody can. Sure certainly the average person can't. 0:21:12.760 --> 0:21:16.879 There's a few percent at the top, the people with 0:21:16.960 --> 0:21:20.920 the most foresight who can figure those things out. They 0:21:20.960 --> 0:21:24.919 can be great investors. They should be paid a lot 0:21:24.800 --> 0:21:30.520 for their services. But the average person can't do those things. 0:21:30.600 --> 0:21:33.440 And the computer may be able to do a better 0:21:33.520 --> 0:21:36.719 job than the average person because it can digest a 0:21:36.720 --> 0:21:40.320 lot of data. It doesn't make mistakes, you know. One 0:21:40.359 --> 0:21:43.000 of the themes of the book is that emotions are 0:21:43.080 --> 0:21:48.000 the investors enemy. Computers are not very emotional. So in 0:21:48.080 --> 0:21:52.160 many regards, I believe computers can probably do a better 0:21:52.280 --> 0:21:57.320 job than some very large percentage of investors, but just 0:21:57.440 --> 0:22:00.720 not as good as the best. And those folks who 0:22:00.720 --> 0:22:03.600 are the people who can peer into the future and 0:22:03.680 --> 0:22:08.200 spot the next Steve Jobs on the next Amazon, there 0:22:08.240 --> 0:22:13.440 really outliers. We're talking about a teeny tiny percentage of investors, exactly. 0:22:14.400 --> 0:22:18.280 It's not it's not even the best of the average investors. 0:22:18.280 --> 0:22:22.320 You're talking about, you know, two and three standard deviations 0:22:22.320 --> 0:22:26.199 away from that normal Bell Bell curve. I don't want 0:22:26.240 --> 0:22:28.159 people listening to think, well, I could be one of 0:22:28.200 --> 0:22:31.000 the better. The average person is never going to be 0:22:31.040 --> 0:22:35.240 a starting player on an NBA team, and most people 0:22:35.240 --> 0:22:38.000 are not going to be those outlier who can spot 0:22:38.040 --> 0:22:40.480 the future ten years before it happens. So if you 0:22:40.520 --> 0:22:44.400 think about it, what your listeners should spend their time 0:22:44.440 --> 0:22:48.159 doing is, in my opinion, is figure out how they 0:22:48.160 --> 0:22:51.679 should position themselves in the market. And and that really 0:22:51.720 --> 0:22:55.600 comes back to the cycle. You know, in this business, 0:22:56.119 --> 0:22:59.680 there are only really two things we do. We want 0:22:59.680 --> 0:23:03.840 to select the better securities and avoid the worst ones. 0:23:04.600 --> 0:23:07.639 And we want to have more risk exposure when the 0:23:07.720 --> 0:23:12.280 time is appropriate and less when it's not that ladder 0:23:13.400 --> 0:23:17.600 thing that cycle positioning, and uh, you know that's the 0:23:17.640 --> 0:23:20.080 reason for the book. That's my main job at oak 0:23:20.080 --> 0:23:23.840 Tree is to figure out how we should be positioned 0:23:24.520 --> 0:23:28.199 in those regards. Uh. Most people can't figure out the 0:23:28.280 --> 0:23:33.760 next Amazon. You're right, they should they should uh bypassive 0:23:33.760 --> 0:23:37.160 products or hand off their capital to a professional manager 0:23:37.600 --> 0:23:43.520 who can add value. But I do think that that you, 0:23:43.840 --> 0:23:48.639 the listener, should be figuring out where are we in 0:23:48.680 --> 0:23:54.080 the cycle, what does that imply for my behavior, and 0:23:54.720 --> 0:23:58.400 how do I want to be positioned visa v risk 0:23:58.520 --> 0:24:01.840 at this time. So let's talk a little bit about 0:24:01.880 --> 0:24:07.240 the institutional investor versus the individual. We know most mom 0:24:07.240 --> 0:24:10.159 and pop investors at home can't do the things that 0:24:10.280 --> 0:24:14.720 these outliers are capable of doing. Your office works with 0:24:14.760 --> 0:24:19.160 a lot of institutions. What sort of challenges do institutional 0:24:19.160 --> 0:24:23.320 investors face that perhaps mom and pop don't or are 0:24:23.359 --> 0:24:28.399 they just human and suffer the same emotional consequences as anybody. 0:24:28.600 --> 0:24:34.160 Institutions don't make investments. People make investments for institutions, And 0:24:34.240 --> 0:24:40.920 you're right, those people have emotions too. Those people are 0:24:41.040 --> 0:24:44.160 bombarded with the same news that the mom and pop 0:24:44.200 --> 0:24:47.679 investor is. News is good, news is bad, Taxes up, 0:24:47.720 --> 0:24:51.480 taxes down, this company beat, this company fell short. Uh, 0:24:51.680 --> 0:24:54.680 end of the world, you know, trees growing to the sky, 0:24:54.840 --> 0:25:00.000 whatever it is. Everybody gets those same inputs. Everybody has emotions. 0:25:00.040 --> 0:25:04.719 So it's not true. Now the the institutional investor may 0:25:04.760 --> 0:25:09.760 be better educated in finance, may have more experience, etcetera. 0:25:10.640 --> 0:25:16.359 But uh, it's just not that easy. In general, the 0:25:16.600 --> 0:25:19.680 professional has the advantage of doing these things full time. 0:25:19.960 --> 0:25:22.879 But guess what, the mom and pop investor has the 0:25:22.920 --> 0:25:28.240 advantage that they can't get fired. The the institutional investor 0:25:28.359 --> 0:25:31.199 has to worry about getting fired. And that makes it 0:25:31.640 --> 0:25:34.560 hard to do the right thing at the extremes. You know, 0:25:35.080 --> 0:25:37.600 let's go back, Barry to the fourth quarter of oh eight. 0:25:37.680 --> 0:25:40.240 Lehman Brothers has gone bankrupt. That stock market is get 0:25:40.280 --> 0:25:44.400 skating down bond prices are collapsing, and you had to buy. 0:25:44.520 --> 0:25:47.200