WEBVTT - How Oaktree's Howard Marks Spots a Market Bubble 0:00:02.480 --> 0:00:14.040 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.040 --> 0:00:21.320 Hello and welcome to another episode of the All Thoughts podcast. 0:00:21.480 --> 0:00:22.840 I'm Tracy Allaway and. 0:00:22.760 --> 0:00:23.799 I'm Joe Wisenthal. 0:00:24.120 --> 0:00:28.200 So, Joe, we recently recorded an episode with Kevin Muhror 0:00:28.320 --> 0:00:32.600 where we were talking about concentration risk in stock indices, 0:00:33.000 --> 0:00:36.520 and I guess historical analogies with the dot com bubble 0:00:36.600 --> 0:00:39.000 of the two thousands, and I know that this is 0:00:39.040 --> 0:00:41.800 one of your favorite subjects. I think I said it 0:00:41.840 --> 0:00:44.680 was like your own personal catnip. That's right, And so 0:00:44.800 --> 0:00:48.400 I thought, you know what, I did not get Joe 0:00:48.520 --> 0:00:51.000 a Christmas present this year. In fact, I don't think 0:00:51.000 --> 0:00:53.320 I've ever gotten you a Christmas present, But wouldn't it 0:00:53.400 --> 0:00:56.080 be nice if I got him a whole episode where 0:00:56.120 --> 0:00:58.720 we're talking to one of the world's most famous investors 0:00:58.880 --> 0:01:01.280 who correctly call the Internet bubble. 0:01:01.680 --> 0:01:04.120 Let's do it. Let's jump right into it. No more intro. 0:01:04.240 --> 0:01:07.200 I'm so thrilled about this conversation. Let's just get it started, 0:01:07.280 --> 0:01:07.640 all right. 0:01:07.880 --> 0:01:10.280 I will also admit this is a belated Christmas present 0:01:10.319 --> 0:01:12.440 to myself as well. So we are going to be 0:01:12.480 --> 0:01:15.560 speaking with Howard Marx. He is, of course the co 0:01:15.640 --> 0:01:19.560 founder and co chair of oak Tree Capital Management. He's 0:01:20.040 --> 0:01:24.800 famously a credit investor, but he did call, as I said, 0:01:25.480 --> 0:01:28.959 the dot com bubble correctly. So Howard, thank you so 0:01:29.040 --> 0:01:30.360 much for coming on the show. 0:01:31.240 --> 0:01:34.360 It's a pleasure to be with you. Tracy, and also Joe. 0:01:35.000 --> 0:01:39.080 Maybe just to begin with give us some context around 0:01:39.280 --> 0:01:42.800 what the early two thousand's late nineteen nineties were like 0:01:42.920 --> 0:01:44.720 for you. What were you doing and what were you 0:01:44.840 --> 0:01:45.919 observing at that time? 0:01:46.840 --> 0:01:52.960 Well, the nineteen nineties were a slow time for credit investors. 0:01:53.240 --> 0:01:58.960 We're kind of opportunistic and bargain hunters, and bargains come 0:01:59.000 --> 0:02:02.600 from dislocation and you know, people feeling urgency to get 0:02:02.640 --> 0:02:07.040 out of positions. And the nineties were generally a placid period, 0:02:07.560 --> 0:02:12.840 except for the around ninety eight we had the evaluation of 0:02:12.840 --> 0:02:18.760 the Russian ruble and a Southeast Asian crisis, and we 0:02:18.840 --> 0:02:22.240 had the meltdown of a highly levered hedge fund called 0:02:22.320 --> 0:02:24.919 Long Term Capital Management. But those were all kind of 0:02:25.000 --> 0:02:31.280 vidiosyncratic events, not macro and not broad based. Other than that, 0:02:31.360 --> 0:02:35.320 the investment environment was placid. Importantly, it was the best 0:02:35.360 --> 0:02:38.440 decade in history I think for stocks and the S 0:02:38.480 --> 0:02:41.440 and P five hundred rows an average of twenty percent 0:02:41.480 --> 0:02:44.320 a year for ten years, which is an astronomical an 0:02:44.320 --> 0:02:47.840 astronomical accomplishment. If you rise twenty percent a year for 0:02:47.880 --> 0:02:51.600 ten years, I would guess that something goes up roughly 0:02:51.680 --> 0:02:55.000 eight times in ten years, which is incredible. And of 0:02:55.040 --> 0:02:57.360 course this was all powered by the what we call 0:02:57.440 --> 0:03:01.760 the TMT bubble, tech media and telecom bubble, some people 0:03:01.840 --> 0:03:04.959 call it the Internet bubble, which prevailed in ninety eight, 0:03:05.040 --> 0:03:08.600 ninety nine and into two thousand. So it was hot times, 0:03:09.080 --> 0:03:12.840 not for credit investors, hot times for equity investors. 0:03:13.120 --> 0:03:16.680 You know, you recently wrote a memo that called back 0:03:16.760 --> 0:03:19.799 to a memo that you had written basically exactly twenty 0:03:19.800 --> 0:03:22.440 five years ago. So right at the start of two thousand, 0:03:22.600 --> 0:03:26.640 of course, the dot com bubble or the TMT bubble peaked, 0:03:26.680 --> 0:03:30.000 I think it was in March of that year. You 0:03:30.120 --> 0:03:32.800 got the timing right. And that's sort of extraordinary because 0:03:32.800 --> 0:03:35.840 there were a lot of people probably starting in nineteen 0:03:35.960 --> 0:03:39.720 ninety eight, the nineteen ninety nine, maybe even earlier, like 0:03:39.760 --> 0:03:43.240 this is ridiculous. There's all these companies they literally don't 0:03:43.280 --> 0:03:45.560 have a penny in earnings, or perhaps don't even have 0:03:45.600 --> 0:03:48.080 a penny in revenue, they just have the name dot 0:03:48.120 --> 0:03:51.600 com in their name. They ipo at crazy prices. What 0:03:51.840 --> 0:03:55.480 is the experience like? I mean, that was very fortunate 0:03:55.640 --> 0:03:57.440 timing on your part, But there were a lot of 0:03:57.480 --> 0:04:01.040 people who you know, were famously correct in early and 0:04:01.440 --> 0:04:04.320 they had clients abandoned them and so forth, and they 0:04:04.560 --> 0:04:06.800 thought it was like, oh, you don't understand the new paradigm, 0:04:06.800 --> 0:04:09.920 et cetera. What's that like in the years before that, 0:04:10.560 --> 0:04:14.680 as it feels like the market is becoming increasingly untethered 0:04:14.720 --> 0:04:19.440 from any sort of reality and yet there's no payoff 0:04:19.640 --> 0:04:21.760 in being correct, right. 0:04:21.640 --> 0:04:24.840 Well, there's so much to say in response to your question. 0:04:25.320 --> 0:04:27.760 You know, I use a lot of quotes and adages 0:04:27.839 --> 0:04:30.359 and when I write, because you know, other people have 0:04:30.480 --> 0:04:34.880 said things so much better than we can. And one 0:04:34.880 --> 0:04:37.440 of the first adages I learned in the early seventies 0:04:37.800 --> 0:04:39.800 was that being too far ahead of your time is 0:04:39.839 --> 0:04:45.599 indistinguishable from being wrong. So yeah, it's painful to say 0:04:45.600 --> 0:04:48.960 something and predict something and then have to wait years 0:04:48.960 --> 0:04:52.839 and years for it to come true. Alan Greenspand famously 0:04:52.920 --> 0:04:57.080 said I think it was in ninety six that we're 0:04:57.120 --> 0:05:01.000 beginning to see signs of irrational exuberance in this, and 0:05:01.040 --> 0:05:04.240 of course the market went straight up for the next 0:05:04.240 --> 0:05:07.680 four years. And you know, there are people who pronounced 0:05:07.720 --> 0:05:10.320 that we were in a stock market bubble. I think 0:05:11.440 --> 0:05:14.480 I can think of one in June of twenty twenty, 0:05:15.400 --> 0:05:18.000 and here we are almost five years later. And of 0:05:18.040 --> 0:05:21.160 course we did stall out in twenty two. But if 0:05:21.200 --> 0:05:23.560 you went out in twenty and weren't smart enough to 0:05:23.560 --> 0:05:26.839 come back in in twenty two, you've missed a big ride. 0:05:27.279 --> 0:05:31.360 So I think, well, you know, one thing I argue 0:05:31.400 --> 0:05:34.599 strenuously Joe, is that in the investment business there's no 0:05:34.680 --> 0:05:38.680 place for certainty. And Mark Twain said, it ain't what 0:05:38.760 --> 0:05:40.640 you don't know that gets you into trouble. It's what 0:05:40.680 --> 0:05:43.640 you know for certain that just ain't true. And so 0:05:44.520 --> 0:05:49.280 you can have opinions, but you should never be certain 0:05:49.440 --> 0:05:53.400 that you're right, and you should never arrange your financial 0:05:53.400 --> 0:05:57.599 affairs on the assumption that your forecast is right, because 0:05:57.640 --> 0:06:02.440 it can be right intellectually or factually irrationally, but just 0:06:02.560 --> 0:06:05.920 take a long time to materialize. And if you can't 0:06:05.960 --> 0:06:10.440 survive between when you take your position and when it 0:06:10.880 --> 0:06:15.760 when your expectation comes true, then obviously it's not something 0:06:15.760 --> 0:06:18.679 you should do. And one of my colleagues once wrote 0:06:18.680 --> 0:06:20.400 a note to his clients. He says, if you name 0:06:20.440 --> 0:06:22.480 a price, don't name a date. And if you name 0:06:22.480 --> 0:06:23.679 a date, don't name a price. 0:06:24.360 --> 0:06:26.320 That's anybody advice or journalist too. 0:06:26.800 --> 0:06:30.200 But anybody who names a price and a date is 0:06:30.400 --> 0:06:33.800 probably going to get carried out of there sooner or later. 0:06:35.440 --> 0:06:38.000 So what was it like then when you hit the 0:06:38.240 --> 0:06:41.240 published button on the note? I think it was called 0:06:41.279 --> 0:06:45.040 bubble dot com and you published it. I think it 0:06:45.080 --> 0:06:48.800 was right at the start of January first. Still, what 0:06:48.920 --> 0:06:51.000 was it, Yeah. 0:06:50.880 --> 0:06:53.320 January, It was January second, two thousand. It was the 0:06:53.360 --> 0:06:55.120 first business day of two thousand. 0:06:54.960 --> 0:06:57.360 And then start later that month. 0:06:57.200 --> 0:06:59.960 Right, yeah, No, I think a little later that year. 0:07:00.240 --> 0:07:02.960 Joe said it was in March. I don't remember exactly. 0:07:03.000 --> 0:07:04.360 I thought it was a little later than that. But 0:07:05.480 --> 0:07:08.080 you know, i'd started writing these memos in nineteen ninety 0:07:08.320 --> 0:07:10.240 I've been writing for ten years. Of course, in those 0:07:10.320 --> 0:07:13.560 days they went out in the mail and to a 0:07:13.600 --> 0:07:17.520 limited audience, just my clients, and you know, for ten 0:07:17.600 --> 0:07:20.280 years I never had a response. And then I spent 0:07:20.880 --> 0:07:24.200 the fall of ninety nine working on this memo bubble 0:07:24.200 --> 0:07:27.560 dot com and was ready to push the button. I 0:07:27.600 --> 0:07:30.720 guess I polished it over Christmas probably and sent it 0:07:30.760 --> 0:07:33.720 out the first day. And you know, let me just 0:07:33.840 --> 0:07:36.760 clarify one thing for the record and for the benefit 0:07:36.800 --> 0:07:40.240 of the listeners. If you read that memo, it does 0:07:40.280 --> 0:07:45.280 not predict the bubble, and it does not say you know, 0:07:45.480 --> 0:07:50.320 the market's going to collapse. All it did is describe 0:07:50.360 --> 0:07:56.000 the current conditions. And that's two different things. Now. I 0:07:56.080 --> 0:08:01.960 don't make predictions. I only describe current conditions. And my 0:08:02.080 --> 0:08:04.880 motto is we never know where we're going, but we're 0:08:04.920 --> 0:08:07.440 sure as help or to know where we are. And 0:08:07.520 --> 0:08:10.240 I believe, you know, this is a little bit of 0:08:10.280 --> 0:08:13.400 a matter of semantics. I believe that where we are, 0:08:13.760 --> 0:08:19.040 if we properly assess it, informs where we're going. But 0:08:20.280 --> 0:08:24.760 I think people who waste their time figuring out making predictions, 0:08:25.120 --> 0:08:30.200 which I'm strongly against, are wasting their time. I think 0:08:30.240 --> 0:08:36.160 that describing current conditions can be done accurately and obviously 0:08:36.200 --> 0:08:41.520 has an impact on what the future holds. So as 0:08:41.559 --> 0:08:45.920 I say, read the memo, I think it reads well 0:08:46.000 --> 0:08:49.880 in retrospect, but don't expect to find a place where 0:08:49.880 --> 0:08:51.840 I say, get out of the market or the market's 0:08:51.840 --> 0:08:54.000 going to collapse or there or in a bubble that's 0:08:54.160 --> 0:08:56.640 going to pop. What I say there is I just 0:08:56.720 --> 0:09:01.200 want to call your attention to all these forms of 0:09:01.920 --> 0:09:06.960 excessive or overheated behavior and let you know what I 0:09:07.000 --> 0:09:09.400 think is going on. That's all it says. 0:09:09.760 --> 0:09:13.400 So in the art of just identifying where we are, 0:09:13.440 --> 0:09:16.520 and when we're talking about financial markets, obviously we can 0:09:16.600 --> 0:09:20.720 use all kinds of ratios, etc. You know, price to earnings, 0:09:20.720 --> 0:09:23.880 price to forward earnings valuations, a million different ratios that 0:09:23.920 --> 0:09:26.319 you can come up with. And then you know there 0:09:26.320 --> 0:09:30.280 are sort of cultural markers. And I remember in summer 0:09:30.520 --> 0:09:33.240 ninety nine, I would get lunch every day at the 0:09:33.280 --> 0:09:36.760 same pizza shop with the pizza shop owner head CNBC 0:09:36.920 --> 0:09:39.600 on and he was trading tech stocs at the time, 0:09:39.640 --> 0:09:43.280 and these other sort of indicators that people are just 0:09:43.480 --> 0:09:46.880 excited about the prospect of making money and making money fast. 0:09:47.240 --> 0:09:49.760 And when you do an assessment and you say, okay, 0:09:50.080 --> 0:09:52.320 here's where we are, how much do you sort of 0:09:52.400 --> 0:09:55.960 hew strictly to the math, so to speak, and how 0:09:56.000 --> 0:10:01.640 do you systematically incorporate other indicators of exuberant which perhaps 0:10:01.640 --> 0:10:05.559 can't always be captured on a Bloomberg terminal for example. 0:10:06.440 --> 0:10:10.240 No, look, I think you're absolutely on the right track, Joe. 0:10:10.720 --> 0:10:14.400 You read the memo. My observations are, I would say 0:10:14.480 --> 0:10:19.120 ninety nine percent what you call cultural markers, which I 0:10:19.120 --> 0:10:24.000 think is great, or behavioral indicators, and one percent math. 0:10:24.559 --> 0:10:29.960 And to me, it's the behavior that is so indicative. 0:10:30.360 --> 0:10:33.920 And in my first book, which is called The Most 0:10:33.920 --> 0:10:37.520 Important Thing, I have something in there called the poor 0:10:37.559 --> 0:10:43.760 Man's Guide to Market Assessment, and it really takes culture, 0:10:45.160 --> 0:10:50.800 mostly cultural markers, and puts them on in two columns 0:10:50.880 --> 0:10:56.400 left and right, and whichever column is prevailing, it tells 0:10:56.400 --> 0:10:59.080 you something. And for example, I say in there that 0:10:59.559 --> 0:11:02.559 if people like me are being invited to cocktail parties 0:11:03.040 --> 0:11:06.240 and are the center of attention and so forth, then 0:11:06.640 --> 0:11:09.679 it probably means that investing is has been doing well 0:11:09.920 --> 0:11:14.000 and everybody's optimistic about it. And it indicates that maybe 0:11:14.160 --> 0:11:17.520 things are too hot, and if people like me are shut, 0:11:17.960 --> 0:11:22.079 not invited, or shunt it off to the corner, maybe 0:11:22.200 --> 0:11:25.520 the markets are too cold, too cheap, and it's time 0:11:25.559 --> 0:11:30.480 to strike. So I think that these behavioral indicators are 0:11:30.520 --> 0:11:34.600 extremely important. And I wrote a memo in I think 0:11:34.640 --> 0:11:38.679 it was the summer of twenty three called taking the Temperature, 0:11:39.200 --> 0:11:42.360 and I describe what I do in this regard as 0:11:42.400 --> 0:11:44.720 taking the temperature of the market to figure out if 0:11:44.760 --> 0:11:47.679 it's hot or cold. And when I was working on 0:11:47.720 --> 0:11:50.640 my second book, which is called Mastering the Market Cycle, 0:11:50.679 --> 0:11:52.880 and I was speaking with my son Andrew, who is 0:11:52.920 --> 0:11:55.640 a venture capitalist, I said to him, you know, I 0:11:55.679 --> 0:11:57.719 think my forecasts over the course of my career have 0:11:57.800 --> 0:12:01.720 been about right. And he says to me, yeah, that's 0:12:01.760 --> 0:12:05.240 because you did it five times in fifty years. Five 0:12:05.320 --> 0:12:09.440 times in fifty years, I found the market either so 0:12:09.640 --> 0:12:14.000 crazy high or crazy low that you could make a 0:12:14.040 --> 0:12:19.800 logical case that was either overextended or too cheap, and 0:12:20.280 --> 0:12:22.520 you could do so with a high degree of confidence. 0:12:23.360 --> 0:12:26.760 And I recount the five times I did it and why. 0:12:27.400 --> 0:12:29.680 But you know, if I had tried to do it 0:12:29.720 --> 0:12:32.880 five hundred times or five thousand times in my career, 0:12:33.080 --> 0:12:34.880 I mean I've probably been in an investment business for 0:12:34.920 --> 0:12:38.000 about almost twenty thousand days. If I tried to do 0:12:38.080 --> 0:12:43.000 it five thousand times every fourth day, you know, I'd 0:12:43.040 --> 0:12:47.840 probably be fifty to fifty at best. So to me, 0:12:48.559 --> 0:12:55.800 it's noting extremes of behavior. And that's what I was 0:12:55.840 --> 0:12:58.360 doing with bubble dot com. And that's what I did 0:12:58.400 --> 0:13:13.840 in the five other observations. 0:13:17.280 --> 0:13:22.640 So you've emphasized that you're describing current conditions, not necessarily 0:13:22.800 --> 0:13:29.480 making predictions. I'm curious how you translate those, you know, 0:13:29.679 --> 0:13:36.200 let's say, accurate assessments of the current environment into actionable 0:13:36.920 --> 0:13:40.120 investments or I guess another way of asking this is, 0:13:40.200 --> 0:13:43.880 you know, if you're looking at stocks and thinking they're 0:13:43.920 --> 0:13:48.280 overvalued or there might be signs of overvaluation, how does 0:13:48.320 --> 0:13:51.480 that translate into the credit space? 0:13:52.360 --> 0:14:01.360 Good question, Tracy. To me, the main access along which 0:14:01.559 --> 0:14:08.520 one establishes one's behavior as an investor is the access 0:14:08.520 --> 0:14:14.360 that runs from aggressive to defensive. Each of us should 0:14:14.360 --> 0:14:19.480 figure out based on our personal conditions, our wealth, our income, 0:14:19.560 --> 0:14:25.600 our needs are dependents, our age plans, et cetera, and 0:14:25.720 --> 0:14:29.880 also ability to withstand fluctuations. Each of us should figure 0:14:29.880 --> 0:14:33.360 out what our normal risk posture should be. Normally, should 0:14:33.360 --> 0:14:36.160 I be a low risk person normal or a high 0:14:36.240 --> 0:14:42.680 risk person? And then you should build the portfolio that 0:14:43.360 --> 0:14:49.280 responds to that decision. But then you might try to 0:14:49.440 --> 0:14:53.360 vary your position from time to time as conditions in 0:14:53.400 --> 0:14:57.000 the markets change. And I believe that as I said 0:14:57.040 --> 0:15:01.360 that the main access along which one should should think 0:15:01.360 --> 0:15:07.600 about varying one's position is between offense and defense. So 0:15:08.000 --> 0:15:10.920 you know, you establish a position which is your normal position, 0:15:10.960 --> 0:15:13.080 which has a certain amount of aggressiveness, is a certain 0:15:13.120 --> 0:15:16.240 amount of defensiveness. But then are there times when you 0:15:16.240 --> 0:15:19.000 should become more aggressive and are times when you should 0:15:19.000 --> 0:15:21.720 become more defensive. And that's what I did on those 0:15:21.720 --> 0:15:25.720 five occasions. And I'll give you an example. And by 0:15:25.760 --> 0:15:28.640 the way, these are all described in Taking the Temperature. 0:15:29.200 --> 0:15:33.120 And I've mentioned or you've mentioned the memos from time 0:15:33.160 --> 0:15:35.480 to time, and I just want to note for the 0:15:35.760 --> 0:15:40.480 listeners that they're all available at Oaktreecapital dot com under 0:15:40.520 --> 0:15:43.600 the heading of Insights. There's thirty five years at worth 0:15:43.640 --> 0:15:47.520 of memos. There about two hundred and there's no price 0:15:47.560 --> 0:15:50.080 of admission. They're all free and anybody wants to sign 0:15:50.160 --> 0:15:53.160 up for a subscription can do so. But you know, 0:15:53.360 --> 0:15:56.720 in Taking the Temperature, I described the way in nine 0:15:56.760 --> 0:16:01.760 in five oh six, I was getting really leary of 0:16:01.800 --> 0:16:07.520 the markets. What was my indicator, my indicator, or as 0:16:07.600 --> 0:16:13.040 Joe would say, my cultural marker. My indicator was that 0:16:13.120 --> 0:16:16.320 I'm reading in the in the paper about new deals 0:16:16.320 --> 0:16:21.360 that are getting done, and the deals were crazy deals, 0:16:22.280 --> 0:16:26.120 deals that in my opinion, should not get done. They 0:16:26.120 --> 0:16:29.920 were too good for the issuer and in my opinion, 0:16:29.960 --> 0:16:33.960 too bad for the investor. And the deals were getting 0:16:33.960 --> 0:16:38.400 done anyway. And you know, one of the investor's main 0:16:38.520 --> 0:16:45.880 jobs is to decline to engage in stupid deals. And 0:16:46.280 --> 0:16:48.440 you know, if somebody comes and says, you know, I'm 0:16:48.480 --> 0:16:50.680 going to sell you a gold mine and if you 0:16:50.720 --> 0:16:53.240 can put up a million dollars, you're going to make 0:16:53.480 --> 0:16:55.960 one hundred thousand dollars a month for the rest of 0:16:56.000 --> 0:16:58.960 your life. Your job is to say no, that's too 0:16:59.000 --> 0:17:03.400 good to be true. Or you know, if I say, 0:17:03.600 --> 0:17:06.680 I think there's a gold mine in Australia and if 0:17:06.680 --> 0:17:09.000 you put up a million dollars, it'll probably give you 0:17:10.080 --> 0:17:11.960 tay you a million dollars a year the rest of 0:17:12.000 --> 0:17:14.159 your life. If we find gold, you should say no, 0:17:14.280 --> 0:17:16.679 that sounds too risky. You know, I just think that 0:17:17.160 --> 0:17:21.359 we're unlikely to find gold. But if you see those 0:17:21.400 --> 0:17:25.439 deals getting done, it tells you that investors are not 0:17:25.560 --> 0:17:31.760 applying vigilance. They're not doing their job of resisting deals 0:17:31.760 --> 0:17:35.080 that are too risky or structured not in their favor, 0:17:36.440 --> 0:17:39.439 and in five oh six, I was seeing these deals 0:17:39.440 --> 0:17:43.600 done that made absolutely no sense. And I describe myself 0:17:43.640 --> 0:17:47.560 as wearing out the carpet between my office and my partner, 0:17:47.600 --> 0:17:49.919 Bruce carsh And you know, every day I would go 0:17:49.960 --> 0:17:51.919 and say, look at this piece of crap that you 0:17:51.920 --> 0:17:55.320 got issued yesterday. A deal like this shouldn't get done, 0:17:55.480 --> 0:17:58.560 and if a deal like this can get done, there's 0:17:58.600 --> 0:18:02.800 something wrong. Ninety nine percent of my observation at that 0:18:02.880 --> 0:18:11.199 time that investors were not being suitably skeptical, cautious, demanding, 0:18:12.480 --> 0:18:16.359 and risk averse. And you know, Buffett has a great 0:18:16.400 --> 0:18:19.440 saying which feeds right into this. He says, the less 0:18:19.480 --> 0:18:23.439 prudence with which others conduct their affairs, the greater the 0:18:23.440 --> 0:18:27.399 prudence with which we must conduct our own affairs. And 0:18:27.440 --> 0:18:31.919 when others are wacky, we should head to the sidelines. 0:18:32.960 --> 0:18:37.880 That was the foundation of that conclusion. Now what happened 0:18:38.320 --> 0:18:40.719 was it turned out we were in a housing bubble, 0:18:41.160 --> 0:18:43.919 and the housing bubble gave rise to a mortgage bubble, 0:18:44.359 --> 0:18:49.160 and the mortgages, the subprime mortgages issued to people who 0:18:49.600 --> 0:18:52.160 could not or would not document their income of their 0:18:52.200 --> 0:18:56.879 assets were packaged into mortgage backed securities, and the people 0:18:56.880 --> 0:19:00.879 who bought the riskier tranches of those securities, lost all 0:19:00.880 --> 0:19:05.040 their money, which the rating agencies rated very highly, because 0:19:05.040 --> 0:19:08.680 they didn't understand it. And this was going on en mass, 0:19:09.040 --> 0:19:11.320 and it was the collapse of the mortgage backed securities, 0:19:11.600 --> 0:19:15.560 of which the banks had in many cases retained the 0:19:15.640 --> 0:19:19.520 risky portions when they structured them. It was the collapse 0:19:19.560 --> 0:19:23.760 that took you know, bear Stearns and Merrill Lynch and 0:19:24.240 --> 0:19:29.720 Lehman Brothers and other AIG, etc. Out of business as 0:19:29.840 --> 0:19:34.000 independent endings. I hastened to point out I didn't know 0:19:34.040 --> 0:19:38.760 anything about mortgage backed securities. I didn't understand subprime. I 0:19:38.800 --> 0:19:40.679 didn't know what was going on. It was going on 0:19:40.760 --> 0:19:44.720 in a distant corner of the investment world which I 0:19:44.840 --> 0:19:48.520 was not in on. I just knew that the climate 0:19:49.160 --> 0:19:55.560 was too permissive and the mortgage backed developments were a 0:19:55.680 --> 0:20:00.320 manifestation of that. But your question, I always try to 0:20:00.359 --> 0:20:03.240 come back to the question. Your question was what do 0:20:03.280 --> 0:20:08.639 you do about? So what did we do? We sold 0:20:09.040 --> 0:20:13.439 most of our real estate holdings, We reduced holdings in 0:20:13.520 --> 0:20:20.640 many areas. We liquidated holdings in large funds, our opportunistic 0:20:20.680 --> 0:20:27.399 debt funds that we had formed in two four ET cetera. 0:20:27.880 --> 0:20:33.159 We sold those holdings. We raised either small funds or 0:20:33.200 --> 0:20:40.159 no funds, and we waited for this behavior to produce opportunities. 0:20:40.440 --> 0:20:46.720 After it passed. On the first day of seven, Bruce 0:20:46.760 --> 0:20:49.960 and I sent the memo to our clients saying we'd 0:20:50.000 --> 0:20:52.720 like to have three and a half billion dollars for 0:20:52.920 --> 0:20:56.879 distress debt fund. The largest distress fund in history had 0:20:56.920 --> 0:21:02.159 been two billion. It was our one fund. We wanted 0:21:02.200 --> 0:21:04.440 three and a half because we thought there was something 0:21:04.480 --> 0:21:08.600 big coming, and within a month we had eight billion. 0:21:09.480 --> 0:21:12.600 We went to our investors, we said we can't use 0:21:12.600 --> 0:21:14.840 eight billion, we'll take three and a half. We closed 0:21:14.840 --> 0:21:19.160 that fund in March of seven, but we said we'd 0:21:19.240 --> 0:21:21.600 like to have the rest of your appetite for a 0:21:21.640 --> 0:21:26.119 stand by fund, and we continued for a year to 0:21:26.200 --> 0:21:29.640 raise a stand by fund again in an area where 0:21:29.640 --> 0:21:31.720 the biggest fund in history was two billion. We raised 0:21:31.720 --> 0:21:36.479 eleven billion and that was our fund seven B and 0:21:36.520 --> 0:21:39.360 we put it on the shelf and we said this 0:21:39.400 --> 0:21:42.880 is for when the stuff hits the fan, and we're 0:21:42.880 --> 0:21:45.280 not going to invest it until that time, and we're 0:21:45.280 --> 0:21:48.840 not going to charge any fees, and it's just commitments 0:21:48.840 --> 0:21:50.760 on the shelf. Because we'd like to have capital we 0:21:50.760 --> 0:21:57.080 can draw. And when Lehman went bankrupt on September fifteenth 0:21:57.119 --> 0:22:02.120 of eight, we had that eleven billion dollars. We had 0:22:02.119 --> 0:22:05.359 only invested about ten one billion. We had ten billion 0:22:05.800 --> 0:22:09.000 that we could call on, and so unlike most people, 0:22:09.040 --> 0:22:10.719 we didn't have to worry about where are we going 0:22:10.760 --> 0:22:16.280 to get money, or can we invest or our client's 0:22:16.320 --> 0:22:19.720 going to withdraw their money. Rather than we had commitments, 0:22:19.760 --> 0:22:23.160 we were sure we could draw and so we could 0:22:23.800 --> 0:22:29.600 plunge in and we started to invest Bruce. Bruce does 0:22:29.600 --> 0:22:32.879 the investing, and we developed our position jointly and we 0:22:33.040 --> 0:22:37.040 decided to get down to work. So the next week 0:22:37.560 --> 0:22:42.160 after the Lehman bankruptcy was Friday fifteenth. We started investing 0:22:42.240 --> 0:22:46.240 and he invested for that fund a loan four hundred 0:22:46.240 --> 0:22:48.240 and fifty million dollars a week on average for the 0:22:48.280 --> 0:22:52.960 next fifteen weeks, that seven billion in one quarter. Remember 0:22:53.040 --> 0:22:54.960 in an area where the biggest fund in history was 0:22:55.000 --> 0:23:00.520 two billions. Why because we had prepared mentally, we had 0:23:00.600 --> 0:23:08.520 noted the bad climate. We had prepared for a denoument, 0:23:09.480 --> 0:23:15.800 and we swung into action when it arrived. And I 0:23:15.840 --> 0:23:18.160 was very proud of him for taking that position, and 0:23:18.320 --> 0:23:21.040 people on the street have told me that in that 0:23:21.160 --> 0:23:24.639 quarter we were the only buyer. Well, that's how you 0:23:24.680 --> 0:23:27.600 get good deals. If you can buy where nobody else 0:23:27.680 --> 0:23:30.000 is buying, you get your pick of the litter at 0:23:30.040 --> 0:23:34.000 low prices. So that's I just gave you a four 0:23:34.080 --> 0:23:37.679 or five year I guess four year description of a process. 0:23:38.040 --> 0:23:42.160 But man, you have to be patient because in five 0:23:42.160 --> 0:23:45.480 to six we were doing nothing, just selling, and we 0:23:45.480 --> 0:23:49.639 were not rewarded in five or six for that behavior. 0:23:50.080 --> 0:23:54.280 The reward came at the end of eight. But you know, 0:23:54.560 --> 0:23:57.879 I think it's not everybody's in a position to apply 0:23:58.000 --> 0:24:01.680 that process to that extent, but I think it describes 0:24:01.720 --> 0:24:03.840 the process, and of course I use it as an 0:24:03.880 --> 0:24:07.000 example for one simple reason. It was successful. 0:24:08.359 --> 0:24:11.159 Always a good always a good outcome when you have 0:24:11.240 --> 0:24:15.159 a success from it. Obviously, fantastic story your latest memo 0:24:15.440 --> 0:24:17.960 which inspired us to reach out and want to chat 0:24:18.000 --> 0:24:20.800 with you on Bubble Watch, And as you mentioned, is 0:24:20.840 --> 0:24:24.119 the twenty fifth anniversary of the bubble dot com memo, 0:24:24.200 --> 0:24:27.720 and so twenty five year anniversaries are just probably a 0:24:27.760 --> 0:24:30.040 good time to go back. But on the other hand, 0:24:30.480 --> 0:24:34.080 there is also this moment that we alluded to in 0:24:34.119 --> 0:24:37.760 the intro of incredible enthusiasm really for like a handful 0:24:37.800 --> 0:24:42.800 of tech ai related names that's lifting the entire market up. 0:24:43.440 --> 0:24:45.080 Is this one of the moments? I mean, what is 0:24:45.080 --> 0:24:47.879 the temperature right now as you see it? You've mentioned 0:24:47.880 --> 0:24:51.119 you've had five moments sort of maybe five calls in 0:24:51.160 --> 0:24:53.280 your career. Is this a sixth right now? 0:24:54.800 --> 0:24:59.960 No, it's not okay because you asked before. Behavioral or numerical. 0:25:00.400 --> 0:25:04.520 The main observations today are numerical. The peaking ratio on 0:25:04.600 --> 0:25:08.280 the S and P five hundred is elevated relative to 0:25:08.640 --> 0:25:13.880 historic norms, and the so called Magnificent seven, the biggest 0:25:13.920 --> 0:25:18.280 companies in the S and P dominate its behavior. Are 0:25:19.240 --> 0:25:23.760 you going up or have been going up rapidly? And 0:25:24.320 --> 0:25:29.080 they're hot stocks, And when you see one group perform 0:25:29.160 --> 0:25:31.280 especially well, you have to ask whether it's a bubble. 0:25:31.359 --> 0:25:34.800 And the S and P, of course, has gone up 0:25:35.000 --> 0:25:38.200 more than twenty percent a year for the last two years, 0:25:38.560 --> 0:25:42.240 and it's only the I think the fifth time according 0:25:42.280 --> 0:25:45.560 to JP Morgan, the fifth time in history. So you 0:25:45.680 --> 0:25:50.840 have to ask these questions. But the troubling aspects those 0:25:52.119 --> 0:25:56.680 are numerical and what I say in the memo is that, 0:25:57.080 --> 0:26:03.439 in my opinion, it lacks the behavioral aspects. 0:26:02.880 --> 0:26:03.520