1 00:00:00,160 --> 00:00:02,360 Speaker 1: Masters in Business is brought to you by the American 2 00:00:02,440 --> 00:00:07,200 Speaker 1: Arbitration Association. Business disputes are inevitable, resolve faster with the 3 00:00:07,200 --> 00:00:12,280 Speaker 1: American Arbitration Association, the global leader in alternative dispute resolution 4 00:00:12,360 --> 00:00:15,800 Speaker 1: for over ninety years. Learn more at a d R 5 00:00:16,200 --> 00:00:22,560 Speaker 1: dot org. This is Masters in Business with Barry Ridholts 6 00:00:22,600 --> 00:00:26,920 Speaker 1: on Bloomberg Radio. This week on the podcast, I have 7 00:00:27,440 --> 00:00:30,560 Speaker 1: the one and only Howard Marks of oak Tree Capital. 8 00:00:31,320 --> 00:00:36,320 Speaker 1: Dear Lord, this was a master class in everything from 9 00:00:36,360 --> 00:00:42,479 Speaker 1: investing to valuation two cycles to managing your own emotions. 10 00:00:44,080 --> 00:00:47,320 Speaker 1: This is one of those podcasts that I guarantee you 11 00:00:47,360 --> 00:00:51,839 Speaker 1: will listen to two or three or four times. My 12 00:00:52,000 --> 00:00:55,000 Speaker 1: job was to just push Howard a little bit in 13 00:00:55,040 --> 00:00:58,040 Speaker 1: one direction and then stay the hell out of his way. 14 00:00:58,680 --> 00:01:05,280 Speaker 1: He is so experienced, knowledgeable, smart, insightful, full of wisdom, 15 00:01:05,400 --> 00:01:08,880 Speaker 1: charming and and he also has a bit of a 16 00:01:08,920 --> 00:01:11,759 Speaker 1: devilish sense of humor, which I don't know if you'll 17 00:01:11,840 --> 00:01:16,840 Speaker 1: hear it. But the things we discussed um off camera, 18 00:01:16,880 --> 00:01:21,120 Speaker 1: so to speak. I just find his his insights and 19 00:01:21,240 --> 00:01:25,360 Speaker 1: his perspective delightful. I I could go on at great 20 00:01:25,440 --> 00:01:29,440 Speaker 1: length of all the things we discussed. I won't. I'm 21 00:01:29,520 --> 00:01:33,400 Speaker 1: just gonna say, with no further ado, my ninety minutes 22 00:01:33,560 --> 00:01:39,840 Speaker 1: with Howard Marks. This is Masters in Business with Barry 23 00:01:39,920 --> 00:01:45,959 Speaker 1: Ridholtz on Boomberg Radio. My special guest today is Howard Marks. 24 00:01:46,520 --> 00:01:51,200 Speaker 1: He is the co founder and chairman, co chairman, co 25 00:01:51,360 --> 00:01:55,400 Speaker 1: chairman of oak Tree Capital Management, and he has a 26 00:01:55,600 --> 00:02:01,120 Speaker 1: long and storied history on Wall Street. Rather than go 27 00:02:01,280 --> 00:02:05,480 Speaker 1: through all of the details, will discuss it as we 28 00:02:05,600 --> 00:02:08,240 Speaker 1: as we get to it. I am compelled to mention 29 00:02:08,320 --> 00:02:16,280 Speaker 1: that oak Trees seventeen distress debt funds have averaged after 30 00:02:16,480 --> 00:02:21,040 Speaker 1: fees for the past twenty two years, far outpacing it's 31 00:02:21,120 --> 00:02:23,720 Speaker 1: their peers. That's about as much of an intro as 32 00:02:23,760 --> 00:02:26,600 Speaker 1: I think we really need. Let's jump right into this. 33 00:02:27,080 --> 00:02:32,520 Speaker 1: I find your history really fascinating. You minored in Japanese studies. 34 00:02:33,200 --> 00:02:36,320 Speaker 1: Ever plan on doing something besides finance? I never did. 35 00:02:36,480 --> 00:02:40,720 Speaker 1: I was a Wharton kid. But at those days, in 36 00:02:40,800 --> 00:02:42,880 Speaker 1: the mid sixties, you were required to have a non 37 00:02:42,919 --> 00:02:46,080 Speaker 1: business minor and also to have one semester of the 38 00:02:46,120 --> 00:02:49,079 Speaker 1: literature of a foreign country. Most people took English or 39 00:02:49,120 --> 00:02:52,680 Speaker 1: French for some reason. I have no recollection of I 40 00:02:52,720 --> 00:02:55,720 Speaker 1: took Japanese and I loved it, and so I turned 41 00:02:55,760 --> 00:02:59,040 Speaker 1: that into my minor, and I took fifteen credits in 42 00:02:59,120 --> 00:03:02,960 Speaker 1: the You would uh what was then called the Oriental 43 00:03:02,960 --> 00:03:06,480 Speaker 1: Studies Department, and and you had always wanted to go 44 00:03:06,520 --> 00:03:09,799 Speaker 1: into finance, and I think that's reflected you ended up 45 00:03:10,160 --> 00:03:14,160 Speaker 1: graduating from Wharton with a major in finance an MBA 46 00:03:14,320 --> 00:03:17,359 Speaker 1: from University of Chicago, and then you move over as 47 00:03:17,360 --> 00:03:20,840 Speaker 1: an equity analyst at City Corps. Eventually you become the 48 00:03:20,919 --> 00:03:24,640 Speaker 1: director of research there. Before you find your way to 49 00:03:24,680 --> 00:03:28,200 Speaker 1: the Trust Company of the West and there you end 50 00:03:28,280 --> 00:03:32,640 Speaker 1: up focusing on distress that high yield bonds and convertible securities, 51 00:03:33,000 --> 00:03:35,960 Speaker 1: before you became their c i O for fixed income. 52 00:03:36,240 --> 00:03:40,520 Speaker 1: How do you transition from equity analysts to fixed income analysts? 53 00:03:41,960 --> 00:03:46,880 Speaker 1: It was a real life story, not a dream story. Um, 54 00:03:46,960 --> 00:03:49,560 Speaker 1: as you say, I was director of research for equities 55 00:03:49,560 --> 00:03:52,760 Speaker 1: from seventy five seventy eight. The bank was what was 56 00:03:52,800 --> 00:03:55,600 Speaker 1: called the nifty fifty investor. We've invested in the fifty 57 00:03:55,880 --> 00:03:58,680 Speaker 1: best and fastest growing companies in America. And it was 58 00:03:58,720 --> 00:04:02,360 Speaker 1: a disaster because the official dictum was it didn't matter 59 00:04:02,400 --> 00:04:04,960 Speaker 1: what price you paid. The prices paid were highly excessive. 60 00:04:05,000 --> 00:04:09,240 Speaker 1: That corrected in the seventies. The the investor in these 61 00:04:09,280 --> 00:04:14,080 Speaker 1: great companies probably lost eight of his money, haven't Haven't 62 00:04:14,120 --> 00:04:17,360 Speaker 1: we heard that expression it doesn't matter what price you pay, 63 00:04:17,440 --> 00:04:20,080 Speaker 1: you just have to own this. Well, we do hear that, 64 00:04:20,160 --> 00:04:22,799 Speaker 1: And of course that's exactly the wrong thing to say. 65 00:04:23,040 --> 00:04:24,839 Speaker 1: What I say is there no such thing as a 66 00:04:24,880 --> 00:04:27,279 Speaker 1: good idea or a bad idea in the investment world 67 00:04:27,400 --> 00:04:30,480 Speaker 1: without reference to price. It's not what you buy, it's 68 00:04:30,520 --> 00:04:34,360 Speaker 1: what you pay. And finally, investing is not a matter 69 00:04:34,400 --> 00:04:37,080 Speaker 1: of buying good things. It's a matter of buying things 70 00:04:37,080 --> 00:04:40,640 Speaker 1: well and meaning at at the appropriate value. And people 71 00:04:40,760 --> 00:04:44,120 Speaker 1: or less, and people who don't know the difference shouldn't 72 00:04:44,120 --> 00:04:46,640 Speaker 1: be in the business. Well that that seems to be 73 00:04:47,279 --> 00:04:51,279 Speaker 1: an issue that comes up anyway. The bank faltered with 74 00:04:51,360 --> 00:04:53,600 Speaker 1: this fifty fifty. They thought it would be great if 75 00:04:53,600 --> 00:04:56,040 Speaker 1: they had somebody other than me as director of research. 76 00:04:56,839 --> 00:05:02,280 Speaker 1: Uh and Uh. I asked my boss, uh, Peter Vermilier, Uh, 77 00:05:02,320 --> 00:05:04,680 Speaker 1: What's what's next? He said, I'd like you to start 78 00:05:04,720 --> 00:05:07,040 Speaker 1: a convertible bond fund. So I moved over to the 79 00:05:07,480 --> 00:05:10,960 Speaker 1: bond department in May of seventy eight, started the fund 80 00:05:11,040 --> 00:05:15,640 Speaker 1: in August, and in August I got the phone call 81 00:05:15,680 --> 00:05:19,119 Speaker 1: to change my life. My The head of the bond 82 00:05:19,160 --> 00:05:22,200 Speaker 1: department said, there's some guy named Milken or something in 83 00:05:22,279 --> 00:05:25,920 Speaker 1: California and he deals with something called high yield bonds 84 00:05:26,000 --> 00:05:28,360 Speaker 1: and can you figure out what that is? A client 85 00:05:28,480 --> 00:05:30,919 Speaker 1: had had come in and asked for Ohio bond fund 86 00:05:31,279 --> 00:05:33,599 Speaker 1: and they asked me to be the manager and that 87 00:05:33,600 --> 00:05:36,000 Speaker 1: that put me in the right place at the right time. 88 00:05:36,040 --> 00:05:38,880 Speaker 1: So it was a pure luck, just serendipity. You he 89 00:05:38,960 --> 00:05:41,240 Speaker 1: hasn't invest you in this client, and I'd come in 90 00:05:41,279 --> 00:05:43,360 Speaker 1: with that is my only contribution. Barriers that I was 91 00:05:43,400 --> 00:05:47,159 Speaker 1: smart enough to say, yes, I'm gonna I'm gonna challenge 92 00:05:47,160 --> 00:05:50,640 Speaker 1: you on that a little later. So that leads to 93 00:05:50,680 --> 00:05:55,880 Speaker 1: an interesting question, how did your experience with both being 94 00:05:56,120 --> 00:06:00,719 Speaker 1: an equity analyst and the obvious problems with buy it 95 00:06:00,760 --> 00:06:03,640 Speaker 1: at any price in the how did that affect your 96 00:06:03,680 --> 00:06:08,560 Speaker 1: approach to either high yield or subsequently distressed assets. Well, 97 00:06:08,560 --> 00:06:12,000 Speaker 1: what I would say is number one, you learn nothing 98 00:06:12,080 --> 00:06:16,920 Speaker 1: from success. You only learned from failure. You learn from experience. 99 00:06:17,240 --> 00:06:19,359 Speaker 1: Experience is what you got when you didn't get what 100 00:06:19,400 --> 00:06:23,320 Speaker 1: you wanted. And so so the experience of buying top 101 00:06:23,360 --> 00:06:31,080 Speaker 1: quality assets and losing was very instructive, and it, as 102 00:06:31,120 --> 00:06:33,599 Speaker 1: I say, it convinced me that the key is the 103 00:06:33,600 --> 00:06:36,680 Speaker 1: price you pay. Any there's no asset which is so 104 00:06:36,760 --> 00:06:39,800 Speaker 1: good that it can't be overpriced. There are few assets 105 00:06:39,800 --> 00:06:42,320 Speaker 1: which are so bad that they can't be underpriced. So 106 00:06:42,360 --> 00:06:45,000 Speaker 1: when I switched into the HYO bond field that everybody 107 00:06:45,040 --> 00:06:50,880 Speaker 1: thought was disreputable and unseemly and non fiduciary, and they 108 00:06:50,920 --> 00:06:54,120 Speaker 1: called the junk you know, and I said, well, maybe 109 00:06:54,320 --> 00:06:57,480 Speaker 1: maybe if it's so disparaged, maybe you can find a bargain. 110 00:06:58,080 --> 00:07:02,680 Speaker 1: And in fact that was the case. The common thread 111 00:07:02,720 --> 00:07:05,440 Speaker 1: between working in equities and working in high yield bonds 112 00:07:05,480 --> 00:07:10,120 Speaker 1: or distress is that in most of the fixed income world, 113 00:07:11,200 --> 00:07:13,600 Speaker 1: high grade fixed income treasuries and that kind of thing, 114 00:07:13,880 --> 00:07:16,320 Speaker 1: the only thing that matters is the direction of interest rates. 115 00:07:16,640 --> 00:07:21,480 Speaker 1: Interest rates up, price down, because everybody assumes there's no 116 00:07:21,520 --> 00:07:24,520 Speaker 1: credit risk. When you get down into hyel bonds and 117 00:07:24,560 --> 00:07:28,080 Speaker 1: distress debt, there is credit risk. I describe it as 118 00:07:28,120 --> 00:07:31,360 Speaker 1: fixed income where what the company does matters, so you 119 00:07:31,440 --> 00:07:34,760 Speaker 1: had better be able to judge the future of the company, 120 00:07:35,160 --> 00:07:37,560 Speaker 1: just like you do as an equity analyst. So it 121 00:07:37,680 --> 00:07:41,040 Speaker 1: was really the right skill set applied to the right 122 00:07:41,080 --> 00:07:45,040 Speaker 1: asset class. I'm still taken by the phrase experience is 123 00:07:45,080 --> 00:07:47,920 Speaker 1: what you get when you don't get what you want. 124 00:07:47,960 --> 00:07:50,000 Speaker 1: Do do we credit you for that? Or or has 125 00:07:50,040 --> 00:07:53,480 Speaker 1: that been around longer than you? Well, I'm too old 126 00:07:53,560 --> 00:07:57,000 Speaker 1: to remember where I got it, so you may. I'm 127 00:07:57,000 --> 00:07:59,840 Speaker 1: Barry rid Hilts. You're listening to Masters in Business on 128 00:08:00,000 --> 00:08:03,800 Speaker 1: Bloomberg Radio. My special guest today really needs no introduction. 129 00:08:03,920 --> 00:08:07,280 Speaker 1: He is Howard Marks. He is the co chairman and 130 00:08:07,480 --> 00:08:11,240 Speaker 1: co founder of oak Tree Capital, which is now a 131 00:08:11,360 --> 00:08:15,200 Speaker 1: publicly traded company and has done extremely well for its 132 00:08:15,240 --> 00:08:19,720 Speaker 1: long term clients. Let's talk about what you're probably best 133 00:08:19,760 --> 00:08:24,240 Speaker 1: known for, the Chairman Chairman's Men memos, which you put 134 00:08:24,240 --> 00:08:27,800 Speaker 1: out every quarter. And I will quote no lesser an 135 00:08:27,840 --> 00:08:31,800 Speaker 1: authority than Warren Buffett who said, when I see memos 136 00:08:31,840 --> 00:08:34,600 Speaker 1: from Howard Marks in my mail that the first thing 137 00:08:34,640 --> 00:08:38,640 Speaker 1: I opened and read I always learned something new. But 138 00:08:38,640 --> 00:08:41,920 Speaker 1: but that's today, and when you first began these a 139 00:08:41,920 --> 00:08:45,920 Speaker 1: few decades ago, that really wasn't what the response was like. 140 00:08:46,400 --> 00:08:48,880 Speaker 1: Tell us about what happened in the early When did 141 00:08:48,880 --> 00:08:53,520 Speaker 1: the memos begin? I started in I'm not again, I 142 00:08:53,559 --> 00:08:57,480 Speaker 1: don't exactly remember why, um, but I remember the events. 143 00:08:57,679 --> 00:08:59,839 Speaker 1: I went to the Midwest. I met with the head 144 00:08:59,840 --> 00:09:02,599 Speaker 1: of pension funds of General Mills, and he explained to 145 00:09:02,640 --> 00:09:04,920 Speaker 1: me that over the fourteen years he had run the fund, 146 00:09:05,200 --> 00:09:08,079 Speaker 1: he was never above the seven percentile or below the 147 00:09:08,160 --> 00:09:11,800 Speaker 1: forty seven percentile, and as a result solidly in the 148 00:09:11,840 --> 00:09:16,360 Speaker 1: second quartile for fourteen years. The funny math about it 149 00:09:16,360 --> 00:09:17,880 Speaker 1: in our business is if he can do that for 150 00:09:17,920 --> 00:09:20,920 Speaker 1: fourteen years, you end up in the fourth percentile for 151 00:09:21,000 --> 00:09:23,520 Speaker 1: the entire fourteen year period, because most people who do 152 00:09:23,600 --> 00:09:26,560 Speaker 1: well for a while shoot themselves into foot ten or 153 00:09:26,559 --> 00:09:28,840 Speaker 1: bottom tent exactly. So I was very impressed by that. 154 00:09:29,480 --> 00:09:35,720 Speaker 1: And then I came home and h some famous value 155 00:09:35,920 --> 00:09:38,320 Speaker 1: management firm had had a really tough time because they 156 00:09:38,360 --> 00:09:40,440 Speaker 1: were heavy in the banks, and the banks suffered terribly. 157 00:09:40,720 --> 00:09:42,720 Speaker 1: And the president comes out and he says, well, you know, 158 00:09:43,200 --> 00:09:45,120 Speaker 1: of course, if you want to be in the top 159 00:09:45,160 --> 00:09:47,319 Speaker 1: five percent of money managers, you have to be willing 160 00:09:47,320 --> 00:09:50,680 Speaker 1: to be in the bottom five percent. And I said, 161 00:09:50,840 --> 00:09:53,680 Speaker 1: how wrong can you be? I I my clients don't 162 00:09:53,720 --> 00:09:55,960 Speaker 1: care for him in the top five, and they're absolutely 163 00:09:56,000 --> 00:09:57,960 Speaker 1: unwilling to be in the bottom five. I like the 164 00:09:58,000 --> 00:10:01,360 Speaker 1: other approach, where you're to lead just above the middle, 165 00:10:02,080 --> 00:10:04,000 Speaker 1: and that puts you at the top for the long run. 166 00:10:04,320 --> 00:10:07,840 Speaker 1: Second quartile over long periods of time leads to top 167 00:10:07,880 --> 00:10:10,040 Speaker 1: five percent if you never have that terrible year to 168 00:10:10,080 --> 00:10:14,559 Speaker 1: pull you down. So so I published the first memo 169 00:10:14,720 --> 00:10:19,360 Speaker 1: called the Route to Performance. The Road to Perform its 170 00:10:19,400 --> 00:10:23,560 Speaker 1: the route to the route and the interesting question what 171 00:10:23,720 --> 00:10:26,960 Speaker 1: kept me going because as you say, I had, the 172 00:10:27,040 --> 00:10:31,080 Speaker 1: response was thundering. I never had a response. For the 173 00:10:31,080 --> 00:10:34,080 Speaker 1: first ten years, I never had one response. I never 174 00:10:34,160 --> 00:10:36,600 Speaker 1: nobody ever said, good memo, and nobody said I got it, 175 00:10:36,640 --> 00:10:39,120 Speaker 1: and I wrapped the fish in it. I have to 176 00:10:39,280 --> 00:10:43,600 Speaker 1: I have to stop here and emphasize this. This is 177 00:10:44,320 --> 00:10:50,000 Speaker 1: pre Twitter, pre Facebook, pre email. You were literally spending 178 00:10:50,040 --> 00:10:53,720 Speaker 1: time running a memo, printing them out, folding them, addressing envelope, 179 00:10:53,720 --> 00:10:57,040 Speaker 1: stamping them, inserting paper into envelopes, and taking him to 180 00:10:57,640 --> 00:10:59,360 Speaker 1: the They used to have this thing called the mail 181 00:11:00,120 --> 00:11:03,559 Speaker 1: um the post office, and you could mail envelopes that way. 182 00:11:03,720 --> 00:11:06,320 Speaker 1: So you're doing this for a decade and I might 183 00:11:06,360 --> 00:11:08,880 Speaker 1: as well have thrown them in the drain because I 184 00:11:09,000 --> 00:11:12,640 Speaker 1: never heard back nothing. But of course to hear back, 185 00:11:12,960 --> 00:11:15,040 Speaker 1: somebody would have had to either write me a letter 186 00:11:15,200 --> 00:11:17,120 Speaker 1: and put a stamp on it and put it in 187 00:11:17,160 --> 00:11:20,120 Speaker 1: that thing called the post office, or pick up the phone, 188 00:11:20,280 --> 00:11:23,320 Speaker 1: and nobody did. So it's a solid So the question 189 00:11:23,360 --> 00:11:26,679 Speaker 1: that that naturally leads to is you have to be 190 00:11:26,800 --> 00:11:31,679 Speaker 1: very self motivated to express your views if you're sending 191 00:11:31,679 --> 00:11:36,120 Speaker 1: this out to deafening silence. And I I was writing 192 00:11:36,200 --> 00:11:39,439 Speaker 1: about stuff I believed in, and this was it was quarterly. 193 00:11:39,480 --> 00:11:41,319 Speaker 1: Then is that right? No? No, there was only one 194 00:11:41,360 --> 00:11:44,080 Speaker 1: in ninety and one in ninety one, and and uh, 195 00:11:44,240 --> 00:11:45,880 Speaker 1: then it started to pick up a little bit. I 196 00:11:45,920 --> 00:11:49,480 Speaker 1: don't remember. I never did it with the regularity in mind. 197 00:11:49,679 --> 00:11:51,839 Speaker 1: And by the way, during the crisis, I probably did 198 00:11:51,840 --> 00:11:54,760 Speaker 1: ten a year because there was so much to write about. Sure, 199 00:11:55,559 --> 00:11:58,679 Speaker 1: so that that's amazing you kept going and then something 200 00:11:58,880 --> 00:12:01,880 Speaker 1: changed into thousand. On the first day of two thousand, 201 00:12:02,000 --> 00:12:06,600 Speaker 1: I wrote a memo called bubble dot com about the 202 00:12:06,720 --> 00:12:11,160 Speaker 1: possible fragility of the tech bubble. Uh, and that had 203 00:12:11,200 --> 00:12:15,320 Speaker 1: two virtues. Number one, it was right, and number two 204 00:12:15,360 --> 00:12:18,400 Speaker 1: it was right quick. It was timely. So because if 205 00:12:18,400 --> 00:12:20,360 Speaker 1: you're right, but it takes three years to happen, they 206 00:12:20,400 --> 00:12:24,240 Speaker 1: don't remember you. You know, there there's there's there's saying 207 00:12:24,240 --> 00:12:26,920 Speaker 1: in our business. Well, that's right if it was saying 208 00:12:26,920 --> 00:12:28,760 Speaker 1: in our business that being too far ahead of your 209 00:12:28,800 --> 00:12:33,079 Speaker 1: time is indistinguishable from being wrong. But this was right quickly. 210 00:12:33,720 --> 00:12:36,920 Speaker 1: And so I say, I think I said in the 211 00:12:36,960 --> 00:12:40,920 Speaker 1: introduction to my book that that made me after ten years, 212 00:12:40,960 --> 00:12:44,760 Speaker 1: I became an overnight success. And I remember that memo. 213 00:12:46,040 --> 00:12:49,280 Speaker 1: Barrens picked it up in the Wall Street Journal picked it. 214 00:12:49,280 --> 00:12:52,800 Speaker 1: It made the rounds, and it was suddenly that that's 215 00:12:52,840 --> 00:12:55,920 Speaker 1: exactly right, just like Playboy magazine at Summer Camp. Right, 216 00:12:56,240 --> 00:12:59,199 Speaker 1: it made the rounds, to say the least. So so 217 00:12:59,240 --> 00:13:02,200 Speaker 1: you don't recall what motivated you to start it. And 218 00:13:02,280 --> 00:13:07,360 Speaker 1: aside from that dot com memo, what the bubble dot com? 219 00:13:07,400 --> 00:13:10,680 Speaker 1: What other ones really are memorable and stay with you? 220 00:13:11,160 --> 00:13:17,520 Speaker 1: I think two indicate the process for taking advantage of 221 00:13:17,600 --> 00:13:22,000 Speaker 1: extremes of the cycle, and which is very important to me. 222 00:13:22,600 --> 00:13:25,160 Speaker 1: And in March of oh seven, I wrote a memo 223 00:13:25,320 --> 00:13:27,959 Speaker 1: called the Race to the Bottom, which you talked about 224 00:13:27,960 --> 00:13:30,360 Speaker 1: the fact that when investments are in short supply and 225 00:13:30,440 --> 00:13:32,839 Speaker 1: people are in heat to make them, they will bid 226 00:13:34,360 --> 00:13:38,400 Speaker 1: to an extent that that makes them bad investments. And 227 00:13:38,480 --> 00:13:43,240 Speaker 1: then in of course, then we had the crisis. And 228 00:13:43,280 --> 00:13:46,720 Speaker 1: then in mid October eight, which was the depths of 229 00:13:46,760 --> 00:13:52,880 Speaker 1: the crisis, I wrote one called Current Developments um and 230 00:13:52,880 --> 00:13:56,679 Speaker 1: and another, well maybe the better one called the Limits 231 00:13:56,679 --> 00:14:01,400 Speaker 1: to Negativism, in which I said, you know, everybody knows 232 00:14:01,440 --> 00:14:06,160 Speaker 1: that investing requires skepticism. And most of the time skepticism 233 00:14:06,200 --> 00:14:08,960 Speaker 1: consists of saying no, no, no, that's too good to 234 00:14:09,000 --> 00:14:13,440 Speaker 1: be true. But in the depths of a crisis, skepticism 235 00:14:13,559 --> 00:14:17,120 Speaker 1: requires you to say no, that's too bad to be true. 236 00:14:17,679 --> 00:14:20,960 Speaker 1: And people were telling such horror stories and nobody could 237 00:14:21,000 --> 00:14:25,479 Speaker 1: imagine any assumption which could not be exceeded on the downside. 238 00:14:25,800 --> 00:14:28,560 Speaker 1: And I said, hey, people are just being too pessimistics. 239 00:14:28,600 --> 00:14:31,080 Speaker 1: We actually heard people say stocks are going to zero 240 00:14:31,160 --> 00:14:33,600 Speaker 1: well and and the financial world is going to melt down. 241 00:14:34,280 --> 00:14:37,880 Speaker 1: And and you know, most of my I don't think 242 00:14:37,880 --> 00:14:41,320 Speaker 1: these things up in my head, Barry, most of these 243 00:14:41,320 --> 00:14:46,080 Speaker 1: things stem from some experien experience. And so I had 244 00:14:46,120 --> 00:14:48,280 Speaker 1: a meeting with the pension manager was trying to talk 245 00:14:48,360 --> 00:14:53,760 Speaker 1: that pension fund into investing in a levered loan fund 246 00:14:53,840 --> 00:14:58,000 Speaker 1: of fund of loans that was had leverage and the 247 00:14:58,240 --> 00:15:01,960 Speaker 1: levered return on the fund. Seeing loans was in the twenties, 248 00:15:03,360 --> 00:15:06,160 Speaker 1: and he well, not only that, but he said, well 249 00:15:06,160 --> 00:15:09,200 Speaker 1: what about if they are defaults? And every default scenario 250 00:15:09,360 --> 00:15:13,840 Speaker 1: that I assumed, the c I oh said well what 251 00:15:13,880 --> 00:15:16,360 Speaker 1: if it's worse than that? What if it's worse? What 252 00:15:16,440 --> 00:15:19,240 Speaker 1: if it's worse? No, and I and and eventually I 253 00:15:19,360 --> 00:15:21,480 Speaker 1: ended up saying, do you have any equities in your 254 00:15:21,480 --> 00:15:24,160 Speaker 1: pencrofun And the c IO said yes. I said, well, 255 00:15:24,200 --> 00:15:26,200 Speaker 1: then you better run out and sell them, because the 256 00:15:27,200 --> 00:15:31,440 Speaker 1: the environment you're pushing me to assume everything is valueless. 257 00:15:31,720 --> 00:15:33,560 Speaker 1: And so I ran back to my office and I 258 00:15:33,600 --> 00:15:36,520 Speaker 1: wrote this memo, The Limits to Negativism, which says, sometimes 259 00:15:36,520 --> 00:15:38,800 Speaker 1: you've got to say no, it can't be that bad. 260 00:15:38,960 --> 00:15:41,880 Speaker 1: I'm Barry rit Hults. You're listening to Master's in Business 261 00:15:41,960 --> 00:15:46,240 Speaker 1: on Bloomberg Radio. My special guest today is Howard Marks. 262 00:15:46,360 --> 00:15:49,600 Speaker 1: He is the founder and co chairman, co founder really 263 00:15:50,520 --> 00:15:53,400 Speaker 1: of oak Tree Capital Management, which is now a publicly 264 00:15:53,440 --> 00:15:59,400 Speaker 1: traded company specializing in distress debt, convertible securities, a whole 265 00:15:59,480 --> 00:16:03,320 Speaker 1: run of different fixed income related investment. And let's talk 266 00:16:03,320 --> 00:16:07,000 Speaker 1: a little bit about distress debt. I look at the 267 00:16:07,080 --> 00:16:10,680 Speaker 1: high yield market rates now, and there's low as they've 268 00:16:10,760 --> 00:16:14,720 Speaker 1: been since, which is kind of surprising. What is that? 269 00:16:14,840 --> 00:16:17,560 Speaker 1: What should we take from that? Well, Barry, people ask me, 270 00:16:17,720 --> 00:16:20,240 Speaker 1: are we in a high yield bubble? And my answer 271 00:16:20,280 --> 00:16:23,280 Speaker 1: is no, we're in a bond bubble, generally speaking, across 272 00:16:23,280 --> 00:16:25,600 Speaker 1: the board. Does on the board, the central banks have 273 00:16:25,840 --> 00:16:30,840 Speaker 1: pulled the interest rates so low that you know, all 274 00:16:31,000 --> 00:16:35,920 Speaker 1: the the yields on all fixed income instruments are calibrated 275 00:16:36,320 --> 00:16:38,360 Speaker 1: relative to each other. That's why we have what's called 276 00:16:38,360 --> 00:16:41,760 Speaker 1: the yield curve. So if the maturity is longer, the 277 00:16:41,840 --> 00:16:44,040 Speaker 1: yield is higher. If the quality is lower, the yield 278 00:16:44,040 --> 00:16:46,400 Speaker 1: is higher. If the liquidity is lower, the yield is higher. 279 00:16:46,600 --> 00:16:48,360 Speaker 1: But they all start from the base rate. And the 280 00:16:48,400 --> 00:16:52,680 Speaker 1: central banks said back in twenty nine or ten, let's 281 00:16:52,680 --> 00:16:55,640 Speaker 1: make the base rate zero to get this economy going. 282 00:16:56,200 --> 00:17:01,280 Speaker 1: And so the the incremental turn you get for taking 283 00:17:01,320 --> 00:17:04,280 Speaker 1: time risk, credit risk, a liquidity risk is still about 284 00:17:04,320 --> 00:17:07,840 Speaker 1: the same as history. But you were starting from such 285 00:17:07,880 --> 00:17:10,399 Speaker 1: a low rate. So the yield on all bonds is 286 00:17:10,440 --> 00:17:14,240 Speaker 1: extremely low, including high yield bonds. So you reference the 287 00:17:14,280 --> 00:17:17,560 Speaker 1: Fed taking rates to zero. Should they not have done that? 288 00:17:17,640 --> 00:17:20,679 Speaker 1: Should there have been a fiscal policy instead of a 289 00:17:20,720 --> 00:17:24,280 Speaker 1: monetary policy, what what options presented at that time. I 290 00:17:24,320 --> 00:17:26,600 Speaker 1: think it would have been good to have. Well, in fact, 291 00:17:26,640 --> 00:17:30,000 Speaker 1: we we did have some fiscal also, but not much. 292 00:17:30,680 --> 00:17:32,560 Speaker 1: It would have been good to have some of that, 293 00:17:32,760 --> 00:17:36,480 Speaker 1: you know, the uh we had, you know, deficit spending, 294 00:17:36,520 --> 00:17:39,760 Speaker 1: the famous shovel ready projects and that kind of thing, uh, 295 00:17:39,800 --> 00:17:41,320 Speaker 1: you know, would have been a good idea, were a 296 00:17:41,320 --> 00:17:44,439 Speaker 1: good idea. But I think that the the the monetary 297 00:17:44,640 --> 00:17:48,720 Speaker 1: was essential. And I think that you know, basically, you 298 00:17:48,720 --> 00:17:51,959 Speaker 1: can't quibble with with results. We went through the worst 299 00:17:52,000 --> 00:17:56,439 Speaker 1: financial crisis in eighty years, and we pulled out of 300 00:17:56,480 --> 00:18:00,280 Speaker 1: it very quickly, and here we are in and I 301 00:18:00,359 --> 00:18:02,840 Speaker 1: would say for most people it is a distant memory, 302 00:18:03,200 --> 00:18:05,680 Speaker 1: that's true. And especially when you look around the world, 303 00:18:05,720 --> 00:18:09,920 Speaker 1: if it's if you don't like this economy, well don't 304 00:18:09,920 --> 00:18:12,520 Speaker 1: look overseas, because we're by far the cleanest shirt in 305 00:18:12,560 --> 00:18:15,000 Speaker 1: the hamper. So people, that's a good one. So people 306 00:18:15,080 --> 00:18:18,720 Speaker 1: say to me, you know, how do you grade Geitner 307 00:18:18,800 --> 00:18:22,000 Speaker 1: and Banankee and Poulson and company on their handling of 308 00:18:22,040 --> 00:18:26,000 Speaker 1: the crisis? And I said, you know, I don't know 309 00:18:26,040 --> 00:18:28,320 Speaker 1: if I give him an A, but if you mark 310 00:18:28,359 --> 00:18:31,840 Speaker 1: them on a curve, they get an A plus because 311 00:18:32,040 --> 00:18:35,240 Speaker 1: clearly far they did far the best job in the world, 312 00:18:35,640 --> 00:18:38,479 Speaker 1: and we are out of the crisis we had. We 313 00:18:38,560 --> 00:18:43,280 Speaker 1: have had a modest recovery. But you know, there are 314 00:18:43,280 --> 00:18:45,480 Speaker 1: a lot of bad things that could have happened that 315 00:18:45,520 --> 00:18:48,959 Speaker 1: didn't to to money market funds, to commercial paper and 316 00:18:49,000 --> 00:18:52,400 Speaker 1: so forth. And here we are, uh in a very 317 00:18:52,440 --> 00:18:57,600 Speaker 1: healthy environment. So I don't quibble with the people who 318 00:18:57,800 --> 00:18:59,760 Speaker 1: pull us out of the crisis, and in fact, I 319 00:18:59,800 --> 00:19:02,679 Speaker 1: think they did a hell of a good job. I 320 00:19:02,760 --> 00:19:05,040 Speaker 1: would not have liked to have had that job at 321 00:19:05,080 --> 00:19:08,240 Speaker 1: that time. I'll quibble a little bit and saying you 322 00:19:08,280 --> 00:19:12,400 Speaker 1: can give Paulson the A plus, Bernanking Geythner, we're part 323 00:19:12,400 --> 00:19:15,359 Speaker 1: of the team that helped create the crisis, so I 324 00:19:15,400 --> 00:19:17,440 Speaker 1: have to dock them a few points. But but but 325 00:19:18,680 --> 00:19:23,320 Speaker 1: it certainly is Paulson who gets unmitigated credit to say 326 00:19:23,359 --> 00:19:27,439 Speaker 1: the least's let's let's get back to um distress, Debton 327 00:19:27,600 --> 00:19:31,760 Speaker 1: and and the issue you you raise here um about 328 00:19:31,840 --> 00:19:36,520 Speaker 1: us doing fairly well. I noticed that credit spreads are 329 00:19:36,680 --> 00:19:40,200 Speaker 1: the favorite weapon of the perma bear when they when 330 00:19:40,200 --> 00:19:43,680 Speaker 1: they get too tight. The answer as well, investors are 331 00:19:43,680 --> 00:19:45,840 Speaker 1: so complacent and as soon as they start to widen. 332 00:19:46,359 --> 00:19:50,360 Speaker 1: It's okay, here comes the next disaster. What is going 333 00:19:50,400 --> 00:19:52,720 Speaker 1: on with credit spreads? And and why is it used 334 00:19:53,200 --> 00:19:56,600 Speaker 1: as that double edged sword? Well, credit spreads are to 335 00:19:56,680 --> 00:20:01,280 Speaker 1: some extent that indicator of psychology. Uh um. But you know, 336 00:20:02,400 --> 00:20:07,399 Speaker 1: I don't believe in taking uh my instructions from the market. 337 00:20:07,840 --> 00:20:11,080 Speaker 1: I put out a memo about a year ago um 338 00:20:11,359 --> 00:20:13,600 Speaker 1: as a result of a conversation I hear had here 339 00:20:13,600 --> 00:20:16,680 Speaker 1: at Bloomberg where people were you remember, the markets got 340 00:20:16,720 --> 00:20:19,520 Speaker 1: off to a terrible startlaship and everybody was bugging me. 341 00:20:19,880 --> 00:20:21,600 Speaker 1: You know, isn't that a cell signal? If the market 342 00:20:21,640 --> 00:20:25,240 Speaker 1: is holding into a cell signals? Right? So I ran 343 00:20:25,359 --> 00:20:27,760 Speaker 1: back to my office again, and this time I wrote 344 00:20:27,760 --> 00:20:30,560 Speaker 1: a memo entitled what does the market now? And I 345 00:20:30,600 --> 00:20:33,200 Speaker 1: think it doesn't know much? But I but I do think. 346 00:20:33,440 --> 00:20:35,639 Speaker 1: I do think that the that the credit spread is 347 00:20:35,640 --> 00:20:39,600 Speaker 1: an indicator of the values that are available. And when 348 00:20:39,720 --> 00:20:42,160 Speaker 1: when credit spreads are wide, that means, for the benefit 349 00:20:42,200 --> 00:20:45,840 Speaker 1: of your listeners, that the interest on low grade bonds 350 00:20:45,960 --> 00:20:48,520 Speaker 1: is much higher than it is on high grade bonds, 351 00:20:48,800 --> 00:20:54,200 Speaker 1: then I think you have substantial uh incentive to invest 352 00:20:54,400 --> 00:20:57,879 Speaker 1: in low grade instruments. It also is an indicator of fear. 353 00:20:58,640 --> 00:21:01,960 Speaker 1: That's why spreads are wide. When spreads narrow, it means 354 00:21:02,000 --> 00:21:05,639 Speaker 1: that people are less afraid. As you say, more complacent, 355 00:21:05,840 --> 00:21:08,760 Speaker 1: I would say more risk tolerant, and that the reward 356 00:21:08,840 --> 00:21:12,199 Speaker 1: for bearing incremental risk is on the decline, which is 357 00:21:12,200 --> 00:21:15,320 Speaker 1: not a good thing. I'm Barry Ri Hults. You're listening 358 00:21:15,400 --> 00:21:19,160 Speaker 1: to Masters in Business on Bloomberg Radio. My special guest 359 00:21:19,200 --> 00:21:22,760 Speaker 1: today is Howard Marks of oak Tree Capital. Let's talk 360 00:21:22,800 --> 00:21:26,679 Speaker 1: a little bit about volatility and uncertainty. You have a 361 00:21:26,760 --> 00:21:31,359 Speaker 1: number of delightful quotes about the future, and one of 362 00:21:31,359 --> 00:21:36,840 Speaker 1: my favorite is investing concerns exactly one thing dealing with 363 00:21:36,880 --> 00:21:40,960 Speaker 1: the future. Yet it's clearly impossible to know anything about 364 00:21:41,000 --> 00:21:45,720 Speaker 1: the future. You can't predict, you can only prepare. Discuss 365 00:21:45,800 --> 00:21:52,640 Speaker 1: that well, everybody who wants to engage in investing has 366 00:21:52,680 --> 00:21:57,159 Speaker 1: to reach your conclusion as to whether the future is 367 00:21:57,760 --> 00:22:00,960 Speaker 1: predictable or not. If you believe that is, you'll behave 368 00:22:01,000 --> 00:22:05,800 Speaker 1: one way. You will uh can reach a conclusion about 369 00:22:05,840 --> 00:22:08,600 Speaker 1: what the future holds and put together the perfect portfolio 370 00:22:08,680 --> 00:22:14,119 Speaker 1: for that eventuality. If you don't believe it, you will 371 00:22:14,600 --> 00:22:18,439 Speaker 1: think about different possibilities and you'll put to together a 372 00:22:18,480 --> 00:22:22,920 Speaker 1: portfolio that will suboptimize, that will do well under many 373 00:22:22,960 --> 00:22:27,800 Speaker 1: of them, and not badly. And that's that's a difference 374 00:22:27,840 --> 00:22:31,760 Speaker 1: of approach. I don't believe the future is predictable, you know. 375 00:22:31,840 --> 00:22:36,760 Speaker 1: I I'm from the believers in what John Kenneth Golbreys said. 376 00:22:36,800 --> 00:22:38,919 Speaker 1: He said, we have two kinds of forecasters, the ones 377 00:22:38,960 --> 00:22:41,040 Speaker 1: who don't know and the ones who don't know. They 378 00:22:41,040 --> 00:22:43,760 Speaker 1: don't know. Well, I know, I don't know, and so 379 00:22:44,400 --> 00:22:47,080 Speaker 1: I try to put together portfolios that will do well 380 00:22:47,119 --> 00:22:50,880 Speaker 1: in a variety of environments, but without trying to make 381 00:22:50,880 --> 00:22:53,720 Speaker 1: a prediction about here's what's gonna happen interesting exactly, here's 382 00:22:53,720 --> 00:22:57,159 Speaker 1: what's gonna do, Here's where's the recession exactly. So you 383 00:22:57,200 --> 00:23:02,159 Speaker 1: can have a portfolio which is prepared for a variety 384 00:23:02,280 --> 00:23:08,080 Speaker 1: of eventualities without uh insisting that any one of them 385 00:23:08,400 --> 00:23:11,399 Speaker 1: is going to be the case. And that leads to 386 00:23:11,400 --> 00:23:14,480 Speaker 1: another quote of yours. We can make excellent investment decisions 387 00:23:14,920 --> 00:23:18,000 Speaker 1: on the basis of present observations with no need to 388 00:23:18,000 --> 00:23:21,320 Speaker 1: make guesses about the future. Essentially what you just said. 389 00:23:21,320 --> 00:23:24,040 Speaker 1: That's right, you know. Let me make clear one thing, Barry, 390 00:23:26,160 --> 00:23:28,760 Speaker 1: it would be great if we knew what the future held. 391 00:23:28,760 --> 00:23:31,520 Speaker 1: It's not like I don't care. We would be great 392 00:23:31,560 --> 00:23:33,520 Speaker 1: investors if we knew what the market was going to 393 00:23:33,640 --> 00:23:36,600 Speaker 1: do tomorrow in which stocks would do best. But if 394 00:23:36,640 --> 00:23:41,159 Speaker 1: you reach the conclusion that you can't know, then you 395 00:23:41,440 --> 00:23:44,959 Speaker 1: look for another avenue to deal with the future. And 396 00:23:45,000 --> 00:23:47,720 Speaker 1: I'm in that category, and that's figuring out what's happening 397 00:23:47,760 --> 00:23:50,760 Speaker 1: today and adjusting it. So so I do something I 398 00:23:50,840 --> 00:23:53,800 Speaker 1: call take the temperature of the market. Okay, how does 399 00:23:53,800 --> 00:23:56,120 Speaker 1: one take the temperature of the market. In fact, when 400 00:23:56,160 --> 00:23:59,040 Speaker 1: we look at the market today, let's talk about stocks, 401 00:23:59,280 --> 00:24:02,160 Speaker 1: the vix is pretty much as low as it gets 402 00:24:02,160 --> 00:24:06,080 Speaker 1: for any extended period of time. Um, what does that 403 00:24:06,160 --> 00:24:08,720 Speaker 1: tell about market risks? What does that tell us about 404 00:24:08,880 --> 00:24:11,320 Speaker 1: the temperature of the market. Well, you you want to 405 00:24:11,320 --> 00:24:17,920 Speaker 1: know what kind of thinking is being incorporated in investment decisions. 406 00:24:18,080 --> 00:24:20,640 Speaker 1: If I was considering an investment, I could know only 407 00:24:20,680 --> 00:24:24,639 Speaker 1: one fact. I'd like to know how much optimism is 408 00:24:24,680 --> 00:24:28,399 Speaker 1: incorporated in the price Because if there's a lot of optimism, 409 00:24:28,440 --> 00:24:31,200 Speaker 1: then there's a lot of possibility of disappointment and if 410 00:24:31,280 --> 00:24:34,359 Speaker 1: and if the if, if the truth turns out to 411 00:24:34,359 --> 00:24:37,760 Speaker 1: be less good than the expectations, then the price will fall. 412 00:24:38,400 --> 00:24:41,800 Speaker 1: If there's no optimism, as there was back in October 413 00:24:41,880 --> 00:24:44,280 Speaker 1: of oh eight at the depths of financial crisis, then 414 00:24:44,320 --> 00:24:53,120 Speaker 1: I know we can buy risky assets aggressively because there's 415 00:24:53,160 --> 00:24:56,840 Speaker 1: no possibility of disappointment or the the assumptions that are 416 00:24:56,880 --> 00:25:00,240 Speaker 1: factored into the price are as negative as possible, or war. 417 00:25:01,080 --> 00:25:06,360 Speaker 1: And so you know, oak Tree invested extremely aggressively between 418 00:25:07,440 --> 00:25:11,240 Speaker 1: UM September fift oh eight, which was the day Lehman 419 00:25:11,280 --> 00:25:14,360 Speaker 1: went under, and the end of the year. We invested 420 00:25:14,359 --> 00:25:18,400 Speaker 1: over half a billion dollars a week over that period, 421 00:25:18,680 --> 00:25:21,080 Speaker 1: and that turned out to be mostly fixed income or 422 00:25:21,160 --> 00:25:23,520 Speaker 1: was in a mix. Well, most of what we do 423 00:25:23,680 --> 00:25:27,080 Speaker 1: is what we call credit, you know, non government fixed income, 424 00:25:27,520 --> 00:25:31,400 Speaker 1: and and most of it was distressed at UM. So 425 00:25:31,520 --> 00:25:35,760 Speaker 1: the point is, uh, the temperature of the market was frigid, 426 00:25:36,359 --> 00:25:40,200 Speaker 1: which meant there was no enthusiasm and we could buy 427 00:25:40,240 --> 00:25:44,520 Speaker 1: you know, Buffett says, the less prudence with which others 428 00:25:44,560 --> 00:25:47,159 Speaker 1: conduct their affairs, the greater the prudence with which we 429 00:25:47,280 --> 00:25:50,560 Speaker 1: must conduct our own affairs, which means if other people 430 00:25:51,040 --> 00:25:56,679 Speaker 1: are unworried, we should be terrified. If other people are terrified, 431 00:25:57,440 --> 00:26:01,439 Speaker 1: we should be aggressive. So you've talked a lot about 432 00:26:01,600 --> 00:26:04,720 Speaker 1: second degree thinking. I think a lot of people if 433 00:26:04,760 --> 00:26:07,359 Speaker 1: I were to ask them if I could share with 434 00:26:07,440 --> 00:26:11,000 Speaker 1: you one aspect of a stock or a market, they 435 00:26:11,040 --> 00:26:14,000 Speaker 1: would say, tell me valuation. You're taking that a step 436 00:26:14,040 --> 00:26:19,040 Speaker 1: further and saying tell me sentiment, and what is already 437 00:26:19,040 --> 00:26:23,439 Speaker 1: reflected in valuation? So let's talk about second degree thinking. 438 00:26:23,480 --> 00:26:26,919 Speaker 1: It's a phrase you've referred to repeatedly. Well, I actually 439 00:26:26,960 --> 00:26:30,800 Speaker 1: call it second level second level right, Um, I think 440 00:26:30,840 --> 00:26:33,200 Speaker 1: in terms of degrees because it's been so called out. 441 00:26:33,280 --> 00:26:38,600 Speaker 1: But what is second level thinking? Well, you you agreed 442 00:26:38,680 --> 00:26:41,639 Speaker 1: with me earlier when I said, if you think like 443 00:26:41,760 --> 00:26:44,560 Speaker 1: everybody else, you'll take the same actions as everybody else. 444 00:26:44,600 --> 00:26:47,280 Speaker 1: If you take take the same actions as everybody else, 445 00:26:47,480 --> 00:26:51,399 Speaker 1: you'll have the same results of everybody else. So, and 446 00:26:51,520 --> 00:26:56,840 Speaker 1: by the way, it seems mathematically unarguable, Well, if that's true, 447 00:26:57,200 --> 00:26:59,919 Speaker 1: then in order to be a superior investor, you have 448 00:27:00,520 --> 00:27:05,320 Speaker 1: think different from everybody else. And that about different is 449 00:27:05,359 --> 00:27:08,520 Speaker 1: not enough. He has to be different and right. So 450 00:27:08,720 --> 00:27:12,040 Speaker 1: to some degree, this is Keynes's famous beauty contest. Yes, 451 00:27:12,119 --> 00:27:18,359 Speaker 1: this is absolutely Can's hypothesized a beauty contest in which 452 00:27:18,520 --> 00:27:22,119 Speaker 1: the newspaper ran the pictures of twenty young women. It 453 00:27:22,200 --> 00:27:25,480 Speaker 1: was a very Chopin's time, and and he offered a 454 00:27:25,520 --> 00:27:28,080 Speaker 1: prize or the newspaper offered a prize to the reader 455 00:27:28,160 --> 00:27:31,439 Speaker 1: whose entry ranking the girls in terms of prettiness was 456 00:27:31,520 --> 00:27:36,280 Speaker 1: closest to the average entry. The first level thinker says, 457 00:27:36,359 --> 00:27:38,440 Speaker 1: I'm going to figure out which girls are the prettiest. 458 00:27:39,440 --> 00:27:42,199 Speaker 1: The second level thinker says, I'm going to figure out 459 00:27:42,280 --> 00:27:46,639 Speaker 1: which girls the average reader will say are the prettiest. 460 00:27:47,000 --> 00:27:49,120 Speaker 1: That's how you win the contest. Now, don't you run 461 00:27:49,119 --> 00:27:53,800 Speaker 1: into the next digression, which is the next person thinking, 462 00:27:53,920 --> 00:27:56,600 Speaker 1: I'm going to think how the second level thinkers? At 463 00:27:56,640 --> 00:28:00,679 Speaker 1: what point do investors start to outsmart themselves? Can you 464 00:28:00,760 --> 00:28:02,960 Speaker 1: take that thinking too far? Yeah, well you can go 465 00:28:03,040 --> 00:28:05,320 Speaker 1: to third level and fourth level, but I think second 466 00:28:05,400 --> 00:28:09,680 Speaker 1: level is good enough. You know, I mean you when 467 00:28:09,680 --> 00:28:12,400 Speaker 1: you get into the question of trying to figure out 468 00:28:12,480 --> 00:28:15,879 Speaker 1: which girls the average reader is going to conclude, the 469 00:28:15,920 --> 00:28:18,360 Speaker 1: average reader is going to say that is the produced 470 00:28:18,400 --> 00:28:22,760 Speaker 1: He gets very complex. And so with with the niceties, 471 00:28:22,840 --> 00:28:26,199 Speaker 1: you have to kind of factor in the realities of 472 00:28:26,280 --> 00:28:31,760 Speaker 1: can you do it? So if you can merely come 473 00:28:31,840 --> 00:28:37,600 Speaker 1: up with a better sense of value and write price 474 00:28:37,720 --> 00:28:42,160 Speaker 1: than others on a consistent basis. I think that's good 475 00:28:42,280 --> 00:28:46,680 Speaker 1: enough without going to third and fourth levels. I like 476 00:28:46,760 --> 00:28:49,640 Speaker 1: the way that sounds. Let's let's talk a little bit 477 00:28:49,640 --> 00:28:53,520 Speaker 1: about the opposite of um trying to guess how other 478 00:28:53,560 --> 00:28:56,320 Speaker 1: people are going to guess and bypass it, and talk 479 00:28:56,360 --> 00:29:02,240 Speaker 1: a little bit about the shift towards passive investing. In indexing. 480 00:29:02,760 --> 00:29:04,480 Speaker 1: Some people have said, we don't want to try and 481 00:29:04,520 --> 00:29:06,760 Speaker 1: guess what's the best stock is, or what other people 482 00:29:06,800 --> 00:29:09,280 Speaker 1: are gonna think what the best stock is, just by 483 00:29:09,320 --> 00:29:11,240 Speaker 1: the whole thing and not worry about it well, and 484 00:29:11,280 --> 00:29:14,160 Speaker 1: in fact, Barry, some people are observing that most people 485 00:29:14,200 --> 00:29:17,360 Speaker 1: who try to do that don't do it well, and 486 00:29:17,400 --> 00:29:23,400 Speaker 1: that the average UH mutual fund doesn't add value. Well, 487 00:29:23,560 --> 00:29:26,960 Speaker 1: it's obvious that on average, the average investor does average 488 00:29:27,120 --> 00:29:32,120 Speaker 1: before fees and below average after fees and trading impact. 489 00:29:32,720 --> 00:29:38,440 Speaker 1: So now there's a ground swell toward what's called passive 490 00:29:38,960 --> 00:29:41,520 Speaker 1: investing or indexation. You're buy an index fund, you buy 491 00:29:41,520 --> 00:29:44,479 Speaker 1: a fund. Ad bused a little bit of everything. By 492 00:29:44,480 --> 00:29:47,680 Speaker 1: the way, this theory was advanced fifty years ago when 493 00:29:47,680 --> 00:29:50,120 Speaker 1: I started at the University of Chicago, So it's nothing new. 494 00:29:50,480 --> 00:29:54,480 Speaker 1: It's a sign of how thinking goes. That it took 495 00:29:54,520 --> 00:29:57,240 Speaker 1: fifty years for it to take hold. But the point 496 00:29:57,360 --> 00:30:01,000 Speaker 1: is John Vogel at Vanguard and to the Index Fund, 497 00:30:01,160 --> 00:30:07,160 Speaker 1: I don't know, probably okay, forty years ago and and 498 00:30:07,200 --> 00:30:10,640 Speaker 1: it's been creeping up. But the movement toward passive has 499 00:30:10,680 --> 00:30:12,720 Speaker 1: become a ground swell in the last year or two 500 00:30:12,960 --> 00:30:15,080 Speaker 1: because a lot of people are throwing in the towel. 501 00:30:15,360 --> 00:30:20,480 Speaker 1: And basically the stems from University's Chicago work on something 502 00:30:20,480 --> 00:30:23,680 Speaker 1: called the efficient market hypothesis, which said that so many 503 00:30:23,720 --> 00:30:26,880 Speaker 1: people are out there trying to make money in the market, 504 00:30:27,600 --> 00:30:32,520 Speaker 1: and they're all intelligent, computer literate, with access to databases, 505 00:30:32,880 --> 00:30:39,840 Speaker 1: highly motivated, objective, and clinical, and that that their efforts 506 00:30:40,080 --> 00:30:45,920 Speaker 1: to find bargains and over pricings cause prices to converge 507 00:30:45,920 --> 00:30:49,320 Speaker 1: with something called intrinsic value, so that there are no bargains. 508 00:30:49,720 --> 00:30:51,920 Speaker 1: And if there are no bargains to be found or 509 00:30:52,000 --> 00:30:55,920 Speaker 1: over pricings to be avoided, then you can't beat the market. 510 00:30:56,200 --> 00:30:59,080 Speaker 1: That's the theory we've been speaking with Howard Marks. He 511 00:30:59,240 --> 00:31:03,160 Speaker 1: is the co founder, co chairman and co c I 512 00:31:03,240 --> 00:31:06,440 Speaker 1: oh are you still co cee? Dishwasher Code Dishwasher of 513 00:31:06,480 --> 00:31:09,880 Speaker 1: Oak Tree Capital Management. Be sure and stick around where 514 00:31:09,880 --> 00:31:12,160 Speaker 1: we keep the digital tape rolling and continue to talk 515 00:31:12,200 --> 00:31:16,040 Speaker 1: about all things valuation. Uh. Be sure to check out 516 00:31:16,120 --> 00:31:19,240 Speaker 1: my daily column on Bloomberg dot com or follow me 517 00:31:19,800 --> 00:31:24,120 Speaker 1: on Twitter at rid Halts. We love your comments, feedback 518 00:31:24,160 --> 00:31:28,880 Speaker 1: and suggestions right to us at m IB podcast at 519 00:31:28,920 --> 00:31:31,680 Speaker 1: Bloomberg dot net. I would be remiss if I did 520 00:31:31,720 --> 00:31:36,120 Speaker 1: not say you can find all of Howard's really delightful 521 00:31:36,240 --> 00:31:40,320 Speaker 1: and and beautifully written memos at oak Tree Capitol dot 522 00:31:40,320 --> 00:31:43,320 Speaker 1: com or his book. We didn't even get to the 523 00:31:43,360 --> 00:31:47,080 Speaker 1: only thing that matters his book. Uh. The only thing 524 00:31:47,160 --> 00:31:49,880 Speaker 1: that most, the most important thing. The only thing that 525 00:31:49,920 --> 00:31:52,960 Speaker 1: matters is the book, which is the most important thing, 526 00:31:53,280 --> 00:31:55,720 Speaker 1: and you can find that at Amazon or at fine 527 00:31:55,760 --> 00:31:59,680 Speaker 1: bookstores near you. I'm Barry Rihults. You're listening to Masters 528 00:31:59,720 --> 00:32:05,480 Speaker 1: and Nous on Bloomberg Radio. If you're having a business dispute, 529 00:32:05,560 --> 00:32:08,640 Speaker 1: the process can be slow and drawn out, especially if 530 00:32:08,680 --> 00:32:11,320 Speaker 1: you rely on litigation in the courts. You can wait 531 00:32:11,360 --> 00:32:14,040 Speaker 1: for years before your case is resolved, and the longer 532 00:32:14,080 --> 00:32:17,520 Speaker 1: your case proceeds, the more your case can cost. Not 533 00:32:17,640 --> 00:32:21,960 Speaker 1: with the American Arbitration Association, arbitration or mediation with the 534 00:32:22,000 --> 00:32:26,400 Speaker 1: American Arbitration Association is faster. In fact, nearly fifty of 535 00:32:26,400 --> 00:32:29,760 Speaker 1: our cases settled prior to hearings. A d r dot 536 00:32:29,880 --> 00:32:33,720 Speaker 1: org resolve faster. Welcome to the podcast. I don't know 537 00:32:33,720 --> 00:32:35,280 Speaker 1: why I do this every time, Howard, Thank you so 538 00:32:35,360 --> 00:32:38,080 Speaker 1: much for doing this. I always find it delightful and 539 00:32:38,160 --> 00:32:41,400 Speaker 1: instructional anytime we get to sit down. Someone said to 540 00:32:41,440 --> 00:32:44,720 Speaker 1: me the other day we were just in Toronto, I 541 00:32:44,760 --> 00:32:48,200 Speaker 1: guess before winter, at at a c f A events 542 00:32:48,520 --> 00:32:51,240 Speaker 1: and someone said to me, you know, I've either listened 543 00:32:51,240 --> 00:32:55,840 Speaker 1: to or seeing you interview Howard multiple times. You've become 544 00:32:55,880 --> 00:32:59,400 Speaker 1: the Howard Marks whisperer and I'm My response was, I'm 545 00:32:59,440 --> 00:33:02,440 Speaker 1: pretty sure he doesn't need a whisperer. He's pretty uh 546 00:33:02,680 --> 00:33:06,360 Speaker 1: articulate on his own. UM, so let's keep talking about 547 00:33:06,360 --> 00:33:09,440 Speaker 1: the market, because there's so much stuff we didn't get 548 00:33:09,480 --> 00:33:12,640 Speaker 1: to and so many things we were last speaking about 549 00:33:13,400 --> 00:33:20,280 Speaker 1: UM indexing, Bill Miller had a really fascinating quote. He said, 550 00:33:20,320 --> 00:33:25,280 Speaker 1: the problem with active management is an active management. The 551 00:33:25,320 --> 00:33:28,680 Speaker 1: problem with active management is most of those managers are 552 00:33:28,800 --> 00:33:33,000 Speaker 1: essentially high cost closet indexers. UM. What do you think 553 00:33:33,000 --> 00:33:39,800 Speaker 1: of something like that? Well, I do think that most 554 00:33:39,880 --> 00:33:46,600 Speaker 1: people ken for maybe career purposes, to hug the benchmark 555 00:33:47,200 --> 00:33:49,480 Speaker 1: and to have a portfolio which is not very different 556 00:33:49,520 --> 00:33:53,520 Speaker 1: from the benchmark, in which case you're wasting your money 557 00:33:53,680 --> 00:33:57,320 Speaker 1: by paying him or her fees. You can get the 558 00:33:57,360 --> 00:34:02,000 Speaker 1: benchmark for probably six basis six basis points as six 559 00:34:02,120 --> 00:34:06,880 Speaker 1: hundreds of a percent, and active managers probably get close 560 00:34:06,920 --> 00:34:10,239 Speaker 1: to a percent on average. I think those numbers are 561 00:34:10,239 --> 00:34:12,960 Speaker 1: about right. Okay, So that means the average manager is 562 00:34:13,040 --> 00:34:18,279 Speaker 1: charging uh eight four ninety four basis points more, which 563 00:34:18,360 --> 00:34:22,560 Speaker 1: is a straight subtraction from the performance of their funds. 564 00:34:22,760 --> 00:34:25,360 Speaker 1: And if they don't add at least ninety four basis 565 00:34:25,360 --> 00:34:29,399 Speaker 1: points uh to the return per year, you might as 566 00:34:29,400 --> 00:34:32,040 Speaker 1: well go into an index. And that was his point. 567 00:34:32,120 --> 00:34:34,760 Speaker 1: He said, if you want to do active, then really 568 00:34:34,800 --> 00:34:37,480 Speaker 1: do active. Don't waste your time with Well, that's well, 569 00:34:37,480 --> 00:34:39,640 Speaker 1: that goes to what I mentioned before my memo, dare 570 00:34:39,640 --> 00:34:43,160 Speaker 1: to be great, dare to be great. In order to outperform, 571 00:34:43,200 --> 00:34:46,120 Speaker 1: you have to dare to be different from the index, 572 00:34:46,840 --> 00:34:48,640 Speaker 1: which means you have to be dare to be wrong. 573 00:34:48,880 --> 00:34:51,120 Speaker 1: You have to be willing to either accept a draw 574 00:34:51,200 --> 00:34:54,560 Speaker 1: down or a significant under performance in any given year. 575 00:34:54,600 --> 00:34:58,160 Speaker 1: Exactly there is no The interesting thing about investing is 576 00:34:58,160 --> 00:35:02,000 Speaker 1: that there is no approach which is guaranteed to work. 577 00:35:02,800 --> 00:35:07,160 Speaker 1: There can't be, given the nature of markets. Nature's markets 578 00:35:07,200 --> 00:35:11,440 Speaker 1: abhor certainty. Right, And I'm so glad you said that 579 00:35:11,480 --> 00:35:15,360 Speaker 1: because this has been a peeve of mind forever, because 580 00:35:15,640 --> 00:35:19,080 Speaker 1: you I want to repeat what you said, markets abhor 581 00:35:19,160 --> 00:35:23,920 Speaker 1: certainty every time I flicked on the TV. Some clueless 582 00:35:23,920 --> 00:35:27,880 Speaker 1: pondit is saying markets hate uncertainty. And if you think back, 583 00:35:28,560 --> 00:35:32,440 Speaker 1: the only time there's certainty is at extreme tops or 584 00:35:32,520 --> 00:35:35,600 Speaker 1: extreme bottoms two thousand. When you did the dot com 585 00:35:35,640 --> 00:35:39,799 Speaker 1: bubble in in January two thou markets were sure, they 586 00:35:39,800 --> 00:35:43,000 Speaker 1: were certain, valuations didn't matter, Trees go to the sky, 587 00:35:43,080 --> 00:35:46,680 Speaker 1: everybody loves it. And back in oh nine March oh nine, 588 00:35:47,400 --> 00:35:50,880 Speaker 1: markets are going to zero. There is no value that 589 00:35:51,000 --> 00:35:54,520 Speaker 1: is cheap enough. It's all terrible. So I like your 590 00:35:54,600 --> 00:35:59,800 Speaker 1: quote better markets abhor certainty. Well, you know, maybe Barry 591 00:36:00,120 --> 00:36:03,160 Speaker 1: should rephrase No, No, I'm I'm You're stuck with that one. 592 00:36:03,200 --> 00:36:06,960 Speaker 1: I'm keeping it. How would you want to rephrase that? 593 00:36:07,000 --> 00:36:15,080 Speaker 1: Because that's pithy. I think that investors like certainty, it's 594 00:36:15,160 --> 00:36:20,160 Speaker 1: just that it's usually wrong and wrongest at the extremes. 595 00:36:21,719 --> 00:36:25,520 Speaker 1: That's a that's a good it's less of a sound bite. 596 00:36:25,600 --> 00:36:28,480 Speaker 1: It's less of a sound bite, but it explains exactly 597 00:36:29,160 --> 00:36:33,440 Speaker 1: markets a poor certainty because investors listen. If you're comfortable, 598 00:36:34,440 --> 00:36:37,960 Speaker 1: then it's probably not a lot about performance because to 599 00:36:38,120 --> 00:36:41,160 Speaker 1: get to that point, you have to do something that 600 00:36:41,280 --> 00:36:47,200 Speaker 1: is intuitively uncomfortable and and countervailing to what the crowd 601 00:36:47,280 --> 00:36:50,040 Speaker 1: is doing. Well. Dave Swenson, who runs the Endowminant Yeah, 602 00:36:50,120 --> 00:36:54,040 Speaker 1: which is been a performing endowment for decades for He's 603 00:36:54,040 --> 00:36:55,799 Speaker 1: been doing it for thirty years and he has great, 604 00:36:55,840 --> 00:36:59,680 Speaker 1: great results. He said in his book Pioneering Portfolio Management 605 00:37:00,120 --> 00:37:09,400 Speaker 1: that that investment management requires the maintenance of uncomfortably idiosyncratic positions, which, 606 00:37:09,800 --> 00:37:15,640 Speaker 1: in the light of so called common sense or conventional wisdom, 607 00:37:15,680 --> 00:37:24,880 Speaker 1: appear uh irrational. In other words, what everybody believes, common sense, 608 00:37:25,520 --> 00:37:29,080 Speaker 1: common wisdom is is factored into the price of the stock. 609 00:37:29,480 --> 00:37:31,759 Speaker 1: If you're going to find a bargain, you have to 610 00:37:31,800 --> 00:37:36,160 Speaker 1: find the times when consensus is wrong. You have to 611 00:37:36,200 --> 00:37:43,480 Speaker 1: diverge from consensus, which can can only be uncomfortable. Makes sense, Yeah, 612 00:37:43,880 --> 00:37:47,520 Speaker 1: you have to be idiosyncratic, and people will look at 613 00:37:47,520 --> 00:37:50,680 Speaker 1: you and you say, who is that not selling out 614 00:37:50,680 --> 00:37:53,400 Speaker 1: of his tech stocks in the first quarter of two thousands, 615 00:37:53,480 --> 00:37:57,200 Speaker 1: which raises the question You're not just in an ivory 616 00:37:57,239 --> 00:38:00,279 Speaker 1: tower penning notes and sending them out and not caring 617 00:38:00,280 --> 00:38:04,160 Speaker 1: if people responding. Your oak tree is now running forty 618 00:38:04,600 --> 00:38:10,120 Speaker 1: hundred d hundred billions. In two thousand, you guys were 619 00:38:10,120 --> 00:38:15,000 Speaker 1: still running billions of dollars. So you have real clients 620 00:38:15,520 --> 00:38:18,719 Speaker 1: with real assets at risk, real money at risk, and 621 00:38:18,880 --> 00:38:22,200 Speaker 1: their jobs on the line. Because your clients are primarily institutional, 622 00:38:23,440 --> 00:38:31,160 Speaker 1: How do you handle when something looks idiosyncratic? People say 623 00:38:31,840 --> 00:38:34,440 Speaker 1: how it has finally gone off the deep end this time? 624 00:38:35,000 --> 00:38:37,560 Speaker 1: And the phone start lining up in the office, Hey, 625 00:38:37,600 --> 00:38:40,799 Speaker 1: what are you guys doing? How do you manage that? 626 00:38:41,000 --> 00:38:44,440 Speaker 1: As as a as a company? How does the organization 627 00:38:44,480 --> 00:38:46,799 Speaker 1: handle well? I think one of the money manager's most 628 00:38:46,840 --> 00:38:51,399 Speaker 1: important jobs is client education. And hopefully we've convinced our 629 00:38:51,400 --> 00:38:55,000 Speaker 1: clients by now that you have to be contrarian, and 630 00:38:55,080 --> 00:38:57,719 Speaker 1: you have to look wrong for a while, and and 631 00:38:57,480 --> 00:39:01,520 Speaker 1: and so forth, um and and it's our job to 632 00:39:01,560 --> 00:39:03,920 Speaker 1: hold their hands when we do extreme things. You know. 633 00:39:04,000 --> 00:39:08,000 Speaker 1: I wrote this memo current Developments back October the eighth 634 00:39:08,080 --> 00:39:11,000 Speaker 1: of eight, probably the low point of credit. And I 635 00:39:11,160 --> 00:39:13,479 Speaker 1: mentioned that I was talking to a reporter at that time. 636 00:39:13,680 --> 00:39:15,280 Speaker 1: He said, what are you doing? I said, we're buying. 637 00:39:15,280 --> 00:39:18,359 Speaker 1: He said to me, you are like that with an 638 00:39:18,400 --> 00:39:21,560 Speaker 1: exclamation point. Well, everybody else he spoke to a selling, right, 639 00:39:21,800 --> 00:39:26,520 Speaker 1: and and uh. And so when everybody, if there are 640 00:39:26,520 --> 00:39:29,560 Speaker 1: a hundred money managers in are selling, what do you 641 00:39:29,600 --> 00:39:31,239 Speaker 1: want to do? You want to buy or sell? You 642 00:39:31,280 --> 00:39:34,520 Speaker 1: want to be the Well, actually the answer is most 643 00:39:34,560 --> 00:39:36,520 Speaker 1: of the time the crowd is right. It's at those 644 00:39:36,520 --> 00:39:39,040 Speaker 1: extremes where I want to be on the opposite side. 645 00:39:39,520 --> 00:39:41,880 Speaker 1: But only at the extremes. Are ninety nine out of 646 00:39:41,920 --> 00:39:46,320 Speaker 1: a hundred selling, that's right? And and if a hundred selling, 647 00:39:46,680 --> 00:39:49,720 Speaker 1: then there must be no optimism in prices. Prices cannot 648 00:39:49,719 --> 00:39:53,360 Speaker 1: be high relative to intrinsic value. You can't lose by buying. 649 00:39:53,960 --> 00:39:57,200 Speaker 1: So what about the process. We've seen this happen over 650 00:39:57,200 --> 00:40:00,680 Speaker 1: and over again with especially with value stops. I assume 651 00:40:00,760 --> 00:40:04,880 Speaker 1: it's similar with distressed assets or anything credit related, which 652 00:40:04,960 --> 00:40:08,759 Speaker 1: is just because something is cheap doesn't mean it's not 653 00:40:08,800 --> 00:40:11,960 Speaker 1: going to get cheaper. There's there's a famous quote, um 654 00:40:12,239 --> 00:40:15,760 Speaker 1: David Einhorn said, a stock that's down is a stock 655 00:40:15,800 --> 00:40:18,759 Speaker 1: that was down before it got got in half. So 656 00:40:18,840 --> 00:40:21,799 Speaker 1: how do you know? I love that line. How do 657 00:40:21,880 --> 00:40:26,640 Speaker 1: you know when you're early? You're not. You're not necessarily 658 00:40:26,640 --> 00:40:30,759 Speaker 1: gonna take the bottom. You're prepared to buy something and 659 00:40:30,840 --> 00:40:33,040 Speaker 1: keep buying it as it continues to fall out of bed. 660 00:40:33,239 --> 00:40:36,960 Speaker 1: You never know when you're at the bottom. It is 661 00:40:38,200 --> 00:40:43,560 Speaker 1: logically impossible because what is the bottom. The bottom is 662 00:40:43,600 --> 00:40:49,120 Speaker 1: the price below which things never went. You went. That's 663 00:40:49,120 --> 00:40:52,120 Speaker 1: a past tense work. You can only assess the bottom 664 00:40:52,320 --> 00:40:58,160 Speaker 1: in the past tense. So if you can't find the bottom, 665 00:40:58,239 --> 00:41:00,680 Speaker 1: what can you do? You can buy that that smile 666 00:41:00,760 --> 00:41:03,319 Speaker 1: at the bottom of what I would say. You can 667 00:41:03,360 --> 00:41:06,279 Speaker 1: buy when it's cheap. That's all you can do, even 668 00:41:06,320 --> 00:41:09,040 Speaker 1: if it's quote unquote early, even if it's early, because 669 00:41:09,080 --> 00:41:11,640 Speaker 1: you don't know if you're early or not. But if 670 00:41:11,680 --> 00:41:15,760 Speaker 1: you're if you're really no value, then you know when 671 00:41:15,760 --> 00:41:19,120 Speaker 1: things are cheap. So the debt, by the way, and 672 00:41:19,560 --> 00:41:22,080 Speaker 1: you have to bear in mind everybody wants to be 673 00:41:22,080 --> 00:41:24,480 Speaker 1: a successful investor has to bear in mind the cheap 674 00:41:25,960 --> 00:41:31,959 Speaker 1: and going up tomorrow are not synonymous. And so if 675 00:41:32,000 --> 00:41:36,480 Speaker 1: you buy because it's cheap, it goes down, you buy 676 00:41:36,520 --> 00:41:39,280 Speaker 1: more it's still cheap, you keep buying. No, it's cheaper, 677 00:41:40,400 --> 00:41:43,160 Speaker 1: it goes down more, you buy more. If you liked 678 00:41:43,160 --> 00:41:45,319 Speaker 1: it at nine, you're gonna love it at eight and 679 00:41:45,400 --> 00:41:48,279 Speaker 1: at seven. And then you run out of money and 680 00:41:48,360 --> 00:41:52,120 Speaker 1: you raise more money and you keep doing it. But 681 00:41:52,920 --> 00:41:57,239 Speaker 1: eventually you have to be proved. Right, So what at 682 00:41:57,239 --> 00:42:04,719 Speaker 1: what point does um At what point do you say 683 00:42:04,719 --> 00:42:06,960 Speaker 1: to yourselves, I'm out of money, I need more capital, 684 00:42:07,239 --> 00:42:10,040 Speaker 1: and you go back to the client base. What what 685 00:42:10,120 --> 00:42:15,279 Speaker 1: do they say in response to that? Well, sometimes they say, 686 00:42:15,640 --> 00:42:17,680 Speaker 1: you know, we have faith in you, here some more money. 687 00:42:17,680 --> 00:42:21,840 Speaker 1: And sometimes they say, you know, you're obviously a moron. 688 00:42:23,160 --> 00:42:25,520 Speaker 1: They actually say that too, Well, not that word, but 689 00:42:25,640 --> 00:42:29,000 Speaker 1: I mean they're like I described that that experience in 690 00:42:29,040 --> 00:42:31,279 Speaker 1: October eight when I went out to get people to 691 00:42:31,400 --> 00:42:35,040 Speaker 1: invest in a levered You raised a lot of money 692 00:42:35,040 --> 00:42:37,160 Speaker 1: for that fund, didn't well, not the levered loan fund. 693 00:42:37,800 --> 00:42:40,360 Speaker 1: We reached a point where on the levered loan fund 694 00:42:40,960 --> 00:42:44,080 Speaker 1: where we we needed money and we couldn't get the 695 00:42:44,120 --> 00:42:47,319 Speaker 1: clients to put it up anymore. We had a shortfall. Uh. 696 00:42:47,480 --> 00:42:50,160 Speaker 1: The irony is I felt that it was my responsibility 697 00:42:50,200 --> 00:42:52,680 Speaker 1: and I put it up myself, your own cash because 698 00:42:52,719 --> 00:42:55,400 Speaker 1: the clients did the last dollars. It would have been 699 00:42:55,480 --> 00:42:57,160 Speaker 1: unfair if I would have stepped in front of them 700 00:42:57,200 --> 00:42:59,840 Speaker 1: and put my money into in place of them, but 701 00:43:00,080 --> 00:43:02,400 Speaker 1: if they refused, I put it in. It was one 702 00:43:02,400 --> 00:43:04,520 Speaker 1: of the great investments I ever made. What were the 703 00:43:04,560 --> 00:43:10,320 Speaker 1: returns of that from eight Well, certainly more than really yeah, 704 00:43:10,560 --> 00:43:13,240 Speaker 1: not too bad, not too bad. But but the point 705 00:43:13,320 --> 00:43:18,680 Speaker 1: is um the degree of faith in you that your 706 00:43:18,719 --> 00:43:22,400 Speaker 1: clients have tells you how long they'll stick with you 707 00:43:22,520 --> 00:43:26,080 Speaker 1: when things go tough. But every client is probably going 708 00:43:26,120 --> 00:43:28,760 Speaker 1: to reach a point where he says, I'm out of money, 709 00:43:29,160 --> 00:43:34,879 Speaker 1: I'm fatigued. I love you, but you know, maybe you're 710 00:43:34,920 --> 00:43:40,319 Speaker 1: not right. M you. I recall you were raising one 711 00:43:40,320 --> 00:43:43,640 Speaker 1: of the distressed funds. I don't remember it was in 712 00:43:43,719 --> 00:43:46,120 Speaker 1: the housing bust in oh six, o seven or lift, 713 00:43:46,239 --> 00:43:50,520 Speaker 1: but it was a substantial, substantial funds. Uh that did 714 00:43:50,560 --> 00:43:53,760 Speaker 1: really well. Which which fund am I thinking? Well? Uh? 715 00:43:53,800 --> 00:43:56,440 Speaker 1: On the we had a we had a very big 716 00:43:56,480 --> 00:43:58,960 Speaker 1: fund in No. One oh two which did very well 717 00:43:59,239 --> 00:44:02,040 Speaker 1: because we were able to invest in the telecom meltdown 718 00:44:02,280 --> 00:44:07,560 Speaker 1: and the scandals of and Run and Delphian World Colm. Uh. 719 00:44:07,719 --> 00:44:11,160 Speaker 1: The market snapped back in oh three, we raised more 720 00:44:11,239 --> 00:44:13,760 Speaker 1: funds than OH four, oh five and no fund to No. Six. 721 00:44:14,080 --> 00:44:15,759 Speaker 1: On the first day of oh seven, we went out. 722 00:44:15,840 --> 00:44:18,359 Speaker 1: We said the clients, you know, we think we can 723 00:44:18,520 --> 00:44:22,600 Speaker 1: use three billion three And within a month we had 724 00:44:22,640 --> 00:44:25,239 Speaker 1: eight oh real And we said to the clients, so 725 00:44:25,280 --> 00:44:30,600 Speaker 1: you really have trained your clients well educated and and 726 00:44:30,800 --> 00:44:33,319 Speaker 1: uh and we said to him, we can't use eight. 727 00:44:33,320 --> 00:44:35,360 Speaker 1: We will take three and a half. We closed that fund. 728 00:44:35,719 --> 00:44:37,279 Speaker 1: We said, but we'd like to have the rest of 729 00:44:37,320 --> 00:44:40,040 Speaker 1: your interest in a standby fund. So the first fund 730 00:44:40,160 --> 00:44:44,239 Speaker 1: three and a half billion was seven and we said 731 00:44:44,239 --> 00:44:47,960 Speaker 1: we'd like to have money for seven b and we started. 732 00:44:48,000 --> 00:44:50,400 Speaker 1: We had the first close of that in marcho seven. 733 00:44:50,640 --> 00:44:53,279 Speaker 1: We had the last close in March o eight, and 734 00:44:53,360 --> 00:44:57,160 Speaker 1: by that time it was eleven billion UM. And we 735 00:44:57,239 --> 00:44:59,320 Speaker 1: told people it's a standby fund. We're not going to 736 00:44:59,440 --> 00:45:01,520 Speaker 1: spend it on the time is right. We're not going 737 00:45:01,640 --> 00:45:06,120 Speaker 1: to charge any fees until we're into the investment process. 738 00:45:06,160 --> 00:45:09,799 Speaker 1: So from March oh seven until Juno eight, we didn't 739 00:45:09,880 --> 00:45:12,680 Speaker 1: charge any fees. Juno eight we started to spend the 740 00:45:12,719 --> 00:45:18,799 Speaker 1: money very gradually. Uh, that's fairly early in that's right. 741 00:45:19,200 --> 00:45:24,680 Speaker 1: And and Lehman went bankrupt. On September we were twelve 742 00:45:24,680 --> 00:45:27,680 Speaker 1: percent called. By the end of the year, we were 743 00:45:28,520 --> 00:45:32,400 Speaker 1: called so fully invested, so we called of eleven billion, 744 00:45:32,400 --> 00:45:36,160 Speaker 1: which is six and a billion over fifteen weeks. That's 745 00:45:36,160 --> 00:45:38,520 Speaker 1: all you had to do, you know, all you had 746 00:45:38,560 --> 00:45:41,919 Speaker 1: to do to make money in the crisis in retrospect 747 00:45:42,600 --> 00:45:45,239 Speaker 1: was have money to spend and the nerve to spend it. 748 00:45:45,880 --> 00:45:50,160 Speaker 1: You didn't need caution, conservatism, risk control, patients, selectivity, discipline, 749 00:45:50,160 --> 00:45:52,839 Speaker 1: any of those things. All you needed was money and nerve, 750 00:45:53,400 --> 00:45:59,279 Speaker 1: money and nerve, and money and nerve, capital and and 751 00:46:00,000 --> 00:46:02,080 Speaker 1: but not all the time, because sometime money and nerve 752 00:46:02,080 --> 00:46:04,920 Speaker 1: will get you killed. And and one of most of 753 00:46:04,960 --> 00:46:07,200 Speaker 1: the time, well and money. And so one of the 754 00:46:07,280 --> 00:46:10,319 Speaker 1: keys in investing is to know which is which. That 755 00:46:10,480 --> 00:46:14,120 Speaker 1: that's really that's really fascinating. Um, there's another quote of 756 00:46:14,120 --> 00:46:17,480 Speaker 1: yours that's relevant to exactly what you just said. I 757 00:46:17,560 --> 00:46:21,680 Speaker 1: have to bring up rule number one. Most things will 758 00:46:21,760 --> 00:46:25,759 Speaker 1: prove to be cyclical. Rule number two. Some of the 759 00:46:25,840 --> 00:46:29,160 Speaker 1: greatest opportunities for gain and loss come when other people 760 00:46:29,239 --> 00:46:33,799 Speaker 1: forget rule number one. Why is it that people do 761 00:46:33,880 --> 00:46:37,680 Speaker 1: not understand that this too shall pass, that it's most 762 00:46:37,680 --> 00:46:41,120 Speaker 1: cyclical because of the rule of emotion rather than logic. 763 00:46:42,280 --> 00:46:45,759 Speaker 1: Emotion is a great enemy of all investors. Back in 764 00:46:45,920 --> 00:46:50,960 Speaker 1: nineteen seventy five, probably forty two years ago, I learned 765 00:46:50,960 --> 00:46:53,239 Speaker 1: one of the greatest lessons. Somebody said to me there 766 00:46:53,239 --> 00:46:56,680 Speaker 1: are three stages to a bull market. The first age, 767 00:46:57,080 --> 00:47:00,520 Speaker 1: when a few bright people believed that there could be improvement, 768 00:47:01,120 --> 00:47:04,520 Speaker 1: the second stage, when most people understand that things are 769 00:47:04,520 --> 00:47:07,640 Speaker 1: actually getting better, and the third stage, when every idiot 770 00:47:07,640 --> 00:47:10,880 Speaker 1: believes that things can only get better forever. So so 771 00:47:10,880 --> 00:47:15,480 Speaker 1: where are we today. It's it's February, you know, Barry. 772 00:47:15,680 --> 00:47:20,480 Speaker 1: I don't believe that most people are thinking very optimistically. 773 00:47:21,200 --> 00:47:23,840 Speaker 1: I think most people have reservations. Most people understand that 774 00:47:23,880 --> 00:47:27,240 Speaker 1: economic growth is uncertain. Most people understand that we don't 775 00:47:27,280 --> 00:47:30,560 Speaker 1: know how the central bank experiment with zero rates is 776 00:47:30,600 --> 00:47:33,279 Speaker 1: going to end up, or how it gets reversed. And 777 00:47:33,360 --> 00:47:37,120 Speaker 1: of course most people are concerned about the geopolitical developments 778 00:47:37,120 --> 00:47:41,880 Speaker 1: in the world today. So I believe that enthusiasm is 779 00:47:41,920 --> 00:47:45,680 Speaker 1: not unrestrained, it's tempered. I believe it's tempered. On the 780 00:47:45,719 --> 00:47:51,719 Speaker 1: other hand, people maybe maybe thinking in not a bullish way, 781 00:47:51,760 --> 00:47:53,840 Speaker 1: but I think they're acting in a bullish way. What 782 00:47:53,960 --> 00:47:57,600 Speaker 1: accounts for the difference rates near zero, and when you 783 00:47:57,680 --> 00:48:00,640 Speaker 1: live in a low return world, you have to take 784 00:48:00,760 --> 00:48:03,680 Speaker 1: risk to get returned. People are willing to take risk 785 00:48:03,760 --> 00:48:08,680 Speaker 1: because my late father in law would call them handcuffed volunteers, 786 00:48:09,200 --> 00:48:11,640 Speaker 1: people who do things not because they want to, but 787 00:48:11,719 --> 00:48:16,480 Speaker 1: because they have to have choice there isn't and so 788 00:48:16,640 --> 00:48:20,719 Speaker 1: people are taking more risk than they used to take 789 00:48:21,480 --> 00:48:25,600 Speaker 1: to get the returns they used to get at one 790 00:48:25,640 --> 00:48:29,200 Speaker 1: point in time. Um I recall in the early two 791 00:48:29,239 --> 00:48:34,120 Speaker 1: thousand's the rule of thumb for for foundations and endowments 792 00:48:34,120 --> 00:48:38,400 Speaker 1: and any charity to maintain their tax deferred status is 793 00:48:38,440 --> 00:48:41,200 Speaker 1: they're giving out five percent a year and that's a 794 00:48:41,239 --> 00:48:45,040 Speaker 1: pretty easy bogey to hit most of the time. But 795 00:48:45,160 --> 00:48:49,840 Speaker 1: when you have you know, rates uh rising rapidly in 796 00:48:50,000 --> 00:48:53,920 Speaker 1: stocks not doing especially well, that becomes a real challenge 797 00:48:53,960 --> 00:48:56,600 Speaker 1: to hit. We saw that in the in the early 798 00:48:56,680 --> 00:49:01,680 Speaker 1: to mid two thousands. How much of what takes place 799 00:49:02,800 --> 00:49:05,840 Speaker 1: in direct reference to what you were just saying, comes 800 00:49:05,920 --> 00:49:11,719 Speaker 1: from foundations having no alternative comes from endowments, charities, all 801 00:49:11,760 --> 00:49:15,600 Speaker 1: the big nonprofits having to hit that five percent bogey 802 00:49:15,600 --> 00:49:18,919 Speaker 1: because they're so loath to go into the corpus of 803 00:49:18,920 --> 00:49:24,919 Speaker 1: of their trust. How much of that handcuffed um volunteers 804 00:49:25,040 --> 00:49:27,719 Speaker 1: comes from that segment of the investing world. Well, I 805 00:49:27,760 --> 00:49:31,879 Speaker 1: think of a good bit, although foundations and endowments are 806 00:49:31,920 --> 00:49:35,759 Speaker 1: not a large proportion of the money. Uh. But the 807 00:49:35,760 --> 00:49:39,240 Speaker 1: same is true of pension funds. You know, the management 808 00:49:39,239 --> 00:49:42,960 Speaker 1: of a company puts in an amount of money, and 809 00:49:43,000 --> 00:49:45,360 Speaker 1: then that amount of money is supposed to be invested 810 00:49:45,400 --> 00:49:48,839 Speaker 1: in grown so that by the end or by the 811 00:49:48,920 --> 00:49:52,160 Speaker 1: in the future, there will be enough money to pay pensions. 812 00:49:52,239 --> 00:49:56,239 Speaker 1: And the connection between today's dollars and the number and 813 00:49:56,280 --> 00:49:58,280 Speaker 1: the dollars you need in the future to pay pensions 814 00:49:58,360 --> 00:50:01,400 Speaker 1: is called the actuarial assumption, the rate you need to 815 00:50:01,520 --> 00:50:04,799 Speaker 1: make the math work. And for a long time that 816 00:50:04,920 --> 00:50:09,320 Speaker 1: was eight and say now most in the interests of conservatism, 817 00:50:09,360 --> 00:50:11,600 Speaker 1: most pension funds have switched to seven and a half. 818 00:50:11,960 --> 00:50:13,920 Speaker 1: But if you think about it, that that that the 819 00:50:14,000 --> 00:50:19,799 Speaker 1: five year T bill treasury note used to pay six 820 00:50:19,840 --> 00:50:21,680 Speaker 1: and alf p So how hard is it to make 821 00:50:21,719 --> 00:50:23,759 Speaker 1: eight at that point and today it pays one and 822 00:50:23,800 --> 00:50:29,960 Speaker 1: a half? And stocks used to stocks return in the nineties, 823 00:50:30,000 --> 00:50:32,560 Speaker 1: and it was assumed that they would return at least 824 00:50:32,600 --> 00:50:36,719 Speaker 1: eleven forever, and today it's assumed that they'll pay, they'll 825 00:50:36,760 --> 00:50:40,719 Speaker 1: make five or six. So if if the prospective returns 826 00:50:40,760 --> 00:50:46,960 Speaker 1: have come down so drastically and the expectations of institutional 827 00:50:46,960 --> 00:50:50,960 Speaker 1: investors have not, then I think that they all have 828 00:50:51,000 --> 00:50:54,040 Speaker 1: a real challenge. So I don't know if you can 829 00:50:54,080 --> 00:50:57,799 Speaker 1: really talk about state pension funds, but they seem to 830 00:50:57,800 --> 00:51:03,800 Speaker 1: be somewhat underfunded and wed to these high return expectations. 831 00:51:04,600 --> 00:51:08,440 Speaker 1: What does this tell us about the future obligations that 832 00:51:08,560 --> 00:51:12,000 Speaker 1: taxpayers may find themselves on note, for that's really one 833 00:51:12,000 --> 00:51:15,520 Speaker 1: of the great questions today, Barry that very few people 834 00:51:15,560 --> 00:51:21,880 Speaker 1: are talking about. But the pension, the the the state 835 00:51:21,960 --> 00:51:25,000 Speaker 1: or municipality puts in a certain amount of money and 836 00:51:25,040 --> 00:51:29,040 Speaker 1: then it assumes a rate of return which will enable 837 00:51:29,080 --> 00:51:31,920 Speaker 1: it to pay. But I've noticed if you assume a 838 00:51:32,040 --> 00:51:35,759 Speaker 1: high rate of return, you have less money today, but 839 00:51:36,080 --> 00:51:38,840 Speaker 1: more money down the road, and appreciably more. What that 840 00:51:38,880 --> 00:51:42,279 Speaker 1: assumption should be, and what I think it used to 841 00:51:42,320 --> 00:51:46,960 Speaker 1: be is what we can make. Now I think more 842 00:51:47,040 --> 00:51:50,520 Speaker 1: often it's what we need. But that's not right. It 843 00:51:50,520 --> 00:51:52,319 Speaker 1: should be what they can make, and what you can 844 00:51:52,360 --> 00:51:54,799 Speaker 1: make in this low return environment has come down quite 845 00:51:54,800 --> 00:52:00,000 Speaker 1: a bit, regardless of the assumed rates being too high. 846 00:52:00,239 --> 00:52:05,399 Speaker 1: Lots of funds are underfunded anyway, regardless no's and and 847 00:52:05,600 --> 00:52:09,480 Speaker 1: uh on others. If you ratchet down your return expectations, 848 00:52:09,760 --> 00:52:13,160 Speaker 1: then you're even even more undertunded. I think that most 849 00:52:13,440 --> 00:52:18,520 Speaker 1: public funds are woefully underfunded, and many of them are 850 00:52:18,560 --> 00:52:23,000 Speaker 1: working with their unions to renegotiate the pensions so that 851 00:52:23,080 --> 00:52:27,160 Speaker 1: the that that the UH funds can be returned to viability. 852 00:52:28,120 --> 00:52:31,440 Speaker 1: In some cases you can't do it, like in Illinois, 853 00:52:31,920 --> 00:52:36,080 Speaker 1: where the pension fund is a right that's guaranteed in 854 00:52:36,120 --> 00:52:42,359 Speaker 1: the constitution and you can't play with pens. So it's 855 00:52:42,600 --> 00:52:49,360 Speaker 1: unnoable how these funds will deal with the future. You 856 00:52:49,400 --> 00:52:54,120 Speaker 1: look at Illinois, it just doesn't seem that it's possible 857 00:52:54,760 --> 00:52:58,799 Speaker 1: for insolvency to be avoided really for the for the 858 00:52:58,880 --> 00:53:02,879 Speaker 1: state or for the individual for the fun you know that, Well, 859 00:53:02,960 --> 00:53:05,280 Speaker 1: it requires the state on the hook to make makeup 860 00:53:05,320 --> 00:53:08,160 Speaker 1: the short it is because because the constitutional right. So 861 00:53:08,200 --> 00:53:11,040 Speaker 1: if that's the case, does the state is the state 862 00:53:11,080 --> 00:53:15,640 Speaker 1: looking at either a renegotiation or a default. Well, it 863 00:53:16,960 --> 00:53:22,239 Speaker 1: may do. We've had some small municipal bankruptcies around the country. Yes, 864 00:53:22,800 --> 00:53:31,320 Speaker 1: Stockton for good memory, um, but you know, nobody wants 865 00:53:31,360 --> 00:53:35,959 Speaker 1: to experience these things until they have to. Nobody says, 866 00:53:36,000 --> 00:53:37,759 Speaker 1: you know, if we go on this track, we're going 867 00:53:37,800 --> 00:53:39,920 Speaker 1: to be broken ten years. So that's X y Z 868 00:53:41,560 --> 00:53:44,200 Speaker 1: unless they have to. What's the famous Hemingway quote. It 869 00:53:44,360 --> 00:53:47,120 Speaker 1: was very gradual and until it was very sudden that 870 00:53:47,239 --> 00:53:50,600 Speaker 1: the may I don't know that, I take your word 871 00:53:50,640 --> 00:53:53,400 Speaker 1: for it. How did he go bankrupt? It was very gradual. 872 00:53:53,800 --> 00:53:56,120 Speaker 1: But you know, but there is no provision for state 873 00:53:56,120 --> 00:54:01,360 Speaker 1: bankruptcies in the Bankruptcy Code. What about uh, A territory 874 00:54:01,440 --> 00:54:05,279 Speaker 1: like Puerto Rico, there was no provision for bankruptcy. That 875 00:54:05,360 --> 00:54:07,960 Speaker 1: was one of the challenges in resolving that issue, and 876 00:54:08,000 --> 00:54:11,279 Speaker 1: it had to be done consensually. But but I think 877 00:54:11,360 --> 00:54:15,640 Speaker 1: that uh, you know, if you look at the math, 878 00:54:16,880 --> 00:54:18,759 Speaker 1: you look at the funding status, and you look at 879 00:54:18,800 --> 00:54:21,880 Speaker 1: the assumed returns, a lot of public pension funds are 880 00:54:21,920 --> 00:54:24,520 Speaker 1: going to have big problems down the road. And I'm 881 00:54:24,560 --> 00:54:29,640 Speaker 1: not talking about the twenty second century, uh, And you 882 00:54:29,640 --> 00:54:33,040 Speaker 1: mean a decade or so from from here. I'm not 883 00:54:33,080 --> 00:54:35,560 Speaker 1: an expert on the numbers, but I believe that it's 884 00:54:36,200 --> 00:54:42,319 Speaker 1: more imminent than infinite. And I I just don't think that, uh, 885 00:54:42,400 --> 00:54:46,480 Speaker 1: that the average citizen, uh understands the risk. And you 886 00:54:46,480 --> 00:54:50,040 Speaker 1: know what's let's say that we did begin to have 887 00:54:50,760 --> 00:54:54,759 Speaker 1: states going under with the federal government bail amount It 888 00:54:54,840 --> 00:54:58,000 Speaker 1: depends on who's running the government, that's right. And by 889 00:54:58,040 --> 00:55:01,000 Speaker 1: the way, if you look at the stay which are 890 00:55:01,800 --> 00:55:09,239 Speaker 1: uh most troubled, you'll find out that that that the 891 00:55:09,960 --> 00:55:13,520 Speaker 1: Illinois who else is on that that shortlist? Well, I don't, 892 00:55:13,560 --> 00:55:17,319 Speaker 1: I don't, I shouldn't really go into that where where 893 00:55:17,920 --> 00:55:21,440 Speaker 1: above my depth. California has seemed to get its fiscal 894 00:55:21,480 --> 00:55:23,160 Speaker 1: house in order. Well, I think they're on the way. 895 00:55:23,200 --> 00:55:26,040 Speaker 1: They've taken some steps. But the point is I think 896 00:55:26,040 --> 00:55:32,960 Speaker 1: that that uh, you know, the the expectation that that 897 00:55:33,080 --> 00:55:35,640 Speaker 1: the states will be bailed out by the federal government, 898 00:55:35,920 --> 00:55:40,320 Speaker 1: which which means transferring money. I mean, the federal government 899 00:55:40,320 --> 00:55:43,240 Speaker 1: has no money. It is not a money making organization. 900 00:55:43,320 --> 00:55:45,840 Speaker 1: It is only an intermediary. It collects money and it 901 00:55:45,880 --> 00:55:48,160 Speaker 1: gives it out and print prints a little on the 902 00:55:48,160 --> 00:55:49,680 Speaker 1: side of prince a little. But I mean, but it 903 00:55:49,800 --> 00:55:52,120 Speaker 1: doesn't earn any money. It's not like you and me 904 00:55:52,280 --> 00:55:56,279 Speaker 1: going to work in the morning and and so so. 905 00:55:56,440 --> 00:56:03,320 Speaker 1: The the the federal government redistributes money amongst the states. 906 00:56:04,239 --> 00:56:09,040 Speaker 1: It's it's hard to see a massive trend of taking 907 00:56:09,120 --> 00:56:14,000 Speaker 1: money from the states that have been uh pro economical 908 00:56:14,080 --> 00:56:16,759 Speaker 1: and prudent and giving it out to the ones that 909 00:56:16,840 --> 00:56:25,360 Speaker 1: have been profigate, So that complicates matters. And UM, I 910 00:56:25,480 --> 00:56:30,280 Speaker 1: just think that the precarious state of public pension funds 911 00:56:30,719 --> 00:56:35,080 Speaker 1: is an issue that has received very little attention, but 912 00:56:35,560 --> 00:56:39,000 Speaker 1: will get more in the future in the coming years. 913 00:56:39,200 --> 00:56:42,400 Speaker 1: I want to jump to my favorite questions, but before 914 00:56:42,440 --> 00:56:47,120 Speaker 1: I do, I have to reference something you described, um 915 00:56:47,160 --> 00:56:50,640 Speaker 1: I believe was at the c f A event in Toronto, which, 916 00:56:50,680 --> 00:56:54,960 Speaker 1: for lack of a better phrases, is called organizational alpha. 917 00:56:55,320 --> 00:57:01,680 Speaker 1: You were describing the way your firm more than assets selection, 918 00:57:02,200 --> 00:57:07,440 Speaker 1: the way your firm processes information and create some mechanism 919 00:57:07,600 --> 00:57:13,160 Speaker 1: for identifying opportunities for investment. So so let's talk a 920 00:57:13,160 --> 00:57:16,240 Speaker 1: little bit about that. You referenced some of your colleagues 921 00:57:16,280 --> 00:57:22,120 Speaker 1: your reference Bruce Covener, Cars, Bruce carsh Bruce Kovener, different 922 00:57:22,120 --> 00:57:26,080 Speaker 1: person um the other gentleman, Sheldon Stone, Sheldon and and 923 00:57:26,120 --> 00:57:29,919 Speaker 1: who else are running different portfolios in the office. John 924 00:57:29,920 --> 00:57:32,320 Speaker 1: Brady runs the real estate and Matt Wilson and Jordan 925 00:57:32,400 --> 00:57:35,080 Speaker 1: Crews run the control funds, the Klee Kramer runs the 926 00:57:35,080 --> 00:57:37,760 Speaker 1: European control funds. Uh. You know, we have a lot 927 00:57:37,800 --> 00:57:41,000 Speaker 1: of strategies. We have a lot of great guys running them, 928 00:57:41,080 --> 00:57:44,320 Speaker 1: and even some women and so you um which is 929 00:57:44,440 --> 00:57:48,560 Speaker 1: which is relatively rare these days in in institutional asset management, 930 00:57:48,560 --> 00:57:54,120 Speaker 1: but that's starting to change. Um So you are co chairman, 931 00:57:54,600 --> 00:57:56,760 Speaker 1: co c I O. Is that correct? No, I'm co 932 00:57:56,920 --> 00:57:59,440 Speaker 1: chairman and co founder, co founder. You were ce I 933 00:57:59,520 --> 00:58:06,600 Speaker 1: O for never I misremembering that. Edit that out. We'll 934 00:58:06,640 --> 00:58:09,560 Speaker 1: we'll leave that in. Um So, how so, where I'm 935 00:58:09,560 --> 00:58:13,160 Speaker 1: where I'm getting to with this is how is the 936 00:58:13,200 --> 00:58:17,720 Speaker 1: decision making process about where to allocate capital, how aggressively 937 00:58:17,760 --> 00:58:21,640 Speaker 1: to portion? How are those decisions actually made? Sure? Well, 938 00:58:21,760 --> 00:58:25,840 Speaker 1: Number one, for the most part, Barry, we don't allocate 939 00:58:25,880 --> 00:58:29,640 Speaker 1: capital clients. Institutional clients don't go to a firm like 940 00:58:29,720 --> 00:58:31,800 Speaker 1: oak Tree and say here's a hundred million dollars. Do 941 00:58:31,840 --> 00:58:34,320 Speaker 1: what you think is right to a specific going to 942 00:58:34,400 --> 00:58:37,880 Speaker 1: a fist specific fund or strategy. So we don't have 943 00:58:37,920 --> 00:58:40,520 Speaker 1: the allocation decision. Our job is to manage the money 944 00:58:40,600 --> 00:58:46,160 Speaker 1: within the assignment. Um. When you use the term organizational alpha, 945 00:58:46,200 --> 00:58:49,000 Speaker 1: which I think is a good one. Alpha means perfect 946 00:58:49,120 --> 00:58:53,560 Speaker 1: personal skill, the the ability to add value above what 947 00:58:53,680 --> 00:58:58,320 Speaker 1: the market gives in any given niche Where does it 948 00:58:58,320 --> 00:59:00,960 Speaker 1: come from? And the answer I think is it's it's 949 00:59:01,000 --> 00:59:06,160 Speaker 1: personal or its organizational. Personal means hiring great people, and 950 00:59:06,160 --> 00:59:08,920 Speaker 1: of course we try to do that, but organizationally, I 951 00:59:09,000 --> 00:59:12,480 Speaker 1: think that you can be constructive or destructive. We have 952 00:59:13,000 --> 00:59:18,680 Speaker 1: a very explicit investment philosophy which tells everybody who works 953 00:59:18,680 --> 00:59:22,560 Speaker 1: at oak Tree what our game plan is and how 954 00:59:22,600 --> 00:59:24,960 Speaker 1: we're going to go about adding value for the clients. 955 00:59:25,960 --> 00:59:32,240 Speaker 1: An emphasis on risk control and on consistency, not on top, 956 00:59:32,280 --> 00:59:35,560 Speaker 1: that's how bottom this u and insistence that we will 957 00:59:35,600 --> 00:59:40,360 Speaker 1: only be active in inefficient markets, and a desire for 958 00:59:40,440 --> 00:59:43,200 Speaker 1: a high degree of specialization. We don't have a general 959 00:59:43,400 --> 00:59:48,760 Speaker 1: research pool. We have research teams assigned to every strategy. 960 00:59:49,800 --> 00:59:54,200 Speaker 1: We have a refusal to base investment decisions on macro forecasts, 961 00:59:54,280 --> 00:59:57,520 Speaker 1: which shouldn't come as a surprise to you, and a 962 00:59:57,600 --> 01:00:02,040 Speaker 1: reluctant to raise and lower cash to time the markets, 963 01:00:02,040 --> 01:00:04,640 Speaker 1: which we think is very difficult to do most of 964 01:00:04,640 --> 01:00:07,960 Speaker 1: the time. So everybody knows the game plan. We think 965 01:00:08,000 --> 01:00:15,160 Speaker 1: it's an effective um game plan, especially that everybody knows 966 01:00:15,240 --> 01:00:16,960 Speaker 1: that the way to succeed at oak Tree is not 967 01:00:17,040 --> 01:00:19,720 Speaker 1: by being some cowboy and swinging for the fences, but 968 01:00:19,960 --> 01:00:24,320 Speaker 1: rather to to control the risk and drive out the 969 01:00:24,320 --> 01:00:33,240 Speaker 1: negative surprises. Um So the investment philosophy gives everybody a 970 01:00:33,360 --> 01:00:37,280 Speaker 1: creed to live by and a way to pull together, 971 01:00:37,920 --> 01:00:40,760 Speaker 1: and we don't have. You know, I've seen investment organizations 972 01:00:41,120 --> 01:00:45,720 Speaker 1: torn apart by by battles between the cowboys and the chickens. 973 01:00:46,040 --> 01:00:49,400 Speaker 1: You know, in in the good markets, the cowboys say, 974 01:00:49,480 --> 01:00:51,200 Speaker 1: the chickens are put holding us back, and in the 975 01:00:51,240 --> 01:00:54,040 Speaker 1: bad markets, the chickens say, the cowboys are getting us killed. 976 01:00:54,440 --> 01:00:57,400 Speaker 1: And it's very bad. Uh it's also bad for the clients. 977 01:00:57,840 --> 01:01:00,000 Speaker 1: Our clients want to know what kind of an order 978 01:01:00,000 --> 01:01:02,920 Speaker 1: aization they're hiring, and then they want to get what 979 01:01:02,960 --> 01:01:06,920 Speaker 1: they came for, and an explicit creed like we have 980 01:01:07,560 --> 01:01:10,200 Speaker 1: enables that to be the case. So I think that 981 01:01:10,200 --> 01:01:14,800 Speaker 1: that the the the common creed the investment philosophy is 982 01:01:14,840 --> 01:01:17,280 Speaker 1: extremely important. Then the other thing is that at oak 983 01:01:17,320 --> 01:01:21,400 Speaker 1: Tree we have a structure which is designed to encourage 984 01:01:21,600 --> 01:01:27,360 Speaker 1: team behavior, not individual behavior. Uh So nobody at oak Tree, 985 01:01:27,840 --> 01:01:31,800 Speaker 1: you know, we don't have the philosophy that that exists 986 01:01:31,800 --> 01:01:34,960 Speaker 1: in some places. You eat what you kill. Uh. You know, 987 01:01:35,080 --> 01:01:38,240 Speaker 1: everybody gets paid on their own performance, and you can 988 01:01:38,320 --> 01:01:41,960 Speaker 1: quantify it down to the basis point. Uh. We get 989 01:01:42,000 --> 01:01:46,200 Speaker 1: paid at oak Tree on how the team did, how 990 01:01:46,240 --> 01:01:48,920 Speaker 1: the firm did, how the team did, what we believe 991 01:01:49,000 --> 01:01:54,000 Speaker 1: of your contribution and your potential. We don't keep records 992 01:01:54,080 --> 01:01:57,720 Speaker 1: of who gave which recommendation and how much money did 993 01:01:57,720 --> 01:02:00,440 Speaker 1: it make us or lose it. We don't pay people 994 01:02:00,480 --> 01:02:04,240 Speaker 1: based on their quantitative results in the prior year, because 995 01:02:04,400 --> 01:02:08,440 Speaker 1: quantification is in everything, and the prior year is everything. 996 01:02:08,520 --> 01:02:13,800 Speaker 1: You know, uh m Albert Einstein said, not everything that 997 01:02:13,920 --> 01:02:16,680 Speaker 1: counts can be counted, and not everything that can be 998 01:02:16,720 --> 01:02:20,880 Speaker 1: counted counts. There is so much more in assessing the 999 01:02:20,920 --> 01:02:24,240 Speaker 1: contribution of an individual to the performance of the team 1000 01:02:24,320 --> 01:02:29,320 Speaker 1: and the organization than just whether his recommendations worked last year. 1001 01:02:29,880 --> 01:02:36,280 Speaker 1: Uh that we uh insist on uh an organization that 1002 01:02:36,520 --> 01:02:39,360 Speaker 1: functions as a team for the benefit of the clients, 1003 01:02:39,680 --> 01:02:42,680 Speaker 1: and it sounds like it's certainly been working over the years. 1004 01:02:43,240 --> 01:02:46,200 Speaker 1: Let's let's jump to some of our favorite questions while 1005 01:02:46,240 --> 01:02:49,280 Speaker 1: I while I still have you, you mentioned some folks 1006 01:02:49,320 --> 01:02:52,680 Speaker 1: who influenced you at city Who who are some of 1007 01:02:52,760 --> 01:03:02,800 Speaker 1: your early mentors. I don't really have the mentors to 1008 01:03:04,120 --> 01:03:09,320 Speaker 1: talk about. My uh philosophy was shaped mostly about reading. 1009 01:03:10,080 --> 01:03:12,600 Speaker 1: So so wh who affected you well? I mentioned John 1010 01:03:12,640 --> 01:03:15,120 Speaker 1: Kenneth galbray Thrower, and I think he was terrific. And 1011 01:03:15,160 --> 01:03:17,840 Speaker 1: he talked about the fact that forecast on work, and 1012 01:03:17,840 --> 01:03:24,800 Speaker 1: he talked about um, the fact that people in the 1013 01:03:24,800 --> 01:03:29,120 Speaker 1: financial world have very short memories and that's why cycles 1014 01:03:29,120 --> 01:03:32,520 Speaker 1: tend to repeat. Has a great book called A Short 1015 01:03:32,600 --> 01:03:39,040 Speaker 1: History of Financial Euphoria which talked about the extremes of cycles, 1016 01:03:39,200 --> 01:03:42,480 Speaker 1: and that was very impactful on me. I read that 1017 01:03:42,520 --> 01:03:45,680 Speaker 1: one a long time ago. What other books have you 1018 01:03:45,720 --> 01:03:51,080 Speaker 1: read that have been very influential to your philosophy? Fooled 1019 01:03:51,080 --> 01:03:54,280 Speaker 1: by Randomness by Nassa Nicholas to Leb talks about the 1020 01:03:54,320 --> 01:03:59,520 Speaker 1: fact that the future is indeterminate and that events are 1021 01:03:59,600 --> 01:04:02,680 Speaker 1: unpret aredictable in large part because the world is subject 1022 01:04:02,760 --> 01:04:05,160 Speaker 1: to randomness. And in a world of random this, you 1023 01:04:05,200 --> 01:04:08,200 Speaker 1: can't have events that are predictable and and and I 1024 01:04:08,240 --> 01:04:11,840 Speaker 1: think he makes very very sound arguments on that subject. 1025 01:04:12,120 --> 01:04:16,240 Speaker 1: So there's any other example against the Gods by Peter 1026 01:04:16,280 --> 01:04:21,640 Speaker 1: Bernstein on the subject of of of probability and risk, 1027 01:04:22,280 --> 01:04:27,560 Speaker 1: um and and so forth. I UM, not too long 1028 01:04:27,560 --> 01:04:30,760 Speaker 1: ago had Meyer Stateman in here, and he said in 1029 01:04:30,800 --> 01:04:35,880 Speaker 1: one of his early advisers was Peter Bernstein, demanding guy, 1030 01:04:35,880 --> 01:04:38,520 Speaker 1: but he said whatever he worked with on him was 1031 01:04:38,560 --> 01:04:40,560 Speaker 1: so much better when it was done. And you know, 1032 01:04:40,680 --> 01:04:42,800 Speaker 1: I so I wrote a memo called risk in OH 1033 01:04:42,880 --> 01:04:48,680 Speaker 1: six and updated it Risk revisited in fourteen, and then 1034 01:04:48,720 --> 01:04:52,120 Speaker 1: in fifteen I found a memo from Bernstein on my 1035 01:04:52,200 --> 01:04:56,240 Speaker 1: desk and oh seven, memo from Bernstein who had passed 1036 01:04:56,240 --> 01:04:59,400 Speaker 1: away in O nine, and it was entitled can risk 1037 01:04:59,480 --> 01:05:03,000 Speaker 1: be reduced to a number? He didn't think so? I 1038 01:05:03,040 --> 01:05:06,200 Speaker 1: don't think so. I don't think that risk can be quantified. 1039 01:05:06,280 --> 01:05:09,040 Speaker 1: I think it's just a matter of subjective judgment and 1040 01:05:09,040 --> 01:05:11,640 Speaker 1: and and it had a profound influence on me, as 1041 01:05:11,640 --> 01:05:16,800 Speaker 1: he did in general. His his writing was just so 1042 01:05:18,080 --> 01:05:24,080 Speaker 1: dense with thought and so clearly structured, and his prose 1043 01:05:24,280 --> 01:05:27,400 Speaker 1: was I find any time I sit down, UM, I 1044 01:05:27,480 --> 01:05:31,400 Speaker 1: have his book on gold on my desk, and I'm 1045 01:05:31,480 --> 01:05:34,080 Speaker 1: I'm looking forward to diving into any of the books 1046 01:05:34,080 --> 01:05:36,480 Speaker 1: you want to mention you You previously mentioned Graham and Dodd. 1047 01:05:36,840 --> 01:05:39,680 Speaker 1: Is there anything else you want to reference. Uh, what 1048 01:05:39,680 --> 01:05:44,160 Speaker 1: what are you reading now? I'm reading Tim Geithner's autobiogramys 1049 01:05:44,320 --> 01:05:48,840 Speaker 1: really Stress Test and how is It's very interesting. It's 1050 01:05:50,040 --> 01:05:56,400 Speaker 1: it's not h exciting reading, it's not fun reading, but 1051 01:05:56,520 --> 01:05:59,880 Speaker 1: it's very very illuminating. Oh, you get a lot of 1052 01:05:59,880 --> 01:06:01,880 Speaker 1: in said as to what was going on behind the scenes. 1053 01:06:02,480 --> 01:06:08,280 Speaker 1: I have not read either Bernanke or Paulson's um autobiographies, 1054 01:06:08,360 --> 01:06:11,360 Speaker 1: but they are sitting on my shelf, and I'm just 1055 01:06:11,680 --> 01:06:14,160 Speaker 1: one of these days I feel obligated to get to 1056 01:06:14,200 --> 01:06:16,840 Speaker 1: the well. I think we should because if we don't 1057 01:06:17,440 --> 01:06:25,960 Speaker 1: study crises, then we are bound to repeat them quicker. 1058 01:06:26,600 --> 01:06:28,840 Speaker 1: If we study them, it will take longer. Of course, 1059 01:06:28,840 --> 01:06:32,439 Speaker 1: they'll always but you know, it was Santayana who said, 1060 01:06:33,240 --> 01:06:36,080 Speaker 1: those are those who are ignorant of history are bound 1061 01:06:36,080 --> 01:06:40,000 Speaker 1: to repeat it, and and reading the books of people 1062 01:06:40,040 --> 01:06:47,680 Speaker 1: like Paulson will help us, uh to delay their repetition. 1063 01:06:48,840 --> 01:06:51,160 Speaker 1: What do you what do you do outside of the 1064 01:06:51,200 --> 01:06:55,040 Speaker 1: office to relax? What do you do for fun? Well? 1065 01:06:55,080 --> 01:07:03,400 Speaker 1: I read, okay, and I play some tennis, and I 1066 01:07:03,600 --> 01:07:08,760 Speaker 1: uh like houses and architecture. You like architecture, I had 1067 01:07:08,840 --> 01:07:11,280 Speaker 1: no idea about that. What do you do? How does 1068 01:07:11,320 --> 01:07:14,320 Speaker 1: that express itself. Do you go on architectural tours. I'm 1069 01:07:14,360 --> 01:07:17,760 Speaker 1: assuming you've been to oak Brook and done the whole 1070 01:07:18,160 --> 01:07:24,920 Speaker 1: I do, right, I do visit uh stand out examples 1071 01:07:24,920 --> 01:07:28,000 Speaker 1: of architecture, you know. And the great thing about is 1072 01:07:28,040 --> 01:07:31,640 Speaker 1: that when you go on a business trip, right, you 1073 01:07:31,640 --> 01:07:35,160 Speaker 1: can find the best one or two examples and you 1074 01:07:35,200 --> 01:07:37,120 Speaker 1: can go visit them. It doesn't take very long. You're 1075 01:07:37,160 --> 01:07:39,240 Speaker 1: kind of bi coastal. You're in l a part of 1076 01:07:39,240 --> 01:07:42,720 Speaker 1: the year, so you have plenty of Frank Gary buildings 1077 01:07:42,760 --> 01:07:46,960 Speaker 1: and other such stuff. Your references are too modern. I 1078 01:07:46,960 --> 01:07:50,439 Speaker 1: didn't say modern. Okay, that is my bias coming out. 1079 01:07:50,800 --> 01:07:55,440 Speaker 1: I actually prefer classical architecture, Okay, such such as well. Uh, 1080 01:07:57,480 --> 01:08:00,120 Speaker 1: I mentioned Frank. When you when you go to in 1081 01:08:00,320 --> 01:08:05,800 Speaker 1: you should visit potsdown Potsdam has great examples of eighteenth 1082 01:08:05,840 --> 01:08:10,960 Speaker 1: century architecture, and and UH, you know when you go 1083 01:08:11,400 --> 01:08:14,760 Speaker 1: to UH, when you're down south, you should go to 1084 01:08:14,960 --> 01:08:20,720 Speaker 1: Mount Vernon and Manticello and so forth. Um. And it's 1085 01:08:20,760 --> 01:08:22,599 Speaker 1: really a highlight to be able to take a little 1086 01:08:22,640 --> 01:08:24,960 Speaker 1: bit out of your day to go see a great 1087 01:08:24,960 --> 01:08:30,439 Speaker 1: building that's fascinating. I had no idea. UM. You you 1088 01:08:30,600 --> 01:08:34,400 Speaker 1: occasionally bump into a millennial or a recent college grad. 1089 01:08:34,520 --> 01:08:37,240 Speaker 1: What sort of advice do you give to a young 1090 01:08:37,320 --> 01:08:40,240 Speaker 1: person just starting their career if they said, hey, I'm 1091 01:08:40,280 --> 01:08:43,559 Speaker 1: interested in finance, UH, what advice would you give them? 1092 01:08:43,600 --> 01:08:47,040 Speaker 1: I think the most important thing, Barry, is that you know, 1093 01:08:49,000 --> 01:08:52,160 Speaker 1: when I got out of grad school, I applied for 1094 01:08:52,240 --> 01:08:55,679 Speaker 1: six different jobs and sift six different fields of finance. 1095 01:08:55,720 --> 01:08:58,439 Speaker 1: I didn't know what I wanted to do. Uh, And 1096 01:08:59,040 --> 01:09:02,200 Speaker 1: I went into investment management primarily because I had had 1097 01:09:02,200 --> 01:09:04,960 Speaker 1: a good summer job at City Bank in nineteen and 1098 01:09:05,000 --> 01:09:09,439 Speaker 1: I enjoyed it. Uh. And all those jobs offered about 1099 01:09:09,479 --> 01:09:14,680 Speaker 1: the same pay. They all offered between twelve and four dollars, 1100 01:09:14,840 --> 01:09:18,320 Speaker 1: and that was a year, not a month. And then 1101 01:09:19,240 --> 01:09:22,920 Speaker 1: sometime in the eighties God looked down and he said, 1102 01:09:22,920 --> 01:09:25,040 Speaker 1: I'm going to let those people who manage money make 1103 01:09:25,080 --> 01:09:34,080 Speaker 1: more than everybody else. And so there's a tendency for 1104 01:09:34,240 --> 01:09:38,639 Speaker 1: people to go into investment management hedge fund management in particular, 1105 01:09:39,280 --> 01:09:41,960 Speaker 1: because they want to get rich. It's not a good reason. 1106 01:09:42,479 --> 01:09:46,720 Speaker 1: And what I always counseled young people is that they 1107 01:09:46,760 --> 01:09:50,800 Speaker 1: should try to find something that they will enjoy. And 1108 01:09:52,000 --> 01:09:55,120 Speaker 1: if you're doing something every day for your life, which 1109 01:09:55,240 --> 01:09:58,040 Speaker 1: is hopefully a long time and you're not enjoying it, 1110 01:09:58,080 --> 01:10:01,679 Speaker 1: then you're wasting your life and doing that the pile 1111 01:10:01,760 --> 01:10:04,680 Speaker 1: up money that you'll have left at the end. It 1112 01:10:04,720 --> 01:10:10,120 Speaker 1: seems so uh futile. So uh, you know, Christopher Morley, 1113 01:10:10,560 --> 01:10:13,559 Speaker 1: you're a great one for quotes. Christopher Morley, the English 1114 01:10:13,560 --> 01:10:18,320 Speaker 1: writer said my favorite one. He said, there's only one success, 1115 01:10:18,800 --> 01:10:20,800 Speaker 1: to be able to live your life your own way. 1116 01:10:21,920 --> 01:10:28,120 Speaker 1: And so what that means is number one. Two, follow 1117 01:10:28,200 --> 01:10:32,160 Speaker 1: the convention of society into whatever all the cool kids 1118 01:10:32,560 --> 01:10:34,559 Speaker 1: think is great at a given point in time is 1119 01:10:35,040 --> 01:10:39,280 Speaker 1: an obvious mistake. You should not let society set your goals. 1120 01:10:40,240 --> 01:10:44,839 Speaker 1: And number two, the challenge is really, in my opinion, 1121 01:10:44,880 --> 01:10:47,360 Speaker 1: to figure out what will make you happy and then 1122 01:10:47,400 --> 01:10:51,479 Speaker 1: to pursue it. Uh. But that's what I tell people. 1123 01:10:51,520 --> 01:10:54,640 Speaker 1: Try to do something you'll love. Uh. There's nothing like 1124 01:10:54,760 --> 01:10:59,080 Speaker 1: spending your day uh doing something you love. You know. 1125 01:10:59,120 --> 01:11:01,760 Speaker 1: I always say to people that investment management is great. 1126 01:11:01,760 --> 01:11:04,559 Speaker 1: I would do it for nothing if I if I 1127 01:11:04,600 --> 01:11:08,200 Speaker 1: had to. Fortunately I don't have to. My wife says 1128 01:11:08,200 --> 01:11:13,360 Speaker 1: I'm gainfully unemployed, which which is pretty much exactly what 1129 01:11:13,560 --> 01:11:16,120 Speaker 1: you're saying. Well, there's you know, we only get one life. 1130 01:11:16,520 --> 01:11:19,040 Speaker 1: You get to be my age. You're getting there one 1131 01:11:19,040 --> 01:11:22,240 Speaker 1: of these days, but you realize that it's not finite. 1132 01:11:22,280 --> 01:11:24,280 Speaker 1: My wife says, none of us is getting out of 1133 01:11:24,280 --> 01:11:30,000 Speaker 1: this alive. So the only thing that makes sense is 1134 01:11:30,080 --> 01:11:37,360 Speaker 1: to try to maximize our satisfaction with our lives. You 1135 01:11:37,400 --> 01:11:40,040 Speaker 1: get to be seventy nine years old, you look back, 1136 01:11:40,040 --> 01:11:44,040 Speaker 1: you say, damn, I should have X y Z. It's unfixable. 1137 01:11:44,920 --> 01:11:47,840 Speaker 1: That's what you must think about. What will I how 1138 01:11:47,880 --> 01:11:51,760 Speaker 1: will I feel about my life at the end? And 1139 01:11:51,840 --> 01:11:56,120 Speaker 1: you have to behave in accordance to not having regret 1140 01:11:55,920 --> 01:11:59,519 Speaker 1: at the end. And and from what I'm told, very 1141 01:11:59,520 --> 01:12:01,960 Speaker 1: few people will say I should have spent more time 1142 01:12:02,000 --> 01:12:05,839 Speaker 1: at the office. Very few. Um and our final question, 1143 01:12:06,400 --> 01:12:09,360 Speaker 1: what is it that you know about investing in any 1144 01:12:09,439 --> 01:12:12,599 Speaker 1: of its? Guys? Is that you wish you knew when 1145 01:12:12,680 --> 01:12:18,360 Speaker 1: you began low back in the nineteen sixties nine seventies. Well, 1146 01:12:18,400 --> 01:12:21,360 Speaker 1: I think that that. You know, I've learned a lot 1147 01:12:21,360 --> 01:12:25,160 Speaker 1: of lessons through experience. As we discussed getting what you 1148 01:12:25,200 --> 01:12:29,080 Speaker 1: didn't want, it's right and and uh, you know, those 1149 01:12:29,120 --> 01:12:31,439 Speaker 1: are the things that have shaped my philosophy to be 1150 01:12:32,000 --> 01:12:36,200 Speaker 1: what it is today. The the futility of trying to 1151 01:12:36,240 --> 01:12:42,320 Speaker 1: guess the future, the importance of understanding cycles, the essential 1152 01:12:43,360 --> 01:12:47,280 Speaker 1: character of value, that it's not what you buy, it's 1153 01:12:47,320 --> 01:12:52,080 Speaker 1: what you pay. Um, the essential character of value. Yes, 1154 01:12:52,200 --> 01:12:56,320 Speaker 1: I mean the relationship between price and value determines your success. 1155 01:12:56,720 --> 01:13:00,920 Speaker 1: Not buying high quality assets, not shunning low quality assets, 1156 01:13:00,960 --> 01:13:07,560 Speaker 1: but buying assets of of any quality when they're available 1157 01:13:07,680 --> 01:13:11,160 Speaker 1: cheaper than they should be. Uh. So, I think that 1158 01:13:11,560 --> 01:13:14,960 Speaker 1: these are the kinds of the importance of controlling emotion, 1159 01:13:15,360 --> 01:13:19,400 Speaker 1: the importance of contrarianism. In fact, I got great news, Marry. 1160 01:13:20,439 --> 01:13:23,519 Speaker 1: My book, The Most Important Thing, has twenty chapters, and 1161 01:13:23,680 --> 01:13:27,639 Speaker 1: each chapter says the most important thing is, and then 1162 01:13:27,640 --> 01:13:31,519 Speaker 1: it's a different thing. And I've tried to distill the 1163 01:13:31,560 --> 01:13:35,320 Speaker 1: important lessons of my career into that book. And uh 1164 01:13:35,479 --> 01:13:38,960 Speaker 1: and I'm satisfied with the job I have done, and 1165 01:13:39,080 --> 01:13:41,799 Speaker 1: as have everybody who's read the book. I can't recommend 1166 01:13:41,840 --> 01:13:45,520 Speaker 1: it enough. Um. The blurb on the cover is Warren Buffett, 1167 01:13:46,200 --> 01:13:49,400 Speaker 1: who is essentially the person who you tell a lovely 1168 01:13:49,400 --> 01:13:52,960 Speaker 1: story about him, saying, why don't you write a book? Howard? 1169 01:13:52,960 --> 01:13:56,080 Speaker 1: I tried, he he wrote me. I always figured that 1170 01:13:56,200 --> 01:14:00,200 Speaker 1: when I retired, I would pull the memos to other 1171 01:14:00,400 --> 01:14:06,040 Speaker 1: into a coherent uh book and uh in. I got 1172 01:14:06,040 --> 01:14:08,679 Speaker 1: a an email from Warren and he said, if you'll 1173 01:14:08,720 --> 01:14:10,919 Speaker 1: write a book, I'll give you a blurb for the jacket. 1174 01:14:11,400 --> 01:14:14,240 Speaker 1: And that was all the motivation I needed to get going. 1175 01:14:14,880 --> 01:14:17,200 Speaker 1: And and the book came out a year later. And 1176 01:14:17,400 --> 01:14:19,880 Speaker 1: by the way, I love the fact that Warren Buffett says, 1177 01:14:20,240 --> 01:14:22,360 Speaker 1: you know who, I'd like to read a book from 1178 01:14:22,520 --> 01:14:25,080 Speaker 1: that Howard Marks guy. Send him an email telling him 1179 01:14:25,080 --> 01:14:27,200 Speaker 1: I'll give him a blurb, and a year later I'll 1180 01:14:27,200 --> 01:14:29,360 Speaker 1: get a book from him. Well, I mean, the amazing 1181 01:14:29,439 --> 01:14:32,200 Speaker 1: thing is the amazing thing is that somebody like Warren, 1182 01:14:33,040 --> 01:14:37,439 Speaker 1: despite the respect he enjoys and the success he has enjoyed, 1183 01:14:37,880 --> 01:14:42,519 Speaker 1: is still reading. He's a a vociferous read. And by 1184 01:14:42,520 --> 01:14:45,599 Speaker 1: the way, he doesn't read his own writing. He reads 1185 01:14:45,600 --> 01:14:49,720 Speaker 1: from other people and and and and and glean's what 1186 01:14:49,920 --> 01:14:55,000 Speaker 1: is to be gotten? And you know, he's eighty seven. 1187 01:14:55,080 --> 01:14:58,160 Speaker 1: I think he's not done learning. He he just said, 1188 01:14:58,240 --> 01:15:00,519 Speaker 1: if you've seen the HBO document to me on him, 1189 01:15:00,560 --> 01:15:03,760 Speaker 1: it's fascinating. He describes himself as he goes, I'm just 1190 01:15:03,800 --> 01:15:07,240 Speaker 1: a cigar, but there's nothing left anymore. But he still 1191 01:15:07,280 --> 01:15:09,519 Speaker 1: goes to the office him and Charlie Manger. Manger is 1192 01:15:09,640 --> 01:15:13,760 Speaker 1: ninety something and they read three or four hours a day. 1193 01:15:14,000 --> 01:15:16,960 Speaker 1: That's just astonishing. Howard, thank you so much for being 1194 01:15:17,000 --> 01:15:20,800 Speaker 1: so generous with your time. It's always a delight uh 1195 01:15:20,800 --> 01:15:24,760 Speaker 1: an instructional one chatting with you. We've been speaking with 1196 01:15:24,840 --> 01:15:28,240 Speaker 1: Howard Marks of oak Tree Capital. Be sure to go 1197 01:15:28,360 --> 01:15:31,599 Speaker 1: to oak Tree Capital dot com. You can see the 1198 01:15:31,800 --> 01:15:36,599 Speaker 1: entire collection of chairman's memos. Each one is a lesson 1199 01:15:36,640 --> 01:15:39,840 Speaker 1: in itself, the most important thing at Amazon and fine 1200 01:15:39,920 --> 01:15:44,120 Speaker 1: bookstores near you. If you have enjoyed this conversation, be 1201 01:15:44,160 --> 01:15:46,240 Speaker 1: sure and look up an inch or down an inch 1202 01:15:46,280 --> 01:15:48,960 Speaker 1: on Apple iTunes and you can see any of the 1203 01:15:49,000 --> 01:15:50,479 Speaker 1: other I want to say, we're coming up on a 1204 01:15:50,560 --> 01:15:55,519 Speaker 1: hundred and forty such conversations. I would be remiss if 1205 01:15:55,560 --> 01:15:59,400 Speaker 1: I did not thank Medina A recording engineer Taylor Riggs 1206 01:15:59,479 --> 01:16:03,599 Speaker 1: or booker Michael Batnick, our head of research. We love 1207 01:16:03,640 --> 01:16:07,160 Speaker 1: your comments, feedback and suggestions right to us at m 1208 01:16:07,200 --> 01:16:10,960 Speaker 1: IB podcast at Bloomberg dot net. I'm Barry Rihults. You've 1209 01:16:11,000 --> 01:16:16,320 Speaker 1: been listening to Masters in Business on Bloomberg Radio. Masters 1210 01:16:16,320 --> 01:16:19,480 Speaker 1: in Business is brought to you by the American Arbitration Association. 1211 01:16:19,840 --> 01:16:24,720 Speaker 1: Business disputes are inevitable, resolve faster with the American Arbitration Association, 1212 01:16:25,080 --> 01:16:29,479 Speaker 1: the global leader in alternative dispute resolution for over ninety years. 1213 01:16:29,960 --> 01:16:32,559 Speaker 1: Learn more at a d R dot org