WEBVTT - Interview with Howard Marks: Masters in Business (Audio) 0:00:00.160 --> 0:00:02.360 Masters in Business is brought to you by the American 0:00:02.440 --> 0:00:07.200 Arbitration Association. Business disputes are inevitable, resolve faster with the 0:00:07.200 --> 0:00:12.280 American Arbitration Association, the global leader in alternative dispute resolution 0:00:12.360 --> 0:00:15.800 for over ninety years. Learn more at a d R 0:00:16.200 --> 0:00:22.560 dot org. This is Masters in Business with Barry Ridholts 0:00:22.600 --> 0:00:26.920 on Bloomberg Radio. This week on the podcast, I have 0:00:27.440 --> 0:00:30.560 the one and only Howard Marks of oak Tree Capital. 0:00:31.320 --> 0:00:36.320 Dear Lord, this was a master class in everything from 0:00:36.360 --> 0:00:42.479 investing to valuation two cycles to managing your own emotions. 0:00:44.080 --> 0:00:47.320 This is one of those podcasts that I guarantee you 0:00:47.360 --> 0:00:51.839 will listen to two or three or four times. My 0:00:52.000 --> 0:00:55.000 job was to just push Howard a little bit in 0:00:55.040 --> 0:00:58.040 one direction and then stay the hell out of his way. 0:00:58.680 --> 0:01:05.280 He is so experienced, knowledgeable, smart, insightful, full of wisdom, 0:01:05.400 --> 0:01:08.880 charming and and he also has a bit of a 0:01:08.920 --> 0:01:11.759 devilish sense of humor, which I don't know if you'll 0:01:11.840 --> 0:01:16.840 hear it. But the things we discussed um off camera, 0:01:16.880 --> 0:01:21.120 so to speak. I just find his his insights and 0:01:21.240 --> 0:01:25.360 his perspective delightful. I I could go on at great 0:01:25.440 --> 0:01:29.440 length of all the things we discussed. I won't. I'm 0:01:29.520 --> 0:01:33.400 just gonna say, with no further ado, my ninety minutes 0:01:33.560 --> 0:01:39.840 with Howard Marks. This is Masters in Business with Barry 0:01:39.920 --> 0:01:45.959 Ridholtz on Boomberg Radio. My special guest today is Howard Marks. 0:01:46.520 --> 0:01:51.200 He is the co founder and chairman, co chairman, co 0:01:51.360 --> 0:01:55.400 chairman of oak Tree Capital Management, and he has a 0:01:55.600 --> 0:02:01.120 long and storied history on Wall Street. Rather than go 0:02:01.280 --> 0:02:05.480 through all of the details, will discuss it as we 0:02:05.600 --> 0:02:08.240 as we get to it. I am compelled to mention 0:02:08.320 --> 0:02:16.280 that oak Trees seventeen distress debt funds have averaged after 0:02:16.480 --> 0:02:21.040 fees for the past twenty two years, far outpacing it's 0:02:21.120 --> 0:02:23.720 their peers. That's about as much of an intro as 0:02:23.760 --> 0:02:26.600 I think we really need. Let's jump right into this. 0:02:27.080 --> 0:02:32.520 I find your history really fascinating. You minored in Japanese studies. 0:02:33.200 --> 0:02:36.320 Ever plan on doing something besides finance? I never did. 0:02:36.480 --> 0:02:40.720 I was a Wharton kid. But at those days, in 0:02:40.800 --> 0:02:42.880 the mid sixties, you were required to have a non 0:02:42.919 --> 0:02:46.080 business minor and also to have one semester of the 0:02:46.120 --> 0:02:49.079 literature of a foreign country. Most people took English or 0:02:49.120 --> 0:02:52.680 French for some reason. I have no recollection of I 0:02:52.720 --> 0:02:55.720 took Japanese and I loved it, and so I turned 0:02:55.760 --> 0:02:59.040 that into my minor, and I took fifteen credits in 0:02:59.120 --> 0:03:02.960 the You would uh what was then called the Oriental 0:03:02.960 --> 0:03:06.480 Studies Department, and and you had always wanted to go 0:03:06.520 --> 0:03:09.799 into finance, and I think that's reflected you ended up 0:03:10.160 --> 0:03:14.160 graduating from Wharton with a major in finance an MBA 0:03:14.320 --> 0:03:17.359 from University of Chicago, and then you move over as 0:03:17.360 --> 0:03:20.840 an equity analyst at City Corps. Eventually you become the 0:03:20.919 --> 0:03:24.640 director of research there. Before you find your way to 0:03:24.680 --> 0:03:28.200 the Trust Company of the West and there you end 0:03:28.280 --> 0:03:32.640 up focusing on distress that high yield bonds and convertible securities, 0:03:33.000 --> 0:03:35.960 before you became their c i O for fixed income. 0:03:36.240 --> 0:03:40.520 How do you transition from equity analysts to fixed income analysts? 0:03:41.960 --> 0:03:46.880 It was a real life story, not a dream story. Um, 0:03:46.960 --> 0:03:49.560 as you say, I was director of research for equities 0:03:49.560 --> 0:03:52.760 from seventy five seventy eight. The bank was what was 0:03:52.800 --> 0:03:55.600 called the nifty fifty investor. We've invested in the fifty 0:03:55.880 --> 0:03:58.680 best and fastest growing companies in America. And it was 0:03:58.720 --> 0:04:02.360 a disaster because the official dictum was it didn't matter 0:04:02.400 --> 0:04:04.960 what price you paid. The prices paid were highly excessive. 0:04:05.000 --> 0:04:09.240 That corrected in the seventies. The the investor in these 0:04:09.280 --> 0:04:14.080 great companies probably lost eight of his money, haven't Haven't 0:04:14.120 --> 0:04:17.360 we heard that expression it doesn't matter what price you pay, 0:04:17.440 --> 0:04:20.080 you just have to own this. Well, we do hear that, 0:04:20.160 --> 0:04:22.799 And of course that's exactly the wrong thing to say. 0:04:23.040 --> 0:04:24.839 What I say is there no such thing as a 0:04:24.880 --> 0:04:27.279 good idea or a bad idea in the investment world 0:04:27.400 --> 0:04:30.480 without reference to price. It's not what you buy, it's 0:04:30.520 --> 0:04:34.360 what you pay. And finally, investing is not a matter 0:04:34.400 --> 0:04:37.080 of buying good things. It's a matter of buying things 0:04:37.080 --> 0:04:40.640 well and meaning at at the appropriate value. And people 0:04:40.760 --> 0:04:44.120 or less, and people who don't know the difference shouldn't 0:04:44.120 --> 0:04:46.640 be in the business. Well that that seems to be 0:04:47.279 --> 0:04:51.279 an issue that comes up anyway. The bank faltered with 0:04:51.360 --> 0:04:53.600 this fifty fifty. They thought it would be great if 0:04:53.600 --> 0:04:56.040 they had somebody other than me as director of research. 0:04:56.839 --> 0:05:02.280 Uh and Uh. I asked my boss, uh, Peter Vermilier, Uh, 0:05:02.320 --> 0:05:04.680 What's what's next? He said, I'd like you to start 0:05:04.720 --> 0:05:07.040 a convertible bond fund. So I moved over to the 0:05:07.480 --> 0:05:10.960 bond department in May of seventy eight, started the fund 0:05:11.040 --> 0:05:15.640 in August, and in August I got the phone call 0:05:15.680 --> 0:05:19.119 to change my life. My The head of the bond 0:05:19.160 --> 0:05:22.200 department said, there's some guy named Milken or something in 0:05:22.279 --> 0:05:25.920 California and he deals with something called high yield bonds 0:05:26.000 --> 0:05:28.360 and can you figure out what that is? A client 0:05:28.480 --> 0:05:30.919 had had come in and asked for Ohio bond fund 0:05:31.279 --> 0:05:33.599 and they asked me to be the manager and that 0:05:33.600 --> 0:05:36.000 that put me in the right place at the right time. 0:05:36.040 --> 0:05:38.880 So it was a pure luck, just serendipity. You he 0:05:38.960 --> 0:05:41.240 hasn't invest you in this client, and I'd come in 0:05:41.279 --> 0:05:43.360 with that is my only contribution. Barriers that I was 0:05:43.400 --> 0:05:47.159 smart enough to say, yes, I'm gonna I'm gonna challenge 0:05:47.160 --> 0:05:50.640 you on that a little later. So that leads to 0:05:50.680 --> 0:05:55.880 an interesting question, how did your experience with both being 0:05:56.120 --> 0:06:00.719 an equity analyst and the obvious problems with buy it 0:06:00.760 --> 0:06:03.640 at any price in the how did that affect your 0:06:03.680 --> 0:06:08.560 approach to either high yield or subsequently distressed assets. Well, 0:06:08.560 --> 0:06:12.000 what I would say is number one, you learn nothing 0:06:12.080 --> 0:06:16.920 from success. You only learned from failure. You learn from experience. 0:06:17.240 --> 0:06:19.359 Experience is what you got when you didn't get what 0:06:19.400 --> 0:06:23.320 you wanted. And so so the experience of buying top 0:06:23.360 --> 0:06:31.080 quality assets and losing was very instructive, and it, as 0:06:31.120 --> 0:06:33.599 I say, it convinced me that the key is the 0:06:33.600 --> 0:06:36.680 price you pay. Any there's no asset which is so 0:06:36.760 --> 0:06:39.800 good that it can't be overpriced. There are few assets 0:06:39.800 --> 0:06:42.320 which are so bad that they can't be underpriced. So 0:06:42.360 --> 0:06:45.000 when I switched into the HYO bond field that everybody 0:06:45.040 --> 0:06:50.880 thought was disreputable and unseemly and non fiduciary, and they 0:06:50.920 --> 0:06:54.120 called the junk you know, and I said, well, maybe 0:06:54.320 --> 0:06:57.480 maybe if it's so disparaged, maybe you can find a bargain. 0:06:58.080 --> 0:07:02.680 And in fact that was the case. The common thread 0:07:02.720 --> 0:07:05.440 between working in equities and working in high yield bonds 0:07:05.480 --> 0:07:10.120 or distress is that in most of the fixed income world, 0:07:11.200 --> 0:07:13.600 high grade fixed income treasuries and that kind of thing, 0:07:13.880 --> 0:07:16.320 the only thing that matters is the direction of interest rates. 0:07:16.640 --> 0:07:21.480 Interest rates up, price down, because everybody assumes there's no 0:07:21.520 --> 0:07:24.520 credit risk. When you get down into hyel bonds and 0:07:24.560 --> 0:07:28.080 distress debt, there is credit risk. I describe it as 0:07:28.120 --> 0:07:31.360 fixed income where what the company does matters, so you 0:07:31.440 --> 0:07:34.760 had better be able to judge the future of the company, 0:07:35.160 --> 0:07:37.560 just like you do as an equity analyst. So it 0:07:37.680 --> 0:07:41.040 was really the right skill set applied to the right 0:07:41.080 --> 0:07:45.040 asset class. I'm still taken by the phrase experience is 0:07:45.080 --> 0:07:47.920 what you get when you don't get what you want. 0:07:47.960 --> 0:07:50.000 Do do we credit you for that? Or or has 0:07:50.040 --> 0:07:53.480 that been around longer than you? Well, I'm too old 0:07:53.560 --> 0:07:57.000 to remember where I got it, so you may. I'm 0:07:57.000 --> 0:07:59.840 Barry rid Hilts. You're listening to Masters in Business on 0:08:00.000 --> 0:08:03.800 Bloomberg Radio. My special guest today really needs no introduction. 0:08:03.920 --> 0:08:07.280 He is Howard Marks. He is the co chairman and 0:08:07.480 --> 0:08:11.240 co founder of oak Tree Capital, which is now a 0:08:11.360 --> 0:08:15.200 publicly traded company and has done extremely well for its 0:08:15.240 --> 0:08:19.720 long term clients. Let's talk about what you're probably best 0:08:19.760 --> 0:08:24.240 known for, the Chairman Chairman's Men memos, which you put 0:08:24.240 --> 0:08:27.800 out every quarter. And I will quote no lesser an 0:08:27.840 --> 0:08:31.800 authority than Warren Buffett who said, when I see memos 0:08:31.840 --> 0:08:34.600 from Howard Marks in my mail that the first thing 0:08:34.640 --> 0:08:38.640 I opened and read I always learned something new. But 0:08:38.640 --> 0:08:41.920 but that's today, and when you first began these a 0:08:41.920 --> 0:08:45.920 few decades ago, that really wasn't what the response was like. 0:08:46.400 --> 0:08:48.880 Tell us about what happened in the early When did 0:08:48.880 --> 0:08:53.520 the memos begin? I started in I'm not again, I 0:08:53.559 --> 0:08:57.480 don't exactly remember why, um, but I remember the events. 0:08:57.679 --> 0:08:59.839 I went to the Midwest. I met with the head 0:08:59.840 --> 0:09:02.599 of pension funds of General Mills, and he explained to 0:09:02.640 --> 0:09:04.920 me that over the fourteen years he had run the fund, 0:09:05.200 --> 0:09:08.079 he was never above the seven percentile or below the 0:09:08.160 --> 0:09:11.800 forty seven percentile, and as a result solidly in the 0:09:11.840 --> 0:09:16.360 second quartile for fourteen years. The funny math about it 0:09:16.360 --> 0:09:17.880 in our business is if he can do that for 0:09:17.920 --> 0:09:20.920 fourteen years, you end up in the fourth percentile for 0:09:21.000 --> 0:09:23.520 the entire fourteen year period, because most people who do 0:09:23.600 --> 0:09:26.560 well for a while shoot themselves into foot ten or 0:09:26.559 --> 0:09:28.840 bottom tent exactly. So I was very impressed by that. 0:09:29.480 --> 0:09:35.720 And then I came home and h some famous value 0:09:35.920 --> 0:09:38.320 management firm had had a really tough time because they 0:09:38.360 --> 0:09:40.440 were heavy in the banks, and the banks suffered terribly. 0:09:40.720 --> 0:09:42.720 And the president comes out and he says, well, you know, 0:09:43.200 --> 0:09:45.120 of course, if you want to be in the top 0:09:45.160 --> 0:09:47.319 five percent of money managers, you have to be willing 0:09:47.320 --> 0:09:50.680 to be in the bottom five percent. And I said, 0:09:50.840 --> 0:09:53.680 how wrong can you be? I I my clients don't 0:09:53.720 --> 0:09:55.960 care for him in the top five, and they're absolutely 0:09:56.000 --> 0:09:57.960 unwilling to be in the bottom five. I like the 0:09:58.000 --> 0:10:01.360 other approach, where you're to lead just above the middle, 0:10:02.080 --> 0:10:04.000 and that puts you at the top for the long run. 0:10:04.320 --> 0:10:07.840 Second quartile over long periods of time leads to top 0:10:07.880 --> 0:10:10.040 five percent if you never have that terrible year to 0:10:10.080 --> 0:10:14.559 pull you down. So so I published the first memo 0:10:14.720 --> 0:10:19.360 called the Route to Performance. The Road to Perform its 0:10:19.400 --> 0:10:23.560 the route to the route and the interesting question what 0:10:23.720 --> 0:10:26.960 kept me going because as you say, I had, the 0:10:27.040 --> 0:10:31.080 response was thundering. I never had a response. For the 0:10:31.080 --> 0:10:34.080 first ten years, I never had one response. I never 0:10:34.160 --> 0:10:36.600 nobody ever said, good memo, and nobody said I got it, 0:10:36.640 --> 0:10:39.120 and I wrapped the fish in it. I have to 0:10:39.280 --> 0:10:43.600 I have to stop here and emphasize this. This is 0:10:44.320 --> 0:10:50.000 pre Twitter, pre Facebook, pre email. You were literally spending 0:10:50.040 --> 0:10:53.720 time running a memo, printing them out, folding them, addressing envelope, 0:10:53.720 --> 0:10:57.040 stamping them, inserting paper into envelopes, and taking him to 0:10:57.640 --> 0:10:59.360 the They used to have this thing called the mail 0:11:00.120 --> 0:11:03.559 um the post office, and you could mail envelopes that way. 0:11:03.720 --> 0:11:06.320 So you're doing this for a decade and I might 0:11:06.360 --> 0:11:08.880 as well have thrown them in the drain because I 0:11:09.000 --> 0:11:12.640 never heard back nothing. But of course to hear back, 0:11:12.960 --> 0:11:15.040 somebody would have had to either write me a letter 0:11:15.200 --> 0:11:17.120 and put a stamp on it and put it in 0:11:17.160 --> 0:11:20.120 that thing called the post office, or pick up the phone, 0:11:20.280 --> 0:11:23.320 and nobody did. So it's a solid So the question 0:11:23.360 --> 0:11:26.679 that that naturally leads to is you have to be 0:11:26.800 --> 0:11:31.679 very self motivated to express your views if you're sending 0:11:31.679 --> 0:11:36.120 this out to deafening silence. And I I was writing 0:11:36.200 --> 0:11:39.439 about stuff I believed in, and this was it was quarterly. 0:11:39.480 --> 0:11:41.319 Then is that right? No? No, there was only one 0:11:41.360 --> 0:11:44.080 in ninety and one in ninety one, and and uh, 0:11:44.240 --> 0:11:45.880 then it started to pick up a little bit. I 0:11:45.920 --> 0:11:49.480 don't remember. I never did it with the regularity in mind. 0:11:49.679 --> 0:11:51.839 And by the way, during the crisis, I probably did 0:11:51.840 --> 0:11:54.760 ten a year because there was so much to write about. Sure, 0:11:55.559 --> 0:11:58.679 so that that's amazing you kept going and then something 0:11:58.880 --> 0:12:01.880 changed into thousand. On the first day of two thousand, 0:12:02.000 --> 0:12:06.600 I wrote a memo called bubble dot com about the 0:12:06.720 --> 0:12:11.160 possible fragility of the tech bubble. Uh, and that had 0:12:11.200 --> 0:12:15.320 two virtues. Number one, it was right, and number two 0:12:15.360 --> 0:12:18.400 it was right quick. It was timely. So because if 0:12:18.400 --> 0:12:20.360 you're right, but it takes three years to happen, they 0:12:20.400 --> 0:12:24.240 don't remember you. You know, there there's there's there's saying 0:12:24.240 --> 0:12:26.920 in our business. Well, that's right if it was saying 0:12:26.920 --> 0:12:28.760 in our business that being too far ahead of your 0:12:28.800 --> 0:12:33.079 time is indistinguishable from being wrong. But this was right quickly. 0:12:33.720 --> 0:12:36.920 And so I say, I think I said in the 0:12:36.960 --> 0:12:40.920 introduction to my book that that made me after ten years, 0:12:40.960 --> 0:12:44.760 I became an overnight success. And I remember that memo. 0:12:46.040 --> 0:12:49.280 Barrens picked it up in the Wall Street Journal picked it. 0:12:49.280 --> 0:12:52.800 It made the rounds, and it was suddenly that that's 0:12:52.840 --> 0:12:55.920 exactly right, just like Playboy magazine at Summer Camp. Right, 0:12:56.240 --> 0:12:59.199 it made the rounds, to say the least. So so 0:12:59.240 --> 0:13:02.200 you don't recall what motivated you to start it. And 0:13:02.280 --> 0:13:07.360 aside from that dot com memo, what the bubble dot com? 0:13:07.400 --> 0:13:10.680 What other ones really are memorable and stay with you? 0:13:11.160 --> 0:13:17.520 I think two indicate the process for taking advantage of 0:13:17.600 --> 0:13:22.000 extremes of the cycle, and which is very important to me. 0:13:22.600 --> 0:13:25.160 And in March of oh seven, I wrote a memo 0:13:25.320 --> 0:13:27.959 called the Race to the Bottom, which you talked about 0:13:27.960 --> 0:13:30.360 the fact that when investments are in short supply and 0:13:30.440 --> 0:13:32.839 people are in heat to make them, they will bid 0:13:34.360 --> 0:13:38.400 to an extent that that makes them bad investments. And 0:13:38.480 --> 0:13:43.240 then in of course, then we had the crisis. And 0:13:43.280 --> 0:13:46.720 then in mid October eight, which was the depths of 0:13:46.760 --> 0:13:52.880 the crisis, I wrote one called Current Developments um and 0:13:52.880 --> 0:13:56.679 and another, well maybe the better one called the Limits 0:13:56.679 --> 0:14:01.400 to Negativism, in which I said, you know, everybody knows 0:14:01.440 --> 0:14:06.160 that investing requires skepticism. And most of the time skepticism 0:14:06.200 --> 0:14:08.960 consists of saying no, no, no, that's too good to 0:14:09.000 --> 0:14:13.440 be true. But in the depths of a crisis, skepticism 0:14:13.559 --> 0:14:17.120 requires you to say no, that's too bad to be true. 0:14:17.679 --> 0:14:20.960 And people were telling such horror stories and nobody could 0:14:21.000 --> 0:14:25.479 imagine any assumption which could not be exceeded on the downside. 0:14:25.800 --> 0:14:28.560 And I said, hey, people are just being too pessimistics. 0:14:28.600 --> 0:14:31.080 We actually heard people say stocks are going to zero 0:14:31.160 --> 0:14:33.600 well and and the financial world is going to melt down. 0:14:34.280 --> 0:14:37.880 And and you know, most of my I don't think 0:14:37.880 --> 0:14:41.320 these things up in my head, Barry, most of these 0:14:41.320 --> 0:14:46.080 things stem from some experien experience. And so I had 0:14:46.120 --> 0:14:48.280 a meeting with the pension manager was trying to talk 0:14:48.360 --> 0:14:53.760 that pension fund into investing in a levered loan fund 0:14:53.840 --> 0:14:58.000 of fund of loans that was had leverage and the 0:14:58.240 --> 0:15:01.960 levered return on the fund. Seeing loans was in the twenties, 0:15:03.360 --> 0:15:06.160 and he well, not only that, but he said, well 0:15:06.160 --> 0:15:09.200 what about if they are defaults? And every default scenario 0:15:09.360 --> 0:15:13.840 that I assumed, the c I oh said well what 0:15:13.880 --> 0:15:16.360 if it's worse than that? What if it's worse? What 0:15:16.440 --> 0:15:19.240 if it's worse? No, and I and and eventually I 0:15:19.360 --> 0:15:21.480 ended up saying, do you have any equities in your 0:15:21.480 --> 0:15:24.160 pencrofun And the c IO said yes. I said, well, 0:15:24.200 --> 0:15:26.200 then you better run out and sell them, because the 0:15:27.200 --> 0:15:31.440 the environment you're pushing me to assume everything is valueless. 0:15:31.720 --> 0:15:33.560 And so I ran back to my office and I 0:15:33.600 --> 0:15:36.520 wrote this memo, The Limits to Negativism, which says, sometimes 0:15:36.520 --> 0:15:38.800 you've got to say no, it can't be that bad. 0:15:38.960 --> 0:15:41.880 I'm Barry rit Hults. You're listening to Master's in Business 0:15:41.960 --> 0:15:46.240 on Bloomberg Radio. My special guest today is Howard Marks. 0:15:46.360 --> 0:15:49.600 He is the founder and co chairman, co founder really 0:15:50.520 --> 0:15:53.400 of oak Tree Capital Management, which is now a publicly 0:15:53.440 --> 0:15:59.400 traded company specializing in distress debt, convertible securities, a whole 0:15:59.480 --> 0:16:03.320 run of different fixed income related investment. And let's talk 0:16:03.320 --> 0:16:07.000 a little bit about distress debt. I look at the 0:16:07.080 --> 0:16:10.680 high yield market rates now, and there's low as they've 0:16:10.760 --> 0:16:14.720 been since, which is kind of surprising. What is that? 0:16:14.840 --> 0:16:17.560 What should we take from that? Well, Barry, people ask me, 0:16:17.720 --> 0:16:20.240 are we in a high yield bubble? And my answer 0:16:20.280 --> 0:16:23.280 is no, we're in a bond bubble, generally speaking, across 0:16:23.280 --> 0:16:25.600 the board. Does on the board, the central banks have 0:16:25.840 --> 0:16:30.840 pulled the interest rates so low that you know, all 0:16:31.000 --> 0:16:35.920 the the yields on all fixed income instruments are calibrated 0:16:36.320 --> 0:16:38.360 relative to each other. That's why we have what's called 0:16:38.360 --> 0:16:41.760 the yield curve. So if the maturity is longer, the 0:16:41.840 --> 0:16:44.040 yield is higher. If the quality is lower, the yield 0:16:44.040 --> 0:16:46.400 is higher. If the liquidity is lower, the yield is higher. 0:16:46.600 --> 0:16:48.360 But they all start from the base rate. And the 0:16:48.400 --> 0:16:52.680 central banks said back in twenty nine or ten, let's 0:16:52.680 --> 0:16:55.640 make the base rate zero to get this economy going. 0:16:56.200 --> 0:17:01.280 And so the the incremental turn you get for taking 0:17:01.320 --> 0:17:04.280 time risk, credit risk, a liquidity risk is still about 0:17:04.320 --> 0:17:07.840 the same as history. But you were starting from such 0:17:07.880 --> 0:17:10.399 a low rate. So the yield on all bonds is 0:17:10.440 --> 0:17:14.240 extremely low, including high yield bonds. So you reference the 0:17:14.280 --> 0:17:17.560 Fed taking rates to zero. Should they not have done that? 0:17:17.640 --> 0:17:20.679 Should there have been a fiscal policy instead of a 0:17:20.720 --> 0:17:24.280 monetary policy, what what options presented at that time. I 0:17:24.320 --> 0:17:26.600 think it would have been good to have. Well, in fact, 0:17:26.640 --> 0:17:30.000 we we did have some fiscal also, but not much. 0:17:30.680 --> 0:17:32.560 It would have been good to have some of that, 0:17:32.760 --> 0:17:36.480 you know, the uh we had, you know, deficit spending, 0:17:36.520 --> 0:17:39.760 the famous shovel ready projects and that kind of thing, uh, 0:17:39.800 --> 0:17:41.320 you know, would have been a good idea, were a 0:17:41.320 --> 0:17:44.439 good idea. But I think that the the the monetary 0:17:44.640 --> 0:17:48.720 was essential. And I think that you know, basically, you 0:17:48.720 --> 0:17:51.959 can't quibble with with results. We went through the worst 0:17:52.000 --> 0:17:56.439 financial crisis in eighty years, and we pulled out of 0:17:56.480 --> 0:18:00.280 it very quickly, and here we are in and I 0:18:00.359 --> 0:18:02.840 would say for most people it is a distant memory, 0:18:03.200 --> 0:18:05.680 that's true. And especially when you look around the world, 0:18:05.720 --> 0:18:09.920 if it's if you don't like this economy, well don't 0:18:09.920 --> 0:18:12.520 look overseas, because we're by far the cleanest shirt in 0:18:12.560 --> 0:18:15.000 the hamper. So people, that's a good one. So people 0:18:15.080 --> 0:18:18.720 say to me, you know, how do you grade Geitner 0:18:18.800 --> 0:18:22.000 and Banankee and Poulson and company on their handling of 0:18:22.040 --> 0:18:26.000 the crisis? And I said, you know, I don't know 0:18:26.040 --> 0:18:28.320 if I give him an A, but if you mark 0:18:28.359 --> 0:18:31.840 them on a curve, they get an A plus because 0:18:32.040 --> 0:18:35.240 clearly far they did far the best job in the world, 0:18:35.640 --> 0:18:38.479 and we are out of the crisis we had. We 0:18:38.560 --> 0:18:43.280 have had a modest recovery. But you know, there are 0:18:43.280 --> 0:18:45.480 a lot of bad things that could have happened that 0:18:45.520 --> 0:18:48.959 didn't to to money market funds, to commercial paper and 0:18:49.000 --> 0:18:52.400 so forth. And here we are, uh in a very 0:18:52.440 --> 0:18:57.600 healthy environment. So I don't quibble with the people who 0:18:57.800 --> 0:18:59.760 pull us out of the crisis, and in fact, I 0:18:59.800 --> 0:19:02.679 think they did a hell of a good job. I 0:19:02.760 --> 0:19:05.040 would not have liked to have had that job at 0:19:05.080 --> 0:19:08.240 that time. I'll quibble a little bit and saying you 0:19:08.280 --> 0:19:12.400 can give Paulson the A plus, Bernanking Geythner, we're part 0:19:12.400 --> 0:19:15.359 of the team that helped create the crisis, so I 0:19:15.400 --> 0:19:17.440 have to dock them a few points. But but but 0:19:18.680 --> 0:19:23.320 it certainly is Paulson who gets unmitigated credit to say 0:19:23.359 --> 0:19:27.439 the least's let's let's get back to um distress, Debton 0:19:27.600 --> 0:19:31.760 and and the issue you you raise here um about 0:19:31.840 --> 0:19:36.520 us doing fairly well. I noticed that credit spreads are 0:19:36.680 --> 0:19:40.200 the favorite weapon of the perma bear when they when 0:19:40.200 --> 0:19:43.680 they get too tight. The answer as well, investors are 0:19:43.680 --> 0:19:45.840 so complacent and as soon as they start to widen. 0:19:46.359 --> 0:19:50.360 It's okay, here comes the next disaster. What is going 0:19:50.400 --> 0:19:52.720 on with credit spreads? And and why is it used 0:19:53.200 --> 0:19:56.600 as that double edged sword? Well, credit spreads are to 0:19:56.680 --> 0:20:01.280 some extent that indicator of psychology. Uh um. But you know, 0:20:02.400 --> 0:20:07.399 I don't believe in taking uh my instructions from the market. 0:20:07.840 --> 0:20:11.080 I put out a memo about a year ago um 0:20:11.359 --> 0:20:13.600 as a result of a conversation I hear had here 0:20:13.600 --> 0:20:16.680 at Bloomberg where people were you remember, the markets got 0:20:16.720 --> 0:20:19.520 off to a terrible startlaship and everybody was bugging me. 0:20:19.880 --> 0:20:21.600 You know, isn't that a cell signal? If the market 0:20:21.640 --> 0:20:25.240 is holding into a cell signals? Right? So I ran 0:20:25.359 --> 0:20:27.760 back to my office again, and this time I wrote 0:20:27.760 --> 0:20:30.560 a memo entitled what does the market now? And I 0:20:30.600 --> 0:20:33.200 think it doesn't know much? But I but I do think. 0:20:33.440 --> 0:20:35.639 I do think that the that the credit spread is 0:20:35.640 --> 0:20:39.600 an indicator of the values that are available. And when 0:20:39.720 --> 0:20:42.160 when credit spreads are wide, that means, for the benefit 0:20:42.200 --> 0:20:45.840 of your listeners, that the interest on low grade bonds 0:20:45.960 --> 0:20:48.520 is much higher than it is on high grade bonds, 0:20:48.800 --> 0:20:54.200 then I think you have substantial uh incentive to invest 0:20:54.400 --> 0:20:57.879 in low grade instruments. It also is an indicator of fear. 0:20:58.640 --> 0:21:01.960 That's why spreads are wide. When spreads narrow, it means 0:21:02.000 --> 0:21:05.639 that people are less afraid. As you say, more complacent, 0:21:05.840 --> 0:21:08.760 I would say more risk tolerant, and that the reward 0:21:08.840 --> 0:21:12.199 for bearing incremental risk is on the decline, which is 0:21:12.200 --> 0:21:15.320 not a good thing. I'm Barry Ri Hults. You're listening 0:21:15.400 --> 0:21:19.160 to Masters in Business on Bloomberg Radio. My special guest 0:21:19.200 --> 0:21:22.760 today is Howard Marks of oak Tree Capital. Let's talk 0:21:22.800 --> 0:21:26.679 a little bit about volatility and uncertainty. You have a 0:21:26.760 --> 0:21:31.359 number of delightful quotes about the future, and one of 0:21:31.359 --> 0:21:36.840 my favorite is investing concerns exactly one thing dealing with 0:21:36.880 --> 0:21:40.960 the future. Yet it's clearly impossible to know anything about 0:21:41.000 --> 0:21:45.720 the future. You can't predict, you can only prepare. Discuss 0:21:45.800 --> 0:21:52.640 that well, everybody who wants to engage in investing has 0:21:52.680 --> 0:21:57.159 to reach your conclusion as to whether the future is 0:21:57.760 --> 0:22:00.960 predictable or not. If you believe that is, you'll behave 0:22:01.000 --> 0:22:05.800 one way. You will uh can reach a conclusion about 0:22:05.840 --> 0:22:08.600 what the future holds and put together the perfect portfolio 0:22:08.680 --> 0:22:14.119 for that eventuality. If you don't believe it, you will 0:22:14.600 --> 0:22:18.439 think about different possibilities and you'll put to together a 0:22:18.480 --> 0:22:22.920 portfolio that will suboptimize, that will do well under many 0:22:22.960 --> 0:22:27.800 of them, and not badly. And that's that's a difference 0:22:27.840 --> 0:22:31.760 of approach. I don't believe the future is predictable, you know. 0:22:31.840 --> 0:22:36.760 I I'm from the believers in what John Kenneth Golbreys said. 0:22:36.800 --> 0:22:38.919 He said, we have two kinds of forecasters, the ones 0:22:38.960 --> 0:22:41.040 who don't know and the ones who don't know. They 0:22:41.040 --> 0:22:43.760 don't know. Well, I know, I don't know, and so 0:22:44.400 --> 0:22:47.080 I try to put together portfolios that will do well 0:22:47.119 --> 0:22:50.880 in a variety of environments, but without trying to make 0:22:50.880 --> 0:22:53.720 a prediction about here's what's gonna happen interesting exactly, here's 0:22:53.720 --> 0:22:57.159 what's gonna do, Here's where's the recession exactly. So you 0:22:57.200 --> 0:23:02.159 can have a portfolio which is prepared for a variety 0:23:02.280 --> 0:23:08.080 of eventualities without uh insisting that any one of them 0:23:08.400 --> 0:23:11.399 is going to be the case. And that leads to 0:23:11.400 --> 0:23:14.480 another quote of yours. We can make excellent investment decisions 0:23:14.920 --> 0:23:18.000 on the basis of present observations with no need to 0:23:18.000 --> 0:23:21.320 make guesses about the future. Essentially what you just said. 0:23:21.320 --> 0:23:24.040 That's right, you know. Let me make clear one thing, Barry, 0:23:26.160 --> 0:23:28.760 it would be great if we knew what the future held. 0:23:28.760 --> 0:23:31.520 It's not like I don't care. We would be great 0:23:31.560 --> 0:23:33.520 investors if we knew what the market was going to 0:23:33.640 --> 0:23:36.600 do tomorrow in which stocks would do best. But if 0:23:36.640 --> 0:23:41.159 you reach the conclusion that you can't know, then you 0:23:41.440 --> 0:23:44.959 look for another avenue to deal with the future. And 0:23:45.000 --> 0:23:47.720 I'm in that category, and that's figuring out what's happening 0:23:47.760 --> 0:23:50.760 today and adjusting it. So so I do something I 0:23:50.840 --> 0:23:53.800 call take the temperature of the market. Okay, how does 0:23:53.800 --> 0:23:56.120 one take the temperature of the market. In fact, when 0:23:56.160 --> 0:23:59.040 we look at the market today, let's talk about stocks, 0:23:59.280 --> 0:24:02.160