Chit Chat Stocks - Howard Marks: The Distressed Debt King (What Does He Think About AI and Private Credit?)

Episode Date: April 29, 2026

On this episode of Chit Chat Stocks, Brett and Ryan go through another "superinvestor" by studying Howard Marks and his approach to the debt investing markets. We discuss: (00:00) Introduction (10:12) Understanding investing philosophy (15:24) Case Studies: The Great Financial Crisis and Inter Milan Investment (30:13) Navigating the COVID-19 Panic: Airline Investments (36:25) The TORM Case Study: A Debt-to-Equity Success (41:59) Key Takeaways from Howard Marks' Investment Philosophy (46:21) AI and Private Credit: Future Considerations ***************************************************** Subscribe to our newsletter, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Check out Value Spotlight: Stockwriteup.com  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Will the Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options. Earn interest, get it right, and earn $1 per contract at ibkr.com slash predictions. Last trading day, June 17th. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice

or recommendation. Now, please enjoy this episode. welcome into chit chat stocks a podcast to help you find your next great investment today we are studying howard marks a super investor that has been a leading distressed debt investor for decades putting up great returns for the fund he founded oak tree we'll go through all the history look at some of his famous case studies you know we're going to look at the great financial crisis his current takes on private credit and AI, and much, much more. We're going to look at his vesting style and what we and the listeners of this podcast can learn from looking at Howard Marks. This is part of our Super Investor Series. We looked at many, many investors. We're going to

look at a couple more this year. We're going to close things out in 2026 with this series. But yeah, we have, I think, 12 to 15 in the back catalog. Go check those out in the queue if you want. Before we get started, I guess I should say, my name is Brett Schaefer. I'm joined as always by Ryan Henderson, my co-host. And remember to follow the show, Chit Chat Stocks, YouTube, Spotify, Apple Podcasts. Give us a five-star review where you can. That is the best way to support this ad-supported show. And subscribe to the newsletter, Emerging Notes. The link for there will be in the show notes. Connect with us wherever you can. Ryan, I'm going to get into the history of howard marks but first what did you know about this investor before we started

studying for this episode i knew a little bit i had read i think two of his books mastering the market cycle and what's the other one the early one the one big thing is that i believe the name of the one of his early ones uh but a couple things that stood out one i did not realize how old he was. He looks pretty young in a lot of pictures. He looks healthy. He was born, I believe, in the late 40s. So he's seen a lot of cycles. He's seen a lot of different investment environments as well. And he's got the experience to show for. And then I would also describe Howard Marks as sort of a value investing purist where, and it makes for really, it makes for engaging and helpful books. And it's, it's very sort of different from our style, but there's still

a lot to be learned here. And you can see he's one of those investors that kind of thrives on complexity. All right, let's get right into it. Howard Marks is probably not as known as Peter Lynch or Warren Buffett, but he has been, I'd say, one of the quote-unquote stewards of the investing world for the last few decades. He has his frequent communications with markets. He'll go on financial media, all that good stuff. Ryan and I both read his book, Mastering the Market Cycle, although it's been many years since we have. I honestly really forgot exactly what the book is about. I think it's probably just a compilation of the memos that we read in preparation from this. And frankly, like his memos, the book can drag on a little bit, circling back and forth,

but his investment style has to the test of time. Today, we're going to be looking at that. At 80 years old, Marks is a part of the aging group of investors, I would say, that have made their mark, pun intended, in the late 60s through the 80s. Buffett, Munger, Icahn, Soros, and more. It's kind of that group that are 80 to 100 years old, maybe a little bit younger,

that have been around for the modern evolution of financial markets in the United States. Marks has followed a pretty standard path. I'm going to go through a brief history here. worked as an analyst at Citigroup from 1969 through 1978, then became a VP and portfolio manager of high-yield debt from 1978 through 1985, I believe at Citigroup. And with the craziness of interest rates and the rise of LBOs at the time, leveraged buyouts, that must have been a wonderful time to get into debt investing. And then from 1985 through 1995, he was a leader at the TCW

group in distressed investing. In 1995, he founded a firm called Oaktree, also focused on distressed debt investing. That gives him many decades in the arena investing in the debt markets. I think that counts probably 50 years at this point. Interestingly, Oaktree went public in 2012, and then in 2019, Brookfield took a 68% stake in the business. Marks and others retain the other ownership interest. And he remains co-chair of the firm, making what they say in his biography now as big picture decisions. I'm sure aged 80 years old, he has delegated some of the work. But look, he's been in this market for many, many years. It's a bit different than equity investing because we don't have the same access to these type of investments. And they're not as

public for readers, people to look at famous investments like Buffett has made. But if you want to look at his long-term track record. He's not as famous, but honestly, his returns have been fantastic. But you have to look at that in context to the entire debt market. So debt markets differ from equity markets when evaluating returns. Absolute performance may be lower than equities over a 50 to 100-year period, but investors in a bond fund or a distressed debt fund are looking for one, low volatility, usually maybe lower volatility than stocks, and uncorrelated returns across the business cycle. This is why they're popular with people like pension funds, insurance companies, things like that. And before we dive into Oaktree's returns, maybe to bring investors

up to speed, let's talk about an example of how bond returns works. Because there are varying types of bonds. You have government debt, maybe short-term treasuries is the safest. Then you have high yield. Essentially, the riskier it is that you're going to get paid back your principal, the more out on the quote unquote risk curve people take. And they'll have many different machinations. We don't have to get into all the details. It's kind of famous how complicated these things get made. If we look at Oaktree, though, they play in the high yield distressed debt market, which focuses on debt that is trading at a discounted price among troubled companies, meaning you have to do much more fundamental work on whether the company will

have the capacity to pay you back. It's not like a high-yield savings account that might just buy short-term treasuries and then pay you back. You don't worry about anything. You have to do a lot of analysis on what you get if they default, where you sit as an investor in the capital stack. And if we look at actually the math of these returns, a bond, they'll pay a coupon rate, which is that fixed annual interest payment. And I know I'm trying to keep it light on the numbers, but I think this is important to illustrate why the high-yield debt environment can produce some very, very good returns if you're an astute investor. If you have a $1,000 bond and it has a 5% interest rate, that is $50 in interest earned every year. But if that bond

is trading at a discount to its principal at, say, $0.90 on the dollar, you can buy it in the open market for $900. That brings up the curled yield to 5.6%. But if you have a bond that's at a distress level of $500 at only 50 cents on the dollar, the annual interest payment is 10% versus what you paid for on your cost basis. However, you also have your what is called yield to maturity. If the bond ever gets paid back in full, you get your initial $500 investment plus the $500 that is the gap between what the principal was and what you bought and your 10% interest payment every year, that can greatly increase returns. So for example, instead of the 5% annual return, if that $1,000 bond is over a five-year period, you can get a

23% yield to maturity. I think for anyone confused on the numbers there, just think if a bond is trading at a discounted price, you can get a very, very, very high return compared to what you might think of the low returns strictly with bonds. And that's where, hey, that's where Oak Tree and marks have decided to play. We don't have exact data. There are multiple funds within the $200 billion Oak Tree universe, but estimates are that the returns have been 19% net of fees since 1995 for the core strategy with minimal drawdowns. I think that is extremely impressive. I mean, it's not as high as the long-term returns of Buffett or early days Buffett or Druckenmiller or Soros, but I mean, for the market they're playing, that's fantastic. And we're going to

dive into how we did it, his philosophy on the market cycle. But I have a quote that maybe we can kick things off where here, quote, in the distressed debt funds that we organized in 1990 and 2002, both times of chaos and financial markets, we earned net IRRs in the 30s and 40s. If you think about it, those IRRs have to be described as apparent. No one else, no one should be able to earn returns like those without significant leverage. And yet we did, like all investors, we try to buy things for less than they're worth. The above results suggest we were aided in those funds by people who are willing to sell things far below their net worth. Why would they do so? Often because of the fire sale process described above. This is from one

of his memos. There's 1,600 pages worth of them on his website. You can peruse them for hours if you want. This is really the core of his philosophy, going into the panic and using shrewd fundamental analysis to, hey, buy some high yielding debt at a discounted price. Ryan? Anything to add there before we get into some case studies? No, to sum it up, I think he, I kind of think of Howard Marks as a classic heads I win, tails I don't lose investor or tails I don't lose much. And when we look at the Oak Tree portfolio today, the bread and butter is credit, but they do have about 30% of their assets in non-credit.

So that includes equity, includes real estate. But usually most of those investments come from the tails. I don't lose part of their bets where they will oftentimes take collateral if the debt isn't paid off or whatever. And that's kind of how they end up with this sort of hodgepodge of different assets. But I'll talk briefly about the non-credit portfolio, and then we can go through some case studies. On his returns, I'll just mention like 19% estimated net. That is good in and of itself. But when you think about it as a bond portfolio that's built to withstand difficult times, that is really astounding returns over a long period. And they're working with more than $200 billion in assets today. So they're doing it at great scale. And I think investors are more than happy, more than satisfied with those returns. So talking about the non-credit portfolio, I mentioned it earlier, about 30% today of their $200 billion plus in assets are invested in either equities, so both private equities and some public equities. You can actually look up their portfolio online and you'll get some stocks in there, but it's a microscopic portion of Oak Tree's overall assets, so it's not that indicative of how they invest really. And then they also own a bunch of real estate. So how they end up with private equity businesses usually seems to be this loan-to-own-like strategy where they offer high-yield debt to a distressed borrower.

And that distressed borrower will, if they aren't able to pay, end up offering ownership in the business as collateral and ultimately Oakshan ends up taking that over. Going through some of these, I was digging through like company after company in the private equity portfolio. There seems to be a focus on durable physical assets that typically provide like essential goods or services. one exception here is going to be my first case study, which is Inter Milan, a soccer team. That's kind of a random one. But in general, they tend to own things like on the infrastructure side. So airports or airport adjacent assets. They actually own three gates here in Austin, Texas, where I'm at. They own a lot of shipping ports, some railroads, stuff like that. That's the infrastructure side. And then they also own a lot of power related assets. So utilities, energy equipment providers. There was a high number of engineering services, like contractors, basically to the power

industry. But really, yeah, it's basically durable, physical businesses less likely to be disintermediated by anything digital from what i saw i saw very little online focused businesses there and then on the real estate side the they've got 14 billion in assets there and it's a super wide mix and i would guess a lot of these uh again not all of this is public but i would guess a lot of this is the loan to own strategy where starts as debt ends up becoming equity in some way and it goes from residential and multifamily properties to industrial properties to even commercial offices as well. It's kind of all over the place. It seems like whenever a sector is going through trouble, they go in and look for who needs money and then they structure it in a way that either

they get paid back at a really high rate or they have significant downside protection. That seems to be the strategy for oak tree and then the other part that stands out to me is i would describe them as sort of capital stack agnostic where their bread and butter is in credit and high yield debt but they are willing to buy whatever asset gives them the best opportunity so they've got convertible debt they've got you know standard high yield debt they sometimes they'll just go write out and buy a company outright or buy equity outright. They're willing to go wherever they see the best potential returns. Usually that's some blend of credit with equity downside protection. But I'll stop it there. Brett, why don't we go through some of his best investments

or most notable investments ever? You've got the first one here. Yes, the great financial crisis for a lot of investors. This is where you kind of made your mark. Again, I like using that term, but this is also his last name, for whether you're an astute investor or not. It seems like a lot of people were able to see this ahead of time and either prepare like Marks did to take advantage coming out the other side or bet against it. And the GFC in 2007 to 2009, I think, could be considered his magnum opus. He predicted the market crash generally, not perfectly,

not like Burry or something like that, and the credit crunch perfectly while raising funds to deploy in the panic. Being with a memo in early 2007, he talked about loosening lending standards. Here's a quote. Abby, the UK's second largest home loans provider, has raised the standard amount it'll lend home buyers to five times either their single or joint salaries, eclipsing the traditional borrowing levels of around three and a half times their salaries. What he said on this is, in other words, there had been a traditional rule of thumb saying that borrowers can safely handle mortgages with a face amount equal to three plus times their salaries, but now they can have five times what interest should be drawn.

He says either that the rules used to be too conservative, which can happen sometimes. I mean, that happens a lot of times in emerging markets. You know, New Bank is an example there where credit line is extremely tight for most people just because these banks are really risk-averse for poor people in that market. Or, you know, people are losing standards

and they just want to grow volumes. And that's what we saw in the great financial crisis. Yet another quote here. What do we see in the U.S. mortgage market as home prices rose and interest rates declined? First, low teaser rates, then higher loan-to-value ratios, then 100% financing, then low amortization, then no amortization, then loans requiring no documentation or employment. I mean, we've talked about this many times. A lot of investors will know the whole story of the great financial crisis, but it is crazy

that people were getting homes with no documentation. That's how crazy the bubble got. And from his perspective is he's generally from the sidelines. He wants to watch for when loosening lending standards occur in any market, not just housing. And he is just not going to bet against it, but he is waiting for the eventual bust. It's kind of just his classic mastering the market cycle of when there are loosening standards where there's a huge glut of supply of loans, when capital is flooding into an industry, almost always a bust will occur. He's not going to invest in a bubble a la Soros. He's not going to be like Burry or some other shorts out there that we've talked about that are going to bet against this stuff. But he waits with dry powder to deploy on the other side when the risk reward is favorable in the high yield markets. Quote, this is from another memo, the same thing happens in the investing world. Bad investors drive out good. When undisciplined investors are out there with lots of money to get rid of, there's less scope for disciplined investors to insist on strong covenants. That's why the level of covenant protection is a good barometer of the market climate.

So he's just saying across the housing market at the time and all the loan industry along with it, there was just loosening standards of, hey, what am I actually getting here? What protections do I have as a loan investor? And he said, all right, we're going to wait. And if the bubble does pop, as it did, we're going to be prepared on the other side. By early 2008, he was writing about how greed had toppled over in the bond market to a collapse. Quote, in times of the crisis, you sell what you can sell, not what you want to sell. Many of the entities that held CDO debt also had leveraged loans. Thus, when they couldn't get fair prices for CDO debt, they sold leveraged loans, putting

their prices under pressure as well. And when the creation of new collateralized loan obligations slowed to a trickle, the decline in demand from CLOs removed an important prop from loan prices. So this is a lot of terms to say. There were fire sales from the people associated in this market, and Otrey could come in and buy them at an extreme discount because they had the capital. He raised, I think I had a note here, I probably maybe didn't mention it, but he raised, I think, over $10 billion in 2008 in preparation for the other side. Turned out smart.

They earned some fantastic returns. I think that's about it. Yeah. In going through all his or most of his great investments over the years, I guess what I've learned is if you really need liquidity and you've got to sell something, you can expect Oaktree to be sitting there waiting. That's why Buffett, honestly, is pretty close with him because they kind of have the same mentality. Buffett retired now, but Berkshire, almost the same thing in the great financial crisis. I'm sure they were chasing similar assets and saying, look, we can be that lender of last resort. It's the same mentality.

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Last trading day for this contract is June 17th. Yeah, a couple thoughts on his timing of the great financial crisis. first off sometimes you look back at the gfc and investors say well how could you have seen that coming i bet if you're a debt investor and you saw all those things you just talked about where people are getting loans 100 financing teaser rates not showing any employment or credit history it's like you would just be you would almost feel like you have to pull a michael burry and start shorting these in some way uh but the other part is and he's talked about this it's being early on bets like this is almost it can be almost indistinguishable from being wrong because you

might have to pay premiums for it and and markets can kind of be irrational for a long time so and this is maybe something a takeaway i have for my own personal investing where if you feel like things are frothy either a you can sit with a bunch of cash on the sidelines which might be a little rough for a few years and actually could be rough for many years especially if you're wrong or and i'm guessing this is a lot of what oak tree did was have idiosyncratic assets in your portfolio that in the event of a real estate collapse you're still going to get paid and you can use that cash to redistribute. So I guess my lesson there is like, if I think things are overvalued, I should own stuff that maybe is going to hold up well in bad times if valuations start

to get depressed because all of a sudden, if all your stocks are selling off at the same time, it becomes a little more tough to reallocate. Any thoughts there before I go through my case study, Brett? I agree. Yeah, there's a lot of lessons we'll talk about at the end too that we You'll learn as investors that may not be buying bonds, but individual stocks as well, and trying to not blow up your portfolio in a boom-bust cycle that can occur in equity markets as well. Okay, the first investment I'm looking at from Oaktree's history is Inter Milan. This is not – Shocking. Not that big.

As a soccer man. Not that big in the grand scheme of things for Oak Tree, but I do think it's emblematic of their loan to own strategy overall. So I guess two reasons I'm going to talk about it is one, I like soccer, so I find it interesting, but also it showcases kind of their stereotypical investment that they've made over the years. So in 2021, there was a company called Suning Holdings Group that owned Inter Milan, the soccer team based in, as the name implies, Milan. This was a large Chinese holding company that owned a bunch of different assets. And during COVID, pretty much every soccer team was struggling revenue wise because you weren't attracting as many fans and you basically needed a cash plug during those times. However, simultaneously, Suning was facing a massive liquidity crisis because they owned a ton of commercial real estate in China and had a big investment in Evergrande. For those that don't remember that story, there was this massive Chinese property developer

who went through their own debt crisis and the government basically unwound them. So Suning could have tried to sell their stake in Evergrande, but the government probably wasn't letting them because they didn't want this fire sale on a bunch of assets. So they were just stuck holding these things for several years. So anyways, Sunin, the Inter Milan owner, needed money. And in 2021, Oak Tree provided them a 275 million euro payment in kind loan, PIK loan. And this loan structure is one where instead of making regular cash payments, The interest owed is capitalized, meaning it is added directly to the loan's outstanding principal balance. That means because the interest is added to the principal, future interest is calculated on a larger total loan amount. So this can pile up quite quickly. And from what I read, typically, you'll see these types of loans in situations where a company doesn't have the consistent cash flow to pay it off right now or on a recurring basis, but could potentially have the ability to pay it in one big balloon payment down the road.

It's the kick the can down the road loans. That's what I'd like to call. Yeah, it's basically what it is. And in this case, Suning was allowed to pay it through shares of Inter Milan. That was their collateral, which is what they ultimately had to do. They tried in May of 2024. The total debt had reached almost 400 million euros. Suning tried to organize another refinancing round with PIMCO, but the deal collapsed. So the other thing you'll see with these PIK loans is, and this sounds like a problem, but companies that are borrowing in a PIK loan will sometimes take on more debt to pay off their existing debt. But in this case, deal fell through with PIMCO and Oaktree ultimately seized control of Inter Milan in May 2024. Following the acquisition of the club, Oaktree has been pretty hands off. They retained the same, like they made no changes really to the sporting office, like anyone that's managing of the roster or anything like that. But they did bring in a club president just to manage the business side and make sure that it was run responsibly, at least on the financial side. Keep in mind, though, we talked about this whole ordeal, this entire transaction.

Pretty much none of it had anything to do with Inter Milan. Like, Inter Milan was still a fine asset during this time. The only reason this transaction happened was because Sunin needed money. uh so like inter milan obviously they had sort of the covid cash crunch but they had great following great notoriety i mean the soccer team was still doing well so they were generating consistent revenue so that wasn't the issue it's not like they needed like a turnaround and it was the asset that was causing the sell-off it was literally the buyer or the seller needed money distressed seller uh and it's almost like the underlying asset didn't matter at all it could

have been almost any asset ultimately this ends up being a decent one but it reminded me of this famous Howard Marks quote where he says our goal isn't to find good assets but good buys thus it's not what you buy it's what you pay for it so today Inter Milan is valued at roughly 1.1 to 1.3 billion dollars again sports teams or sports franchise valuations are very like rough because it's ultimately transaction based and it's what whatever the next billionaire is willing to pay for it but it's probably a decent ballpark i guess it's based on comps so some people when you go back and look at the irr on this investment some people say they bought it for basically 400 million dollars roughly because that's the total value of debt that was owed to them by sunin but

that's not really accurate because they only lent 275 million euros to sunin the rest was just the high interest payments that accrued over the three years so and obviously there would be some interest costs but ultimately what happened here is oak tree gave out 275 million euros three years later they got a 1.2 roughly billion dollar asset so was it no actual interest payments or it was all payment in kind or did they they might have got some interest on top of that in the three years interim or was it all PI whatever it is PIK I'm not sure if some of the interest was paid off but it went from 275 million owed to almost 400 million owed in three years so I'm guessing that's very little was paid off in that time so in this case they this was the tails I don't lose

and actually ultimately sort of tails I win situation assuming that they're able to sell Inter Milan at some point down the road for a decent chunk of change, they're going to have gotten a pretty, they found a distressed buyer, took it off his hands at a cheap deal, didn't get the interest payments, but there was plenty of downside protection because they were able to seize the asset. All right. Yeah. It's pretty textbook. You kind of get that protection on the downsides. I'm going to go into my second case study here is the COVID-19 panic in the airline rescue where he is looking for another heads i win tail i tails i don't lose where if you have defaults you have some protection here where you can either get playing collateral you

can either get gates you can either get loyalty membership programs which are very complicated but can be quite valuable um but yeah let's get into the coven 19 panic and what he did with some airline distressed debt uh what's nice about having these 1600 pages of memos uh frank we did not read them all uh we read some of them but we did not have time to read them all he has commented though and invested on many big events of the last three decades with real time stamps of his thoughts and covet 19 was no exception so back in 2020 while ryan and i were shocked looking at ackman's hell is coming cnbc appearance do you remember this ryan i'll never forget it i think we were in the same we were living together at the time this was must watch television

Yeah. I think people still misunderstand that CNBC appearance because they take the hell is coming quote when in reality he was trying to say hell is coming, but I'm actually going to buy the dip. But Marks, though, was preparing to deploy capital and made some interesting distressed loans to airlines as a lender of last resort.

I think sidebar, this is an example of the difference between equity and credit investors. Airlines may be a perfect area for distressed debt, But airports are where we might make a little more money as an individual stock investor. On March 19th, he published an amendment to clients. He said, quote, and this is March 19th, 2020, at one of the height of the panic. Let's see. He says, I'll share some color from Comjustin, one of our debt traders.

Quote, after two days of a basically stalled, but stressed market, we are finally finding had the rubber band snap. forced sellers uh that need immediate cash flow brought the market lower to hurry we opened three to five point lower and the street was again hesitant to take risk so only transfer to blah blah blah blah one of the brokers said it was flat out mayhem uh and he was working from home imagine what an actual trading floor would have been like it basically became ducking cover if you were a market maker as the risk-taking abilities are being hindered by their c-suite before immediate it's a bit confusing but you kind of see the chaos at the time besides immediate

needs investors sold to prepare for quarter-end redemptions, FX movements, and to fund margin calls. Short settlements were rampant and larger blocks cleared in high-quality BB credits. Most people don't even want to guess what the mark is on CCC credit risk. This ultimately ended up being the first real day of panic we have seen in a long time. Marks argued, look, he said this is going to be a good time to invest. He said, quote, we're never happy to have the events that bring on chaos and especially not the ones that are underway today. But it's sentiment like Justin describes above that fuels the emotional selling

that allows us to access the greatest bargains. In April of 2020, and this is how I think the communication piece and everything that goes around building a brand within your investment fund works because in April of 2020, they were able to look at their investors and say, hey, you trust us, we put up a good track record,

you understand clearly what our strategy is. There is $15 billion specifically to target distressed industries in the COVID lockdowns. And when you look to that, airlines were a clear candidate. He was a part of the LATAM and Azul airline restructurings. Those are two Latin American airlines. One might argue that he was bailed out by the government, but I think that is part of the equation you need to look at as an investor. You don't really need to complain that the government is doing things you wouldn't, but just invest how the world actually is. And as a part of the airline investment, they use loyalty programs and slotting fees at the airports as collateral. This allowed them some value in a default scenario

as travel was eventually going to recover. And hey, it might be a different airline, but we can get some value if we kind of lose here. They also had, quote, equity triggers, kind of like a convertible bond to help with upside. And essentially, when the airline industry recovered within a few years, the debt was refinanced in the corporate bond market and the equity values skyrocketed, I'm sure. We don't have the details of exactly what their cost basis is, what the interest income they earned versus what they actually closed out with. But within a few years, I'm sure the internal rate of return was fantastic. People look at this and say, he kind of crushed it in the COVID-19 lockdown while Buffett was selling airlines. Look,

Airlines were a tiny part of Berkshire's portfolio, but clearly Marx kind of looked at the 2020 panic. And unlike Berkshire Hathaway, which didn't really do anything, they took well advantage and seemed to do quite well by their clients. All right, folks, before we move on, let's talk about our home for investment research, Fiscal AI. Fiscal AI is a complete stock research platform for fundamental investors. We use it every single day here at Chitchat Stocks. It has everything you need to research individual companies from 20 years of financial data to company-specific segments and KPIs, earnings call transcripts, Morningstar reports, and insider ownership data, and much, much more. And they just lowered the price of their highest tier by 60%. If you want a complete enterprise-grade financial data terminal, check out Fiscal.ai.

If you use our link, fiscal.ai slash chitchat, you will automatically get two weeks of Fiscal Pro for free, no card required. And if you want to upgrade, our link will get you 15% off any paid plan. Again, that's fiscal.ai slash chitchat. The link will be in the show notes. Yeah, this actually points to probably a hidden advantage for Oak Tree, which is they've now done such a good job coming out of panics, like investing in sort of chaos that I imagine they're able to do a decent job raising funds when times are rough because they can point to here's the type of stuff we're going to invest in you've seen us do it before here's a

good opportunity to capitalize on a bunch of chaos so i imagine that does become sort of a funding advantage for that relative to other asset managers i'm going to talk about my second case study today this is probably one of the more complicated transactions i i read for uh oak tree and and howard marks this was yet another sort of debt to equity swap that ultimately it seems created a ton of value for oak tree so in 2015 the global shipping industry was in a brutal drawdown and a company named torm t-o-r-m which was a danish shipping company that transported oil products was in a liquidity crunch they owed about 1.4 billion dollars in debt to a consortium of different banks and they were struggling to generate cash keep in mind here the

the banks were pretty desperate at this point they they wanted to get their money back uh and it wasn't looking good for torm at the time at the time oak tree owned a separate smaller fleet of 25 tankers through a different fund that they managed so oak tree approached torm's lenders and told them, basically, we will give Torm, the shipping company, our 25 ships for free if you wipe out all the old debt and give us a majority of the stock. And Torm's lenders, I mean, that doesn't sound like a great deal, really, because you're getting your debt wiped out, but they were able to convert to some stock and they're willing to do it because they might not get back their 1.4 billion, but they get equity

themselves and it's equity that's worth significantly more because torm's now debt-free and has an extra 25 ships so a bit of a complicated transaction but the result was oak tree gave up 25 ships and got a 62 ownership stake in a now debt-free danish shipping giant following the acquisition oak tree apparently helped improve the business so it's cleaner balance sheet they were able to modernize the fleet make a lot of upgrades i think the 25 ships were an improvement in in terms of like equipment quality there were some operational improvements as well again it always looks better in hindsight i don't know what all the operational improvements really were and then they moved the company's primary listing to the nasdaq so they were able

to get a little more funding as well so on top of all that in 2021 uh maybe 2022 the the onset of the russia ukraine war uh basically forced a whole bunch of the most efficient shipping or short shipping routes had to be redirected which led to much longer shipping routes and torm as a shipper gets paid based on a combination of weight carried and distance traveled so their revenue skyrocketed and the result was oakshire gave up 25 ships estimates say those 25 ships would have been worth around 500 million they got 62 equity in what as of 2024 peaked at a market cap of $4 billion, and they were paid out a ton of dividends along the way. So significant improvement from the assets that they traded over. And the estimates are today that they got

around a 30% IRR. I find this one funny that they never paid for anything. They just transferred 25 ships and basically got great equity stake in a now debt-free business. But it goes to show this is again oak tree does not shy away from complexity i think they almost favor complexity because it gives them sort of a competitive advantage yeah and they want creative ways to make sure they can protect their downside whether it's the ship's loyalty program slotting fees at the airports or what we talked about with the inter milan uh able to convert into a trophy asset if things run into trouble right the portfolio we don't really have much public access to but any takeaways you kind of looked at it anything there there isn't that much

similarity across their various equity public equity stakes torm is their largest holding today by the way their largest equity holding but they've been selling that down but it basically seems that and maybe some of these are one-offs where they just thought the equity was interesting and they bought it in the open market but it seems like a lot of these were debt to equity swaps that they got in through some sort of distressed form and and now they've got sort of this residual equity portfolio because this was the downside protection on a bunch of other deals that's fair that's fair yeah not really one where you can do any 13f following um maybe someday we'll see more publicly what the bond market looks like it seems like an industry regardless

of whether you have trade web and market access trying to help where it's stuck like 40 years in the past i don't know why you can't digitally trade uh bonds but that's a whole nother topic and there's really no disclosures. So, hey, we'll be in the dark, but I think the returns have been fantastic either way. And we've had some case studies, public stuff that Marks and other people have reported on. As we round into the final segments here,

we're going to do a takeaways and then what he said about AI and private credit because people are clearly asking him a bunch about those two markets that are huge, huge debt markets at the moment. Those two takeaways, I guess you just went, so I'll kick things off here. one. The one takeaway I had are that risks are highest when everyone thinks they are lowest. He

says this time and time again. It's helped him throughout his investing career. This means that they are not properly priced in or people are generally ignoring risks to flood the market with liquidity. It's the classic quote, when the music is playing, you have to dance. Marks, to use the analogy, is the awkward guy sitting in the corner. That fits us. We don't like dancing either so yeah all right to protect your downside in bond investing the only thing you don't want is a permanent loss of capital and you want to make sure to minimize the risk of this occurring mark says that they have taken quote donuts over the years but less than others with stock investing as an individual i think this makes you is making sure you do not investing something

that has a high degree of bankruptcy risk or does not mean your shares may go down 80 percent a downturn or use margin. There's lessons here for the individual investors like our listeners and ourselves that are investing in stocks. And three, the market cycle always occurs. You can say demand is infinite. You can say people are going to pay their mortgages without... People pay their mortgages and then just do no underwriting. But again, we've seen what happened there. If there's no discipline, if there's an infinite flood of capital into a market, the cycle is going to happen. It's going to flood out the good investors with all the bad investors just giving bad loans.

And you can have a government that papers over losses, but eventually the business cycle will play out if greed comes to an excess. It's just human nature. He takes the psychology of investing and plays in, oh, I forgot to finish my notes here. It's the combination of psychology of investing and value investing.

He's using that human nature and psychology that turns into the market cycle and is saying, I'm going to wait for the fire sales, for the deep value bond plays coming out the other side yeah i think those are all good takeaways honestly my first takeaway was that for an investor like me i can't really replicate this strategy and probably shouldn't he marks and oak tree broadly fished in the areas where there were a lot of bad assets usually but they were able to position their investments or the terms of their investment in a way where they wouldn't lose money or they would be paid a ton

of interest by the underlying company which if you're just the average equity holder that might not be the most favorable outcome for you so yeah i guess my first takeaway is don't copy this uh it's unless maybe you're running a high yield debt fund and you're listening to this podcast second one and i think this is a good quote he says bold steps taken in pursuit of great performance can just as easily be wrong as right i think it's easy especially at times like right now to be envious of people who are having really good returns when times are really good and maybe they took a concentrated bet on in this case a memory chip company or some some stock that's seen those 10x returns over the last couple years but they very well could have gotten lucky and

it's not that repeatable and if they decide to replicate that strategy and try it again eventually it's going to hurt them so again taking big concentrated bets and i'm kind of saying this to myself here you are potentially just as you could be wrong as easily as you are right so don't get overconfident if it works out one time uh is probably my tip for myself and then the second or the last one for me is and it's not really the type of investment i go for but he has famously said everything is triple a at the right price and it's a good reminder that even great businesses can be bad investments if you pay the wrong price and vice versa so the example i have here is uh i own shares of wix i don't love the business but i do love the price hopefully i

don't just jinx myself but it it's a good example where you can generate good returns if if you see the right valuation the right price even if you don't really really love the underlying business yeah all right listeners are probably thinking well what about today and i kind of wanted to close things off maybe we can discuss a little bit about it you know there's there's a lot of debt flowing into ai ai infrastructure that whole complex there's been a lot of looming stories a lot of rumors just so much commentary around private credit i i don't know what to believe yet it's not something we're an expert in but there's just a ton of concerns out there and of course marks has been asked about it a bunch and has had two memos these are actually the two memos

he has released as of early 2026 i have one quote here uh let's see he essentially said i don't know if this is worth reading the whole thing but he dove into essentially having claude write a memo for him he's trying to test out whether the tools are great uh i'll say this may be a testament of him as an 80 year old he's not afraid to sound foolish and kind of do things that you know the 20 and 30 year olds might make fun of him for but you know buffett on the other hand or some of these other investors might never explore that but here is what he talks about uh let's see here's a quote he had claude come up with uh great okay he's asked about whether claude is going to replace every financial analyst and he says this is where it gets things

wrong. Great investors are much more than fast, unemotional processors of data. They have to be strong, exactly where Claude admits AI might be the weakest in dealing with novel developments where there's not enough prior experience for dependable patterns to have been compiled. They also have to make subjective decisions regarding qualitative factors and exercise taste and discernment. For instance, choosing the right counterparties has played an important part in Oak Tree's success. How will AI make judgments of that sort? And there's something else. AI doesn't have skin in the game. It doesn't feel the weight of concentrated positions or the fear of capital loss. Its willingness to take risks might not be constrained by humans' normal risk

aversion. The best investors sense potential risk intuitively, and this contributes greatly to their success. Okay. Well, what do you think? Agree or disagree with his take here? I agree. And there is one quote there that I really like is, for instance, choosing the right counterparties has played an important part in Oak Tree's success. again maybe not applicable to the average investor but would you know take that inner milan example would claude have been able to know just how desperate sunin really was for capital no my clown her party's gonna be optimist if that's the case maybe maybe it will now uh all right here's one that i think is more applicable for investors regarding what he is

concerned about today and generally with ai he kind of said too early to tell we'll see what happens over the next few years just because it's only been a couple of years of this boom he said while i mentioned it in my december memo i want to point out again that some ai revenue is currently circular in nature derived from ai companies buying from each other the chain of revenue has to ultimately rest on end users paying for real economic value and while that's increasingly the case the question of how much revenue is circular remains an open one that sums up the debate clearly. Yeah. Yeah, I agree. Any other quotes here on the private credit space? I think, yeah, this is one where he's going to be more of an expert in. He says, quote,

the massive amounts of capital that have been available for investment in direct lending created a gold rush in the last 15 years, something like $2 trillion of direct loans have been made. The whole private credit sector was $150 billion 20 years ago. And he says, quote, in my experience, the limiting factor for the credit markets is never borrowers' appetite for capital, but lenders' willingness to supply it. He quotes Field of Dreams, if you provide the capital, they'll borrow it. Thus, the makeup of the credit market was greatly influenced by the growth of private equity, the boom in capital available, and both parties' agreement that software companies were good candidates for investment. He pretty much said there's a lot

of supply here, flooding the markets, and it created a lot of bad investments. He says the The problem might not be actually as bad as the headlines say, but if your investors scream and panic and want their money back, it doesn't matter. He seems to think that if the tide comes out on private credit and direct lending, Oaktree with less exposure will be able to sift through the garbage, same as always. So it's kind of the same situation.

He's waiting if the dominoes fall, or is that the right term? If there's bargains to be had, they'll be waiting if and when they do. He's not saying they will, but he's prepared to make the investments. So what you're saying, Brett, is you think they will—Oak Street will be seizing a number of data centers in 2020. No, this is different than—this is private credit. I'd say the software companies. On the AI side, they will be— That's true.

That's true. He, I guess, would look at the situations the same way. He'd probably look at them interchangeably and say, hey, we just want downside protection. if there are fire sales like for example the core weaves the really high risk players if they have some assets we can buy at a fire sale if things kind of turn south here open ai oracle what have you they don't care what industry it is they just want good downside protection and upside if they're right yeah yeah no i mean the the underlying asset isn't the focus it's like the opposite of every other investor in the world it seems uh it's true it's true i think that's

going to do it. Any other thoughts on Howard Marks? I don't think so. We got, yeah, 50 minutes here. Should be good. A roughly hour long episode. Let us know any other super investors you want us to cover, but we've covered a lot of them. You're going to wind your way through. We're going to, I think, finish with Munger and Buffett to close things out in 2026. But before that, we got to find some other super investors that fit this criteria. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I, or any podcast guests may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future.

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