We Study Billionaires - The Investor’s Podcast Network - RWH002: Investing Wisely in an Uncertain World w/ Howard Marks

Starting point is 00:00:00 You're listening to TIP. My guest today is Howard Marks, who's one of the most influential and widely admired investors of our time. Howard is the co-founder of Oak Tree Capital, where he oversees about $166 billion in assets. Oak Tree's success has made Howard a multi-billionaire, but what's really remarkable about him is the quality of his thinking. In my book, Richer Weiser Happier, I wrote a whole chapter about Howard and described him as a philosopher king of finance. As I see it, nobody I've ever met is better at explaining how to invest intelligently in an uncertain world where everything is changing all of the time and nobody knows what the future holds. As you'll hear in

Starting point is 00:00:40 this episode, one of the secrets of Howard's success is his humility. After more than 50 years in the investment business, he's still constantly challenging his own beliefs and asking himself why he might be wrong and pushing himself to adapt as the world continues to change. Howard sums up this mindset by quoting a Clint Eastwood movie, in which a cop name. named Dirty Harry says a man's got to know his limitations. In this conversation, Howard speaks candidly about why he was probably wrong to dismiss Bitcoin. He shares his views on the current market environment. He explains how to invest successfully in a period of high inflation.

Starting point is 00:01:16 And he talks about why he's so bullish about China at a time when most foreign investors think it's way too risky to invest there. He also talks about the benefits of old-fashioned values like integrity and fairness. I hope you enjoy this masterclass from Howard Marks on how to invest well, how to think well, and how to live a happy life. You're listening to The Richer, Wiser, Happier Podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life. Hi, everyone. I'm delighted to be here with Howard Marks. Howard, thank you so much for joining us. It's wonderful to see you again. It's my pleasure, William. How, you were born, I think, in 1946, maybe seven or eight months after World War II ended.

Starting point is 00:02:13 So obviously, it had been a disastrous period, particularly for Jewish families like yours and mine. And I think you grew up as the child of parents who'd also lived through the Great Depression. I'm wondering, how did your parents influence your attitude to risk and your sense that it's wise to be cautious because the world is a perilous and intensely uncertain place? Well, first of all, when you say live through the Depression, I always try to make the distinction. Not only did they live through the Depression, they were adults during the Depression. If you were five years old, you may not have a vivid memory. It may not have imprinted so much. But my parents were born in the aughts.

Starting point is 00:02:49 And so they were in their 20s plus in the Depression. And I think that if you live through that, you came away risk averse and cautious. And so when I was growing up, phrases like, save for you. for a rainy day and don't put all your eggs in one basket, we're everywhere. I think if you were born 10 years later than me or certainly 20, you never heard those things. And I think that's important. In addition, my father was a world champion pessimist. And so that also prevented me getting in the habit of expecting good things to happen. I often wonder if that's why so many of the great value investors come from these kind of Jewish backgrounds where we actually experience so much

Starting point is 00:03:32 disaster, because I remember as a kid, I would phone my grandmother and she would literally answer the phone, hello, as if someone was calling to tell her that catastrophe was arriving. So it sounds like that was deeply embedded just in your view of life as a kind of uncertain enterprise from the very beginning. Right. Now, before we go too far on this subject of Jewish families, which you raised, I have to point out, I was not brought up Jewish. My mother was a Jew who converted to Christian science because medicine wasn't curing some ill, and she got better. So she attributed to Christian science and became an ardent follower of Christian science. And I was brought up as a Christian scientist. I went to church every Sunday, Bible class every Wednesday, and never had a drink

Starting point is 00:04:14 or a trip to the doctor. That's fascinating. I remember once talking to you about that and you talking about how your sense of morality was deeply informed by what you learned from your mother and what you experienced at church. Is that fair to say? I think that's right. You know, it was of religious upbringing. So later on, if we skip forward a bit, you started in your first summer job at First City National Bank in 1968, and the summer of 1968, a great period. That was exactly when I was born Howard. And I think you became an equity analyst in 1969, when you must have been, what, about 23 years old, and then Director of Research at First City. So these were the go-go years

Starting point is 00:04:52 when the nifty, 50 stocks were soaring. And as I remember, you then lost your job as the Director of research when the bubble burst in 72 to 74. And I'm wondering what that early experience of irrational exuberance taught you. And also how that humbling early setback in your career shaped your perspective on how to invest. It seems like you went through a firestorm very early at a very formative period in your career. Yes. In looking back, William, I'm not sure I recognized at the time how bad the firestorm was. I thought I was doing okay. It's just the nifty 50 stocks that were having a terrible time. But yes, I joined the Investment Research Department for the summer at first National City Bank, which later morphed into they now call City. I believe it was

Starting point is 00:05:38 maybe the world's largest financial institution at the time, riding high, as were the nifty 50 stocks that most of the money center banks, we had this expression, money center banks, the ones in Boston and Chicago and New York. And most of the money center banks subscribed to this thing called nifty 50 investing. Investing in the 50 wasn't strictly 50, but in the best and fastest growing companies in America, companies that were so great that nothing bad could ever happen. And because they were growing so fast and of such high quality, the official dictum was that there was no such thing as a price too high. And importantly, no price too high, those four words, I think, are the hallmark of a bubble. And we hear it said

Starting point is 00:06:20 every time something's in a bubble. So looking back, I had my first brush with a bubble. And if you bought the stocks the day I reported to work and held them for five years, you lost almost all your money. Why? Number one, they were too high. And many of them carried PE ratios between 70 and 90. And five years later, between seven and nine. So there's 90% off the top right there. But secondly, these companies that were so great, nothing bad could ever happen, a lot of them turned out to have feet of clay. You know, where's Polaroid? Where's Kodak? Whatever happened to simplicity pattern? and who do you know that makes their own clothes these days? So it shows you the undying devotion to a concept, which became a bubble, which became a crash. The overall investment results at Citibank were so

Starting point is 00:07:07 bad that in 1977, they brought in a new chief investment officer, Peter Vermilier, and we hit it off well, but he wanted to have his own director of research. And I helped him land a guy named Charlie Porton for that job. And then he says to me, well, what do you want to do next? In retrospect, I think I was lucky not to get fired, but of course, in those days, corporate America pretty much involved lifetime employment. So I said, you know, I'll do anything except spend the rest of my life choosing between Merck and Lilly. There are, I believe, more and less efficient markets. And the market for the great U.S. big stocks is among the most efficient markets. And I think that to spend your life choosing among them is mostly a waste of time. And we know

Starting point is 00:07:53 that most people who manage money in the biggest stocks, most of them don't do as well as the index. So that was a good decision on my part. And Vermilier, who had come from J.P. Morgan, said that where they had a very successful convertible bond fund, he said, I want you to join the bond department and start a convertible bond fund, which I did in May of 1978. And, you know, it's interesting. I went from 75 subordinates, a $5 million budget in a time when that was a lot of money, and membership on all five of the investment groups, most important committees, to no staff, no budget, no committees.

Starting point is 00:08:32 And I was ecstatic. As director of research, my job was to know two sentences on 400 companies. Now I only had to know everything about a few companies. And I was rather than competing in the big stocks where everybody knows everything, I was competing in a small backwater that very few people were concerned with. And the scope for superior performance was much greater. And the intellectual excitement of knowing a few things in depth was terrific. And that really put my career, my life on a great upward trajectory. You also got lucky, I guess, that you were right there. at the beginning of that kind of Michael Milkin era of junk bonds, when suddenly this became an area

Starting point is 00:09:14 that would become extraordinarily important. So clearly there's an profound element of just sheer luck that you happen to catch this amazing wave. You know, I'm a great believer in luck. I've been writing the memos to clients now for, I think this is the 34th year. I wrote one, I believe it was January of 14, called Getting Lucky. And that one got the most responses of any until lately. And it was about how lucky I've been. I feel I've been inordinately lucky from the timing of my birth to my position at the front of the baby boom to the fact that I got into Wharton when they said I wouldn't and so forth. But certainly, you know, having started the convertible bond fund in May of 1978, I got the call in August that changed my life. It was from the head of the bond department. And he said,

Starting point is 00:09:57 there's some guy named Milken or something out in California, and he deals in something called high-yield bonds. Do you think you can figure out what that is? There have always been low-grade bonds, but the way they came into existence prior to 77-78 was that they were high-grade bonds that got into trouble, so-called Fallen Angels. What Michael Milken, Drexel Burnham, and some others at the time did uniquely is they had this concept that you should be able to issue non-investment grade bonds if the The interest rate is sufficient to offset the risk. Makes perfect sense. But prior to those days, it was impossible to issue a bond that was an investment grade.

Starting point is 00:10:37 Moody's in its manual defined a B-rated bond as follows. Fails to possess the characteristics of a desirable investment. In other words, it was bad. And that was without reference to price. And this was, if you think about it, the ideal bookend to my experience in the 70s. I went from losing a lot of money in the best companies in America to making a lot of money safely and steadily in the bonds of some of the worst companies in America. So it helped me to two conclusions.

Starting point is 00:11:08 It's not what you buy. It's what you pay. And good investing comes from buying things well, not from buying good things. And if you don't know the difference between buying good things and buying things well, then you're probably in the wrong business. But it was an epiphany for me. And as you say, right time, right place. the birth of the high-yield bond industry. There were two billion of bonds outstanding when I started

Starting point is 00:11:31 in 78. There are probably two trillion today. And almost every important development in the world of finance other than tech, internet, and venture is based on this idea of risk and return. That prior to these days, it was considered the investor's job to avoid risk. The epiphany for the world was you can take risk if you're adequately compensated. And that formulation really runs the investment business today. In the nifty 50 era, investors had ignored valuations, assuming you could pay any price. Then you make this fortune of cheap assets like junk bonds. So you learn these key lessons very early on about being skeptical of euphoria, seeking bargains, focusing on price. These things have worked incredibly well for you since maybe 1978, something like that. But my sense is that

Starting point is 00:12:24 those beliefs have evolved in recent years, partly because of conversations that you've had with your son, Andrew, during COVID. And I wondered if you could talk us through in some detail, what's changed, how you came to have these conversations with Andrew that I think have led some of your views about what to pay, how to deal with euphoria, when to sell, things like that. It seems like there's actually quite a profound evolution in your thinking that's taken place in the last two years. Well, well, you might could speak for the next hour just on that one question. But, you know, if you said to me, what kind of investor are you? The main bifurcation is growth versus value. And I would have said, I'm a value investor. Value invests because of the here or now. Growth invests in what's on

Starting point is 00:13:07 the come. Value invests on the basis of asset values and cash flows and growth invests on the basis of potential in the distant future. This bifurcation between growth and value really arose probably sometime in the 80s or 90s. You didn't need it before the 60s. There was only one kind of investing. And that was, well, Buffett says it was just investing. But it was really what we call value today. And then in the 60s, this thing called growth investing was invented. I remember sitting in my dad's apartment in early 60s and reading a brochure from, I think it was Merrill Lynch about growth stock investing. And so they put the label of growth stock investing on those. That meant they put the label of value investing to distinguish the other. And the investing industry, especially the stock investing

Starting point is 00:13:57 industry, really hardened around that distinction. And, you know, when you apply to an insurance company or a pension fund or a sovereign wealth fund, you say, I'd like you to hire me as an investment manager, you know, hire my firm. They say, well, which they don't always use these words, but what they say is, well, which bucket do you fall in? Because we have an allocation of money for value and we have an allocation of money for growth. By the way, we have large cap growth, large cap value, small cap, growth, small cap value, foreign growth, foreign value. It's all done on a bucket basis with allocations. And as somebody once said to me about this, the distinction kind of became theologized, you know, hardened into a religion. And fortunately, since I didn't operate

Starting point is 00:14:38 in the stock market, I was not affected by that hardening. But I still, I mean, that's the way we thought of ourselves at Oak Tree and myself as value investors, which meant we don't speculate about the future. We don't guess about what today's going to grow into. We invest on the basis of the present attributes with a modest expectation that they'll continue into the future. So fast forward to March of 2020, the pandemic hits. I'm out in California for Oak Tree's semi-annual client conference. We cancel the conference, but we decide to live stream it instead on March the 11th. We decided not to hold it on, I think, March 5th. And we did the conference to no audience on the 11th. We live streamed. It was well received. And then on the 13th, my son Andrew, his wife,

Starting point is 00:15:25 and baby arrive in California to write out the pandemic. And they move in with us. And, you know, for March, April, and May, we live together. And it's rare in today's world for three generations, even two generations of adults to live together. But it didn't used to be so rare. But the result was, great conversations. And Andrew is a professional investor, extremely thoughtful. I would say intellectual about these things, although that make it sound like he's an academic and he's certainly not academic, but he's really a thinker. And so we had spirited conversations. And the result was a memo that I wrote in January of 21 called something a value. I called it something of value because number one, it's really about how people should think about value investing and how they

Starting point is 00:16:12 should kind of elucin the divide between value and growth. And number two, the other reason for that title is that it was a silver lining in the pandemic. It really was something of great value to be able to live with my son for three months. And so intimately, also with his family. It's also a particularly wonderful memo. I say this, having probably read all of your memos over the last 30 years and many of them more than once. It's a wonderful one. Partly, I think the reason it's resonated so deeply with people is because you were humble enough to say, here I am as this kind of billionaire kind of legend in the investing industry. And you're actually open enough and humble enough to say, actually, I think there are things that my son is teaching

Starting point is 00:16:54 me that I haven't understood before. And there's something kind of lovely about seeing a father learning from his son. So if you could talk a bit about some of the key things that he said about things like, because obviously he was buying tech stocks and some growth stocks that he wasn't keen to sell at any point. And this raises real questions about your assumption that price is really what matters most and that the biggest mistake in investing is to overpay. You know, as your countryman, Winston Churchill once said of somebody, he's a humble man and he has a lot to be humble about. People liked the memo on luck because I showed people the personal side of myself and acknowledged my good luck. Even more people like something of value,

Starting point is 00:17:34 I think for the same reasons because I showed the personal and my fallibility or imperfections. You know, S&P breaks the S&P 500 equity index into a growth portion and a value portion. And if you ask the definition of the growth stocks, they're the ones that are projected to have very high rates of growth in the future. But if you look at the value stocks, it's all about price, low prices, low ratio of price to book and to revenues and to earnings. It's all about price, nothing about the companies. And what Andrew said to me, impressed on me, is that Buffett, the king of value investing. One of his important points is that when you invest, you should think of yourself as buying a piece of a company, not buying some piece of paper, you know, like a trading card,

Starting point is 00:18:19 a piece of a company. And if you buy the stock of a great company and it stays great and its future stays bright, you should tend to want to hold it for a long time. Now, this is a great departure. And another thing he pointed out was, so what does a value investor do? You know, Buffett talks about having been able to buy dollars for 50 cents. What does that mean? It means you look in the gutter, you find what you think is a dollar, you buy it for 50 cents, it becomes worth a dollar, you sell it, and you look for another dollar that you can buy for 50 cents. So it's a constant rotating process of buying cheap assets and hoping they become fully priced, and then moving on to another cheap asset. It's a short-term relationship, just designed to garner

Starting point is 00:19:01 discounts. It has nothing to do with the long-run potential of the company. When taken to extreme, though, that's not really what Buffett has done in the last 50 years. He called it cigar-butt investing. Maybe it is what he did, you know, prior to the 60s, but not since. And I think that Charlie Munger is broadly credited with getting Warren to stop doing cigar-but investing and start buying the stocks of great companies at good prices. So Andrew said, that this idea of just garnering discount, discount, discount, discount, it's not enough. You should get on some good companies. You should develop a superior understanding of those companies and know when to hold for decades. That's attractive. It doesn't fall under the canon in terms of value or

Starting point is 00:19:41 certainly not value. But you're really, you're looking for value. You can't quantify it to the penny because many of the attractions exist in the future. And so a lot of the memo was about softening the edges of this divide between value and growth. And that effect, when we started working on the memo, we made a distinction between value investing with a small V and with a capital V, that the capital V was the theologized version. But I think that he was absolutely right in his points about the fact that you have to be more open-minded. When one school of investing becomes so dogmatic and so precisely defined as value did, I think, it's limiting. Life is more ambiguous. when you have more options, but it requires a certain flexibility and open-mindedness.

Starting point is 00:20:27 And I would say that insisting on open-mindedness was one of the most important messages of the memo. Yeah, I feel like for Bill Miller, that was always part of his competitive advantage, was that he didn't have this theological view of value, that when he looked at something like Amazon, he saw that it could be worth an enormous amount one day, even though you couldn't buy it based on kind of conventional views of value back in. 99, 2000 when he was buying it. Exactly. In fact, he had a very good 99. Most value people were licking their wounds because tech, internet and growth stock soared in 99 at the apogee of the bubble. And value was left behind.

Starting point is 00:21:10 And Miller had a great 99, as I recall. And he's buying things like Amazon and so forth. And I ran into him. And I said, how could you buy? How could you or died in the world value investor by Amazon? You know what he said? It looked like value to me. And I think that that's the kind of thinking that you have to have. You know, when I was a boy in the 50s and 60s, maybe the 70s, it felt like the world didn't change much from year to year. The price of a comic book was always a dime and so forth. And so you could invest on the proposition of things being worth a lot today and they're confident that they'll be worth a lot tomorrow. But today, everything changes every day. And the role of technology is ubiquitous. And I think it's a mistake to make that distinction and to say, oh, I invest in things that I believe will not change because that seems rather closed-minded. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. In every conversation you have is with people who are actually shaping the future.

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Starting point is 00:26:04 That's Shopify. com slash WSB. All right, back to the show. Part of your advantage, obviously, over the years has been this gift for pattern recognition that you could look at a period like 1999 during the dot-com bubble and say, yep, this looks a bit like the period before 72, 74 with the nifty 50, or you would look again during the bubbly period before the global financial crisis. And you'd say, yep, this looks like another one of those again.

Starting point is 00:26:33 And part of what I'm wrestling with that I think you're something of very, value memo brings up is just the tremendous difficulty of looking at our current period where, again, there's a sense in which history is rhyming and that there's excess and excessive exuberance and too much risk-taking. But then there's also this question that you're raising in that something of value memo, which is, well, yes, sometimes the world is different. And Templeton's most expensive words in investing, that the most expensive words are this time is different. Well, sometimes, as you've said in the past, it is different. And it's likely to be different more frequently in a period. like this with very rapid change. I'm wondering how you grapple with that really kind of painful

Starting point is 00:27:12 conflict. It's a really difficult one to unravel. Well, it is. That's a great question you ask. There's no easy answer, as there isn't to most things in investing. The first time I heard those words, this time it's different, was New York Times October 11th, 1987. And I read an article that was written by Anise Wallace. The title was, this time it's not any different. And she went on to describe how people fall in line behind this time is different, but that even Templeton allowed that 20% of the time, things really are different. Life is easier if you postulate that things don't change, that the rules of the past apply, et cetera. It's more complicated when you have to live on shifting sands. By the way, what was special about October the 11th, 1987? It was eight days before Black

Starting point is 00:28:00 Monday, which was October the 19th. And if anybody who's listening to this podcast thinks that, it would be a wrenching year if the S&P or the Dow lost 11% that year. Try losing 22% in one day. That's what happened on Black Monday. And of course, that article was well-timed. Exactly right. And basically what it said is that people are throwing out valuation norms in the belief that this time is different. And in particular, there was a product around called portfolio insurance, which basically said you could increase the amount you have in the stock market without taking any incremental risk if you'll just hire on for portfolio insurance. And that's another form of it's different this time. And it also didn't work. The people who had portfolio insurance lost a lot of money. So yes, it makes life very challenging

Starting point is 00:28:48 to not believe that you can blindly apply the rules of the past. And by the way, Templeton said back in the 80s, I think it was, that 20% of the time it really is different. Now I would say it's much more than 20. Things change all the time. And so it's very hard to rely on the norms. A lot of people got into trouble in 20 because once the Fed and the Treasury enacted their rescue measures for the economy during the pandemic, the information stocks, which were the beneficiaries, took off. And pretty soon, especially on their depressed earnings, they were at extremely high PE ratios. And a lot of people said it's an anomaly, it's a mistake, it can't be the case, they're too expensive and the people who think it's different this time are smoking something. And the people who missed those stocks

Starting point is 00:29:38 in 2020 really had very inferior results. And so again, open-minded, flexible, find something great, find a company that can grow at 15% or 20% a year for 15 or 20 years. It's almost impossible to put an intrinsic value on it, but you might want to stay with it. I ask people, people on Twitter to suggest questions that I could ask you today. And one of the things I do in this podcast is when I use someone's question, I send them a signed copy of my book, Richard, why is a happier? I said, thank you. And what struck me here was I was looking at more than 50 questions that came in from people. And a whole array of them basically were asking the same thing, which was essentially what principles would you live by if you were starting over? And there's

Starting point is 00:30:19 someone called Ashutosh Parasha, if I'm pronouncing that correctly, who said, if you were starting out today, what would you do differently? Or would you apply the same principles you did when you started out. And my sense is that people have read your something of value memo and they're saying, well, wait a second. So what do I do now? Like do these ideas that we internalized from Howard's previous memos and his two extraordinary books, do they still hold? David Park also said, do you still stand by your statement that it's not what you buy, it's what you pay that determines a good investment? Or has your son influenced you on the superiority of buying compounders and holding for long periods of time? So if we could kind of draw a conclusion, what would you do if you were starting over, given that,

Starting point is 00:30:57 your views have evolved, would you still invest in the same sort of distressed assets? Would you still be looking for bargains? Would you be looking for things with a longer duration? What would change now if you were starting? Well, listen, William, certainly what I did was right for the time. I started in 68. It would have been great if in 98 I would have switched to something more expansive and jumped on Amazon at the time, but I didn't or Apple. By the way, I mentioned Vermilier said to me, what do you want to do next? And he asked me to start a convertible bond. That was perfect for me. Why? Fixed income. Credit was perfect for me. Because as a non-optimist and a non-dreamer with credit, you get the downside protection from the assets. And you know, you're well supported

Starting point is 00:31:42 and the risk is constrained. And I always tell people that if Peter Vermilia had said to me, I want you to start a venture capital fund and find Amazon when it's created in 30 years, I would have been a disaster. So one of the important lessons is you have to play within yourself, as they say on Super Bowl Sunday, and you have to do the things that fit with your personality, your makeup and your mindset. And so I think what I did was great for me at the time. I could have become more flexible and a little more of a believer earlier. And Andrew points that out, you know, one of the things that happened. You talked earlier about conditioning parents from the depression. In the beginnings of my money management career, I was successful a few times,

Starting point is 00:32:26 and sometimes in a prominent way, in blowing the whistle on excesses to the upside, in being a skeptic and in saying, well, no, that's too good to be true. And we've all lived through periods in the market when people are pricing in things that are too good to be true. Andrew pointed out when we lived together that that became a habit with me, something of a needer. So that conditioning really made me closed to new ideas. And if the goal is open-mindedness, then you shouldn't be close to things. There's a great line in the memo where you say it's very important in this new world to be curious, look deeply into things and seek to truly understand them from the bottom up rather than dismissing them out of hand. Yeah.

Starting point is 00:33:08 Well, in 20, the people look down at some of the information stocks, tech stocks. They said, well, that's selling it a PE of 80. can't be a good idea. Well, but again, you shouldn't have these hard and fast rules. And the great thing about investing is there's so many different hands. On the other hand, in response to your reader who asked the question, you've got to believe in something. You've got to draw the line someplace. So exactly how you integrate. Having standards with open-mindedness is not clear. And you know, the truth is, William, lest anyone forget, in the end, superior investing comes down to superior insight. So everything that you can do in investing is a two-edge sword. If you concentrate and you're

Starting point is 00:33:49 right, you'll make more money. If you concentrate and you're wrong, you'll lose more money. If you lever up and you're right, you'll make more money. If you'll lever up and you're wrong, you'll lose more money. On and on and on. There's only one thing, which is not a two-edge sword, and that's insight. If you have superior insight, you can do better in up markets and you can do better in down markets, although your personality comes into play. But, you know, you have to have a feel. And a feel sounds wishy-washy, but it's hard to base great decisions on quantitative analysis and that the opposite of quantitative analysis is feel. And one of the great things that Andrew pointed out when we live together, and which is discussed at length in the memo, is that the world has

Starting point is 00:34:29 become a smarter place. When Buffett was buying those dollars for 50 cents, it's because very few people understood the essence of smart investing. Very few understood where you could look for those cigar butts. And he had the field to himself. He could buy him for 50 cents because there was nobody else was a round bidding 55. And there's an image in the memo of him sitting in the back room in Omaha, paging through Moody's manual, which was thousands of pages. It had a write-up on the finances of every company in America, every public company America in one book, a couple volumes. You would have to have incredible patience and motivation and stick to it of them. very few people did and very few people knew the idea of looking for big discounts. Fast forward to

Starting point is 00:35:13 today. Today, everybody has a computer. Everybody has a data feed. Everybody can screen every company. Everybody understands this idea of picking up stocks that are too cheap and they understand that a stock selling it a PE of two or 80% of cash or something like that might be too cheap. And so this leads into something I learned in grad school, fortunately in late 60s, the efficient market hypothesis. The market is much more efficient today than it used to be. You know, it's very hard to find a piece of information that is unique. When Andrew was in college, he used to come to me and he would say, Dad, maybe we should buy Ford stock because they're bringing out a great new Mustang. And I always answered with the same thing. I said, who doesn't know that? One of the great secrets in investing,

Starting point is 00:35:53 if you think you found a piece of information, you think it's positive, is you have to say to yourself, who doesn't know that? And if it's commonly known, then it probably isn't going to be the source of superior profits. So the way Andrew formulated it was widely available quantitative information on the present is unlikely to be the source of profits because everybody has it. What's the SEC's job to make sure that everybody has the same information on the same day? When I started, you could get proprietary information. You could sit down with CEOs who wouldn't talk to anybody else and so forth. But today, everybody knows everything that's factual. So your superiority as an investor has to come from dealings which are not back to all, things that will develop in the future.

Starting point is 00:36:34 You have to either have a better understanding of non-quantitative information that's available today or a better understanding of what your future holds. And I think that both of those are summed up by what I call feel. You also have a temperamental advantage that I've seen with people like Bill Miller, Charlie Munger, Joel Tillinghouse, lots of the great investors, that you're just less emotional than most of us. it's easier for you to stand back and look at the odds dispassionately. Emotion is the greatest enemy of superior investing.

Starting point is 00:37:06 If you take a look at most people in what they call the herd or the consensus, as the economy does well, as the company's profits grow, as it reports higher earnings, as the stock rises, most people become more and more and more excited about it, more optimistic, more trusting, and more inclined to buy. So the higher the price, the more buying they do. Then eventually things stopped going so well. The economy turns down. The corporation's profits contract. The earnings announcements are negative. The price of the stock declines. People get pessimistic and depressed and more likely to sell. So the higher the price, the more likely they are to buy.

Starting point is 00:37:44 The lower the price, the more likely they are to sell. This is the opposite of what we should be doing. We should be scaling out as the price rises, perhaps, when it gets unreasonable. And we should be getting in with both feet when it falls. So clearly, most human emotion is arrayed against doing the right thing. And, you know, there are a lot of other examples, not just that. But there's a reason why Buffett said, the less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. When other people are unafraid, we should be terrified because that means they'll pay prices that are too high. When other people are terrified, we should turn aggressive because their terror makes things available to us cheaply. And you're right. I mean,

Starting point is 00:38:25 the great investors I know are unemotional about their investing and they go counter to these trends. Part of what's curious to me, though, is that I always had this image of you having interviewed you several times that I was sort of in the presence of a most superior machine that you clearly had a lot of extra IQ points, but you're also very rational and analytical. But then what kind of started to mess with my head was that I started to realize, well, actually, you do have very strong intuition. And not only that, but you were a good artist as a young man. You're a very good writer. There's something kind of curious about your makeup, where there are these characteristics that seem kind of contradictory, or at least it's very unusual to see them together in the same chemical

Starting point is 00:39:07 experiment. Does that resonate at all, that view of you? I think so. I hope so, because I'd hate to be able to be reduced to one dimension of some brain sitting in a tank, someplace, turning out investment ideas. The investors that I respect are not all the same. Some right. Some don't. Some draw. Some don't. Some ski.

Starting point is 00:39:26 Some don't. But they're all bright. Buffett says if you have an IQ of 160, sell 30 points, you don't need them. But they're all bright. And I think they're just about all unemotional. But you can be lots of other things. And in fact, I think, you know, you have to be able to, again, reach conclusions that are not analytically based, quantitatively based.

Starting point is 00:39:46 You have to have some imagination. If you go back and read the memos that I wrote, for example, during the global financial crisis, October of 08, which was the bottom for credit. It was a meltdown that was going on in the credit world that month. Or the one that I wrote two weeks earlier, it was, I guess Lehman went out bankrupt on September 15th of 08, I think it was. So I put out a memo four days later titled, I think it was now what or something like that. I think it was now what? You couldn't figure out whether or not the world was going to continue to exist. You couldn't prove that the financial institution world was not going to melt down. And a lot of people thought it would.

Starting point is 00:40:25 And a lot of people were absolutely panicking to sell. And there was no experiment. You could conduct. No calculation you could perform to prove that it wasn't going to happen. It felt like a meltdown. And we had Bear Stearns disappear and Merrill Lynch go into the hands of B of A and then Lehman bankrupt. Washington Mutual, Wachovia Bank, and everybody knew who was next and who was after them. And it felt like falling dominoes. And so I wrote a memo, now what? And I said, what do we do now? Do we buy or don't me?

Starting point is 00:40:56 And I said, if we buy and the world melts down, it doesn't matter. But if we don't buy and the world doesn't melt down, then we failed to do our job. We must buy. Now, that's not scientific. It's logical. I hope it's logical, as you say. I think I'm logical. but it sure wasn't quantitative or analytical or anything like that. It was an intuition.

Starting point is 00:41:19 And there was a deep level of gut because I remember you coming back from a meeting with an investor who kept saying, well, what if it's worse than that? What if it's worse than that? And you telling me that you rushed back to your office and you were like, I've got to write about this because sometimes it's too bad to be true. So that's actually, again, for somebody who I had viewed as a superior machine, actually, that's a lot of EQ involved in seeing that and saying, oh, people have melted down to this extent. that they can't see that things can get better? Well, I think that's right. That was discussed in a memo. I think that was October the 12th of 08, and that's one of my favorites. It's called the limits to negativism. But, you know, as an investor,

Starting point is 00:41:55 one of our responsibilities is to be skeptical. And most people think that to be a skeptic, you have to blow the whistle when people are too optimistic. Somebody comes into your office and says, I've managed money for 30 years. I've made 11% a year. I've never had a down month. You have to say, no, that's too good to be true, Mr. Madoff.

Starting point is 00:42:11 But what I realized on that day in that meeting was that our job as a skeptic also includes blowing the whistle when it's things that people are saying are too bad to be true, when there's excessive pessimism. And that's what that day was. We had a levered loan fund. It was in danger of getting a margin call and melting down. So I went around to the investors asking them all to put up more equity. And the one person that you mentioned said to me, well, what if this happens? And I said, Well, that's, we're still okay. Well, what if this had? What if it's worse than that? Well, we're still, what if it's worse than that? And I could not come up with a set of assumptions that satisfied her as to being negative enough. So, and she refused to participate in this re-equitization. So as you say,

Starting point is 00:42:57 I ran back to my office. I wrote out the memo. And she was the only one who wouldn't participate. So I felt it was my duty to put up the money. I put up the money. It was one of the best investments I I ever made. And I did it in part out of duty. You say EQ. One of the great, things we can do, which has nothing, well, it's hopefully based on financial analysis, but when we have a sense for the excesses of emotion in the market, whether it be too optimistic or too pessimistic, if you can meld that with financial analysis to have a sense for what things are worth, see the differences from where they're selling, understand the origin of the difference as coming in large part from emotion, emotional error, then you really

Starting point is 00:43:39 have a great advantage. So when you look at today's environment as someone with 50 years of patent recognition, with deep skepticism, but also with this renewed sense of humility about the fact that maybe some of your previous principles need to be updated because we're living in a different world today. How do you look at this moment that we're in now in this kind of impressionistic way that you do? Are you seeing evidence that it's a time when investors need to be more defensive than usual, that too many people are taking too much risk? Or is it, I'm just a bit of just curious to see how you weigh the kind of optimism that's baked into prices and behavior and

Starting point is 00:44:16 deal structures and the like in the way that you do when you're looking to gauge a market. Well, as I mentioned before, life gets harder when you have to give up on things never being different and when you can't live by a formula or a rule. And the S&P 500 hit 3,300 on February 19th of 20, and then it hit 2,200 and change on March the 24th. So it was like 33 days later, and it was down to third. By June of 20, it was back around 3,300, back to the all-time high. And a lot of people said, this is ridiculous because we're still in a big mess. We still have a pandemic. The economy is still shut down. We just had the worst quarter in history for GDP. How can the market possibly be back intelligently to its pre-COVID high. So people started to blow the whistle and say bubble. It's a bubble.

Starting point is 00:45:12 And obviously, now the stock market is a third higher than that. So it's around 4,500. So anybody who blew the whistle on bubble and went to the sidelines was at minimum too early. It's now 20 months later. I would normally have been among the cautionary commentators. And this was maybe it was because the conversations that were going on between me and Andrew, I couldn't bring myself to do it. Because for two reasons, number one, I think that a bubble is an irrational high. I think today's prices are not irrational. They're rational given the low level of interest rates. Interest rates have a profound effect on what something is worth in dollars.

Starting point is 00:45:51 And the lower the interest rate, the higher the value. So I think that today's values are relatively appropriate, given the level of interest rates. And the other thing is, I believed and believed that we're looking at a period of healthy economic growth. So we have rational prices, albeit low and a good economic outlook, I don't think that's a formula for a collapse of the markets. And so I've given up on saying buy, sell, in and out. What I now say is, if you know your normal risk posture is today a time to be more aggressive or more defensive. And I would say around your normal posture may be a little defensive, mainly because today's prices are fair given the interest rates, but we all think that interest

Starting point is 00:46:33 rates are going to rise somewhat, which means that assets will be worth less somewhat, offset somewhat by the economic strength. But I don't think it's a time to take extreme action, timing-wise, in either direction. I wouldn't ramp up my aggressiveness, but I wouldn't hide under the mattress. And you've lived through intense inflationary times before. Can you give those of us like me who haven't been through this before? I'm 53. I didn't experience it all. one of my childhood memories was of my dad and my uncle getting smashed by the market in those days. How does sensible, prudent investors invest wisely during inflationary times? What are the tweaks you make to your portfolio just to sort of adjust the sales a little bit

Starting point is 00:47:15 so that you're likely to survive and prosper? Well, first of all, William, you know, I get this question. Is this like the 70s? And that was our bout with inflation. And number one, I believe that some aspect of today's inflation is temporary. because I think that there were supply chain interruptions, which took longer to work out than people expected or hoped. But it makes sense. You know, a Toyota, I think has 30,000 parts. If one is unavailable, you get no cars for a while. So it makes sense. So I think that some of this,

Starting point is 00:47:49 and some of it is a bulge in demand, which came from too many people being given too much money in COVID relief in 20 and early 21. So an artificially high demand, artificially low supply, some of it will probably be temporary, depending on what happens with so-called inflationary expectations and whether they get baked in. Number two, we have roughly 7% inflation now for the last eight, nine months. We had about twice that in the 70s. Number three, nobody had an idea how to fix what was going on. We tried win buttons, whip inflation now. We tried price controls. We had a pricing czar, but they could figure out how to beat inflation. Now we know, all you have to do is raise rates. Maybe it causes a recession, but you can do it. The other thing

Starting point is 00:48:35 is that the private sector was heavily unionized in those days. It is not now. The union contracts had cost of living adjustments, where if the cost of living goes up, you get a wage increase. But if you get a wage increase, it feeds through to the cost of the goods manufacturer. There's more inflation and somebody else gets a wage increase. So it was circular and upward spiraling. We don't have colas anymore in our private sector. So I don't think we're going to have inflation like we did then or interest like like we did then. I had a loan outstanding at three quarters over for something called prime, if you remember prime. And I used to get a slip from the bank every time it changed. I have framed on my wall, the slip which says the rate on your loan is now 22 and three

Starting point is 00:49:17 quarters. I don't think we're going there. But, you know, we'll have more inflation in the next five years than we did in the last five years. There will be some unpleasant aspect. to that. It's important to remember that most of the world was trying to get to 2% inflation for the last decade or two, and they couldn't do it. They couldn't get inflation that high. Now it's going to run hot for a little while. What do you do about it? That was your question some time ago. Well, first of all, if you're a fixed income investor, you want to have more in floating rate instruments and less in fixed rate instruments. An instrument with a fixed interest rate becomes less valuable as the interest rate in the environment rises. So floating rate,

Starting point is 00:49:55 your interest rate goes up as rates go up. That's a good thing. So that's an easy one. You want to have more floating, less fixed, and you certainly don't want to have long-term fixed rate because they're the ones that go down the most if interest rates go up by a certain amount. Number two, real estate, healthy real estate can be a real good tool. For example, if you own apartments and if people's wages are rising, thus you can pass on rent increases to them and they can pay them, then that's a good way to protect your profitability. And so multifamily real estate has been strong. That's always the question is okay. I know it's the good thing to do, but the price is up, what do I do? That's when you need the feel. But if the real estate is healthy in a healthy

Starting point is 00:50:36 part of the economy and in a healthy geography, and you can pass on rent increases, that's a good tool against inflation. The third one is to invest in companies where profits grow faster than inflation. You can still produce a positive return, assuming they're priced right. So none of these is a formula that you can apply without thinking, but these are the places to look. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why Vantza is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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Starting point is 00:54:09 and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Just to ask you briefly about a couple of other asset classes, obviously lots of people are intrigued by your views on Bitcoin and cryptocurrencies, which have changed a great deal. I wanted to ask you about that. But I also wanted to ask you about China, which obviously has been very much in the news. I know you've had big investments there that you can't really talk specifically about those investments. But I'm interested in, you've talked about the importance of investing in China and the opportunities

Starting point is 00:54:44 there. But also clearly there are real risks that you've written about of the conflict between socialist ideology and private enterprise or the amount of debt there, things like that. Can you talk whichever order you want to go in about both Bitcoin and China, how you're weighing them up as places we should or shouldn't be investing? Well, our discussions, that is the discussions I had with Andrew, really one of the main focuses was cryptocurrency, because in 2017, which was the year that cryptocurrency came to most people's attention, Bitcoin had been created seven or eight years before that. But that's the year that

Starting point is 00:55:17 Bitcoin went from 1,000 to 20,000. And that's the year that people started talking about it. And I came out very negative. I said, there's no there there. There's no substance to it. doesn't produce cash flow, it can't be valued intrinsically, which means that you can't invest it intelligently. And, you know, one of Andrew's greatest goals was to point out to me that that had been an example of knee-jerk skepticism. I've made a lot of money invading against the new, new thing in the past, whether it was portfolio insurance in 1987 or e-commerce startups with no business in 1999. And here we were, this is another new thing. And so, you know, I've been habitual. has been successful. That combination produces habits. So I came out against Bitcoin. And I probably did it

Starting point is 00:56:03 when it was about $6,000. Then it went to $20,000. Then it went back to $6,000. And it stayed there through 18 and 19 and into 20. And by April of 20, it was, I think, still $6,000. But what Andrew said to me is dead in the most loving possible way. You don't know what you're talking about. You don't know anything about cryptocurrency. You don't know the supply demand case. You don't know the technology, you don't know the uses. And you can't come out as a knee-jerk skeptic about things you don't know about. And in order to make superior investment decisions in any field, you have to know more than most other people. You certainly are not in the category of the people with superior knowledge. All I had was 50 years of investment experience, generalized, but I didn't know anything about

Starting point is 00:56:48 crypto that anybody else didn't know. So he was right about that. And so it's a reminder of the importance of humility, basically. And of being a continuous learning machine and saying there are things I don't know about. You know, usually I write about four memos a year now. And in 2020, with the pandemic, I wrote, I think 13, wrote a lot in March, April when it was needed. But in the summer, when things were quieting down a bit, I wrote two memos that I really like that didn't get much response, uncertainty and uncertainty to the importance of intellectual humility. What is intellectual humility? It means the other guy could be right and accepting that. And I think that's very important for all of us. And confidence, I've run a memo, I've written a memo on everything,

Starting point is 00:57:31 but confidence is a very important thing because you need some of it or else you can never hold your positions, especially when they go against you, but you shouldn't have so much confidence that you ride them all the way down against the evidence or that you are guilty of fubris and you fly too close to the sun. You have to balance it. But I think that it's very important to not think you know everything and to not think the other guy's always wrong. So I think that you're right. One of the most important things is to know what you don't know. Dirty Harry said a man has to know his limitations. So I don't have a strong opinion on crypto because I don't think I know enough, but I'm trying to learn.

Starting point is 00:58:08 And China, in a sense, is an interesting example of something where you talk about how you always like to view the future as a probability distribution. And I wondered if you could talk about if you look at China, how you say, well, I don't really know, but let me lay out this range of probabilities. How would you think about China in that kind of nuanced way, where you're looking at both the dangers and promise of the situation and kind of trying to assign probabilities? Yes. Well, you know, one of my heroes was Peter Bernstein, the investment. philosopher who died around 2009, I believe. And he wrote a memo, which is one of the greatest things I ever read called Can Risk Be Reduced to a Number. And one of the things in there is he said,

Starting point is 00:58:49 there's a range. We don't know where the answer is going to fall within the range. Sometimes we don't know the extent of the range. China is, the range is enormous because we're dealing with cosmic questions. And by the way, we think we can do economic analysis or financial analysis. These are not economic or financial questions. These are political, ideological, social questions. But it's an important question because China is the second biggest economy in the world. And I have friends who can tell me the date on which it will become the biggest economy in the world. And I've always thought you should have money invested in China. You know, one of the things I've seen over my years in this business is something comes up, whether it be index funds or emerging markets or something like that. And people says,

Starting point is 00:59:32 oh, we got that covered. I got 2% in that. You know, if it's important, 2% is not enough. It won't move the needle. Now, people are happy with 2% because at least if it then goes on to quadruple, they can say, I participated. They don't have to kick themselves, but it's not enough. And so if China's going to become the world's biggest economy, and if things work out in a positive way, in the long run, 2% in China is not enough, in my opinion. And as you say, we've had investments in Chinese equities. We've been long-term investors in Chinese NPLs, and we're investors in Chinese credits. How do you dope it out? Not easy. On the one hand, you do have the economic strength, size, and growth potential.

Starting point is 01:00:11 On the other hand, you have the question of how will China behave towards its citizens, its businesses, and towards the rest of the world. And so in the last six months or so, we've seen people say, China is not investable. That's the word, uninvestable. Now, my ears perk up when I hear that because if nothing else, it introduces the possibility that China is cheap. By definition, nothing that people describe as uninvestable can be borne aloft on the winds of adoration. It's not overpriced. Maybe it's underpriced. Maybe it's something one should do.

Starting point is 01:00:46 I'm not an expert in China. When I go to China and they always say to me, well, what do you think about China? I said, why are you asking me, you live here? But it has been my view for the last half a dozen years. What I tell people is that Europe and Japan are economic senior citizens, not much vitality. The U.S. is a mature economic adult, doing fine, but I would argue that the best decades are behind us. China is an economic adolescent. And if you've ever had an adolescent in your house, as I have, then you know it can be tempestuous. And there are ups and downs, but you also know that the adolescents' best decades lie ahead. And I describe China as an adolescent, economically speaking. And this is an example of the ups and downs that I was talking about. Now, I didn't envision

Starting point is 01:01:30 anything in particular. But, you know, when they come down on for-profit education, et cetera, and when the world worries about them geopolitically and militarily, that's what we're talking about here. When you get into the adolescence and the new, new things, stuff can happen. I happen to be positive. By the way, just like you couldn't prove the day after the Lehman bankruptcy that the financial system was not going to melt down, you can't prove what China's future holds. I happen to believe that China wants to be a member of the world community and that Shanghai, for example, wants to be one of the world's centers of finance. And it would take a great leap of the imagination to think that those goals can be achieved if China does some of the geopolitical

Starting point is 01:02:14 things people are afraid of them doing. For a regular investor who doesn't have your advantages of a team based in Hong Kong and a team in Shanghai and the ability to invest in toxic property, that may be selling incredibly cheap. For regular people like me, it's the smart thing just to buy an index fund that invests in China or in China, South Korea, India, or what would be the smart kind of long-term play if you just wanted to tuck something away? Especially here in 2022, when, as Andrew points out, readily available quantitative information about the present cannot be the road to superior performance. Most people, they should invest through others, whether it's an index fund, an ETF, or an actively managed account. We don't do

Starting point is 01:02:57 our own legal work, dental work, medical work. We don't fix our own cars. Why should we manage our own money? Why should we believe that we have the ability as part-timers to do that? So the amateur should basically pick funds and managers, in my opinions. And as you say, you want to go into a global fund that includes China under their charter. That's what I think they should do. The professionals should think twice before dabbling in areas they don't know about. And if I were a professional and I wanted to try a punt on China, I would go into a fund. I wouldn't start picking companies I don't know anything about in a country I don't know anything about. Again, man has to know his limitations. One of the things that struck me, I was looking back at Oak Tree's business

Starting point is 01:03:41 principles from the start from when you co-founded Oak Tree back in 1995 and you wanted to create this firm that would achieve superior performance, but also would take the high road and operate with integrity. And I was very struck by the fact that your principles have basically stayed the same since then, except you recently made a change, I think, for the second time in Oak Tree's history, which was to add responsibility to your charter. Can you talk about that? Because people are skeptical about this sort of thing, right? And always assume that it's just Wall Street kind of whitewashing and using verbiage. But my sense is that you've always been kind of morally serious. And I wanted to get your view on why you decided to make that change and what it actually means to you.

Starting point is 01:04:19 Well, in 1995, when Bruce Karsh and I, who had worked together for eight years, left TCW to form Oak Tree, along with our colleagues, Sheldon Stone, Richard Mason and Larry Keel, the five of us started Oak Tree having left TCW. We sat down, which mostly means I was the scribe, and we wrote down how we wanted to do business. And there were two things. There was the business principles that you described and the investment philosophy. There were two things for different reasons. The investment philosophy is how would we invest and the business principles, how would we live? How would we do business? And for example, as you point out, integrity, candor, openness, fair treatment is really the foundation of the business principles. They're not investment matters. That's about life. So that was about how we wanted to live. And that's the sense in which we included responsibility, added it to the business principles

Starting point is 01:05:14 currently. I'm not saying it's going to make us more money or our clients more money, but I'm saying that's the way we should live. And we should feel, in my opinion, a responsibility to the planet and a responsibility to all members of society. And when I went to Chicago, Milton Friedman was riding high and he was the God there. And he was an exponent of the free market. And he said, it's the corporation's job to make money.

Starting point is 01:05:38 money. And the more money they make, the better a job they did. And that's all, make money for the shareholders. And that view of the world, I think, reached its apogee under Bill Clinton and George W. Bush. The free market will solve all the problems. And I don't think that view is held anymore by many people. And I believe that somewhat widely accepted that corporations and professionals have some other responsibilities, which include planet and society. And you're including diversity in your definition very much, right? Society, that's what I mean. And I think I want to work in an organization that works that way and not otherwise.

Starting point is 01:06:19 There are other organizations that don't have business principles. There are organizations that have business principles which seem to say, you know, you can take advantage of your counterparties. Some of them make a lot of money. But that's not the way I want to live. Bruce Karsh wants to live, my other colleagues, or the rest of Oaktree. That's not the company we want to have. I remember Charlie Munger saying to me not long ago that he didn't think he deserved a lot

Starting point is 01:06:41 of credit for being ethical and moral because he actually figured out it was good business. There is a sense in which it's good business to be ethical. But it does seem like it's also you over the years have seen many people who've been incredibly successful financially who've been total snakes and sharks. Sure. And you know what? Most of the time, the person whose ethics are more flexible makes more money in the short. I think ethical investing is a good idea in the long run. I'm sure that's the idea about it that makes Charlie so happy with it and makes me so happy about it. It's not in the short term. It's not a requisite for success. In fact, I believe that if you say, I want to do this in the ethical way,

Starting point is 01:07:21 I want to do this on the high road. I think it's always easy to figure out what that is. Sometimes it's hard to do it because sometimes it costs your money in the short run. But I think it's the right way. And anyway, it's the way I want my organization. to live. And at this stage in my life, I don't need the money. I don't get a salary. I don't get a bonus. I don't get participation in our funds profits. I only have my ownership of the company, which I hope will gain in value over the years. But in the short run, I work for nothing. And I sure would be doing that if it wasn't at a place that I enjoy being at and I'm proud to represent. I was also very struck by the fact when I was fact checking my book, I think the one

Starting point is 01:08:00 thing that you wanted me to make sure that I tweaked, basically, was to give sufficient credit to Bruce Kosh. And it feels again like your relationship there has been built on kind of respect and these very kind of moral values that old-fashioned and yet incredibly resilient. Bruce and I, we've been partners since 87. That's 37 years. We've never had an argument. Of course, we have debates, intellectual disagreements. We've never had an unkind word. And that is because he respects me and I respect him. And I wrote a memo back in, I think it was 02, called the Most Important Thing, which became my book nine years later. And each section of the memo said, the most important thing is, and then it's something else. And one of the ones that I

Starting point is 01:08:42 had in the memo, but I didn't put it in the book because it's not about investing, is the most important thing is having, I don't even remember what I called it, but having good partnerships. And I said the secret to good partnerships is shared values and complementary skills. And, you know, the chicken shouldn't work with the pig, the buccaneer shouldn't work with the clergyman. Can you imagine if you had a partner in your business whose view of ethics was different from yours? But Bruce and I share to the extreme the desire to operate on the high road. We're very different people with very different skills. You know, your economist book, Thinking Fast and Slow.

Starting point is 01:09:19 I'm a fast thinker. I give my reaction to things often intuitive and intestinal. And Bruce is a slow thinker. thinks things over, he reaches a conclusion, many thinks him again, many thinks him again. And the combination of the two has been incredibly successful. But the key is, I don't disrespect him for dragging out his considerations, and he doesn't disrespect me for being intuitive. And that's incredible formulation for a good partnership. On the question of how to live, I wanted to wrap things up by asking you about what I remember is one of your favorite quotes, which is a line

Starting point is 01:09:54 from The Poet and SES Christopher Morley, who I wish we're English, but actually I checked and I think he's American, I'm afraid how'd. And he said, there is only one success to be able to live your life your way. And I wondered if you could talk a bit about why that line resonates so deeply with you. Well, it is the line I use when student audiences, I speak a lot to students, ask me for career advice. Basically what it says is you shouldn't do what society says is cool, what your friends think are cool, what your peer group thinks is cool, you certainly shouldn't do the thing that will just make you more money, which is an important thing for people to hear. You only get one life. As you get older, when you catch up with me, you'll realize you only get one life. And the only

Starting point is 01:10:39 thing you can do is make the most of it. And it's so trite. Nobody on his desk bed ever says, I should have made more money. But it's true. Some people say, I wish I would have led my life in a better way. I wish I would have been kinder to other people, to my family, to my spouse, to my children, to my colleagues, to my competitors, whatever it might be. And everybody should try to think about what's going to make them happy. For some people, it might be a big pile of money. But that's overrated. One of my friends, who's a multi-billionaire, told me the other day, shockingly, he says, you can't spend a billion dollars. And it's true. Well, there's a caveat. If you're not going to buy yachts and paintings, it's hard to spend in a billion dollars. So trying to get from 10 to 20

Starting point is 01:11:17 billion, probably not going to change your quality of life. And everybody has to figure out what's really going to make them happy. Eric Erickson, the psychologist, talked about the eight stages of man. And we go through eight stages as we age and different things matter to us in the eight stages. Our needs change. And I think it's accurate to say that in the eighth stage, we look back and we say, how have I lived my life? Am I happy with what I live my life? Am I happy with the way I'm thought of? And I wouldn't want to get to that eighth stage where I certainly am and say, you know, I have a lot of money, but everybody thinks I'm a joke or worse. And when you get to the eight stage, it's too late to recalibrate. If you're not happy with what you see, you can't go back and rewrite your reputation.

Starting point is 01:12:04 And I think it's very important to figure out what you want and then get it done. It also really struck me. I was thinking about this before we talked that part of the lesson of your life is that you really picked right game for you. I was struck by the fact that I was reading some old interview and even when you were at high school, you loved the counting and kind of the symmetry of the numbers and the fact that two entries balanced each other. And so you were numerous, you had a logical, analytical mind, not very emotional, love gains of probability. It was this ability to pick a game that you were going to win, that you were equipped to win, seems to me one of the great lessons

Starting point is 01:12:40 of your career. Well, it very much is, but I would point out, I didn't pick it. It It picked me. Vermilier said, I want you to go into the bond department. And then Nolan Bailey called me and he said, do you think you could figure out high-yield bonds? And Bruce Karsh came to me and he said, let's form a partnership and let's form a distressed debt fund and so forth. So yes, I definitely ended up in the right place at the right time. I can't take credit for it. And I don't feel the need to. Yeah, it definitely made me think, though, I should be thinking about my own talents and temperament and what I'm not good at. And I was just thinking about how I play games and was thinking how restless and impatient

Starting point is 01:13:19 I am, whereas you're sitting there playing backgammon and enjoying the probabilities. And it just made me think, why on earth would I want to play these games that I'm not equipped to win? So in a way, my lesson from you is partly, I'm not you. And I shouldn't fool myself into thinking that I am. Your own way. We are all good at different things. And when I talk to these students, not only do I tell them about Christopher Morley, I say,

Starting point is 01:13:42 here's my advice. Find something you'll enjoy. Find something that plays to your strengths and avoid your weaknesses. And I think if you can do those things, you have a great life ahead. Howard, thank you so much for joining us today. You're not only a great investor, but a terrific writer, which annoys me, because it shouldn't be that you're such a good writer as well as such a good investor, but also a wonderful teacher and very generous with your insights. And I'm really grateful for all that you've taught me and the rest of us over all of these years. So thank you really sincerely for being such a great teacher. It's my great pleasure, will you? I would do it again. I hope so. And thank you to our listeners for joining us here. I hope you've all enjoyed it as much as I have. That's it, folks. It's always

Starting point is 01:14:21 fantastic to speak with Howard Marks, who's one of the most thoughtful investors I've ever met. If you'd like to learn more from him, I'd encourage you to check out chapter three of my book, Richer Wiser Happier, which is all about Howard and what he can teach us about making better investment decisions in a very uncertain world where nothing stays the same and the future is. is more or less impossible to predict. I'd also recommend that you read Howard's memos, which are an amazingly valuable resource that's available for free on his company's website. I've included a link to the memos in the show notes for this episode, along with links to Howard's two books. I particularly like a book of how it's called The Most Important Thing, and there's a beautiful

Starting point is 01:15:01 edition of it called The Illuminated Edition, which includes commentary from great investors like Seth Klaman and Joe Greenblatt. It's one of my favorite books about investing. Thanks also to everyone who wrote to me on Twitter to suggest questions to ask howl. I ended up using two of your questions, one from a listener named David Park, who lives in New York, and one from Ashutosh Parashar, who lives in India. As a way of saying thanks, I'm sending each of them a signed copy of my book. Please feel free to follow me on Twitter at William Green 72, and do let me know how you're enjoying the podcast. I'll be back with you soon to interview more of the world's greatest investors.

Starting point is 01:15:36 Thanks so much for listening. Take care. Thank you for listening to TIP. Make sure to subscribe to we study billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors

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We Study Billionaires - The Investor’s Podcast Network - RWH002: Investing Wisely in an Uncertain World w/ Howard Marks

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