Howard Marks: 3 Hours of Timeless Investing Wisdom from a Legendary Investor

investing is a fascinating area but it should be done on the basis of a strong understanding many people invest before they have the understanding it's not uh like uh going to a casino it's not a game of chance and the lower the prices go the more eagerly they sell this is wrong MH what we want to do is buy low and sell High human nature causes us to buy high and sell low at minimum we want to avoid it and at maximum we want to do the opposite now it's not easy because what you have

to do is you have to restrain Your Enthusiasm as things are positive and you have to turn more positive as things are negative very hard to do it's time not timing that produces success just just put your money in and let time [Music] pass from all over the country and the world to our investors who have been waiting for this he's considered a Pioneer in the American Investment world today we have the pleasure of having Howard Marx chairman of oak tree Capital with us welcome thank you well I'm very glad to be here and contribute

what knowledge I have chairman marks I recently read your investment letter as someone who studied econometrics I found many of the statements quite shocking it was full of criticisms about economic forecasting and econometric methodologies I'm curious about the background to that this is quite a dilemma what is investing investing is positioning Capital to benefit from future events MH and yet I insist that we can't know the future how can we invest and uh what what the important conclusion from that is that you must not assume that you know what the future holds if you admit

that you don't know what the future holds then you will invest carefully you won't bet too heavily on one outcome you'll spread your risk diversify hedge and uh have a mixture of Investments uh the Great American humorist Mark Twain said it ain't what you don't know that gets you into trouble it's what you know for certain that just ain't true and I think this is very important for your uh viewers to consider no sentence that begins with I don't know but or I may be wrong but ever got anybody into trouble you get into trouble

when you say I'm sure that this will happen I'm certain that that will happen because if you are too confident and you bet too much on one outcome and you're wrong then you can fail if you admit uncertainty and balance your bets uh uh over a number of scenarios uh it's highly likely that you will succeed people rely on forecasts because they do not like to live with uncertainty uh there's a quote in the memo if people didn't have forecast something like if people didn't have forecast to rely on they couldn't get out of bed

in the morning uh it's uh it's uh terrifying to know that you have to live in a world that is unpredictable but it is in my opinion and you have two choices in my opinion you can say the world is unpredictable and we're going to accommodate to that or we're going to live by predictions one of my friends the day the memo came out one of my friends said to me yes but you have to take a position don't you my answer is you don't have to take a position if there is is an event

and you have no reason to believe you know what the outcome is going to be then you shouldn't bet on that event or you should hedge that event uh when oak tree makes its Investments we merely assume that we don't know what's going to happen in the economy or in the markets uh and we uh we take actions which allow for that uncertainty uh we all have opinions I are I I rail against forecasting but I have opinions I just don't bet heavily on my opinions it's one thing to have an opinion it's something very

different to be confident that you're right and I'm never confident that I'm right where we believe we can be right where we can get a an edge and produce Superior performance we hope is in our in what I call the micro not the macro Macro for the benefit of your viewers is countries economies currencies Commodities interest rates and markets and really nobody knows those things better than anybody else the micro companies Industries Securities these these are things that through hard work and skill I think you can get an advantage and do a superior job so

that's where we put our emphasis but if if that is where we're experts then we shouldn't be betting on economies and interest rates and currencies since 1969 for about 50 years you've been active in finance and investment if you were to divide those 50 years into periods your philosophy techniques and strategies must have evolved how would you categorize those periods and what stage would you say we are at currently well as you indicate when you say 50 years it sounds very uh daunting uh it's a long time uh it didn't feel like 50 years but

um uh yes I have lived through a variety of periods Cycles MH maybe divided by crisis you know uh things are down up down crisis up crisis you know and um I have uh my my career has been punctuated uh by four crises uh 991 0102 mhm 089 Global financial crisis and of course the pandemic and uh so uh for every strategy for every uh investment approach there are times that produce a lot of opportunity and there are times that are uh what the farmer would call fallow slow periods and you have to know the

difference and you have to wait patiently until the opportunities come along and then you have to move aggressively to take advantage of the opportunities and once you do so and they and they make you money and uh the markets recover then you should step back again and become patient once again it's it's it's wrong to think that there are always great opportunities sometimes there are not and I believe that the availability of opportunities depends on the market and it depends most important ly on the behavior of other investors we've we've gone through a long period

um from the middle of 2009 the end of the global financial crisis to early 20120 the beginning of the pandemic we were in a period where the central banks provided Easy Money interest rates were low financing was easily available to anybody who wanted to get money people were eager to provide the money buyers were enthusiastic sellers were complacent they were not eager to sell risk aversion was low fear was low the greatest fear for many of those years was what we call fomo fear of missing out when the market is in this condition nobody's selling

eagerly why should prices be low they shouldn't be there are no Bargains in that climate that is a time for caution that and you must recognize what's going on I wrote a memo to my clients in February 2007 called the race to the bottom and it talked about what happens when people have too much money and they're two year to invest the opportunities deteriorate you have to understand the conditions that you're in and then usually they take on too much risk the structures that they build are too risky something happens some trigger event and uh

it collapses now everybody's terrified and nobody's eager to buy everybody wants to get out fear of losing money replaces fear of missing out and this is the time when Bargains are readily available but you need the courage you have to understand what's going on and you have to have the courage to take advantage of those of those Bargains and so if you accept that the market fluctuates in this way Cycles we call them then clearly it's not wise to behave the same all the time you have to vary your behavior commensurate with what's going on

in the cycle the goal is to be counter cyclical normally what happens is when things are going well economic reports are good companies are reporting good profits stock prices and security prices are rising people feel good they buy and the higher they go the more they buy then they reach a maximum for some reason maybe there's a negative event or maybe the economy just turns down and the economy is deteriorating and Company reports are not as good and stock prices are falling and now people get depressed and they sell and the lower the prices go

the more eagerly they sell this is wrong what we want to do is buy low and sell High human nature causes us to buy high and sell low so that is what I call procyclical Behavior at minimum we want to avoid it and at maximum we want to do the opposite now it's not easy because what you have to do is you have to restrain Your Enthusiasm as things are positive and you have to turn more positive as things are negative very hard to do uh some professionals can do it not too many amateurs can

do it but at minimum you want to not be emotional and not succumb to the cycle so rather than buy high and sell low maybe you say I'm just going to hold throughout you see so that's that's obviously better than being procyclical of course the best thing in the world is to be counter cyclical at the right times but it's not easy and um uh people should not try uh with with the money they need uh but anyway my my career has basically consisted of these cycles and this is why I wrote a book on

on mastering uh the cycle which I'm proud to say is available in Korean uh not that I'm trying to sell books uh but um uh in investing is a fascinating area and it's a potentially profitable area and I recommend it highly but it should be done on the basis of a strong understanding and not too many many people invest before they have the understanding and it's not uh like uh going to a casino it's not a game of chance it is a serious Pursuit that should be followed on the basis of knowledge in which case

uh you know uh it you can count on having a good outcome if you do it wisely the other thing I want to say about the periods of my life is I came into the investing business as you indicate 1969 and we all know that the young people will tell you that was a dumb world nobody knew much not no most people didn't understand how the market Works what makes for an attractive stock or Bond uh most people did not have information access to information uh if you wanted to study a company you have to

send them a letter and ask for the annual report and then they had to send it back in the mail it took a long time and um it was easy to get a knowledge Advantage just through a little effort Warren Buffett talks about buying dollars for 50 c that's a good thing to do but it R it it relies on other people who don't understand that those are 50 doll fast forward to today now everybody has a computer everybody's hooked up to the Internet there's lots of data feeds everybody understands how the market works now

the market is now the world is a smarter place and uh knowledge is cumulative everybody knows everything today so uh my son pointed out in one of my memos called something of value January of 21 that readily available quantitative information about the present will not be the source of superior profits because everybody has it in order to have Superior profets you have to have some Advantage you have to know something that the other people don't know or do a better job of interpreting it m and uh so it is competitive and challenging so what we

say in the terminology of our profession is that the markets have become more efficient they the markets now have more information and do a better job of incorporating it so it it I would say that it has has gotten more challenging over my lifetime when I started I joined the industry in ' 69 I started managing money in 78 I started with high yield bonds most people didn't know about them most people didn't understand them most people were afraid of them so it was possible for me to get a bargain today all that has changed

now everybody knows about them and nobody's afraid of them so why should they be as cheap as they used to be and the answer is they shouldn't the market has become more efficient so I I noticed that you have copies of my first book here called the most important thing and uh there are 20 chapters and each one says the most important thing is and then it's a different thing because in investing there's no one important thing there are many and and and balancing all the considerations is one of the things that make it makes

it challenging but chapter number two says the most important thing is understanding market efficiency you have to understand the concept that I just uh explained and the change in efficiency has been a a a big marker in my career in Korea you're regarded as a master of contrarian investing and that's how you're seen you're known for your great success using a strategy of taking positions opposite to the market has it been about 7 months since Mr Kung interviewed chairman marks that's right about 7 months I saw it then and I watched it again to prepare

for this interview even even back then when the market had a 10% correction you said that it was a healthy adjustment and there was no need to leave the market but the situation is more serious now many tech stocks and platform companies have fallen another 30 to 50% so I'm curious how you view the current market uh since the market has worsened do you think it's time to actively buy stocks I'd like to ask the only not thing I know for sure is it's a better time than a year ago or two years ago uh

the market was very high uh surprisingly after the pandemic the market was very high because the central banks of the world uh came in so strong with the rescue uh that they they they made the uh economy uh stronger and they made the liquidity very available and that produced uh asset prices that were very high and um in the last year prices have been coming down and uh as I as you say as as you say I said a healthy correction not over necessarily there's no reason to think that this is the bottom uh prices

were very high now they're moderate they're not terribly low MH these are not Bargains we're talking about these are reasonable prices nobody can say whether it's going to to go lower MH it may well uh your question part of your question is is this the chance of a lifetime no it's not the chance of a lifetime it's a reasonably priced market now I believe that most investors should be invested most of the time the idea of being able to get in and get out and get in and get out what we call Market timing is

not a good idea for most investors it's very hard to do you have to understand the market you have to stand the economy you have to stand your psychology and you have to operate against your psychology you have to buy when things are really bad and sell when things are really good this is hard for most people so I I don't think that the average viewer should try Market timing they should invest either all the time or almost all the time now it would be great to try to reduce your risk when the market is

really high mhm hard to do may be worth trying but that's about it and Market timing most of the time uh is too hard to try now when I was working on my book about the cycle I said to my son who is a very important uh sounding board for me I said you know I think my market calls have been correct over over my career and you know what he said to me that's cuz you did it five times in 50 years mhm this is very important concept and you know he he he looks

at all these questions with fresh eyes and makes great observations five times in my life the market was here or here and on those occasions the error was obvious the argument was compelling the chance of being right was very high mhm here or here what about here or here or here or here in between it's not so obvious and uh the chance of being wrong is quite substantial that's why people should not try this on a regular basis and we don't try on a regular basis we don't change from month to month or year to

year only in the extremes and and you know and we're professionals and we think we understand the process and yet we don't try that often to time the markets um and think about it this way let's say I told you that the market is 10% overvalued let's say I'm correct what's the probability that it's going to go down over the next year versus up my guess would be 55 to 60% it's it's very common for the market to be overvalued and go up further and in fact if the market went down every time it was

10% overvalued it would never get to 20% overvalued or 30% overval or 40% we've seen those gain and and and we would never have bubbles which we do from time to time so clearly overpriced and going down tomorrow are not synonymous and so I think for most people Market timing is not the solution for most people this the answer is understand investing figure out a rational way to do it whether it's picking good companies or or going into funds or hiring a manager or something like that don't expect too much you know uh I go

to people I say I think we can make you 8% a year I think we can make you 12% a year with our risk year products I say maybe we uh uh I think we can make you 20% a year then the next guy comes in he says we'll triple your money he gets the money but of course his his activities are not founded on a solid foundation we're not going to produce Miracles if you can compound your money at at 10% a year it's a great accomplishment and most people should not expect to do

that or or do better than that the the the S&P 500 the main stock index in the United States has risen at about 10 a half% since 1920 now since 1920 we've had 17 recessions the Great Depression several Wars including a World War MH now we've had a pandemic many geopolitical problems many economic problems we've still compounded at 10 a half% a year and if you put a dollar in the S&P in 1920 and you held it strongly you never bought you never sold you know what you have today 8,000 that's the magic of compound

growth without interruption so for most people the the answer is put your money in understand what you're doing so that you can be steady MH don't mess it up and um I I think that uh there's a great American investor named Bill Miller who has one of the greatest records and he said I quote him as saying it's time not timing that produces success just just put your money in and let time pass so Market timing is difficult as you just mentioned you always say to buy time not timing so uh in a situation like

this in terms of asset allocation are there any assets or portfolios you're particularly focused on well if if you're going to ignore my advice and not just hold steady and try to move money around to improve then uh I think that we have to be aware that the period immediately ahead is more likely to be a worse than average period rather than a better than average period there are a lot of uncertainties uh and in particular of course most countries have high inflation today the central bank banks are trying to rain in the economies cool

off the economies uh uh in order to control inflation which means that they're raising interest rates and withdrawing money from the system and historically these actions have for the most part produced recessions if you if you can do it without producing a recession we call that a soft Landing most most of the time the soft Landing is is not achieved so we're we're going we're looking at a period ahead where business will not be as easy as it used to be we were in an easy money environment with low interest rates and now we're in

a tighter environment because the FED has to cool off the economy which means that it'll be more difficult for companies and um economic growth will be weaker that's the goal go just remember the goal of the of the central bank right now is to is to slow the rate of growth because it is from an overheated economy a too strong economy that we get inflation you can't have inflation control in a raging economy you put all this together and you must say that the next year or two will be challenging we as as we're predominantly

what's called Credit in investors we invest in debt debt bonds loans are a promised stream of payment a contract a company sells you a bond what that means is you give them money and they sign a contract that they will pay you such and such interest every six months at the end of X years you get your money back this is a Dependable contract as long as the company is creditworthy and we think that this is a very good asset class in this this environment a year ago high yield bonds which is one of our

main uh products uh produced uh roughly 4% uh interest every year now it's nine that makes it very attractive and when you combine a high level of promised return with the contractual nature of the return it it sounds pretty good to me uh in the long run stock which do not have the benefit of a contract participate in the growth of the economy and are expected to do better than Bonds in the long run but uh you know for the period immediately ahead uh credit I think is is a good tool and if we run

into tough times your your credit or we call it fixed income investments will probably do better than your stocks in a tough envir but I want to add one more thing and I want to demonstrate how complicated this area is I never talk about this to to to make it seem easy I don't want to make it seem easy we know that the economic Outlook is worse than it was in the recent past we also know that the market is down so the question is is the market down appropr rately given the the worse environment

or too much mhm or too little mhm and you know we know we suspect that there are challenges ahead for the economy but what if I told you the recession will probably take uh 5% off of GDP but the market is priced as if it's going to decline GDP is going to decline 15% that is to say stocks are too cheap so most people think positive event pric is up negative event price is down but it's not just events and prices there's a there's something in between which I've been alluding to psychology it's it's not

just what what the events are but how people feel about those events that produce the change in price so if the events are negative but the psychology is too negative one can argue that that the prices will go up now that's I'm not making that argument I'm only showing how much vaguery vagueness there is in this process of assessing future Direction uh having said that I admit that the future year or two will be challenging uh uh I don't think it's going to be so bad that people should get out today in the expectation that

they'll uh avoid a big loss and and get in lower later uh but it's certainly possible that the markets can decline from here but no sure thing after this interview was arranged I looked into what oak tree was buying I saw that you hold a lot of energy companies their relative performance is good right we have a lot of portfolios we have strategies to do many different things each portfolio holds many things we do not bet so heavily on something that we commit the whole portfolio to it having said that yes we have Holdings in

energy and uh uh not disproportionate I don't make these Investments I don't make any Investments anymore I I provide leadership and and general direction and my my colleague make the individual investing decisions having said that uh I think it's fair to say that in the last year energy Investments produced the best results um and uh we made a lot of money in energy um our goal as investors is always the same which is to buy the things that provide the best bargain in terms of the ratio of the possible reward to the risk involved so

uh we're always trying to uh make in Investments which produce what I call is an asymmetry you have a high probability of making money and a low probability of losing money now at Oak Tree we go further we say if something has a big chance of loss but a huge chance of gain we generally don't do that because we don't like to make investments where we could have big losses what we try to find is things with a good upside which is disproportionate to a downside risk which is which exists but is modest and that's

what we found in energy and uh why why were we able to get good uh deals in energy Securities why did we make these Investments and the answer is that in recent years the world uh developed an allergy to fossil fuel and people who believe in Social responsible investing uh said you must take all the oil and gas and coal stocks and sell them and this is called ESG among other things We Believe very strongly in ESG we believe in being responsible investors we believe that the businessman has responsibilities other than just to make money

we believe in the responsibility to the planet and the people who live on it as well as our employees and our uh fellow citizens but I don't believe that the best thing we can do for the planet is sell all of our energy Investments let's say we do what does that accomplished for the planet somebody else buys them they still exist nothing has changed fundamentally or ecologically MH it's just a a show of intention who buys them people who don't care about social responsibility so maybe they buy up these oil and gas companies and operate

them in a less responsible manner that doesn't help the planet um and um the point is we're going to require oil and gas for a long time the the state of California has just made a decision that that they're going to stop the sale of gasoline powered cars 2035 2035 mhm which means that even in California which is the most ecological State we're going to be selling gasoline cars for 13 years and those cars are going to last 20 years after that which means we're going to need gasoline for the next 33 years the the

key question is who can produce it the cleanest so rather than saying we're going to sell oil of our energy stocks we say we're going to buy the companies that are better performers and we're going to buy the companies that are lesser performers and make them better MH if we can and I personally think that this is a more responsible position than merely selling which accomplishes nothing in my opinion so that's the way we feel about it and so many people were negative on energy stocks that for us they became one of the areas where

you could find the best bargains and in this way I believe that looking for bargains and good investment returns for the clients and being a responsible investor socially came together it's actually the same as my investment idea we're in an era of energy transition but paradoxically that energy transition increases the short-term value of the traditional energy industry industry uh because as you said everyone will try to respond to a predetermined future so major oil holders will likely try to raise the price that that's a common assumption I personally invest in energy stocks and related Investments

too for balance I may hold solar wind or hydrogen assets as well we call it the barbell strategy I think we have to be realistic and practical in making decisions for our portfolios and for the world um in recent years prior to this one uh people were saying that fossil fuel oil gas coal are bad don't do it mhm and a lot of people said sell your oil stocks and some people did sell but and by the way a lot of countries said we're not going to engage in oil and gas production we're going to

shut that down and will import it from other countries like Russia and so in this process Europe to be green MH reduced some countries reduced their energy production and became totally dependent on Russia MH and and energy dependence is one of the weapons that Russia is using against the West right now so now people say well maybe we need oil and gas maybe it has to be produced so I think I think that this idea that oil and gas are bad you should sell at stocks you should engage in that industry is simplistic and the

world is not simplistic and I've been here with you now on this interview what have I told talking about how complicated things are how difficult things are there are very few important decisions in life that can be made on the basis of one factor you want to be green shut down your oil industry and then uh and then uh you know people will uh be cold and uh won't be able to get to work uh it's not so easy people said uh arms manufacturer are bad shut down all the arms manufacturers sell the arms manufactur

guess what we're at War we've been attacked in Ukraine now we need arms to fight Russia maybe arms are not so bad again a multivariate decision not one you've emphasized risk management for a long time and are there any particular risks that investors should avoid or manage at the moment this idea of risk management is very interesting first first of all there's risk management which means using statistical techniques to predict the downside of a portfolio and I don't believe in that and I don't believe that people can show me that it has worked risk management

I believe that after 0102 uh it was mandated that every Bank uh have a risk manager and more money was spent on risk management between 02 and ' 08 than in the rest of History put together and guess what we still had a global financial crisis so I don't think you can eliminate risk through the application of statistical tools and then you have risk management every investor at Oak tree every investment professional at oak tree is a risk manager which is to say that when they pick up an opportunity in addition to figuring out how

well it will go if things go well it's their job to figure out what would happen if things go poorly what is the risk to assess how much the downside is what would have to happen for us to lose money how bad it could get how probable it is that it'll get that bad and what and then the portfolio manager's job is to understand if we add that security to the port P folio what does that do to the overall risk things like correlation and so forth and but I I believe that this function is

best performed by by analysts and portfolio managers not by somebody who sits over there who is neither an analyst nor a portfolio manager but a very good statistician and in Oak tre's investment philosophy there are six tenets the number one is risk control and uh we believe that a successful long-term record is best produced by having a long series of successful uh uh Investments and no terrible ones not by trying to shoot To The Moon but just try for consistent uh success and uh avoidance of disasters and of course we're now you know I've been

working with my clients for uh my colleagues for uh uh 36 years I've been a man manager for uh 44 years and I think this is the record we've produced we don't do as well as the big Risk Takers in the good times perhaps we do much better than they do in the bad times and and we do steady throughout and number two on our list of of investment uh philosophy is consistency I believe risk control and consistency can be a very satisfactory foundation for long-term investment success and that's what we try to produce the

interview is almost over uh actually there's a question I really wanted to ask you I think many Korean investors will be curious too even though you said oak tree doesn't forecast the future and invest based on that I have a question for you there seems to be a consensus that the Federal Reserve played a significant role in the current instability of the global financial markets but recently there's been growing discussion in the US markets about a possible fed pivot where they might soon stop raising interest rates or even lower them so I really want to

ask you this has the FED acted appropriately to rescue the us or global economy from this inflation and if there is a pivot in the future when do you think it will happen I'm just asking casually you know the first thing I want to say is that if you offered me that job I wouldn't take it it's very challenging you know uh since I don't believe in economic forecasts uh I would not know how to do that job and in the last memo which I believe you read uh I talk about the fact that even

the FED can't predict what it's going to do and this shows the challenge that's involved MH second I believe that the fed and the all the world central banks had the challenge in 2020 of confronting something it had never seen before which was the pandemic MH and in a in a crisis in trying to figure out what lies ahead I read a quote from a Harvard Harvard epidemiologist named Michael lipich MH he said we have facts analogies to Prior experience and supposition which means guesses but in the pandemic we had no facts we had no

prior experiences to generalize from all we had was guesses that was true for the doctors trying to respond to the pandemic it was also true for the central bankers trying to respond to the economic difficulty this is the first time in history that the economy was shut down to prevent the spread of a disease first time how do you figure out how to do that and how to recover from it so the the vaccine was developed and I I use the analogy that sometimes when a man is very sick a person they put him into

a coma so that they can develop a cure and fix it then of course you have to bring the person back to life they put the economy into a coma they had to a keep it alive MH and B bring it back to life how do you do that if you've never been through it before so the FED took very strong actions March 23rd of 2020 I believe it was they announced the the the stepping up their program and by the way the markets went straight up from 2020 2020 from March 23rd straight up yeah

now you have three choices let's assume you can do it exactly right too much or too little which should you do they don't they don't know how to do it exactly right since there's no precedent okay take that one off the table that means too much too much or too little too much too much and they did too much and in in America for example in I happen to know the statistics in the third round of relief they sent a check to everybody who made less than $175,000 a year which I think is 80% of

the population now something like I estimate that something between 10 and 20% of the population was hurt financially by the pandemic so 10 to 20 were hurt 80% got checks 60 to 70% of the population got checks for nothing and they couldn't spend the money because the economy was shut down you couldn't go on a vacation you couldn't have a wedding you couldn't have a party you didn't need a dress for a party so people got rich the money piled up in the bank at the same time that manufacturing was shut down so they did

arguably too much but they did not want to do too little and let the economy slide into a depression I believe that if the central banks had not taken action there would have been a global depression and a global depression is not just a recession that's a little worse it's horrible my father and mother lived through the depression and believe me they told me about it and you had grown men standing on street corners selling Apples because they couldn't get a job so the central banks did too much especially the fed and it's it it

laid the groundwork for uh inflation what is inflation too much money chasing too few goods so people had too much money they were enriched by the relief too few goods the manufacturing was shut down and when it started up again it was a little unsteady so we got inflation now the big mistake was that the FED concluded that it was likely to be transitory temporary I'm not smart enough to know whether that was well reasoned or not it was merely wrong and and as a consequence they didn't start to reduce the stimulus early enough and

now we've had inflation now for a year and a half at a at a serious level um so uh now they're trying to withdraw uh stimulus reducing interest rates and uh rather than buying bonds which puts money into the economy they're selling bonds which takes money out of the economy and so you have to before you criticize you have to understand the difficulty and uh anytime I think I know better than them I say to myself would you like that job and that's why I said no so uh they are now going to stay what

we call hawkish easy money is called dubish Tight money is called hawkish they're going to stay hawkish for a good period of time I would estimate uh at least till next summer number one they want to stop inflation and you know when we go camping whether did they tell you if you have a campfire it's not enough to put out the flames you have to make sure that the Embers are cold so that they won't start up again when you leave right they have to make sure all the all the fire is out um number

two they have to uh slay the dragon of inflation they have to kill inflationary thinking inflationary thinking is very dangerous because if I believe that there's going to be inflation ahead I say well prices are going to go up in the future I better buy now what does that have what does that do it causes prices to go up so inflationary expectations are self-fulfilling they have to Stamp Those out out and kill them kill them and then number three they have to preserve their own credibility by not do EAS uh hawkish doish hawkish doish hawkish

doish they have to appear to be presenting a consistent framework so I think that they're going to stay hawkish for a good period of time uh and that is likely to bring on a recession most people believe that the session will be relatively brief and relatively mild and what I say about that is we'll see here's what's impressive that the covid-19 pandemic was something the world experienced for the first time if the central bank had left it in a coma so to speak then they would have had to operate in a coma state that they

had to perform surgery that surgery for inflation surgery for a fatal dis disease doesn't seem that easy is what you're saying it's a very metaphorical expression what's more the recession resulting from that operation might not be as mild or brief as we think anyway you gave me the answer I was worried about we'll leave the interpretation to ourselves finally I want to ask you this question oak tree also has a Korean portfolio right we don't have a Korean portfolio but we include Korea in many of our activities uh we have an uh we we invest

in emerging market equities and and and that Korea is eligible for for inclusion there uh uh and we have owned the debt of Korean companies from time to time in the past and we make real estate investments in Korea okay Korea is an industrial country that has achieved unprecedented development perhaps it even skipped the middle inome trap or broke through it very quickly it's shown insufficient performance recently there's been a lot of negative public opinion about the Korean economy since you've come to Korea you must have thought a lot about Korea so for my final

question I'd like to hear your thoughts on the Korean Economy based on that if you have any advice for Korean investors please share it with us I've been coming to Korea for up to 15 years I enjoy my visits I have friends here that I like to spend time with I have a high opinion of Korea I think it's a very industrious country well organized I think it has a good balance of uh prudence and uh uh shall we say aggressiveness um and uh good energy uh High aspirations for the future um and uh uh

I I stress the fact that I don't know enough about Korea to have an opinion on its markets uh I think it has a bright future I don't know how its Securities are priced commensurate with that future um you know I I certainly are am happy if Korean Securities are included in our portfolios but I keep my hands off okay all right uh it was great honor to have you uh here our studio and I was so happy to share this privilege to our audience thank you very much sir well it's great to be here

I look forward to the next time that I can see you Jacob and you n okay in New York in New York in New York on wall on Wall Street all right thank you very much sir thank you thank you thank you the important thing is then what we all know what's going to happen over the next year information that everybody has is not helpful because we all have it investing is a matter of knowing something other people don't know [Music] today is a really really special day for me I've been invited by chairman Howard

marks of oak tree Capital to his New York office and I'm pleased to share this interview today for today's interview with chairman Howard marks I've invited Mr Jay y Yang as a co- interviewer who has long worked in the New York bond market and with whom I have a long-standing relationship I believe about the bond market capital markets and investment markets we'll have a much more in-depth discussion first let me introduce Mr Jay yangyang who will be interviewing with me hello everyone at SRO TV my name is Jay yongyang as Mr Kim mentioned I worked

in US Treasury trading at hsps for six to seven years before that I worked with subprime mortgages at sheer agist I've worked on Wall Street for nearly 20 years and now I'm managing a bond fund in the Middle East it's great to meet you all thank you shall we introduce today's main guest I'd like to introduce chairman Howard marks of oak tree capital thank you so much for your time today chairman it's a pleasure to be uh with my Korean friends again uh my trip to Soul in November uh was uh very positive and uh

I'm glad to have a second opportunity to speak with you since our valuable interview at our office last November I want to convey that Korean people have been deeply impressed by your insights and perspective and are very grateful now with chairman Howard marks we'll ask several questions about recent major changes and hear his insights a few months ago chairman you mentioned sea change which could be translated in Korean as a complete transformation describing such a big change you said this was the first major change you've witnessed since entering the industry in 1959 after two previous

changes since then there have been substantial changes um inflation has come down considerably and and there's talk about the FED pivoting on rate hikes do you still maintain your view about the fundamental sea change that you wrote about in your memo over the last 40 years we've had virtually all the time until last year either declining interest rates or super low interest rates 40 years that means that you and I and Jacob and almost everybody who's watching have have rarely seen anything else and this has uh shaped people's expectations uh they think that's normal but

interest rates went from I had a loan outstanding from a bank in 1980 at 22% and then in 2020 I was able to borrow at 2% interest rates came down by what we say 2,000 basis points yeah the one thing I'm sure of is that's not going to happen again because when interest rates are two they can't come down much in this period the second C change was the opening of investors Minds to things that uh to The Taking of risk as long as the risk appeared to be justified and rewarded yeah so uh a

high degree of prudence a high degree of safety and insistence on risk avoidance all these things disappeared and now we have a weighing of risk and return this is the second C change the third C change occurred uh well it began at at the beginning of 2009 when the FED took the FED funds rate to zero in order to stimulate the economy and fight the global financial crisis and uh began quantitative easing buying bonds which puts liquidity into the economy this worked very well and the economy made a recovery over the 13 years from the

beginning of ' 09 until the end of uh 21 we had again declining or low interest rates strong economy no inflation or insignificant inflation this encouraged the FED to continue lower the SL slogan was lower for longer and with the FED able to keep interest rates low and yet not have inflation we had a strong economy easy uh easy for companies to make money yeah easy for companies to avoid default or bankruptcy easy for companies to raise financing mhm even if they lost money mhm happy investors M eager buyers nobody was afraid MH and it

was just an easy environment to get everything done and I would just say easier than normal MH and so this can't go on forever MH this is what I'm talking about now is the groundwork for the third SE mhm so much money was pumped in to fight the pandemic mhm effect on the economy we started to see inflation mhm that means that the FED can no longer remain lower for longer MH they had to raise interest rates H in order to fight inflation cool off the economy and uh you know inflation is primarily too much

much money chasing too few goods mhm so they had to cool the economy so that the demand for goods would cool off I believe that there is a realization that keeping interest rates super low MH forever it cannot is not healthy mhm you can't stimulate constantly constantly stimulate the economy has to operate naturally organically and uh you know at the end of 2020 or the beginning of 2021 there was a belief that the FED would by constantly stimulating could engineer Perpetual Prosperity but it always sounded too good to be true to me and now I

think it's turning out that it is too good to be true because now we have inflation and the the inflation which is very bad for many aspects of the economy MH prevents the fed from continuing to stimulate now in the current years I think we'll probably have a recession because of the big increase in interest rates fed raised rates last year the fastest in history from from zero to 4 and a half% in nine months so we'll have a recession it'll be harder to make money M it'll be harder to avoid bankruptcy and default bankruptcy

and default rates will re return in the direction nor it'll be harder to raise money for your company and uh now uh investors or lenders or providers of capital on the one hand they want to put their money to work but on the other hand they're a little worried about the future so it's more balanced now yeah so in many ways I believe that the 13 years I'm talking about were unnatural and too easy and in the coming years uh it's going to be normal MH uh which is a change and you know if people

came into our business 15 years ago it's all they've ever seen they think that's normal it's not normal mhm that was the best of times now I believe we're in more normal times uh but that we're not going to have zero interest rates we going to have two three% interest rates maybe four even four and that will change everything mhm while reading your C change memo I found something interesting you mentioned in 1980 Howard had a loan with 22.25% interest but in 2020 it was 2.25% that's a 2,000 basis points or 20% decrease you mentioned

framing that 22.25% bill so I wanted to ask did you also frame the 2.25% bill from 2020 it's not but it should be it should be right I I I'll have to get a copy and talking about that 2.25% bill refers to when the base rate was nearly 0% which might be a future we'll never see again since there were only two c changes in 50 years would it be correct to interpret that such changes won't occur for at least the next 20 to 25 years we may or may not see it at that low

but I think the important thing is that rates have come down MH I don't think they're going back up MH but they come down they're going to be more steady but not not so low you know that when the FED took the FED funds rate to zero in 09 they kept it there for seven years mhm and and that's too long it's unhealthy um zero rates is an emergency measure mhm we didn't have an emergency for 7 years M the economy was let's say doing fine by 2012 2013 2014 so 3 four five years why

keep it at zero for seven years and the market got used to zero rates which was unhealthy MH it's like a child with candy and sometimes you have to take the candy away but they didn't do it mhm and so so this period was distorted MH by uh rates that were too low the the coming years which will not see the same level of stimulus will not be as much funh but the economy and investing is not about funh it's about doing what's prudent in an in uncertain circumstances MH let me explain the frame I

have here now when Howard received his loan interest bill in 1980 the interest rate was as mentioned 22.25% Howard thought this will never happen again and framed that bill as you can see here as someone who once worked in bonds when I think about that time it gives me chills so I requested Howard to frame his 2.25% bill from 2020 in the same frame and show it in our next interview he said he'll bring that frame when he comes to Korea for an interview in November it's TR a frame worth celebrating so I wanted to

share it with all of you so in mod memos you said that because of the low inflation or low interest rate environment the people investors are walking on a moving walk and get a a bit of a free ride on the moving moving walk and uh with this the sea chain you're talking about are do you think we could be in the moment where the the moving walk is actually coming backwards not backwards just stopping stopping stopping yes mhm M you see in the memo I give a list of the effects of low interest rates

or declining interest rate yeah and among other things number on they make assets more valuable MH if you own a company MH and it produces you know 1 million W per uh year profit in a high interest rate environment that's not such a good deal but in a low interest rate environment that's very desirable because because uh it's it's hard to make that kind of money so the value of that company Rises that's what happened in the 13 years and companies properties shares mhm all Rose in value M uh and the owners said boy I'm

smart mhm uh but but they didn't realize they were on a moving walkway mhm and by the way if everybody's on the same moving walkway then they all think that that they're uh at equilibrium versus each other the other thing is this if you if you had a loan outstanding the way I did MH every year your interest rate came down so anything any transaction that you financed with borrowed money mhm became smarter so what about people who had bought assets mhm using borrowed money mhm they had success two ways asset prices went up cost

of capital went down right well what if that's over mhm you see that's the that's this is the main thing if the moving walkway is not going to uh produce this free ride anymore then we have to ask ourselves whether the strategies that worked in that period are going to be the strategies for the coming period And I think the answer is uh clearly not so much moving to a different topic from Silicon Valley Banks bankruptcy to the crisis of regional Banks could this perhaps be part of the sea change Howard talked about should we

view this as a sign of another major crisis or is it as Jamie Diamond suggested almost over or as Jerome Powell described should we consider it just an inevitable event I'd like to ask Howard what he thinks about this it's a good question mhm in the easy days that I describe M the 13 years practices certain practices were encouraged and in many cases they were easy times practices but when the times change M and Things become hard maybe they don't work so well so in in Easy times when risk does not uh come home to

hurt you the person who takes the most risk makes the most money and risk-taking is encouraged and continues and increases as Warren Buffett says when the tide goes out we find out who is swimming without a bathing suit and so so when when the conditions become normal or challenging then the person who took the most risk has a problem and that's much of what we saw in thinking about our portfolios from the macro M I usually think about aggressiveness and defensiveness this to me this is the main axis on which we have to decide right

so for you or for me or for Jay there's a right amount of risk there's a position on this line that's right for me mhm I don't have to sa for my old age anymore and and I have plenty of money stored up mhm so I can afford to be aggressive I can take a chance somebody else has to be more conservative because they have to ensure their future so so that's we we select our normal position mhm then we say what about today today should I be more aggressive than usual mhm or more defensive

than usual well the point is nothing works all the time aggressive behavior makes you more money in the good times MH but loses you money in The Bad Times conservative protects you in the bad times but you you have to look at others in the good times making more which is challenging produces Envy so the point is that the people who engaged in aggressive behavior in the good times had it perfect MH but if they continue with that behavior when the times become uh more difficult then they get into trouble and there's an old saying

in the lending business M that the worst of loans are made in the best of time mhm so in in when things are going well and risk-taking is successful mhm and there are no uh TR Troublesome events um people become more and more aggressive MH and they reduce they relax their standards MH and they they lend more money to weaker borrowers with less protection and then when the cycle turns down those are the ones that get into trouble and so the some of the banks that failed grew super fast and some of them like Silicon

Valley Bank were in in an area concentrated you know the these are Regional Banks so the svb concentrated on a region that was engaged in an aggressive activity of venture capital mhm which boomed in the good times mhm busted in the bad times and that contributed that was not the whole problem but that contributed to its demise so you're absolutely right the the the change in the environment is very very important and it should not be overlooked why as you may know Jacob and Jay when I was in college I minored in Asian studies MH

and uh it brought me into contact with Asian philosophy MH and I think I think one of the things I learned from that is the importance of uh attributing Power to your environment it's not how smart you are or how strong you are but also your environment will determine a lot of what happens to you and you don't necessarily have control over that or the ability to predict it and you have to understand your environment and react appropriately and I think that's what all of this is about that's truly moving it seems the message was

understand the environment well perhaps the mention of sea change means that if we understand significant environmental changes well even without being extremely smart or strong we can survive and perform well and build a great company like this it seems that's the wisdom you're sharing with us uh I think that uh people tend to overestimate what's under their control mhm and our business which means dealing with the unknown future MH is much much better if we understand our limitations and prepare for an unknown World rather than then assume that we're in control and and it will

go as we expect yeah and you kept saying that we don't necessarily know what's ahead of us but more importantly is that we know that where we are now um so our next question is it's related to your most classic um uh investment uh book The most important thing in that you mentioned about the importance of second level thinking and that is to say in order to generate Superior return you need to start thinking another level so if you think about the broader Equity market today what are the some of the things that second order

thinkings or second order questions you are asking and how does that translate to the sess them the way the equity Market is today it's it's it's really pretty easy Jay everybody knows inflation is up everybody knows that the FED has had to raise rates to fight the inflation everybody knows this will bring down the economy slow it down probably have recession not too bad we'll come out I think everybody agrees on that some people think the FED will pivot to dovish behavior that is uh reducing interest rates this year some people think next year not

a very important distinction but let's say that everybody agrees on the things I mentioned that's not the important thing the important thing is then what we all know what's going to happen over the next year information that everybody has is not helpful because we all have it investing is a matter of knowing something other people don't know so this idea of what the ne what the next year holds is not very helpful nobody has taken issue with the basics of sea change but nobody has said oh yes I agree it's going to stay that way

for five or 10 years that's the important thing if it's true that over the next 5 or 10 years we're not going to have interest rates that are declining or ultra low that's the important thing and that means that the economy will not be as stimulated mhm defaults and bankruptcy will higher importantly today because interest rates are higher an investor can get very good Equity type returns by investing in debt where your return is contractual MH you're not depending on the market MH you you you come from the fixed income world so you know you

you lend out some money the borrower promises you interest and then he pays you back and your return is a certainty as long as he pays you if he doesn't pay you you get his company so he has a lot of incentive to pay you MH well if you can get a high return on that basis that's very attractive and that means to me that to take the return the the risks that are uh associated with um uh equities is not as uh important and so I think that most investors depending on their circumstances and

their aspirations and their tax situation most investors should have more debt in their portfolios today than they did three six n years ago that's the biggest change for me I wrote a memo called uh uh the uh what really matters in in uh November mhm and the main thing I was arguing against was this fixation on the short term MH you know how fast will inflation come down how much will the FED raise rates will that produce a recession how bad a recession how long will last these are not the important things your your viewers

run their portfolios should be concerned about 5 10 20 years not one year MH and so they have to think about things that are more longlived than just the ups and downs of inflation recession uh and and raids regarding the sea change memo and what you just mentioned I was reminded of something I had forgotten Howard said when he first entered the industry the most popular stocks were were the nifty50 stocks back then you were considered foolish not to buy these stocks and people expected their prices would rise forever surprisingly he mentioned that if you

had held nifty50 stocks until 1974 you would have suffered a 90% investment loss even today we see people getting excited about concentrated investments in certain sectors or assets while ignoring stocks with real value uh despite investment gurus like Howard continuing to advise don't follow the crowd always think contrarian people don't change so I'd like to ask Howard again as an investment Guru and Senior mentor to advise investors on how they should manage their mentality uh I would appreciate if you could emphasize that point once again for us it's only natural that the stocks are better

companies MH should be more expensive which are the better companies that's the question you know know in the nifty50 there were two beliefs Jay one was that these were companies that were so good that nothing bad could ever happen and two these are companies who were so good that for their stocks there was no price too high so people were not applying value discipline they were uh worshiping at the altar of these companies now it happens first of all that at least half the companies ran into serious trouble so this idea that nothing bad could

ever happen was a big mistake and uh I I would say in in many cases among other things there was a failure of uh second level thinking for example mhm one of the leading companies of the nifty50 was Xerox mhm and Xerox at that time had a monopoly position yeah in in dry copying without without liquids yeah but not enough people said hey wait a minute they have a monopoly they're keeping the prices very high mhm that produces exceptional profits but might those profits attract competitors who would then require the prices to decline they'll compete

on price how will Xerox do if it has to compete on price and in fact uh mostly Japanese copier companies MH uh developed competing products I I I think Xerox Xerox either went bankrupt or got very close uh everybody knew Xerox was was a great company the question is who asked yeah but is it sustainable so that was number one and then number two this idea that there was no price too high for these stocks mhm I mean one of I was lucky because I was a boy at the time literally literally a boy and

I learned an important lesson in the 70s which is that for there are no as ass ETS which are so good that there's no price too high mhm for every asset regardless of how good it is there's such a thing as a bargain price be price overprice that's the realization that nobody had at the time but the people some people said yes it's it's a great company but it's not that great you see and this is the greatest example of of second level thinking mhm the first level thinker says it's a great company you should

buy the stock mhm it's simplistic everybody understands that probably wron MH the second level thinker says it's a great company but it's not as great as everybody thinks so as a result it's overpriced you should sell the stock you see you have to that's very simplistic example but the point is you have to take your thinking to a higher level mhm M more in-depth more nuanced asking more questions not so superficial and I'm I'm very lucky to have learned this lesson at a very young age by the way you only learn MH from from uh

difficulty uh very few valuable lessons are learn through success mhm since you entered the industry in ' 69 uh it's been 54 years I'd like to ask if you've been happy doing business and investing for 54 years and what has been your driving force to consistently invest while sharing wisdom through memos for others when I was young and learning people shared their wisdom with me MH I can only do the same I have to we say Pay It Forward Pay It Forward Pay It Forward I'm just very happy to share my ideas um the ideas

themselves are not the key to success the key to success is good implementation so I'm not worried that I'm going to get give away my livelihood uh but uh it just seemed if you read all the great uh mathematicians philosophers historians uh estheticians uh everybody they have an idea they wrote it down they shared it with the world and uh I hope my ideas are worth sharing U I started off uh sending the memos to uh my clients MH I thought they should have the benefit of my thinking and of course it's bigger than that

now but uh still um I want to leave this world a better place now I'm not able to be a States or nuclear physicist MH or uh a polar Explorer I work in a small world but you know I get a lot of letters from people who say you changed my life you you you helped me go in a new direction to me that is so gratifying that that that you know that's what I did with my life uh hopefully along with being a good uh husband parent grandfather friend Community member but the thought that

you could make other people's lives better through your intellectual process is uh it's all you need mhm in my opinion Howard has done more meaningful work than any politician nuclear physicist or polar Explorer for ordinary people especially investors I think so last week I went to Nebraska Omaha and saw Warren Buffett and Charlie M from afar at the Burkshire Hathaway shareholders meeting as you know Charlie Munger will turn 100 next year and Warren Buffett is already in his '90s personally I hope Howard will continue sharing wisdom with our investors even longer than them and I

wish you good health so finally I'd like to ask how long do you plan to continue investing and sharing your insights through these memos I I'll do it as long as I can you know it's it's extremely reward ing in my life and uh it it it it's so satisfying when you push through to an idea to a to a thought you never had before it's it's just the greatest thing and this is what makes uh the profession of investing very interesting and uh you know I'd like to do it forever I just spoke to

Charlie yesterday and and uh you know he's enjoying his life U maybe I should set a goal of 99 my my own father lived 101 so maybe maybe that should be uh my goal but uh Warren Buffet M he talks about the fact that he skips to work in the morning and uh I don't know if I can skip anymore I don't know if he can skip but but but the excitement of of dealing with ideas keeps us uh excited about going to work uhu and when I lose that I think I'll lose a lot

I look for I look forward to interviewing with you both in 20 years please we will love please very uh thank you very much we're grateful for your humor and encouragement uh and as mentioned we sincerely hope you'll continue to work with us investors for a long time and we look forward to another interview uh at our office in Soul this November thank you um in Howard Mark's office at Oak Tree we've conducted an hourlong interview it was truly a moving interview I'd also like to thank Mr Jayy yangang for co- interviewing thank you very

much thank you thank thank you very much thank you to all our viewers who watched until now thank you thank you you can't cuddle up with your money it's not going to keep you warm at night money is just a a a scorecard you know when you get to the point where you have more than you need the rest is just a scorecard my first book was called the most important thing it's not money I love to invest I'm 77 years old I'm still going to work and part of our organization I would say at

this point not to make more money but it keeps me thinking it keeps me active MH the most important thing in the world was having loving uh connections with friends and family in my opinion well I'm glad to say hello today and to have you with me and uh Jacob and I have been working on these videos for uh a couple years and they're most enjoyable glad to be here [Music] again well a sea change is a change which is fundamental MH significant and uh probably longlasting MH I've been in this business 54 years I've

lived through two prior SE changes this I believe the third the first was 1978 when uh people revised their thought process and before that they looked for high quality assets after that they said no we'll buy lowquality if it's cheap enough to compensate for the risk that was a change and that change has considered to today today nobody says no no it's low quality we won't buy it today they say it's risky but it offers a high enough return to compensate so we'll do it the second change was the retreat of interest rates starting in

1980 when interest rates turned down and that set off this 40-year decline in interest rates which has uh made a lot of money for asset owners and for borrowers and especially for people who own assets with borrowed money mhm uh this was a perfect environment for that kind of operation uh the essence of the C change memo is that it's over so what the memo said what the third C change is about m is that in anybody who came into this business or entered into investing since 1980 43 years has only seen declining interest rates

or ultra low interest rates and what people do is when they see something for a period of years they tend to think that that's normal and it'll always stay that way but uh I believe that's not true in this case I believe that the period of ultra low interest rates is over and that has very significant repercussions for which investments will do well and which will do [Music] poorly uh Sir John Templeton who who uh was a great investor in the uh last century maybe the maybe the 1980s said that uh you know when that

people tend to say this time is different as you say to rationalize uh unusual uh evaluations and that gets them into a lot of trouble uh H but he also said that 20% of the time things really are different and I believe that this is one of the times when it really is different and uh uh clearly with the FED funds right now at 5% there's not that much room left for a decline and uh I think there are uh conditions in place which will cause the FED to maintain interest rates in the vicinity of

where they are right one of these days the uh the FED will declare Victory against inflation and it will be able to lower interest rates a little bit to stimulate the economy uh but I think you know I make a statement in the memo that in the five or 10 years ahead the FED funds rate is more likely to be between two and four M than between zero and two MH so that that's a bold statement for me because I don't believe in forecasts but uh I think that interest rates were ultra low in the

period I discussed in the memo 09 through 21 and I think that they're not going to be that low in the period going [Music] forward the environment has a profound effect on what works and what doesn't M and uh for the 40 years MH and especially for the 13 years from 09 through the end of 21 uh investors received a Tailwind help from the declining rates declining rates uh stimulate the economy mhm increase consumer demand Drive business to companies mhm uh make companies more profitable make assets more valuable reduce the cost of capital make financing

readily available to companies and cheap and uh make it easy to avoid bankruptcy and default in other words an easy period it was very easy to succeed and this was very good for asset owners and borrowers MH and of course great for somebody who owned assets with borrowed money MH and uh if you accept that that's over that we're not going to be in a period of declining and ultra low interest rates in the in the next 5 to 10 years then uh other strategies uh will will be the preferred ones uh and uh so

I mean the first question is do you agree with my thesis about interest rates each person has to make that decision for themselves um but but if it's true uh that uh that we have this change then people have to say well what are the strategies that will do well in the new environment and uh you know um for the' 09 to 21 period interest rates were extremely low the lowest probably in history the FED funds rate averaged half a percent which is extremely low on naturally low um uh so investing in debt Securities which

is most of what oak tree does uh was not rewarding um you know a year and 3/4s ago high yield bonds yielded 4% not very desirable today they yield more than nine so that's a big change and all along the spectrum of debt mhm or what we call credit the available yields are much more satisfactory today than they were uh in that period and you know the the impact of the C change is that I think people should consider in investing in debt Securities today investors can get Equity type returns from debt and debt which

which consists of a promise to pay mhm is is much more dependable than equities which have no promise uh the S&P 500 Index returned about 10% a year on average for the last century that was enough to turn $1 into $114,000 and today debt Securities offer as I said higho Bonds in the nines MH private debt hard for the individual to access in double digits double digits so that means Equity type returns and that's a wonderful thing that has been missing uh for a long time and uh you know I'm thrilled uh to see that

it has [Music] returned stocks are great mhm stocks uh permit investors to participate in the growth of the economy and the success of leading companies and I'm not saying that your subscribers should sell all their stocks but maybe part and move into into uh dead instruments at this time uh I think that uh a balanced portfolio is attractive today whereas uh you know uh in in the period that I'm talking about uh a an investment in in debt instruments would not have been very [Music] helpful well first of all let me clarify for your subscribers

that we don't really have high interest rates today we have normal interest rates the the rate was abnormally low right for that period 09 through 21 you know the great uh American Economist Paul Samuelson who wrote The Economic textbook that most that I used when I was a student most do said when events change I change my mind what do you do and you know when when the environment changes right we must assume that a new approach is needed um Einstein says the definition of insanity is doing the same thing over and over and expecting

a different outcome right I believe that another definition of insanity is doing the same thing in a different environment and expecting the same outcome so so equities and levered Investments Investments made with borrowed money worked extremely well in the period of declining rates they they clearly should not be expected to work as well with uh steady rates and with higher rates um uh people buying Assets in that period were able to borrow money very cheaply and substitute the borrowed money for their own money to amp up the Returns on their Investments we call that leverage

uh the key is the cheapness of the borrowed money and if the borrowed money is not available as cheaply now or in the future then leverage strategies will not be as successful that that that's like math it's it's it's it's uh logic there's no uh uh supposition in that and so I I mentioned the effects of uh the favorable effects of declining interest rates what about stable and uh normal interest rates well I think that uh economic growth will be slower MH business will be slower company profits will be less profit margins may be under

pressure um assets will not appreciate as dependably cost of capital will not be so low and it will not be so easy to avoid bankruptcy and default so in other words we went through an easy period And I believe we're going into a harder period not catastrophic I'm not talking about a depression I'm not trying to worry anybody but but life will not be as easy and uh so Investments like equities and leveraged private Equity is a great example of a leverag strategy these will may still do okay but they should not be expected to

do as well debt which was unsatisfactory in that period because the yields were so low we'll be much more satisfactory in the coming period you know if you buy a high bond that pays 9% you have a promise of payment if the company keeps its promise which the overwhelming percentage of companies do you'll make 9% there's no doubt about it and that's a wonderful thing uh so I think that now debt Securities uh can play a useful part in most people's portfolios whereas in the 09 to 21 period they could [Music] not well look I

was very fortunate as you know I was asked by City Bank to start their high yield Bond activities in 1978 and 1978 was the beginning of the high yield Bond world now most of your subscribers were born since 19 1978 so think they may think that there always have been high yeld bonds but they're new only 45 years old um we have always had bankruptcies and defaults it's it's it's part of life it happens that in the easy money environment of the last 13 years the default rate was unusually depressed because the environment was unusually

easy in the New World bankruptcies and defaults will occur again uh by the way uh over the last 45 years on average 4% of all uh hob bonds defaulted on average each year but we get paid enough extra interest to make those risky Investments that the Investments were still satisfactory so uh the mere fact that there are defaults and bankruptcies the does not disqualify uh this as an attractive area for investment um I use the analogy to uh life insurance how can life insurance companies uh uh insure people when they know they're all going to

die the answer is it's a risk they're aware of it's a risk they can analyze it's a risk they can diversify and it's a risk that they're highly paid to take so that those four things in my opinion are the criteria for the intelligent bearing of risk for profit and that's what we want to do as an investor I have no interest in avoiding all risk if you avoid risk you probably avoid return what I want to do is take risk intelligently where I'm well paid to do so and that's the history of high yield

bonds investing and we've been doing it for 45 years we've lived through a period where defaults averaged 4% a year and we've been very successful by the way in that period there were 5 years when the default rate was 10 or more uh 1990 91 0102 09 and yet we were still successful uh not you know those years may have been a little painful but over the entire period investing in highill bonds has been very successful [Music] I think one of the most important lessons is that you have to that that investing is not a

mechanical activity where the where the performance of the economy and the uh performance of the company translates directly into the performance of Securities most people think that that if the company does well the security will do well if the company does poorly the security poorly but they miss the fact that there's a step in between and that is investor reaction how do people feel about the progress of the economy and the company you see so for example you can have an announcement of an earnings increase and the stock goes down why because people are disappointed

this the earnings were up 10% they thought it was going to be up 20 so they feel that the company's underperforming stock goes down so that's an important uh lesson the role of psychology and the ramification is that uh you must be conscious of the environment psychological environment when you are an investor so I said in one memo that in real life things fluctuate between pretty good and not so hot but in investors minds they go from Flawless to hopeless and the swing of the pendulum is highly exaggerated so when the pendulum swings positively and

everybody feels good and is thrilled about what's going on and is optimistic about the future and excited usually security prices go too high mhm and become dangerous mhm and you if you can detect that you might want to reduce your Investments or move to safer Investments then eventually the pendulum swings and now people are too depressed and too panicky and too pessimistic and they think that we're going to have bad times forever and when that happens usually this the prices of Investments collapse that's a great time to buy so in the short run psychology is

more important than company fundamentals and uh it it it's not correct to say good events are coming buy bad events are coming sell rather Market is too optimistic sell Market is too pessimistic buy what matters is not the quality of the thing you're investing in but whether the price is high or low relative to the intrinsic value and it's from the fluctuations of price around the intrinsic value that that dict that dictates uh the performance in the short term now if you're a real long-term investor and if you're 25 years old and you say I'm

going to hold this for 40 or 50 years which is the right attitude in many cases MH then you can ignore psychology swings because in the long run if you hold your Investments your return will really dependent be dependent on on the fundamental behavior of the company uh Ben Graham who was Warren Buffett's teacher right said that in the long run the market is a weighing machine and in the short run it's a voting machine mhm in the short run uh the movement of price is determined by movements of popularity in the long run movements

of price are dependent on the performance of economies and companies what we call fundamentals so every investor has to figure out whether they're going to be short-term oriented and buy sell buy sell or long-term oriented and mostly hold uh of course you can be somewhere in between you can not trade every day which I argue terribly against but you can make occasional changes in your portfolio when warranted as I believe uh they are now a friend of mine wrote a book about investing the title is simple but not easy MH the things we want to

do are simple to describe the investor wants to hold more of the things that will do well MH and less of the things that we'll do poorly very simple MH executing is not easy it takes skill to to Fig to know what will do well and what will do poorly and nobody should confuse themselves and when I uh speak to you MH and to my other Close Associates M I always stress I don't want to make investing seem easy I want people to understand how hard it is so that they don't try anything uh too

too adventurous um I published a memo this summer called taking the temperature and uh I talked about five Market decisions that I made starting in 2000 and all five were correct sometimes it took a little while for them to be correct but eventually they were all correct and I describe how I did it and I did it not Based on data but based on my sense for the environment by the way for example uh Oak Tre and I turned negative in' 056 uh because we were worried that the market was behaving in a rash manner

taking too many risks and that that when other people take risks it makes the world a risky place for me mhm now shortly later we had the uh Global financial crisis which was a problem with subprime mortgages and uh mortgage back Securities and you know that meril Lynch be Sterns uh Leman Brothers all disappeared why it was it was you know it was the worst environment I've ever seen um we managed to largely avoid it why we didn't know anything about subprime mortgages but we knew that the world was a risky place so that's why

I say take the temperature of the environment but not easy at that time I had been working for uh 40 years I had a lot of experience so I could recognize what was going on in the environment somebody with less experience really uh did not have the ability to do that so I look investing is a great thing over a long period of time investing will turn a little bit of money into a lot of money if you if you don't screw it up but nobody should think that frequent correct uh uh Market timing is

is is easy so the Investments not that easy it's not easy but it's still very important one of the uh imp applications is that most people should get help most people should not pick their own stocks uh or decide their own Market timing most people should buy uh manage funds or index funds Index Fund manage funds uh actively select Investments buy this sell that trying to have more of the things that do well and less of the things do poor index funds are passive they just hold a I ified basket throughout without buying and selling

either of those is better for the average investor than trying to do it yourself uh you know most people don't do their own legal work they don't uh do their own medical work or their own dental work most people don't even fix their own cars and yet so many people think that they can do their own investing what the investor the individual can do is put aside money set a course and hold to it but in most cases the individual selection is better left to a [Music] professional first the investor has to say to himself

or herself what will be my approach to investing will you you could buy you could establish a portfolio today and leave it alone for 50 years and you will benefit from the long-term performance of the economy the corporations and the market or you can be activist and try to make uh frequent changes in your allocation so I can't say what all your uh subscribers should do it's an individual decision uh they have to decide on the basis of their own expertise how much time they want to devote to the process of investing how much risk

they want to take whether they have dependence whether they have um enough money uh that that they could see uh stand to see decline for a while because declines are part of life in the investment world and what is their attitude toward risk how strong is their stomach for living with fluctuations different for everybody um but so I think that for the nonprofessional investor the most important thing is invest invest for the long term don't be too active because you know our psyches try to get us to to make mistakes they try to get us

excited when things go well and and buy at high prices they try to make us depressed when things go badly and sell at low prices which of course is the opposite of what one should Doh and um but it's common that's why we have highs and lows in the market because psychology becomes too favorable and then to negative the key is to power through for the long term not uh succumb to the short term and not try to uh outthink the short term because most people can't do it so as I say save money don't

spend all you make that's the most important single thing put it aside invest for the long term don't succumb to psychological excesses once in a while you might try to make a change in your allocation when it is demanded I think today is such a time you know anybody who has a portfolio of all stocks for the last 10 or 20 years did very well I think that all stocks is not the right portfolio for the next 10 years for the next 10 years they should have a balanced portfolio with stocks but also uh a

large component of of debt or credit I think that's the right thing for the new environment exactly how large that component should be is different for [Music] everybody well you have summarized the debate mhm Nobody Knows the answer all we have is opinions earlier in our conversation you said that Oak Tre and I are value investors what does a value investor do a value investor in let's say stocks considers himself or herself to be an owner of the company these are not pieces of paper that we trade to make money these These are ownership shares

that we want to hold in the long run because we think we want to be part of that company the value investor tries to figure out what the profits and cash flows of the companies will be in the coming years and tries to turn those estimates of cash flows into a intrinsic value today and then looks to see if the stock can be bought at a reasonable price relative to the intrinsic value growth investors uh actually do something similar but their time Horizon is longer MH they invest more on long-term trends but of course when

you think about the long-term future you can't have a high degree of correctness and you have to have what what what we would call a hunch about whether a certain technology or product will do well 30 years from now but these forms of investing are based on anal Anis and projection of the future Bitcoin or other cryptos there's no such thing there are no cash flows with Bitcoin it's not a productive company uh that will uh throw off cash in the future it may serve a purpose in the financial system of the future that may

or may not make it more valuable than it is today and there's no place to look for the answers so I believe that you that you it's contradictory to say I'm a value investor in crypto because you can't try to figure out the value of crypto uh there it has no backing it has no assets behind it and it has no cash flows so that leaves us with the other term you used speculation now usually the term speculation is used to describe an unwise investment I'm not saying that crypto is necessarily unwise but what I'm

saying is that speculative investment is the opp Opposite of analytical investment and as I mentioned I think you there's no such thing of as analyzing the future of Bitcoin or crypto we don't know and you can't know so it's all just a matter of opinion and if you have a positive opinion you can buy it and if your positive opinion turns out to be correct you may make a lot of money and if it turns out to be incorrect you may lose all your money MH because crypto could turn out to be valueless so speculation

betting on the future m without analytical Foundation but I can't tell you that it's unwise or not to do it in 2017 I wrote in one memo that I thought that bitco that that crypto had nothing behind it and was speculative and unwise I still think that's true but Bitcoin was $110,000 today it's $35,000 this year it's probably the best performing asset Right double up yes so my son who is more open-minded and less and less constrained by old age than me he says Dad it's been around since 2008 his performance is better than yours

his his is better this year that's right but it's been around for 15 years if it was a scam or if it was an empty promise wouldn't that have been exposed by now and the answer is yes that's a good argument and in 2020 it went from 4,000 to 75,000 mhm and then in the next year it came way down and it fell to 177,000 from 75,000 to 17,000 but this year it's gone from 177,000 to 35,000 we all have our opinions and we're entitled to our opinions the key question for any investor how much

money are you going to bet on your opinion and uh clearly uh the story has not been written with regard to crypto uh I will say that the fundamental argument in terms of crypto was what we call the use case that is to say there are uses for crypto and uh you know people will start doing business in crypto and banking uh on the blockchain where they don't trust the banks or the government or they want to they don't want uh other people to know how much money they have or where they want to make

transfers of of of cash in in civilizations where it's hard to send money I would I think it's fair to say that the use case has not been validated yet and crypto's 15 years old but I don't think many people are doing business in crypto yet so uh all we can say is that the use case has not been proved out it remains a speculation but uh I wouldn't bet my life that that it will end up uh uh being a bad [Music] investment uh well clearly uh I know a lot of people who are

very rich and and spend all their time trying to get richer MH and some of them have poor relationships with their family members and not many friends and not many other interests and all they try to do is get richer and some get richer MH for me I mean each person has to decide what's right for them but for some for me that's not enough uh and when you get to be my age and you say am I happy with the way I live my life am I happy with where I am today you know

you can't you you can't cuddle up with your money it's not going to keep you warm at night and um money is uh it's just a uh a scorecard uh you know when you get to the point where you have more than you need mhm the rest is just a scorecard and it shows whether you were a smart business person or not but being a smart business person is not the most important thing in the world the most important thing in the world was having loving uh connections with friends and family in my opinion and

also Jacob other interests we talked before about golf not my interest tennis which which I love uh and art collecting and uh travel uh these are important too you should have a well-rounded life if your goal is to be the richest person in the world then you're probably going to be unsuccessful because there's only one investing is fun when it when it's successful it's not too much fun when it's unsuccessful and if you in well you'll pile up more money uh it's just that it's not the only thing in the world my first book was

called the most important thing it's not money I love to invest I'm 77 years old I'm still going to work and and uh and part of our organization uh I would say at this point not to make more money but it keeps me thinking it keeps me active there's nothing more rewarding in life than tackling an intellectual Challenge and and being successful and thinking things out and and and understanding things better than others and uh reaching answers that are correct all these things are very rewarding and they don't have to have anything to do with

money thank you very much thank you thank you okay bye-bye there's a rule that there's a recession every 8 or 10 years if you don't count that as a normal recession we're in the 15th year or the 16th year right uh we're due for one tomorrow I'm pretty sure there's not going to be one tomorrow I would say my Approach is to say I don't know I can't tell you but when I look around in the environment I don't see terrible excesses in the economy I don't see that consumption is overly enthusiastic I don't see

that inventories are building up too high I don't see uh a large number of construction cranes in the sky suggesting overbuilding it tells me things are kind of in the middle ground yeah and in the middle ground there's no uh Stellar conclusion to draw there's nothing you can say about the condition of our economy strongly which has a high probability of being right so I say nothing got it to all the viewers from the United States Korea and around the world welcome to Global money talk by SRO TV I'm your host danha today we're at

the New York offices of oak tree Capital Management for a very special conversation with Howard marks Howard really needs no introduction but for those who don't know I will say that Howard is someone that Warren Buffett pays attention to Howard has influenced and inspired generations of investors including me it is my great honor and privilege to bring you this conversation with Howard marks Howard thank you thank you Dan thanks for that nice introduction very welcome so I'd like to start with one of your recent memos Mr Market miscalculates in it um you wrote about how

in the markets meaningless statements are often given weight and how a given development can be interpreted positively or negatively depending on the prevailing mood of the market which reminded me of an Amos tersi quote people accept any explanation as long as it fits the facts that said price Behavior can be a useful source of information at times so could you please give a user's manual if you will on how to use price Behavior as a source of information uh sure Dan that's a complex question of course M um and uh I think the basic rule

in the investment world is that there are no easy answers sure um I think what you say is very important quoting verki people always say well why did that happen MH and sometime the answer is no good reason right there's Randomness there's irrationality uh you know people say well he was a good man why did he die well you know there may not be a correlation sure it's a good company why did this go down well who knows sometimes who knows is is the right answer and um but people not just in the investment world

but in general don't like going through life with the answer who knows so as you say verki says they they seek an explanation make sense of it well sometimes you can't sure uh I I wrote a memo and I'll I'll say that a lot in the course of this interview because I've written for 35 years so I've written now on almost every topic in investing uh a memo called what does the market know my general conclusion is the market doesn't know anything okay um the market is not some genius with a high IQ the market

is just the collection of the votes cast by all the people in it so by definition it's not any smarter sure uh if you get if you get uh you know a million people of average intelligence together their conclusion is not any smarter than average it's not like it accumulates to a greater total now having said that as you say sometimes price movements are meaningful sure so I think the answer is you can use it as a signal to think about things a signal to do some research you see a stock is way up or

way down uh you know you might try to figure out if there's obvious reason and try to figure out if the reaction of the stock price to the reason is excessive or insufficient maybe that will tell you there's something worth doing but I have to stress and I'll stress uh frequently in in this conversation with you that reaching these conclusions requires a very high level of expertise and experience and knowledge that most people don't have so for the average person to look at a stock and it's up 20% this week and to say why is

it up is 20% an overreaction or an under reaction MH will it go up more and should I buy the vast majority of people aren't equipped to make that decision right and and uh if they try to do so they're really duding themselves understood um also in that note you wrote about how there are no immutable rules in investing that can be relied upon to produce the same results always um yet investors do tend to make rules based on their experience mostly to mostly to protect themselves from repeating the same mistake you never let your

largest position become x% of the portfolio or be greater next time when the XYZ are true buy the stock um rules aren't perfect but they can help an investor stay disciplined yes what are some of your rules that you like to share well I think I think you know there's an old saying that rules are made to be broken okay uh you can you can have general policies okay but I think it's important to be uh to be ready to break them as necessary um I mean a great example is uh some people adopt a

rule that if a you buy a stock if it goes down x% you should sell it uh it's called the stop loss order sure so let's say you say if I buy a stock and it goes down 10% I sell it you have to think about what does that mean that means that if you if you sell every stock that goes down 10% you can never lose 20% or 30% or 40% but every once in a while you'll have a stock you'll buy it it'll go down 30% you'll sell it and then it'll go up

100% % from there and you'll miss all of those too sure there is no rule uh that you can set to help you negotiate that it's not down 10 or down 20 there is no automatic rule that will uh keep you safe but not result in you missing opportunities um you know I mean I've always taken the approach that if you have a great success you should sell some we say take a little off the table sure in order to capture some of the gain so that if it turns out to be fleeting you won't

give it all uph but if you if you buy something it's up 30% and you sell something that means that if it goes up 60% that part you won't get a g get a ride on right so it's not that the wrong that the rule is wrong or right the question is is it right for you right now the point is like I said about the stop loss order it it prevents great losses but it also uh causes you to miss some successes yeah you have to decide which is which is more important to youh

it based on your financial situation your personality those kinds of considerations so uh you know my idea of of uh taking a little off the table sure if you buy something it goes up 30% you sell some then it goes up another 30% you sell some more another 30% MH well you would have made more money if you held on mhm but on the other hand if it went up 30% and then back down you would have failed to tie up any of the profets which one of those two you can't do both right you

can't you can't secure part of your profit and let it all ride right so every person has to work out for themselves uh what's right for them you can't do this stuff perfectly yeah what is the definition of good for you that's the question that's an interesting point um you recently had a conversation with your partner Bruce K and the chess grandmas Maurice Ashley yes in that conversation Bruce talked about the importance of being at peace with yourself as an investor which I agree is hugely important can you tell us how one gets there and

I think that ties into your point about what is right for you well it also ties into my college minor subject which was Asian studies okay Asian studies is a lot about contentment and uh being at peace uh acceptance and um there's no manual uh for for achieving these things but I mean if you want to uh change something about your personality and that's what we're talking about here it has to be intentional mhm and you have to say how can I achieve greater Serenity uh and importantly one thing is that you have to not

be a perfectionist mhm um it's very hard to get investing just right you know I used to have a friend and we joked a lot in our relationship and we decided one day to catalog all the ways you can be wrong okay so number one is you buy and it goes down okay number two is you don't buy and it goes up mhm number three is it goes up you buy and it goes up but then it goes down MH number two four is you buy you buy and it goes down and you sell and

then it goes up okay there's you know number number five is it goes up and you sell and then it goes up more yeah there's an infinite number of ways to be wrong mhm there's only one way to be right which is you buy MH it goes up yeah you sell and it doesn't go up anymore yeah but you're not going to achieve that right so you have to achieve uh a level of Serenity in your life in all things not just investing sure but um you have to accept that some of the things you

buy are going to go down yes and some of the things you're going to buy will go up and you'll sell them and they'll go up more mhm and you can't make yourself s nuts mhm trying to do it exactly right cuz it's impossible sure uh you know one of the greatest quotes and I think uh when I was a boy John F Kennedy was famous for using this quote give us the courage to change what can be changed the serenity to accept what can't be changed and the wisdom to know the difference MH right

and I think that's important in all walks of life including investing you have to have the surrender to accept that you're going to strive very hard to get it right but you're not going to get it all exactly right MH right and you have to be if you make yourself crazy trying to do so uh you're going to have an unhappy life got it yep and as a followup to that um it seems important that the structure and the surroundings that an investor put himself puts himself in um is very important in achieving that piece

mhm um how have you structured oak tree um what are the you know what kinds of what types of strategies are you pursuing what types of strategies are you intentionally not pursuing um what are the tolerances for draw downs and mistakes how have you built the culture around that so that the investment decision makers at Oak Tree can be at peace well we're very fortunate Dan because we invest in something called Credit Credit means we lend people money MH and they enter into a contract with us that they'll pay us interest periodically and then they'll

pay us our money back at a point in time right and so our uh outcomes are not wide open our outcomes are defined contractually MH most of the time people keep their promises and pay us as they promise and we get the return we expected uh once in a while they don't pay us and we have the rights of an unpaid creditor MH to pursue uh a settlement M um and most of the time that works out okay mhm um so when you are an investor in credit or a lender MH uh you're up side

is limited you get the promised return but you don't get more most of the time and you don't have an Nvidia or a Microsoft on your hands or in Amazon but on the other hand you have very few losers and uh rarely do we have big losers so this fits my personality it fits the organization it fits my colleagues it fits our clients they come to us for that so that's that's a very livable situation sure as opposed to being someone who concent rates on making ownership bets in startup companies where you can have uh

a thousand to one payoff or a complete loss right and most of your most of your investments will be unsuccessful right uh that's right for other people it's not right for us and it's not what our clients come to us for they may go to somebody else got it for that right right but I found uh 46 years ago when I joined the bond department at City Bank a form of investing that fits my person ality my DNA my intellectual makeup got it um now you say how do we set the culture I think the

most important thing about the culture is to not have uh recriminations I want everybody to make decisions that will be correct mhm but I accept that nobody can make only correct decisions for for all of us it's a matter of Inaba average sure and uh the fact that somebody supports an investment that loses money number one it's not that unusual number two it's understandable three it doesn't mean they're a bad person or they were lazy uh and that person should not get criticized uh for you know what if you were a pitcher in baseball and

you got criticized every time you threw a ball sure or every time the other team got a base hit right um we tried not to have blaming or shaming uh to understand what's human and what's achievable MH at the same time if someone repeatedly uh makes U mostly bad decisions over a long period of time then we can draw the conclusion that that person's in the wrong job and maybe uh shouldn't work at Oak Tree sure uh but uh you know if you want people to uh give you the benefit of their best reasoning you

can't criticize every mistake MH right right so somebody who follows your investment philosophy who agrees with your investment approach is it inherently better to apply your investment philosophy to bonds rather than stocks well our philosophy yes uh our philosophy which is uh you know uh a a large number of reasonable successes and a a and a general absence of big failures I mean dead Investments that's what they're made for it's their ideal for that purpose I wrote a memo called fewer losers or more winners right and that's what it's all about everybody in your audience

who sets out to be an investor should decide number one is their goal to be superior MH or will they accept an average result and average result is quite good you know in in in the US the S&P 500 has gone up about 10% a year for the last 100 years which means if you had a dollar 100 years ago you'd have about 15,000 today that's not bad right right and that's average so now most of us don't get to live for 100 years and invest for 100 years but still if you invest at 10%

a year your money doubles every s years right so if you can do that for 35 years it'll double five times and a dollar would become 2 486 32 not bad sure y will you be average or will you try to be above average right which introduces the possibility of being below average right and if you want to be above average which I don't push for the amateur the amateur generally as I said in my answer to your first question is not equipped to do above average they she they should happily settle for average and

the great thing about being average is that you can achieve average results for sure through things like index funds sure and at a low cost right and and without risk of disappointment in terms of being below average you can lose money MH but you can't be below average anyway if somebody says no no I'm not going to settle for average I want to be above average I know I might fall short MH then now that leads to the memo which route to superiority will you follow will you try to have more winners than the average

investor or fewer losers right or both right now it's hard to do both because the defensive mindset enables you to have fewer losers the aggressive mindset is necessary right to have more winners yes it's hard to do both because it's hard to incorporate both the defensive mindset and the aggressive mindset so you should say what kind of person am I which is a better course of action for me mhm I'm comfortable with our approach because what it means is that when we're unsuccessful we're a little unsuccessful yes uh when we're uh successful we're a little

successful yes and know I like that for myself and for my clients more than swinging for defenses and and sometimes having abject failure but everybody has to you know if you see Nvidia and it was up four and a half times last year MH the question is are you going to kick yourself cuz you didn't have it mm uh well human nature says you are sure but you have to say to yourself just a minute didn't I say that I want to have fewer losers and that I'll live without catching all the winners right uh

it's very hard to you know give in human nature where we uh have great fear of missing out and we look at other people's successes and we feel terrible about it you know that's it's bad for investing uh there there's a book about Bubbles and crashes and the author uh said that there is nothing so injurious to your mental well-being as to watch a friend get richh yes unfortunately that's human nature we have to try to uh beat that right right one of my favorite stories from your memos is a story about your friend who

wish she had bought all of Malibu for $300,000 as the ringe family is set to have done back in U 1892 to which you responded well you would have sold it when it got to 600,000 right I think holding on to great long-term Compounders in Stock Investing is very difficult I think it's just as difficult as finding one now it's difficult because the prudent thing to do is to rebalance what I said before take a little off the table sounds intelligent right therefore and if so if the prudent thing to do is to rebalance then

is profiting massively from great long-term Compounders really just luck I wouldn't say it's just luck but it does require luck because uh you buy something and it doubles mhm you make a decision not to sell it if it goes on from there to appreciate further there is some luck involved you can never say oh no that was sure to happen it was obviously an intelligent decision at every point in the market you look at the price of a stock or a bond or a piece of property and you say uh is it fair too high

or too low and there's no scientific instrument for for uh establishing these things you make a judgment sure the question is are you lucky in your judgments uh lucky sounds like um you know it was all by chance rolling the dice no not necessarily sure but but but still we all make judgments every day about whether something is Priced Right or too high or too low and the word lucky may not be the right word but do the do most of your decisions work out uh and we all know that when a decision works out

there's some combination of the fact that you made a good decision but there's also some factor that you were lucky life turned out to be as you expected or maybe even a little better and so you prospered um but you know look in one of the memos I talked about at Amazon that was selling at 90 in 1999 and six sure in 01 yep and you know this question is if you bought it at six would you have sold at 12 well lots of people would take a double would you have sold that 30 five

times 60 10 times right what about when it hit 600 and were up a 100 times your money shouldn't you have sold should wouldn't you used the word prudent before wouldn't it be prudent to sell some and obviously you can't if you sell some you can't let it all ride uh and then you know I think when I wrote that memo it was at 3,300 so if you sold some at six times which was 100 times your money you missed the next 5 and 1 half times right so again you're not going to get it

all right and if you know somebody who bought Apple at 6 and still has it when it's 3,300 yeah and never sold a share right you have to look at them just he was up 500 times right and he didn't sell any what if it had collapsed right you know so again what is your mindset what is your personality um how are you going to feel if something goes from six to 30d to 3,000 and back right right and you know for most of us Mortals uh we would sell some at 600 and some at

3,000 and then hope for the best right by the way if you and and you know this this goes to the difficulty of doing these things if some if you buy something at six and it goes to 60 and you sell half your holding made 10 times your money mhm do you say I hope it goes up right and I make more money right or do you say I hope it goes down down right which proves that I was right to sell some right again human nature The Human Condition MH uh which is kind of

screwed up uh it's it's financially you can tell when something was a good decision you see the outcome humanly mhm the description of a good decision can be very challenging got it shifting GE a bit um if we don't count the 2020 covid recession which lasted for two months as a real recession then the US economy in its is in its longest ever expansion right by a wide margin by wide margin now if we count it as a real recession obviously then that's a different story how do you treat how do you treat the 2020

recession are we was it a real recession therefore we're simply in a normal um economic cycle or um was it merely A disruption therefore were're way in overtime well it's a great question Dan you asked me before what are my rules MH and I said rules are made to be broken yeah there's a rule that there's a recession every 8 or 10 years mhm M uh if you don't count that as a as a normal recession right we're in the 15th year or the 16th year right uh we're due for one tomorrow I'm pretty sure

there's not going to be one tomorrow but you don't know nobody can say was it a recession is this a normal experience are we due for one immediately or did it restart the clock and will it be uh 2008 20 28 or 2030 nobody can say and to rely on applying those rules of eight or 10 years mindlessly is obviously Folly I would say my Approach is to say I don't know I can't tell you but when I look around in the environment I don't see terrible excesses in the economy I don't see that consumption

is overly enthusiastic I don't see that inventories are building up too high I don't see uh a large number of construction cranes in the sky suggesting overbuilding right I when I look in the newspaper I see some good news and some bad news and some good news and some bad news and one day they say maybe we're going to have a inflation rekindling and one day they say we're going to have a recession soon it tells me things are kind of in the middle ground yeah and in the middle ground there's no uh Stellar conclusion

to draw there's nothing you can say about the condition of our economy strongly which has a high probability of being right so I say nothing got it you eoric markets tend to have what I call culprits where the euphoric Behavior typically begins right well I I think the way I would say that is Euphoria needs something to coal around yes a seed right right and I'm I'm going to guess that your answer to my question do you see any of these culprits I'm going to guess the answer based on what you just said is probably

no that you don't see any in the last couple of decades the great excesses have not been in the economy they've been in the financial markets MH uh in the 99 2000 period we had a bubble in tech stocks too much optimism right in ' 08 we had a bubble around housing and housing related uh debt right and then but of of course uh even though we didn't have great excesses in the real economy we had some doozy recessions because damage to the financial sector from the uh investment excesses correcting pulled them down um so

so but yes you're right at at the present time I don't see that culprit which would be and and by the way I don't think that the stock market is crazy high it's a little high but it's not crazy high and I don't think that the credit Market is crazy either just a little too unworried at this time um there are some things that a natural contrarian like me would worry about but not so great as to be paralyzing can you share a couple well just what I said I mean you know uh here we

are in the third quarter of uh 24 if you go back two years uh the world was very pessimistic which meant that the rewards for making Investments were very high uh because people felt so low and things were priced reasonably as a result right now most people are pretty optimistic the mark stock market has rallied for uh almost two years um and uh the aversion to extending credit has weakened so that the uh reward for bearing risk in the credit markets has declined uh so you know I like to buy when everybody's pessimistic and there's

no optimism priced in right today most people are fairly optimistic not crazy but and so there's little pessimism priced in I like to buy when there's a lot of pessimism priced in that's not the case today so uh I think that you can invest today but is nothing to get that excited about got it I get excited when people are jumping out of Windows yeah you think about investing in terms of odds mhm in my experience most people think about investing in terms of being right M did you always think uh this way uh in

terms of odds or did this evolve for you over time that's a great question um I don't know if I've ever been asked that question before I think it's a matter of maturing you know uh I joined the investment business in ' 69 switched to actually managing money in 78 in the in City bank's Bond Department sometime in that 78 to let's say 88 period I don't think I ever never thought in terms of yes no MH but I think that's when I uh strengthened my probabilistic focus uh and you start to realize that that

most questions aren't yes no um but a matter of probabilities you know uh 1963 uh there was a World's Fair in Flushing New York which is which is where I lived uh and uh in Queens and uh IBM had a Pavilion there and they had an interesting thing they had a they had two sheets of plexiglass with with a series of rods connecting them and they and an opening at the top they poured in a bunch of bows at the top and the bowls went like this okay yeah and and and they were they bounced

off the rods and by the time they got to the bottom they were piled up in this shape right and it just it that's that was my first you know I was 17 and that was my first exposure to probability you know um most things happen as you expect less things happen uh in ways you don't expect once in a while something happens that you thought Never Could Happen what we call the tales right and and that's that's the way I think about life you have to you have to really sharpen your focus on that

and in in one of the memos I told the story of I think it was the Super Bowl in 20 16 I'm not too good on on football dates but uh uh Carol Panthers were playing the Denver Broncos and uh they had a former football player on uh he didn't go to University of Chicago he didn't have a PhD uh in in uh in investing but they said to him who do you think's going to win and he said something very smart he said eight out of 10 Carolina wins right this could be one of

the two right now most people don't add that lad point I mean most people here oh you know eight out of 10 Carolina wins well I'm not even going to watch a game I know that's going no right two times out of 10 Denver's going to win and sometimes that happens and you can't you have to get away from black and white thinking in in I keep saying throughout this interview Dan in investing and in life yes when you're dealing with future events you never know how it's going to turn out and you have to

recognize that and you'll be a happier person and more effective right right well we'll have to leave it there okay but thank you very much it's pleasure and and I wish you much luck with your new show thank you very much okay bye-bye [Music]