Howard Marks: The Golden Lessons from 50 Years in Investing

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 M the most important in the

world was having loving uh connections with friends and family in my [Music] 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 uh couple years and they're most enjoyable glad to be here [Music] again well a sea change is a change which is fundamental mhm significant and uh probably long lasting MH I've been in this business 54 years I've lived through two prior sea changes this is I believe the third the first was 19 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 low quality if it's cheap enough to compensate for the risk that was a change and that that change has considered to today today nobody says no no it's low quality weon 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 MH and especially for people who own assets with borrowed money MH 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 mhm 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 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 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 U 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 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's 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 M has a profound effect on what works and what doesn't and uh for the 40 years mhm and especially for the 13 years from 09 through the end of 21 mhm uh investors received a Tailwind help from the declining rates declining rates uh stimulate the economy MH increase consumer demand Drive business to companies 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 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 unnaturally low um uh so so investing in debt Securities which is most of what oak tree does uh was not rewarding U you know a year

and three4 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 debth mhm or what we call Credit the avail able 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 promised to pay MH 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 aob Bonds in the nines 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 SU ESS 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 and 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 uh 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 incent is doing the same

thing in a different environment and expecting the same outcome so so equities and levered investments in 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 M 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 life will not be as easy and uh so Investments like equities and leveraged private Equity is a great example of a leverage 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 will be much more satisfactory in the coming period you know if you buy a higho 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 1978 so think they may think that there always have been high on 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 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 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 Bond investing and we've been doing it for 45 years we've lived through a period when

defaults averaged 4% a year and we've been very success Successful by the way in that period there were 5 years when the default rate was 10 or more uh 1990 91 01 02 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 high 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 will do 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 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 m 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 MH 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 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 in the short run uh 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 and less of the things that will do poorly very simple mhm 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 MH 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 MH 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 oakry 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 MH 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 Merl 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 uhuh one of the uh implications 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 diversified 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 uh 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 in the 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 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 do and um but it's common that's why we have highs and lows in the market because psychology becomes too favorable and then too 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 cuz 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 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 mhm 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 analysis 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 oppos 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 MH without analytical Foundation m 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 that crypto had nothing behind it and was speculative and unwise I still think that's true but Bitcoin was $10,000 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 you his is better this that's right but it's been around

for 15 years if it was a scam M 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 right 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 177,000 but this year it's gone from 17,000 to 35,000 we all have our opinions and we're entitled to our opinions the key question for any investor is how much money are you going to bet on your opinion

m 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 proven 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 M 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 can't cuddle up

with your money it's not going to keep you warm at and um money is uh it's just a 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 is having loving uh connections with friends and family in my opinion and also ja up 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 invest 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 [Music]