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All right, here's what I said.
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I said describe Howard Marks in 280 characters. Here's what it gave you.
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Howard Marks is a legendary investor co- and co-founder of Oaktree Capital, known for his sharp memos, contrarian thinking, and risk-focused approach.
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He made billions zigging when others zag, especially in crises.
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When he writes, Wall Street listens. Pretty flattering.
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Pretty pretty good, yeah.
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Okay, well, I think the best place to start is that kind of zig while others zag.
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So, I want to ask about the S&P because you don't know much about us, but the the short version of of the guy you see across from me there, Sam, is Sam's an entrepreneur. Sam builds his company.
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He sold his company and he took the money that he made and he said, "Look, I worked hard for this money.
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Now, I want this money to work hard for me, but I need it to be safe."
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And so, Sam went into a a mostly, you know, best practice, low-cost index funds in the S&P 500.
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And anytime I ask Sam about his strategy or I tell him, "Dude, you got to buy Bitcoin, Ethereum. You got to buy this.
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You got to put some money over here."
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Cuz I'm I'm like, you know, if Sam is vanilla, I don't even know what I am.
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I'm some flavor off in the side that's strange.
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>> Yeah, I'm tutti-frutti over here.
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And I keep trying to pull him over here, but he says, "No, no, no, I like vanilla."
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And so, he basically just says, "The long-term average of the S&P 500 is 10%.
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If I just hold this for 50 years, I'm going to double, you know, this many times. I'm good."
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But, you know, I do get a little wary when anything seems too safe or too too certain or I guess too taken for granted that this 10% number over the long term will be the be what it'll be.
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I guess what would your message be to Sam?
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Is Sam just, you know, is he right? Is he wrong?
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Would you give him a cautionary warning if if he was your nephew?
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He looks like he might be your nephew.
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If he was your nephew, what would you be telling him?
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Well, on the one hand, Sam, you're right because if you if you have more money than you need to eat, the first purpose of your money should be to make you comfortable.
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It doesn't make any sense.
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Uh Buffett says, "Don't risk what you have and need to get what you don't have and don't need."
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It does makes no sense uh for somebody with a surplus of money to make their daily life less pleasant by going to investments that put them under pressure.
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But, there's going to be a butt on your statement, it sounds like.
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But, on the other hand, the riskiest thing in the world is the place that there's no risk.
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The risk in the markets does not come from the companies, the securities, or the institutions like the exchanges.
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The risk in the markets comes from the behavior of people.
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And it's that for that reason that Buffett says, "When others are imprudent, you should be prudent.
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When other people are carefree, you should be terrified because their behavior unduly raises prices and makes them precarious.
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When other people are terrified, you should be aggressive because their behavior their behavior suppresses prices to the point where everything's a giveaway.
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So, I don't I mean, look, in the long run, you're right about the S&P.
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And over the over the coming years, American companies, on balance, are going to produce prosperity.
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What what's that defined as long term in this Well, I would say a 20 or more is is is the is the real long term.
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And I'll tell you in in a minute how I get there.
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But, my favorite cartoon, I have a file of cartoons from over the years.
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My favorite one, there's a guy, he's got his his a car pulled over to the side of the road.
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The guy's in a phone booth, so you know it's an old cartoon cuz there are no more phone booths.
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And there's a as a factory going up in the background.
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And he's screaming into the telephone, "I don't give a damn about prudent diversification.
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Sell my Fenwick Chemical."
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In other words, prudent diversification calls for certain investment positions and a variety of them in a certain composition.
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Reality says, "I see Fenwick Chemicals burning to the ground. Get me out."
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And you have you can't ignore reality.
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Now, why do What's reality in this case for you?
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Reality is recognizing where things stand.
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And JP Morgan uh published the chart around the end of 24, and it was a scatter diagram showing over the years if you bought uh the relationship between the S&P 500 at purchase and the return of the annualized return over the next 10 years. And it looked like this.
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On this axis, we had return, and on this axis, we had P/E ratio.
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And it was a it was a a negative correlation, which means the higher the P/E ratio you pay, the lower the return you should expect. Makes perfect sense.
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And it showed there was a number here, 23, on the P/E ratio axis, and it showed which is what the P/E ratio on the S&P was at the time, and it showed that historically, if you bought the S&P when the P/E ratio was 23, in every case, there were no exceptions.
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In every case, your annualized return over the next 10 years was between two and minus two.
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That's all you have to know.
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And what what are we today? What what is it today? 23 or 24, 24, 25. Because why?
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Because prices have risen.
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Now, maybe the outlook has risen, so maybe it's still 23.
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But, I think let's say I think 24.
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Um So, you can say the S&P has returned 10% a year on average for 100 years. I I'm happy with 10. I'm in.
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Or you can say it doesn't always return 10.
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By the way, one of the most interesting things about the S&P, if you do the research and I did it for a memo, on average, it has returned 10% a year for 100 years.
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But, do you know that the annual return is almost never between eight and 12?
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Yeah, like it it kills it or it dies. >> yeah.
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Think about what that means.
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The the the norm is not the average.
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But, the the issue for someone like me, so a lot of our listeners I'm one of them.
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You know, I I was fortunate. I had a business.
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I I made a relatively large sum of money at a very young age.
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But, I'm not an investor. Yeah.
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Like, I don't know anything about public markets.
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And so, when I hear you say that, I think, "Well, I don't have an alternative."
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Well, you you do have an alternative.
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You could figure out an algorithm to rebalance your position based on relative price, and you could put it on autopilot.
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I don't recommend, you know, making judgments about the future and the appropriateness of today's price for the future you perceive, but you can do that.
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And and uh there are ways to do these things even if you just use common sense.
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>> What what would you be rebalancing into?
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So, let's say S&P P/E is high, what would be the second best for the sort of non-full-time active investor?
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>> Okay, so I I've tried to suppress my tendency to talk my book until now.
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But, but I think an alternative is is bonds, you know?
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And in 19, I joined Citibank in the investment research department in 1969 as an equity analyst.
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And the bank did so horribly that in '78, I was banished to the bond department.
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And the bond department was the equivalent of Siberia.
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The good news is that at that time, American corporations pretty much gave lifetime employment. So, I didn't get sacked.
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But, I'm in the bond department, and I get a phone call from the head of the bond department saying that there's some guy in in California named something like Milken, and he he invests in something called high-yield bonds.
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Can you figure out what that means? And I said, "Yes."
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And I became a high-yield bond investor. And and you know what?
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When you buy a bond, there's a contract that says the borrower will pay you interest every 6 months and give you your money back at the end, and you can figure out the return that is implied by that contract.
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And if they if the borrower doesn't keep that contract, overgeneralizing, oversimplifying, the creditors get the company through the bankruptcy process.
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So, the borrower has a lot of incentive to pay you, and they almost always pay.
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I've been involved in high-yield bonds for 47 years, and I can tell you they've almost all paid.
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So, today, you can buy high-yield bonds, whether it be the US or Europe or variations on that theme, what we call low grade uh credit.
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And you can buy buy it to get yields of seven to eight.
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Now, seven to eight is pretty close to 10, so that's that's a good thing.
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The bad thing is you have to pay tax every year on the on the income. That's a bad thing.
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But, for those of us who are cautious like you and me, we might say, "I'll take, you know, eight, which in the long run will give me four after tax, as opposed to 10, which after capital gains taxation will give me seven." Or maybe I'll mix them.
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Maybe I'll own a little less S&P and a little more debt because I'm That's what I do now.
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Yeah, because I'm worried. It's not all or nothing.
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And that's why I when I'm on TV shows and they say, "Well, is this a sell or buy?
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Is this risk on or risk off?"
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I resist that formulation because it's never one or the other. It's it's a mix.
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And the only question that's relevant is what mix?
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I think the way when you manage your portfolio, the the operative continuum to think about is the continuum that runs from aggressive to defensive.
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And I think about it as a pedometer in the car.
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So, zero is no risk, 100 is max risk. 100% aggressive.
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You should have a sense for your appropriate normal posture.
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And it sounds to me like, Sam, you're a little conservative guy.
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You've made so much money you can't believe it, but you don't want to give it back.
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So So, I would say that you're a you're a 65.
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And especially given your youth, you may be a 55 for your cohort.
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So, I And And I think you should figure out every every listener, every investor should figure out the right place for them and try to stay there most of the time.
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We need to get a couch here, and you can just I'll call you Dr.
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Marks, and you can tell me your problems. >> what?
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I wrote I once wrote a memo called On the Couch because I think that once in a while the market needs a trip to the shrink.
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I went back and I read a bunch of your old memos, and the one that stood out to me was the uh bubble. com one.
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So, you wrote this back in 2000, and I I actually have a few of these where I feel like there's been moments in time, maybe 2000, 2008, 2012, 2020, where uh it seemed like consensus was going one way, maybe it was max greed, and you went the other way.
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Or it's max fear and panic, and then you you were actually very aggressive.
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Um you did the thing where Buffett says, "Be fearful when others are greedy and greedy when others are fearful."
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It's cool to say, but it's hard to actually do.
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And I thought it'd be fun if you could kind of walk us through a couple of those moments.
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And I don't know, like, you know, not to go too far down memory memory lane, but just, you know, take us back to, you know, the the one in 2000. What did you see? What did you do?
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How did it You know, how did it play out?
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What did you learn from that?
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Take us through a couple of those cuz I think that's your superpower.
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First of all, uh what One of my sayings is we never know where we're going, but we sure as hell would have know where we are.
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And at Oaktree, uh we loudly proclaim our uh inability to make macro forecasts and our non-reliance on macro forecasts.
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But if we want to do the right thing vis-à-vis the macro, we should be able to figure out what's going on at the present time and what that implies for the future.
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Uh it may not happen, the thing you think it implies, but it probably has a higher chance of happening than not happening if you're logical and and understand history and patterns.
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And I wrote a book called Mastering the Market Cycle, which was published in '18, and uh I think I always say it's a cheesy title, but it wasn't my idea.
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The publisher wanted that title cuz they thought it would sell more books.
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But I like the subtitle, and the subtitle says getting the odds on your side.
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And I believe that where we stand in the cycle determines what probably is going to happen and how likely it is.
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And understanding that can improve your odds.
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It can't make you a sure winner, but it can improve your odds, and that's the best we can do in an uncertain world beset by randomness.
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So, you know, I I don't know if you know that I started writing the memos in 1990. Uh bubble.
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com on the first day of 2000 was the first one that ever garnered a response.
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I went 10 years, not only did nobody say, "Hey, that was good."
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Nobody even said, "I got it."
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And And And And so, one of the mysteries is why I kept Who were you sending them to? To our clients. How many? Crickets.
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Well, you know, in 1990, 100. Okay.
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You know, and by mail, of course. I wrote bubble.
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com January the 2nd of 2000, and it had two virtues.
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It was right, and it was right fast.
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If you're right slow, it it doesn't look like you were right.
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One of the great sayings in our business is that being too far ahead of your time is indistinguishable from being wrong.
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So, the the answer is I was not too far ahead.
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Uh in in the fall of '99, I read a book called Devil Take the Hindmost.
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It It's a It's a history of financial speculation.
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Were you looking for books about that cuz you had a hunch or you just randomly read this book?
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No, I I don't remember why I read it.
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Uh uh The idea comes first, not My books My memos are not research-based.
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They're based on ideas that resonate with me.
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And so, I'm reading this book.
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I am interested in financial speculation.
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I'm interested in cycles.
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I'm interested in in the extremes of uh financial behavior.
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Uh so, that's probably why I read it.
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But I'm reading this book, and it talks about all these crazy things that people did, especially in something called the South Sea Bubble.
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Uh Britain had this big national debt, and they concluded that they could uh pay it off by starting a company called the South Sea Company, uh and they granted them a license to trade with the South Sea, by which they meant not Samoa, but Brazil.
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And and they would charge them a a license fee, and that would pay off the debt.
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And it was one of the one of the great bubbles.
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And so, I'm reading in the book about what people were doing in 1720, and, you know, people were quitting their day jobs and hanging out in alehouses to trade the shares of the South Sea Company.
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Et cetera, et cetera, et cetera.
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And I said, "That's what's going on now in the tech bubble."
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People You may recall that people were quitting their jobs, becoming day traders.
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People with no money could trade stocks as long as they didn't ca- carry any balance overnight.
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And um and and uh young people were quitting MBA programs because they had an idea, and if they waited until they graduated, somebody else would take it.
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So So, it just resonated.
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And one of the quotes I use the most now is from uh Mark Twain, who said history does not repeat, but it does rhyme.
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There are certain themes that rhyme from generation to generation and cycle to cycle because they are embedded in human nature, and so they recur.
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And so, uh and when you when you get older in our business, you know, obviously, one of the things I uh hasten to point out is there is no such thing as knowing something about the future.
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And if you don't know about the future, and you want to figure out the future, there's no such thing as analyzing the future.
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It doesn't exist, and the only thing you can do to get a handle on the future is look at the past.
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And uh look for the repetition of patterns, as Twain said, and try to figure out if they apply today. So, this was very easy.
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So, I wrote this memo, bubble.
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com, and it said what they were doing people are doing today.
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And I point tried to point out the folly of what I saw going on.
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The companies with no profits and no revenues were being highly valued.
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Maybe no product, just an idea.
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And that is the epitome of a bubble.
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So, I wrote the memo, uh as I say, January the 2nd.
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Sometime around midyear, the tech bubble started to collapse.
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So, as I said in the introduction to one of my books, after 10 years, I became an overnight success.
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And did you actually bet against it, or did you just preserve capital by not FOMOing into every, you know, tech company, basically?
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Like, what what was the what was the win of that for you?
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First of all, we're not involved We're basically not involved in the US stock market, and we're not involved at all in technology.
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So, we wouldn't have the chance to apply that.
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But I think what we did is we recognized And by the way, things don't happen in isolation uniquely.
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So, when you when you see something like I describe in the tech bubble, you should realize that maybe there are ramifications in other world parts of the world.
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And we figured out that people were engaging in optimism, not pessimism, greed, not fear, uh credulousness, not skepticism, risk tolerance, not risk aversion.
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And when uh as Buffett says about prudence, when nobody's afraid, unwise deals can get done easily. Simple as that.
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And the people who buy that stuff, it usually ends badly.
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The way that you explain it, I think everything makes sense and I totally buy into it.
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But that's actually quite challenging to understand this like macro environment and to say this is where we are. Yeah.
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Well, uh you have to be clinical.
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You have to observe and and without emotion understand what's going on and what the what the implications are.
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And of course, the what we call what I call emotion is part of what's called human nature.
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If you succumb to human nature, it tends to get you to do the wrong thing at the wrong time.
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I came across a great quote within the last year from a guy who's a retired trader, when the time comes to buy, you won't want to.
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And and That and that that that encapsulated encapsulates so much wisdom because what is it that causes the great moments to buy?
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It's probably the point of lowest consensus.
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So but when most people don't believe would be the time that the price is going to be the lowest, right?
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It's the time with either the most uncertainty or the most pessimism or the most fear, most conservatism.
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So you also want to be all those >> causes those things?
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You're talking about you're talking about the manifestation. What's the cause? Mhm. Bad news? I don't know. Bad bad bad events?
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>> Bad news either either exogenous or geo or or in the economy, faltering corporate fortunes, declining stock prices, widespread losses, and a proliferation of articles about how terrible the future looks.
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So, the point that's why you don't want to buy at the low.
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Who would want to buy under those circumstances? Right.
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>> And so you you talked before in your introduction uh about zigging when others zag.
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The only thing I'm sure of is that if you zig when they zig, you're not going to outperform.
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Do you still feel that fear?
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Uh you know, the of you like when you know you're supposed to buy, do you still feel fearful or do you feel like nice, hello my old friend, I love this emotion, this is what I'm supposed to do? >> Right.
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Yeah, I mean, it's not easy, but you have to know you have to do it.
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If you think about it, the fortunes of companies and the outlook for companies doesn't change much.
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What and I'm I'm writing a memo about this that'll come out one of these days.
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And what changes is how people think about what's going on and think about the future.
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And so what changes is the relationship of price to what I'll call value.
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Sometimes they hate them, sometimes they love them.
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When they love them too much, you should expect them to probably go down.
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That sounds like a bull market or a bubble.
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And when they hate them too much, you should expect them to go up.
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That sounds like a bear market or a crash.
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And so you have to do the opposite.
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And and the same developments in the environment that that affect everybody else will affect you.
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You're subject to them, you feel them, you read about them, you hear about them, everybody tells you how dire the outlook is.
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And you know, uh it's hard to ignore them.
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But you have to do the right thing in the face of them.
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Uh 1998, we had uh the Russian ruble devaluation, the debt crisis in in Southeast Asia, and um the meltdown of Long-Term Capital Management.
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And one of our portfolio managers who who was young came to me and he said, "I think this is it.
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I think we're going to melt down. I think it's all over.
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I'm terribly pessimistic." I said, "Tell me why."
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He went through his reasoning.
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Uh I said, "Okay, now go back to your desk and do your job."
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A a a battlefield hero, and I don't want to compare what we do to being a battlefield hero, but a battlefield hero is not somebody who's unafraid.
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It's somebody who does it anyway.
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And that's that's the way you have to be.
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Can I ask you Can I ask Let me ask you about that because so it's funny.
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Interestingly enough, even though I'm the conservative one, I'm actually way more emotional.
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Sean's like a more mostly is is is a pretty stable guy emotionally.
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I go up and down, which I think is actually closer to the average for average folks.
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You said something really You said a bunch of stuff about emotion in the past.
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I think you said to be a good investor, you better be able to invest without emotion or at least act as if you don't have a lot of emotion.
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Has there ever been anything like a mindset shift or a practice or something that you've had to use in order to learn to be less emotional when investing?
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No, these things are not intentional on my part.
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You think you're born like that?
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>> I was born unemotional.
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By the way, and and I want to point out here cuz my wife's downstairs having lunch, that that I I wrote in my book that it's really important to be unemotional in investing.
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Not so good to be unemotional in life in in arenas like marriage.
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Uh so there it's not an advantage.
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But no, for me it came naturally.
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I don't have to I don't have to say, "Oh, there I go again. I'm getting emotional.
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I have to restrain that, blah blah blah."
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It's and and and my partner Bruce Karsh, who's been my partner successfully for 37 years, he's pretty much the same. So that makes it easy.
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I don't have to restrain him.
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We've gassed you up about some of your your best moves.
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What's the worst mistake you made due to an emotional mistake where you you didn't control your temperament properly and you made a mistake?
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>> My worst mistake is not and I know you're talking about a point in time.
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My worst mistake is that I have always been too conservative.
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My parents were traumatized by the Depression.
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I always say the the the question is not whether your parents were alive during the Depression, but whether they were adults. My parents were adults.
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They were born in the 19 aughts.
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And so in the Depression, they were in their 30s.
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And they were they you know, and the Depression was really traumatic.
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Nobody knows what it was like, and it ground on for over 10 years.
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And and so you when you grow up with parents of the Depression, they say things like, "Don't put all your eggs in one basket. Save for a rainy day."
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You know, that kind of stuff.
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And I ended up too conservative.
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And if I if I wasn't as conservative, I'd be richer today.
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I'm not sure I'd be happier.
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Uh because >> What's an example?
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What do you mean you were too conservative?
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Like I guess like how what makes you say that?
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What would you have done differently had that not had that wiring not been done in you?
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Well, I mean, I don't know.
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I might have I might have gone to an into an a more aggressive asset class than credit. Like equities.
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I might have become a venture capitalist.
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Or uh you know, like my son Andrew.
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Or private or leveraged buyout investor.
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But you know, the reason I was talking about the appropriateness of credit for Sam is because while the returns are a little lower, there's much less uncertainty and downside.
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So I I would say that if I I've been in this business 56 years, I would have spent those 56 years in less conservative asset classes, I would have made more money.
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Having said that, it happens that I went into things like high yield bonds in '78 and distressed debt in '88.
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And if I had not been a conservative person, I probably wouldn't have had any clients because they would have been scared off by the risk.
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So it served me well in in pioneering in those businesses.
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But that was my I I mean, I we never had a mistake like we were too defensive at a in a crisis or too aggressive in a bubble.
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We just I just was too conservative all my life.
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And that kind of makes sense because you I don't think you started Oaktree until your late 40s, right?
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>> Just short of my 49th birthday.
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Yeah, and so well I I guess leading up to it, were you already financially successful?
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Were you were you a success leading up to that?
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And and so was it a big risk to start Oaktree? I was secure.
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I I wasn't rich by today's standards, and I may not have been rich by the standards at the time.
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But I had I had lot I had good money and I lived well.
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So I started running money in '78.
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I joined my Oaktree founder partners in '85, '86, '87, '88.
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We did a great job through a variety of environments, and we weren't worried about the ability to do a good job.
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And we had enough money to eat.
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So it it wasn't I mean, but it it I had to overcome my innate caution.
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My wife had to give me a kick in the ass, uh which she uh happily did.
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Um I I may not have done it without her, probably wouldn't have.
29:32
You You said you were you're too conservative, but there's been times when you've been very aggressive.
29:36
And you know, I think the sort of '07, '08 financial crisis, I read something that as the crisis happened, you go raise $10 billion cuz you see the opportunity and you started deploying something like $600 million a week.
29:54
Which is just sounds badass to be honest.
29:55
I don't even Maybe that's Maybe that's not not as crazy in the financial world, but that sounds crazy to me.
30:00
Well, it your your fact set is inaccurate in one regard.
30:06
We did not raise 10 billion after the crisis hit because remember what I said about the guy who said when time comes to invest you won't want to.
30:13
You can't raise money in a crisis.
30:15
You If you went to people you say world's melting down, we're going to buy all this stuff with it's going to be a bonanza, we're going to get rich.
30:22
Nobody will give you money. Why?
30:24
Because the same factors that influence the world influence the people you talk to and everybody else stick their hands in their pockets and say maybe later after the after the dust settles and and like and a lot of people say you know, we're not sure going to try to catch a falling knife.
30:38
And I believe that you make the big money catching falling knives carefully.
30:42
So, what happened is we like I described about the tech bubble in 2000, we detected in '05 '06 that the world was behaving in a in a carefree manner.
30:56
And and I I would wear out the carpet between my office and Bruce's with the Wall Street Journal and I'd say look at this look at this piece of junk that got issued yesterday. There's something wrong.
31:07
If a deal like this can get done, the world is exercising inadequate prudence.
31:13
Specifically on mortgage is or just generally? >> mortgage.
31:17
I never heard of mortgage.
31:17
I never heard of sub I I don't think I ever heard the word subprime.
31:21
I don't think I ever knew what a mortgage-backed security was.
31:26
It just seemed that the world was operating in a pro-the-risk fashion.
31:28
And when people are pro-risk, they they permit bad deals and they pay prices higher than they should.
31:36
So, what happened was on on the first day of '07, we went out to our clients and we said we think there's an opportunity.
31:45
Uh we didn't I don't think we raised funds in '05 or '06 for his uh distressed debt area, but on the first day of '07 we went out we said we think there's a great opportunity coming and we'd like to have 3 billion.
31:56
The at that time the biggest distressed debt fund in history was our '01 fund which preceded the Enron meltdown and so forth and it was 2 and 1/2 billion. And so, 2 and 1/2? Yeah, around there.
32:10
So, we went out to clients we said we'd like to have three.
32:15
That would be the biggest distressed debt fund in history.
32:19
So, within a month we had eight.
32:22
And we said, you know, we can't do anything with 8 billion.
32:26
It's it's it exceeds our ability to invest it wisely.
32:28
So, we're going to take 3 and 1/2 billion and we're going to close the fund.
32:36
But we would like to have the remainder of your interest in a standby fund that will implement if the stuff hits the fan.
32:44
So, the first fund was seven and it was 3 and 1/2 billion and the next fund was 7B and by the time we finished raising money for it a year later, it was 11 billion.
32:56
And was and we and fund seven got fully invested, so we started investing gradually investing 7B in June of '08.
33:03
It's sitting there on the shelf.
33:07
And by September 18th 15th, it was uh no, 18th.
33:13
It was uh uh 12% invested. So, just over a billion.
33:21
And Lehman Brothers declares bankruptcy.
33:25
And so, the question which you implied was do you invest it or not?
33:31
You're sitting there with all that money.
33:33
But the it looks like the world's going to melt down. Do you invest it? Very simple.
33:38
And this as you say, I think this was one of our best moments because I reached a very simple conclusion.
33:48
If we invest it and the world melts down, it doesn't matter what we did.
33:53
But if I don't invest it and the world doesn't melt down, then we didn't do our job. QED.
34:01
You have to move forward.
34:01
I also wrote that it's hard to predict the end of the world.
34:07
It's hard to assign a high probability to it.
34:09
It's hard to know what to do if the world is going to melt down.
34:15
If you do those things and the world doesn't melt down, it's probably a disaster and most of the world time the world doesn't melt down.
34:20
That was the That was the sum of our analysis because there was nothing to analyze.
34:27
There had never been a global financial crisis before.
34:29
The The meltdown of the financial sector had not been anticipated since the Great Depression.
34:37
And there was there was there were no past patterns to extrapolate.
34:40
So, you have to resort to logic. That was the logic.
34:44
So, as you say, we invested 450 million a week for the next 15 weeks in that fund which was 7 billion and Oaktree overall invested an average of 650 million a week for the next 50 15 weeks. How did that turn out?
35:00
So, that's what you put in.
35:03
How did What was the sort of result of that that investing during that time?
35:06
Well, it was great except for I mean, we got good buys and we made good money, but the Fed mobilized uh very astutely cutting interest rates to zero for the first time in history at the beginning of '09 and introducing QE.
35:28
And those two things saved the economy.
35:32
So, we didn't get the meltdown that everybody was afraid of and there were relatively few bankruptcies, especially outside the financial sector that result resulted from the global financial crisis.
35:43
So, we had We've had some barn burner funds in crises.
35:46
This was very good, but not a barn burner.
35:52
You've you you've you've done something that I love which is you've quoted a ton of different people.
35:57
You've quoted Mark Twain a bunch of times.
35:58
You you have all these quotes which like clearly shows that you retain information that you read.
36:03
And I imagine you read a lot.
36:03
Can I ask you about your reading habits?
36:05
How do you pick what books you read?
36:09
I I've never read any books about how to be an investor like, you know, multiply this by that and add this and subtract that and the books I've found most interesting have always been the ones about investor behavior.
36:24
And I mentioned Devil Take the Hindmost, 99.
36:29
One of the greatest books I ever read was before that John Kenneth Galbraith's book called A Short History of Financial Euphoria.
36:37
That was really pivotal for me.
36:40
And since I'm a slow reader, I like the fact it was only about 100 pages.
36:45
And then, you know, back in back in '74 I think Charlie Ellis wrote an article Winning the Loser's Game where he said that because you can't predict the future, active investing doesn't work.
36:58
He was a believer in the efficient market.
37:00
So, rather than try to hit winners like the tennis player, you should try to avoid hitting losers and keep the ball in play.
37:08
And that has always defined my investing style.
37:12
In fact, I wrote a memo in the summer of '24 '23 called Fewer Winners, Fewer Losers or More Winners.
37:20
And that's the basic choice of investing style.
37:24
There's a great I think like sort of math paradox that you've pointed out which is that you know, a fund I don't know if it was your fund, but any fund it could be, you know, never never in the top 10% but sort of never in the bottom 50% and there's a strategy of just consistently being above average will place you in the top 5%, right?
37:44
It'll It'll place you in the top percent.
37:45
Uh can you unpack that idea a little bit?
37:47
I just I just sort of butchered it.
37:49
In 1990 I wrote a memo called The Root to Performance and I had dinner in Minneapolis with my client Dave Van Benscoten who ran the General Mills Pension Fund.
37:58
And he Dave explained to me that he had run the fund for 14 years and in 14 years the the equities General Mills equity portfolio was never above the 27th percentile or below the 47th percentile.
38:13
So, 14 years in a row solidly in the second quartile.
38:15
Now, if you said to the normal person not in the investment business, so this thing fluctuated between the 27th and the 47th, where do you think it was for the whole period?
38:27
They would say, well, let me think. Probably around 37th. The answer is fourth.
38:34
So, if you if you can do well for 14 years in a row and avoid the tendency to shoot yourself in the foot in a bad year, you can pop up to the top.
38:45
At the same time, another investment management firm had a terrible year because they were deep value investors and they were heavy in the banks and the banks suffered terribly, so they were at the bottom.
38:55
So, the president comes out and of course things people in the investment business are great rationalizers and communicators.
39:02
And he says the answer is simple.
39:04
If you want to be in the top 5% of money managers, you have to be willing to be in the bottom.
39:11
Well, that makes great sense except that my clients don't care if I'm ever in the top five and they absolutely don't want to see me in the bottom five.
39:18
So, my reaction is the first guy's approach is the right one for me.
39:24
So, that's why at Oaktree we go for fewer losers, not more winners.
39:29
Yeah, I love that because it's one of the unsexy ideas.
39:32
Like I think any idea you can't, you know, make a movie about or won't make you sound really cool are generally undervalued ideas when they when they actually logically math out the way you the way that one does.
39:43
And so I sort of that was one that stuck out to me is I I said nobody's going to nobody's going to give you a motivational video about being consistently above average and just never shooting yourself in the foot. Right.
39:54
Uh it's all about heroic greatness and huge risks you can take and you know being willing to do it.
39:58
And so you know that's all you hear.
40:00
But but you know uh the Financial Times of London every Saturday they they have an article uh called the lunch with the FT and they take somebody to lunch and they write an article about the person the restaurant and the food.
40:15
And they did that with me in late '22.
40:20
And uh I took the reporter to uh my favorite Italian restaurant near the office in New York where I go 100% of the time if I have a lunch.
40:29
And I and I said to her it eating in this restaurant is like investing at Oaktree.
40:38
Always good sometimes great never terrible.
40:42
Now that to me that sounds like a modest boast.
40:48
But if you can do that for 40 or 50 years I think it'll compound to great results uh if you never shoot yourself in the foot.
40:57
And I think it's I think I don't know if the SEC is listening but I think it's descriptive of what of what we've accomplished.
41:05
There's like this um class of investor that's like kind of become like folk hero.
41:10
Like you know like Warren Buffett's an obvious one where the like a folk hero sort of uh they're high integrity they make greatness seem achievable and relatable uh which is like a whole skill in itself and and you've become one of these like folk heroes.
41:23
Um you know and a lot of them they have in common where they like write a lot they write well they've got wonderful sayings.
41:29
Uh they make challenging things easy to understand.
41:34
Did you purposely try to become like this public figure?
41:36
Well first of all you can't ask uh somebody who did whether they did cuz they'll say no. Nobody will admit that.
41:44
Nobody will say my my public persona is a facade.
41:46
Me and Sam were joking before this we were saying it's cool how uh it's interesting how I think when you started as an investor there was like no celebrity investors.
41:57
There's no like famous person who was doing what you were doing and then now you have whether it's Buffett or Munger there's like the investment guys are now like the philosophers. Yeah.
42:07
The tech CEO nerds are now like the power players of the world.
42:12
Uh podcaster comedians are now like the new trusted media.
42:18
It's like this very strange shift on all fronts where um you know influence has sort of shifted but I find that like investment crossover life philosopher to be just like one of the really wholesome ones that I I personally really like you know. Right.
42:32
Well you know I I hesitate to put myself in the same category but I think Warren has always tried to just educate people and share his knowledge and and people say well why do you give away your secrets?
42:43
Aren't you afraid that other people will emulate you and and and catch up with you?
42:46
But I don't think so because you know we can tell them all day long what what you should do but it's hard to do.
42:52
Like we said at the beginning of the podcast.
42:54
Friend of mine Richard Oldfield in London wrote a book once entitled simple but not easy.
43:03
I think the things we have to do are simple.
43:05
They're just not easy to do.
43:07
I think Buffett makes investing seem simple because he boils it down to the essential ingredients.
43:15
By the way you said there were no famous investors but I think Buffett started around '53 if I'm not mistaken. He just wasn't famous. Yeah.
43:24
Uh but and and there were a few people who were famous in the investment business but I don't think anybody was was uh famous in the in the wider world.
43:35
Well what's interesting for like the normal guys like me and and Shawn is like we learn from you about how to live life. Yeah.
43:40
And you just and you and and that's kind of cool and it just like investing is just your way of like testing if your way of living is true. Right.
43:48
Well investing is a lot like life.
43:50
But but and and by the way uh I'm working on a book along those lines Sam. What's it called? Uh I don't know yet.
44:00
Um but but uh uh if you wait a few years I think it'll be out.
44:05
Well we appreciate you coming.
44:05
I I do want to leave you with one it's a question for for for you.
44:10
So we've asked you a bunch of questions but I I actually think it'd be interesting um what question do you think people who listen to this should ask themselves?
44:18
What's a what's a useful question that you think people could ask themselves as a as a final final note here?
44:24
Well I would think in terms of the mistakes that investors made and I would ask yourself whether you make them.
44:30
Uh so what are the big mistakes investors make?
44:35
Uh I I can think of three.
44:35
Number one do you think you do you think you understand what the future holds and and do you reasonably think that's accurate?
44:48
Uh number two uh I think the biggest single mistake that investors make is that they think the world will remain the way it is.
44:55
That the things that are working today will continue to work the things that aren't working will continue not to work.
45:00
That the trends that are in motion will continue and that there won't be any new trends.
45:04
So do you do you are you part of that?
45:07
And then number three is do your emotions uh rise and fall and get you to do what they want as opposed to what you should do.
45:18
Uh so uh I think you just have to have a checklist.
45:21
You know in my first book The Most Important Thing I had a thing in there called the uh Poor Man's Guide to Market Assessment.
45:29
And and it says on the left a bunch of things and on the right there's a bunch of things and and and it was half tongue-in-cheek or maybe more than half.
45:38
But I mean it says you know uh is the market rising or falling?
45:41
Are the TV shows about investing popular or unpopular?
45:46
If an investor goes to a cocktail party is he mobbed or shunned?
45:50
Uh are the deals get done easily or hard?
45:53
Do people are deals oversubscribed or left begging?
45:57
You know that kind of thing.
45:59
And you can tell you can figure out from that checklist whether the market is overheated and too popular or frigid and and and too shunned.
46:12
And this can tell you a lot of what to do if you're methodical and clinical.
46:16
Well Shawn and I have have read your stuff forever.
46:18
We've listened to so many of your podcasts it's been an honor we really appreciate you doing this.
46:22
I think the best part of our best part of our job is we have an excuse to hang out with amazing people who are way out of our leagues and this is this is one of those occasions so thank you so much. >> Well thank you Sam. Thank you Shawn.
46:34
I've enjoyed your questions and let's do it again sometime. All right.
46:36
You're the best we appreciate you. Bye-bye.