#338: Howard Marks — How to Invest with Clear Thinking

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Well hello, boys and girls. This is Tim Ferris and welcome to another episode of the Tim Ferris Show, where it is my job to interview world class performers to tease out the habits, routines, thinking frameworks, life lessons, favorite books, et cetera, that you can apply and test for yourself. This episode features Someone who is very, very well known. in the world of investing.

But studying what he says is really a study in clearer thinking. And it transcends investing in business in so many different ways. Howard S Marks is co chairman and co founder of Oak Tree Capital Management. a leading investment manager with more than uh one hundred and twenty billion dollars in assets. He is the author of the new book Mastering the Market Cycle. Subtitle Getting the Odds on Your Side and his previous book on investing, The Most Important Thing, subtitle

Uncommon sense for the thoughtful investor was a critically acclaimed bestseller. To give you an idea. of who reads his memos and his writing. has written of Howard quote when I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something.

because it covers a lot of ground we talk about. The three stages of of a bull market, newsletters he reads, thoughts on Bitcoin and crypto. his thoughts on understanding market cycles for making better decisions, how his firm was poised to capitalize on the bubble in two thousand eight and put massive amounts of capital to work and more and more and more and more. We really cover a lot of ground and I had a lot of fun. So Without further ado.

Maybe I've already said that. Howard. Marks. I Howard, welcome to the show.

I am thrilled to be sitting here with you because I have so many fans of your work and thinking in my friend circles. Well that's great to hear. When I went out to a handful to ask for potential topics or questions, they were very, very forthcoming. But what I thought I would do in this particular episode I've never done in a podcast episode before Which is to start with a poem. This is always risky, risky business, but this was suggested by a friend. And he said I would use an A E Housman poem. This captures effectively the uh I think that what he views as as as the spirit of s of much of your writing.

Yeah. And you can agree or disagree. Here we go. I to my perils of cheat and charmer come clad in armor. By stars benign. Hope lies to mortals and most believe her, but man's deceiver was never mine.

The thoughts of others were light and fleeting, of lovers meeting, or luck or fame, mine were of trouble, and mine were steady, so I was ready when trouble came. That is a Shropshire lad. Mm. And I thought that

Uh We could certainly talk about that specifically. But in the course of doing research for this conversation, I discovered that you had studied Not only finance and what you might look at as vocational

subjects when you were an undergrad, but also seems like Japanese. And uh that there was this concept of Mujo that popped up when I was doing my reading. Would you mind describing That time and that concept. Well, I I went to Wharton.

Um At a uh When you were required to have A non business

Minor. And then A semester of the literature of a foreign country in English. I never learned Japanese.

But I started off for some reason, which I uh it's interesting that I have no recollection of what motivated me, but I decided not French literature or English or But Japanese literature. May i it must have been the exoticism. Uh and I liked it so much that I turned Japanese studies into my minor and took

fifteen credits at the graduate level. And that's what turned me from a Teenager. Into a

into a student, really. Um but The professor for most of those courses, a guy named E. Dale Saunders was an inspirational speaker. And uh Oxford Don, an aesthetic.

And Yeah. a Japanese philosophy. And we came across Mujo. Mujou uh literally means the turning of the wheel of the law.

In other words. uh the operation of life. And Uh the the The essence is impermanence.

And because the wheels turn. And Um And also the the unpredictability of the future. And These were really formative for me, and they have in in

Unconsciously. informed everything I've done. Um And uh I think that it

personally that in the investment business and and also in life You are Better off. If you realise number one that If

Life is always gonna change on you and there'll always b be new things coming down the pike. And you can't control it. Um And What we have to do.

is Live with it. In the course of the reading I've I've done prep for this, which is not only

the uh the new book, but also many of your letters which I had already been a fan of, but went back to revisit. Uh I came across many people who had tried to select Favorite quotes and one that came up a lot, so you could certainly correct this if it is not accurate, is something along the lines of You can't you can't predict, you can prepare.

And that Leads me to Two thousand eight. And we're gonna bounce around. chronologically quite a lot, I suspect. But uh during the two thousand eight bubble

Which of course was a time Uh Oak tree. did exactly the opposite. And you put more than a half a billion dollars a week

to work over fifteen weeks. Why did you do that? Were you predicting, were you prepared? What led to That Type of

Sure. the memos. I've been writing the memos since nineteen ninety. Um And uh I wrote one.

About twenty years ago, late nineties. uh called you can't predict, you can't prepare. I stole the tagline from an uh an ad from Northwestern Mutual Life Insurance. Uh but I think that's true of life.

Uh now it sounds like an oxymoron, because how can you prepare if you can't predict? But the answer is Uh we never know what's gonna happen. But we can The likely

Yeah. And prepare for some of them. Uh you can't by definition prepare for every eventuality. But um

I I would say that we did Have a sense. uh my partner Bruce Carsha and I Uh had a sense

in O five and six That the world wasn't running. Right. Um And

The main thing that made us conclude that was the crappy deals that were getting done. And he and I would spend the day walking into each other's office saying, Look at this piece of crap. That got issued yesterday. There's something wrong. A deal like this should not be doable.

The fact that investors are buying this tell me that they're not being sceptical, they're not being uh demanding. They're not applying standards. And Um you know

Uh Buffett. Uh has a has a saying, the less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. And it's absolutely true. Um and so we knew that the market was dangerous.

Because of the behavior of others. Now you can't So we were prepared. We we sold a lot of assets. We liquidated large funds. We replaced them with small funds. We became very selective in our buying. We raised A a very large Fund.

For Investment If A crisis bursting would come into

For distress debt. The interesting thing though So you can Prepare? You can't predict.

The thing that caused the bubble to burst Uh was the Unsubstantiality. of mortgage backed securities and especially subprime. If you read the memos

you won't find a word about it. We didn't predict that. We didn't even know about it. It was occurring in an in an extr odd corner of the securities market. Most of us didn't know about it. Um But it is what what brought the house down.

And we had no idea, but we were prepared because we knew Simply That we were on dangerous ground. And that required Uh cautious preparation.

Let me ask and and I'm I may embarrass myself with questions that Uh display my ignorance about many topics in this interview, but when you raised money for a distret Yeah.

Did you emphasize to the LPs or whoever gave you those funds That Uh you had a specific timeline in mind for deploying those funds, or did you emphasize the importance of patience with those people and that you'd be looking for indicators and that they needed to look at it as a long term investment? How did you manage

The question of of when from those people. The question of when is is one of the hardest ones in our business. And I always say that we may have an idea of what's going to happen, but we never know when it's going to happen. You can't call these things. as one of my partners says, if you name a price, don't name a date, and if you name a date, don't name a price. Uh and then you can't be wrong. But uh We never did name a date, but

We Probably I can't even remember. We probably had a a limit. In other words, if we hadn't deployed it within X years. Then it got canceled, the commitments. Um but I think the i there was an understanding that we thought it was coming within the next one, two, three years.

Something like that. Now the the subtitle of this new book, of course the title Mastering the Mark Sites subtitle Getting the Odds on Your Side. Why this book. And And uh

How does one and this is of course something we could we could discuss Uh for many, many hours on end. But T. Why this book and and how does someone in this context Get the odds on their side.

Um So I started writing the memos in nineteen ninety. I wrote them for twenty years. I always concluded that I would r write a book and pull them together into a philosophy when I retired. Uh and then I got a letter from Warren Buffett in twenty ten. saying if you'll write a book, I'll give you a blurb for the jacket. So that was enough to

And get me to do it in real time. Um I wrote a book called The Most Important Thing. because I found myself sitting in clients' offices saying the most important thing is buying cheap. And then ten minutes later I would say the most important thing is not losing money.

And then ten minutes later I would say that the most important thing is contrarian behavior. So I wrote a book called The Most Important Thing, which has twenty one chapters, and each one starts off the title is The Most Important Thing Is And then it's a different thing. One of those Most important things. is knowing where we stand in the cycle.

Um And uh I as I say, I don't believe in forecasts. I always say We never know where we're going, but we sure as hell ought to know where we are. I mean I can't tell you what's going to happen tomorrow, but I should be able to assess the current environment and and that's the kind of thinking uh that helped us prepare for the for the crisis. Um I think

That The two Most important things. are where we stand in the cycle. And

The broad subject of risk. And in fact where we stand in the cycle is the primary determinant of risk. Um

So uh I think that this is really a an important topic. And it can really help you Do better. Getting the odds on your side.

What that means Is We don't know what's gonna happen. Nobody can tell you. But there are times

When the future is the outlook is better and there are times when it's worse, and it's largely determined by where we stand in the cycle. When we are low in the cycle, That is to say, we're coming off a bust. The economy is starting to warm up.

Investors are just barely starting to switch from pessimism to optimism. and and uh prices are starting to rise, clearly the odds are in your favor. The outlook is better. That doesn't mean you're gonna make money, but the chances are good. On the other hand, when the cycle has gone on, uh the up cycle has gone on for a long time, when it when when valuations are high, when

Optimism is rampant, when everybody thinks everything's gonna get better forever, when the economy's been moving ahead for ten years and it looks like it's never gonna stop. Then usually the enthusiasm had carried the prices

That the odds are against you. And Just knowing that. is is a huge advantage in investing. You should know that when the when we're low in the upcycle That's a time to be aggressive and put a lot of money to work.

and buy more aggressive things and when we when the cycle has gone on for a long time and we're elevated, that's the time to take some money off the table and behave more cautiously. Question about two thousand eight. Uh or you could pick another period, uh a a bus cycle that you're familiar with. Uh, whether from firsthand experience or from research that you've done. You raise these funds. And I wanna revisit the question of when. Uh from a personal standpoint

Uh And I'll admit admit it very freely. I think I've had a very fear based mentality when it comes to public markets. I've done reasonably well in Privately held. technology startups because I lived in the middle of the switchbox in San Francisco and that's the only thing I paid attention to.

And it protected me in a way from my lesser behaviors because I wasn't allowed to sell. Uh but In the public markets I've almost always Held on to cash. Waiting for

some cataclysmic event but then lost my nerve in some fashion. Uh I'd be I'd love to hear and maybe the catching falling knives as a way to segue into this, I don't know. I found that very, very interesting to read about.

Uh but How do you think about sitting on a position like that and timing? What what What determines the go command? For deploying. You have really

touched on an extremely important topic. Most of us have an inherent bias. Most of us are Essentially

Cautious. or essentially aggressive. Probably more people are essentially cautious than aggressive. So one of the most important things is to assess ourselves understand our biases.

And Try to overcome them. Now the the the the Tim Ferris that I heard you describe, I take that to mean That maybe you were Lucky or smart enough to turn cautious leading up to the bubble.

The markets fell apart. You're sitting on cash. You patted yourself on the back for being so smart as to not get caught. And you watched. What you didn't do is you didn't turn

Aggressive at the bottom. That's right. And It's common. Uh

not to do so. It's common to, as you say For people to say, I'm not gonna jump in while this thing's c collapsing down, I'm gonna wait till The Dust has settled and the future is clear, I'm not gonna try to catch a falling knife.

But it is when the knives are falling that the people are most terrified that the best bargains are available. So if you wait until the dust settles The bargains are gone.

And that's what happened at the end of of oh eight. You mentioned that we in distress debt we put five hundred million uh a week to work in the last fifteen weeks following the bankruptcy of Leam Brothers and and across the firm, uh something like six hundred fifty million a week for fifteen weeks, that's ten billion dollars. And the but the key is It was at a time when essentially nobody else would.

You get great bargains. By the time the End of O eight rolled around The hedge funds that were getting withdrawals had either satisfied their withdrawals or gated And

What does gated mean? Told clients they couldn't have their money back for a while. And Um So the the selling abated.

А фіпоса that that uh the great values and with the s with the selling and thus the fear having reduced, they were able to come forward, prices started to move up. Then it's too late. Because if you're trying to buy in a falling market, you can buy all you want at successively lower prices, but if you're trying to buy large amounts in a rising market Your own buying puts the price up. You're your own worst enemy. You can't get much at low prices. So

You know One of the keys to successful investing is to either be unemotional Or at minimum act like you are.

uh you know the great investors I know R behave in an unemotional fashion. You know. Warren Buffett.

Couldn't care less. uh David Tepper. Couldn't care less. And and uh and so forth. Um uh m my own partner, Bruce Carsh, very very very stalwart.

But that we support each other at the bottom. It's not easy. You know, and and uh I say in the book That I recount some of the things we've done right with regard to

cycled extremes. But I absolutely don't want to give the impression that it's easy. It's terrifying. Others are terrified. That's why they're selling. That's why they're saying, I don't care what the price is, just get me out. That's w that's when you want to buy. But the things that terrify them into selling will also terrify you. You have to overcome it.

How much of that stoic resilience or stoic composure is uh Nature versus nurture, born versus Trained. In in from what you've observed and experienced.

And and if if a portion of it is trained. How how would you suggest to someone that they develop That ability. I don't wanna answer categorically. I think it's a hell of a lot easier if you're born that way. is to counter human nature.

And by definition, it can't be easy. Um This is Other than as to, you know, uh where are we in the cycle and what's gonna happen in the s coming six months, this is probably the question I get the most often. How can you

Teach yourself. To be unemotional, to be contrarian, to be a second level thinker. Um And there is no easy answer. uh in in the first book on the subject of what I call second level thinking, I say

Uh In basketball they say you can't coach height. All the coaching in the world will not yet make your team taller. So I don't know, frankly, whether you can Whether people can teach themselves to be unemotional. But clearly

If you are As emotional As others. You will probably succumb to the same errors.

So let's I I think we can uh I'd love to back into this type of uh Not psychological profiling, but an examination of of this type of resilience, maybe indirectly. Maybe it'll come up, maybe it won't. And I might get the the total duration. Uh incorrect. But you mentioned a name, Bruce Carsh, that I'd love to To bring up yet again, and he may he may come up repeatedly. Twenty-three year partnership, is that right? Or twenty plus year thirty one. Thirty one.

Shut. If you were trying to hire a say twenty five year old version of Bruce. What would you be looking for? Well I'll tell you what he is.

He's Super smart. That goes without saying. He is highly competitive.

Mm. you know, he he's a chess player and and and most of the people that uh again, that I know who are good investors are players, either backgammon or or or chess or something like that.

um we are in inherently competitive. Um Uh He's also uh Very analytical.

And he's kind of a grinder. And I would describe myself as being intuitive. And and a quick decider.

Thinking. Slow, Conneman. I'm I'm a fast thinker. You tell me a problem, I tell you my answer. In short order.

And I'm done with it. For the most part. Bruce. We'll think about it longer. Come to his conclusion.

And then he'll come back the next day and he's say, You know, I was thinking about it last night, I don't think that's right. And here's why or I don't think you are right and here's why. And he'll he'll grind on it. For hours and days. I think this is part of the secret to our success. Uh

Again, uh something I once wrote, uh on the subject of a good partnership. I said I said sharu and complementary skills. If you have a partner uh has different values than you do. For example, uh w uh it Bob wants to make the most money possible.

And Ed wants to operate With integrity. Those are largely contradictory. So I think it's very important to share values, but I also think it's

It's important to not be the same person. A copy of yourself. If if you're if it's a copy of yourself, you don't need it. It it the person should bring skills that you don't bring and maybe operate in ways you don't And I think it's it's probably helpful that

Um intuitive and he's analytical. I've heard uh well heard. That's not the right not the right verb. I've read Uh I I believe it was But that he said that

Charlie Monger. has the the something along the lines of the best sixty second mind he's ever encountered. It sounds like You also have

a a very highly developed Fast thinking. Capacity How is it similar or different from

Charlie Munger's sixty second. Well it First of all, it's a daunting comparison. I I I would never put myself in the category with Charlie. He's he's he's brilliant and and uh w one of the best thinkers there is. But uh, you know, uh I mean the main thing is that he has read more broadly

He's had. He's had another twenty two years to read further, and he was probably always Uh And it so it's

It's his ability to call on these references. You know. Uh it in a way it's kinda silly to think we have to inv or that we can uh reinvent all the wisdom in the world. It's great to borrow from others.

And and and Charlie does that broadly, and I try to do it. He just knows more. I think we'll we'll almost certainly come back to Uh Morin and Charlie more in this conversation, but I I want to return to to Bruce because you mentioned the complimentary skill sets. And you've you've written about him, of course, quite a bit, mentioned him quite a bit, and I wanna pull up

quickly just a few lines in the new book. So Bruce and I have exchanged ideas and backed up. each other up almost daily over that period. This is uh preceding text. And my give and take with him, especially in the most difficult of times, has played a particularly indispensable part in the development of the approaches to cycles on which this book is based. Could you share an example of a Of back and forth. Or disagreement.

during a difficult time or with a particular decision. Uh Is that possible just so that we ca we have a a real world example of of the interplay between the two of you? We we normally don't debate individual investments because he operates more at that level and I operate more at the big picture level uh within Oak Tree.

But I mean I think a good example is in the period we just we've been talking about a couple of times now. We've mentioned the last fifteen weeks of O eight. Um You know, it was really a very tough period because. uh Lehman brothers had gone bankrupt and and uh Bear Stearns had disappeared and Merrill Lynch had been absorbed by Bank of America and Washington Mutual and What Covia Banking.

Uh you know, and it it looked like falling dominoes. And it you know, people were talking about the fact that Morgan Stanley was next and Goldman was right behind that. And So you just had to conclude that the world that the financial world was either gonna end or it wasn't. You couldn't analyze it, you couldn't prove anything about the future.

And Uh You know, we would talk about that in that sense, and we were both very Comfortable. Talk about it in that sense.

And What we concluded was that If the world ended. It didn't matter what we did. But if the world didn't end and we hadn't bought

We hadn't done our job. So Buck up. And do your job. Now.

The great thing is that Half the days. Bruce would come to me. 'Cause he would be lying in bed at night thinking about this stuff, and he would come to me and he would say, You know what? I think we're going too fast. I think we should slow down.

And half the days. He would say, I think we're going too slow and uh you know, so I would play Devil's advocate. Um And uh and s support his decision, but

But try to show him. The other side. And and he would do that with me. And That's why we got it done.

But I As I say in the in the introduction to the book from which you read I think that I don't think either of us could have done as good a job.

alone. I think that the devil's advocacy and But in a supportive way. uh really held the key. Um I I wrote it in one of my memo.

I wrote about it. a reporter. Uh And it He called me up.

Bankruptcy of Lehman and he said, What are you doing? I said, We're buying. He said, You are? Like it was the craziest thing he ever heard.

And you know, my reaction was if we're not buying now when we're willing. Uh but Uh you know, it's been a great partnership, uh we as you say Thirty one years. Never an argument.

Never an argument. Never an argument. I mean a d d intellectual disagreements, but never an emotional argument. And never and the key. Is Respect. Even when we disagree, we respect.

And The great thing about that is And then you go back to your corners. And he says

Well, you know what? Maybe Howard's right. And I say, maybe Bruce is right. And then you can have a productive discussion. If if you if your reaction is That moron. Then you can't benefit from what he has to say.

For for people who are hoping to Exhibit that type of Are there any tactical recommendations you might have? And the reason I asked that is uh I no longer live in Silicon Valley, but I was there for seventeen years and you see co founder splits all the time.

Yeah. Some of them go the distance, but a lot of them uh end up fatalities. And you can almost see the writing on the wall when the respect goes out the window. And it's just a matter of time for a lot of these guys.

Uh for for people who are in partnership Let's just for the time being assume it's in a a business capacity or an investing capacity. w what are some of the tools of the trade so that it doesn't escalate? Do you walk out of the room if you're starting to get heated there or do you avoid

given policies of the firm. Any types of sort of mission critical. single decisions from becoming An object of argument.

If that makes any sense. Sure. Uh because when the stakes are high. What are some some recommendations you would have when things when perhaps emotions are starting to escalate. Well the only issue I would take, Tim, is you started with Assume you're in partnership. I think you have to start sooner.

Okay. Who do you get in partnership with? And You know, you have to You have to share values. And you shouldn't be partners with somebody you're not gonna like, enjoy spending time with

and be able to work with constructively when the stuff hits the fan. That's really the key. So I I mean I believe But That most Solv or managerial

Uh Problems. start at the beginning with the hiring decision or the combination decision. So uh

You know, just don't get into business with somebody you're not gonna be able to live with. It's kinda like a marriage. Uh Do you stress test their ability to handle Potential. high stress situations in some real or simulated fashion, do you look back at in say hiring.

decision. Do you look back at their history and reference checks to assess that? How do you assess whether someone is going to keep their cool or not? W well, we don't do simulations or war games or anything like that, but we do, you know, I mean that's an important part of reference checking. Uh you have to You have to look beyond whether it's the person is smart and whether the person's a moneymaker. You know, uh

Oh. We have a no assholes rule. Adultry. And I think that saves a solves a lot of problems. And Uh you know, there are lots of people in the world who can make you a lot of money.

But you you may not want to be in business with them and it you it may not be viable long term. Now it's it's hard to absolutely Follow that rule. Um

because really smart moneymakers are very tempting, but I think it's I think it's really important. But but then You know Once Once you are

uh in business together. And you have the inevitable. Disagreement. I think one of the most important things is to

Number one, acknowledge The limits on what you know. If you If you go in with some humility.

Then You're unlikely to have a fight to the death. That is to the death of your partnership. over an issue. And and it's it's gr

You know, it's great to say I mean, people should wake up in the morning and start the day by practicing I don't know. I don't know. It's a great thing to say and not enough people say it. And

And uh the the The the flip side of I don't know. before about our discussions. Maybe he's right.

You know? And So I think that's important. Humility. Number two. Again.

Uh control of emotion. Don't get into fights. Just to show who's Who's more manly. Uh or you know

Or or equate. Um winning the argument. With success. Because

If you're If you're in a business situation and you're fighting for something that ultimately proves out to be a mistake. Your success in winning the argument. will lead to uh

The failure. Um so don't confuse winning the argument with coming to the best decision. Um And You know, again try to

Limit the testosterone. Um I think that really gets in the way. One one of the many things that I really enjoy about your writing is Is that it

serves for me at least as a reflection on Clear thinking. That transcends. investing. I mean it it it applies to so many if not all areas of life, at least those governed by anything in the prefrontal cortex. And one that caught my eye when I was when I was reading

Which is uh page fifteen of the new book, is the following. And uh I I'd just like to read it. It's not very long. In addition to an opinion regarding what's going to happen, people should have a view on the likelihood that their opinion will prove correct. Some events can be predicted with substantial confidence, example given, will a given investment in grade bond pay the interest it promises? Some are uncertain. Example, will Amazon still be the leader in online retailing in ten years?

and some are entirely unpredictable. Example, will the stock market go up or down next month? It's my point here that not all predictions should be treated as equally likely to be correct, and thus they shouldn't be relied on equally. I don't think most people are as aware of this as they should be. Could you expand on this? Uh a bit if that's possible, uh maybe give some examples of how you or other people you respect use that

type of of heuristic when making decisions are just I suppose reflecting reality in their own minds or perceiving things. Sure. You know We all have opinions.

And we hold our opinions. Because we believe in them. Nobody ever says, you know, my opinion is Ex And

I think I'm wrong. We all think that our opinions are correct. Uh But And and and again the world becomes a better Please.

An easier place to navigate. If we Admit. that even though there are opinions Th they may be wrong.

Uh and uh you know, how how does an investor like me Deal with the fact that he doesn't believe in future predictions. And and uh And the answer is Uh I say

And I have opinions on all these subjects. But I say it's one thing to have an opinion and there's it's another to believe and act as if it's right. And If you just s say maybe I'm wrong, it the world gets easier, in my opinion. easier to succeed.

uh less less easy to to uh to navigate day to day. You know, and and a big theme of the book. is that we have to view the future Not as an event

Which is Pre determined. And predictable. Or you know, determined

Already. But as a range of possibilities, as a probability distribution. And you know, I went to the World Fair Yeah. In flushing. In nineteen sixty four, I think it was.

And I stood before an exhibit that IBM had, and it was you know, it was typical of technology fifty odd years ago. It was the most simplistic thing you could imagine. They had They had a slot at the top and a bunch of balls. And the balls came through the slot and then there were a bunch of pegs. In a grid. And

When the balls hit the pegs, they started to Diffuse. And by the time they get to the bottom They were in a bell shaped distribution. And I think that was probably my

First. exposure to a distribution. But it's beautiful, and that's how life is. The future. is a distribution of possibilities.

And If we're really smart. We know what the distribution what the possibilities are, and we may have an idea of which are more likely and less likely. But we sh we still don't know what's gonna happen. And and and I think we have to behave that way.

Now some things we know more, some things we know less. We shouldn't get confused. But the the the the most important single thing is to not have the same degree of conviction about all of our opinions. Do you apply a one to ten numerical value?

S light, medium, strong. H how do you think about that yourself? Yeah, well I think it's it's certainly not You know I'm not a For the most part a quantifier. If you read the book.

Uh I would hope you would be struck by how few numbers there are in it. Um And uh You know, one of the great

Uh quotes. Which uh is broadly attributed to Einstein, I don't think it was Einstein, is that not everything that can be counted counts, and not everything that counts can be counted. So the m the the most important insights to life are non quantitative. Um but I I I try to be conscious.

Of When I Have an opinion. How likely it is to be correct, and I try really hard not to always assume that I'm right.

By the way, let me add one thing. Um Henry Kaufman. who was the chief economist of Solomon Brothers in the seventies. At a time when America was riven.

with hyperinflation's. fifteen, sixteen, seventeen percent a year. Nobody could figure out how to stop it. Kaufman, uh there was two guys, Kaufman and Al Waldenlauer first boss and they were called Doctor Gloom and Doctor Doom. But and and but but Kaufman Said.

Two kinds of people lose a lot of money. The people who know nothing? And the people who know everything. And Um

uh it's very few of us know nothing, but it's really important to assume to not assume we know everything. Uh is there any Reading you've done or maybe it's just real life experience in the trenches of doing this day in, day out. But uh if for people who want to develop that, uh I I I I saw that you're Seems like a a reader or fan of some of what Nassim

Talibus put out and he talks about epistemological arrogance quite a bit. thinking that we or believing we know it all or more than we we actually know. How how would you suggest are there any Resources, letters, books, memos.

talks that you might recommend to people who want to really Cultivate. that awareness of Limited knowledge. Well, when you started to ask that question, I I I did fast forward to uh

uh Nasim Nicolas Taleb. And his book Fooled by Randomness. Uh I think it's a Really important book. In terms of its ideas.

And uh It's a It's really about how much randomness there is in our world. Now it's primarily about investing. Not the general world, but the world of investing.

And you know, his example is that uh if you're a dentist He picks on the dentist a lot in the book. But if but if you're a dentist picks on economists, too. Yes. And you Always fill a tooth the same way you always get a successful filling. Whereas in the investment business there's nothing

that you can do that if you do it the same every time you're going to get a successful outcome because of the changeability and randomness in the world. Um And and uh this is uh extremely important. And uh

You know, we have to think about the world as a probability distribution, when we you know one of the things that interests me most is when you look at history. You say, Well, I don't know so much about the future, but the history That's that's done. That's settled. We know what happened. We know what the truth was. But Taleb uh uses a concept called alternative Histories.

the other things that reasonably probably could have happened but didn't. And so when you look at a historical event You have to Say Was it

Inevitable. in which case it demonstrates a A truth. Or was it subject to randomness?

And could other things ja have happened just as well. Uh in in a memo around oh six I talked about the Rose Bowl game. between USC and University of Texas. And US C was highly touted as the best team in the history of football

And and and it I won't go through all of it. I hope readers will But In the end, they lost on one play. And so

uh nobody talked about him as being the best football team in history. My point was and I I I wrote I entitled this section what's real. Maybe they were. the best team in history. And maybe the fact that they didn't weren't successful on that one play that the whole game done maybe was because the wind was blowing left to right rather than right to left. at that moment. And

So We should not be too firm in our conclusions. It's I guess. the the recurrent theme is that is is uh lack of certainty. But I I really would push people too fooled by randomness. Uh there's a little book by John Kenneth Galbraith called The Short History of Financial Euphoria and a great quote. He said we have two kinds of forecasters, the ones who don't know and the ones who don't know they don't know.

And and that has been very uh Inspirational for me. I was uh and I I don't think this was attributed to you, but uh I came across it in Mm.

looking at some highlights of your memos. Uh And I don't think it's tributed to you, but someone said s dumb money can become smart money if it accepts its limitations. I don't know if you would agree with that, but it it it's it's stuck with me as

maybe uh not necessarily forecasters, but at least People who Cultivate. Sure. Well that I think first of all, knowing what you don't know is w one of the keys to success in anything. You know, Dirty Harry said a man should know his limitations. I wouldn't say it's not my quote. I wouldn't necessarily say that dumb money can be smart money.

Uh but But I I would say that one of the ways to avoid being dumb money is to not act as if you know things you don't know. Um Maybe by the time I get

done giving the quote I'll be able to remember who said it. But somebody very wise. Said. Mark Twain, that's it. It's not what you don't know that gets you into trouble.

It's what you know for certain that just ain't true. That is so important. There's nothing More dangerous in life. than being sure you know something that you don't know.

If you are If you have excess certitude. You will do things boldly in dangerous ways and to dangerous extents that have the ability to Get you into trouble, get you killed. But a sentence that starts off with I'm not sure but

is unlikely to lead to fatal action. The distinction to me is so Clear. and and so unarguable that I I I think this is one of the most important things for life. Know your limitations.

Y you mentioned a little bit earlier How you could potentially say to yourself in the morning No, I don't know. I don't know. Maybe he or she is right, maybe he or she is right.

Uh it makes me think of some of these memento mori type quotes. But uh Maybe maybe apocryphal from ancient Rome, where they'd have the someone behind the emperor when he's being paraded through the street saying, You're just a man, you're just a man, something like that. I know this is is s seemingly maybe not on the same topic, but Nondetheless, I I I I want to ask about it.

Do you have any particular routines or habits in the first, say, hour or two of your day. Whether it's now or whether you were kind of if you can if there are particularly productive period in your professional life Where you feel like

those routines or habits in the morning were important. Does anything come to mind? I don't have uh stylized. routines. I I I I mean I would just say that my life is a is pretty calm and I try to keep it that way. Um

And um What would be a symptom of it not being calm and how would you respond to that? Well Watch too much Political T V

And getting exercised. about what you see on TV would be a good example. Uh that's that's negative energy. That's not gonna contribute to your your effectiveness in the day. Now my The fact that I don't get exercised about what I see on the news shows.

Uh is not Internum. Purpose. So up to this point we've talked a fair amount about The importance of avoiding hubris.

of understanding your limitations, the incompleteness of your knowledge. How do you balance that with Perhaps knowing your strengths well enough or having conviction in evidence to the extent that you can then take action. Sure. Well that's a great question, Tim. And Clearly it's essential to balance.

Uh You don't want to be the person who thinks he knows. Everything but you can't be very successful in life and especially not in investing if you think you're the person who knows nothing. Um

There is no magic in it. Uh there is no Rule. No method. Uh it's just the

Okay. And awareness. Um but we we have to feel we know enough to take action. Now.

Most successful people, most smart people. Uh Have uh. uh don't have a problem in that area. They have a history

of having their Ideas validated, for the most part. Um But I think it's it's it's I mean it is one of the great uh conundrums which is unanswerable.

uh methodologically. You know, you buy a stock at eighty, it falls to sixty. You say, Well, I think it's cheaper now, I like it more, I'm gonna buy more. You buy more, now it falls to forty. Is there a point at which you say well maybe I'm wrong, and maybe The market's right. uh you know, if you if you throw in the towel and sell every stock you buy

when it goes down a little, you can you can never be successful. But if you Ignore the possibility that your Uh wrong. uh you can never be successful. Um and you ha you have to strike a balance. So

Uh When you buy a stock and it goes down a little. you take another look at your analysis. Uh is there anything you missed? D did your analysis hold water and and so forth. Maybe you talk

to some people that you respect. Um But Uh you know, again if you're if you're too sure you're in trouble, and if you're too unsure you're in trouble, uh you have to strike a balance.

If we come back to the The hypothetical example you gave, someone buying at sixty drops to forty. Drops to thirty, drops to twenty. To avoid being in that position where you are

offering yourself the option of buying or selling at each of those check in points. What are you deciding in advance so that you don't make those interim mistakes or you don't even make those decisions or or look at them to begin with.

That's not my approach or Oak Tree's approach. We don't have pre set rules. Everybody says well why don't you just set a rule? Th there there are things called stop loss orders. You buy something goes down twenty percent, you sell it every time. There is no rule. That will ever work. in every case.

Uh i y y you have a s you have a rule that goes down twenty you're out. So it goes down Twenty one? It's L, then it goes up a hundred. You know? Or it goes down ten.

You don't sell And it never goes up again. Uh There there can't be a rule. It always works.

When they Just before the publication of my Other book. uh I had lunch with Charlie Munger and and at the end of the lunch When I got up to go, he said, Now just remember

None of this is meant to be easy. Anybody who thinks it's easy is stupid. These things cannot be reduced. to a rule. The market

operates. So as to confound rule makers. Uh you know it Yeah. I wrote a memo.

Yeah. Called It's Not Easy. It all comes down to judgment. We have to have If we're gonna have superior investment performance, we have to have superior judgment.

And Uh you you Амінюкань про С. both intellectual and emotionally. But you can't

I mean, superior judgment is isn't something you can order up. And not everybody can necessarily attain it. Um But

Uh I I mean I think that one of the most important things is is to dismiss the concept of a process or rule that always works. The The decision to

Take a certain path versus another. And I I know I'm gonna be bastardizing this, but if if if an advantage could take the form of access to better information better analysis of that information. uh making a better decision. with this with that information that is available, having the courage to act on it and then the emotional fortitude

to either act on it or also sit with that decision. And there there may be other behavioral psychological advantages or disadvantages. I'm sure there are When you talk about judgment Is that A particular link in that

In that chain is it uh I think judgment is everything. Uh uh for example. Just to follow your taxonomy. Judgment is knowing

when you have information that others don't. And If you think you know something that others don't, it's knowing when yours is likely to be valid and knowing whether you're likely to be offbeat. It's n understanding how to analyze it. It's judgment is is is the reaching of conclusions based on your analysis.

Um And uh judgment. is all we have to tell us when something goes against us whether we should hang in or give up. So

Uh As I say, I think it's it's all judgment. I would imagine a lot of people read Your Memos and you're writing.

to develop In in hopes of developing better judgment. And that while there there is no one rule that will work for all circumstances, all cases. There may be certain

Questions. Or tools. That's Proof. helpful in a in a greater percentage of cases than others. And

to to that. I would love to refer to a few things that I have in front of me. One is is a letter that you sent to me along with the book. And uh towards the end of the letter.

It's it Uh it says I I draw on my fifty years of investing experience to provide an orientation to the usual cycles in the economy, corporate profits, the availability of credit, and the securities, as well as some of the less ordinary ones, for example in distressed debt, investor psychology, and even in success. But I think potential the I think potentially the most useful chapter Uh the most useful is the chapter on the cycle and attitudes towards risk. how investors are thinking about risk and behaving toward it at a point in time might be the single most influential determinant of markets' position in the cycle.

Uh, and thus the best indicator of how we should behave with uh regard to and I I read that chapter. I believe I had the right chapter. And There's a there's a point in this chapter. That is uh

That has a few lines bolded. Which I really appreciate, by the way. And it is if I could o if I could ask only one question regarding each investment I had under consideration, it would be simple. How much optimism is factored into the price? Uh Could you talk about

This question. and perhaps give some examples of using it or how people might use it. Sure. You know I

started in the business in a summer job at Citibank summer sixty eight, fifty years ago. And the bank was an investor in the fift what was called the Nifty fifty, the fifty best and fastest growing companies in America. And if you bought the stocks the year I showed up and held them five years, you lost almost all your money. in the best companies in America. Then ten years later I switched to the uh so called junk bond business, high yield bonds. Now I'm lending money to the worst companies in America and I'm making money steadily and consistently.

So uh Clearly buying good things can't be the secret to success in investing and avoiding bad things. It has to be The price you pay. It's not what you buy, it's what you pay.

And There are There's no asset which is so good that it can't become overpriced. This is of course something that people have to bear in mind when they look at the FAG stocks. And on the other hand, Facebook

Uh Amazon, Netflix, Google. And and they throw in alphabet too. Um And Um

So there is No asset. Which is so good that it can't be overpriced. There are very few assets which are so bad that that they can't be underpriced and thus a bargain. So what we have to look for if we're going to be successful investors, uh now my school, which is called value investing, it puts more emphasis than perhaps

uh v venture capital or or growth investing, which you know largely looks for brilliant futures. But It it the key Is

paying a low price relative some to something called intrinsic value. If you pay A high price relative to the value, you're unlikely to do well, and you probably have to get lucky uh to have a good return. But if you pay a low price relative to the intrinsic value, then the odds again, like my book says, are Or on your side.

So we want low price to value. How do you get low price to value? Low optimism. Uh there are other ways to describe it. You mean looking for low overall optimism.

Yeah. If In short. The things that everybody feels good about

are likely to be the things that are high priced and the things that everybody feels bad about are likely to be low priced. So uh if you could Find out. that here's here's a stock Nobody thinks this company can ever have a good day.

Maybe there's a chance that it'll produce some favorable surprises and make you a lot of money. If there's a if there's a a company like the Nifty Fifty back in sixty eight, everybody assumed literally, Tim. Nothing bad could ever happen to these docks. then clearly there has to be so much optimism in the price that it that there'll never there can never be a Favorable surprise. We make money from favorable surprises.

And if if the conviction of uh positive conviction is so high, then c by definition there can never be a favorable surprise. So uh I I think that this is uh a number one concept. You mentioned uh it

This I think I think you said the word Never uh in this sort of hypothetical. Uh Exuberant enthusiasm, what someone might say. And uh what what I believe you there's certain words you dislike using. Well pay pay pay attention to when they come up. It's all part of the uh of this

uh lack of uh intellectual hubris. We should never say Yeah. Never. Always

Has to. Can't You know, these these these Expressions are far too absolute

To be Winners. in a world beset by uncertainty and randomness. Um

And Uh when you when you use those words uh you you tend to get into big trouble. When assessing uh public sentiment. Let's say

anyone participating in the SP five hundred, it could be Narrow. Let's assume we're looking at the Yeah. The broad

Uh the broadest collection of market participants, at least let's just let's just say S P five hundred. I was Texting with a friend of mine who's a successful investor, very different stylistically than yourself.

And I asked him, I said, What what would people use? Or what do investing pros use or what's what do some of them use to measure how feel fearful or greedy Uh and then in quotation marks, the market is. Are there go to indices or polls? And he said people use the VIX as a measure of fear, VIX. Uh And then uh He said some people might use something like yield on junk bonds as a measure.

uh uh in other words yo low yield equals complacent market. What are Let's say Uh it seems so difficult to keep track of the media as a whole, although certainly it becomes obvious at some point if it's all negative or all A positive. Are there Uh

particular indicators that you like to pay attention to or or your firm likes to to at least Uh keep an eye on. In the old book, there's a chapter. that talks about the importance of taking the temperature of the market.

Knowing where we stand. And it has a It it concludes with uh a checklist uh Largely tongue in cheek.

Uh called the Poor man's guide to market assessment. And basically ask some simple questions. What's going on? Are Uh.

If a new fund comes out. Does it sell out immediately or does it struggle? Um If uh If uh if an investor goes to a cocktail party

Yeah, there you are. It's also in the new book. Oh it's also in the new book. Well that's probably a a sign that m that interest in the market is too high, or is he s pushed into a corner and everybody wants to talk to to the uh athletes and the and the venture capital guys. And that's probably an indication that interest in my part of the market is too low and that bargains may be available. Uh you know, and when you turn on T V Uh is it all they want to talk about is the good news or the bad news. And um I have some cartoons.

in in in the new book. Uh Old cartoons dredged up from my files. But you know um It just

But Virtually everything in the world and in the markets. is subject to a either a positive or negative interpretation. And if if if everybody is interpreting everything positively, that tells me

That the That the spirits are too high. and and perhaps ready to be dashed. And and vice versa. You know, the greatest thing I was ever taught was back around seventy three, seventy four, somebody said, I'm going to tell you about the three stages of the bull market. And in the first stage

Just a few Incredibly insightful people. Understand, Okay. There could be improvement.

And in the second stage, most people recognize that improvement is actually taking place. And in the third stage. Everybody and his brother believes that things will only get better forever. Now

I think this is Number one, this is a very accurate description of the world. Number two. Clearly. If you buy in the first stage

when only a few people understand the potential for improvement, you're gonna pay a low price. because there isn't much optimism in the price. Then it as you progress to the second and third stage The un Anticipated improvement takes place.

That gives the market a favorable surprise. the stock prices or the asset prices rise in response to those favorable surprises. Um And uh but you eventually reach a point where the

Good news. convinces people that it's gonna go on forever. And when everybody believes that things will get better forever, clearly it's likely that so much optimism is in the stock price that it's dangerous. And unlikely to yield a profit. So I think that the three stages of the bull market

and conversely of the of the bear market. Are really important. Not as a money making rule. But as something to bear in mind and watch out for. I'm gonna ask you a few questions that

that uh you may not like but that my fans will Kill me four if I don't ask. So where uh I guess number one is Where do you think we are at the moment? And of of course this has to be time stamped, uh and then we're we're talking in August two thousand eighteen.

Uh. And What has you worried? what has you optimistic if you're optimistic about anything. Sure. Well

Where are we? For the last ten years, ever since the crisis, th people have been asking that question in the form of what inning are we in? uh when they asked it in late oh eight, w uh what they really meant was Uh how much longer will the pain go on? Uh now what they're asking is how much longer will the pleasure go on and the bull market and the economic uh

recovery. I think we're in the eighth inning. Now you don't have to time stamp it because I've been saying this for a while. Um and and I'm likely to continue to do so.

But About a year ago. I came to realization that that observation even if accurate, is of limited use because unlike baseball, we don't know how many innings there are in a game. This is a big distinction. In a normal baseball game we know there are nine innings. If I say we're in the eighth and if I say it

Accurately. The good times are about to end. But in economies and markets, there is no fixed duration. So

The bull market This is the tenth year. That's a long time. In the economic

Recovery. This month we have begun the tenth year. The longest economic recovery in recent history is ten years. So These observations Start to tell you.

Not that it's gonna end. But that the likelihood of its continuing is declining. The odds are not on your side. uh when you're in the tenth year, the odds of having ten more years of recovery seemingly are not good. We don't know if there's some reason why there has never been a recovery of more than ten years. Uh

But we have to wonder if there is. Um But on the other hand, we can't be too sure. Uh now I believe that this economic recovery for many years was the slowest on record. That is probably helpful because that

Excesses. From coming into existence that have to be corrected uh with a with a downturn. Um

So You asked about the good news. The good news is that the economy is functioning at a high level. We just had a quarter of unusually rapid growth. Um unemployment is uh declining.

Are economy is the envy of the world. um stock prices which were very high when measured by price earnings ratio last year are not so expensive this year because the earnings have been supercharged.

the the projected earnings of the S P five hundred uh are are way up this year, twenty three percent I think, which is unusual. And higher earnings everything else being equal means a lower price earnings ratio. So on mo by most measures,

Uh stocks. are only slightly expensive. At this point in time. So that's the good news. The bad news

is number one, interest rates are likely to increase and interest rates Increase the burden of debt on companies. And When bonds yield more, they offer more competition for stocks.

Uh clearly there are a lot of uncertainties in the macro world, in the geopolitical world. And in the political world. Um the the the greatest of which is the possibility of a trade war. Which uh

almost everybody thinks would be extremely negative. uh not only for uh the US and for the people who engage in the trade war, but for everyone. And uh I think

that i interestingly, what we've been talking about is assessing the level of investor psychology. I don't believe that investor psychology is terribly frothy. The way I've put it in the past is that People are not Thinking bullish.

But they're acting bullish. A lot of people have moved into higher risk investments in order to get the returns they want because right now safe investments, treasuries and and high grade bonds and cash and money markets, or for so little. So people have been forced to do it. Uh to move out.

The risk curve. And take more risk. And that makes the world a riskier. place for you and me. Uh I I borrowed a phrase from my late Father in law who said that those people could be described as handcuffed volunteers.

They're doing things not because they want to, but because they have to. But the effect on the market is the same. When people move to riskier It makes the market riskier for everyone.

So if we were to Consider all of that. Uh if you had Say th three people come to you. And

you had to g you had to give them some response because that's like a mother in law people in the family. So you c you have to give them some kind of response. And I I might be Feel free to ask some clarifying questions. But let's say someone has Hundred K to invest? One million. Ten million to invest. So a hundred K, one million.

And Ten million, they make a hundred thousand dollars a year. That is Going to remain. stable and predictable. Let's just assume that on the income side.

Uh they are very cautious. I think like a lot of people, the loss aversion and pain of losing a hundred dollars hurts much more than the joy they derive from making a hundred dollars. Uh And they have Their investable funds in this case, hundred K, one million, ten million in cash or cash like e equivalents or some of these safe vehicles currently, and they say

Howard. I don't know what to do. What are your thoughts? I think that One of the most important things of

In investing. is to Make people comfortable. It's a mistake. to sit there and say, you should do this, you should do that

regardless of people's comfort level. Because if you violate their comfort level, if you force them into things that are too risky for them and then things go bad they're unlikely to do the right thing. They're more likely to panic and sell on the way uh uh uh on the lows. which is the cardinal sin of investing. Uh so it's very important to assess people's uh

needs and ability to withstand tough times. Um Clearly, uh the person who makes a hundred and and and has a hundred doesn't have a big margin of

And and and they should invest uh more conservatively, the person with ten million Um uh depending on his psychology. Or her psychology.

Um Probably would be willing to stomach some losses. in the pursuit of Big games.

Um now People always over Estimate in advance. their the equanimity With which they would greet

losses. You know, back in nineteen ninety seven, eight, nine when this when the stock market and the tech stocks were rocketing along. What a l what a lot of people I think said is, Well, I uh you know, my four oh one K's been doing so great, I wouldn't mind if I lost a third of my money. It's okay. believe me, when when it when they lost a third of their money they weren't okay.

Uh But You know, our mantra, my mantra for the last few years Uh uh has been move forward but with caution.

And and uh so in varying degrees to those three people. Uh What I would say We are investing.

Every day. We are endeavoring to be fully invested. Today other than in funds that are strictly designated as standby funds for the for the crisis.

We are Definitely. Taking risk. But with caution. We're a cautious firm.

We invest in Risky asset classes. high yield bonds, distressed debt. Uh real estate emerging market, stocks and bonds, et cetera. These are these are risky assets.

And Oak Tree has always taken a low risk approach, a controlled risk approach to those asset classes. So when I say with caution, I mean With more caution than usual. I think this is a time for more caution than usual.

Uh And and that's what I would tell those people. But I don't so I think that the The uh the uh outlook is not so bad and the prices are not so high that you have to practice maximum defensiveness and go to cash and and and suffer a one percent return on cash. But

I think the outlook is not so good and prices are not so low, but this is time for aggressiveness. And I wouldn't be aggressive. The The Mm-hmm.

I think one way to That I help myself make these decisions and it might h be helpful to your listeners is I re constantly remind myself and others that it as an investor, there are really two key risks that we face every day.

Now the first one is obvious and everybody knows about it. It's the risk of losing money. What's the second? Not so obvious, a little more subtle. It's the risk of missing opportunity. And most people, if if reminded of the twin risks, they would say, Well, I think that's right. And the truth is that I I don't want to lose a lot of money, but on the other hand, I don't want to miss all the opportunities. So I'm gonna compromise. I'm gonna balance the two. I'm gonna do something kind of in the middle. Um And that makes sense. Everybody.

You know, other than Daredevil's and Scared Cats, everybody should do something in the middle. exactly where in the middle is is is debatable. And should be. uh tailored to their own psyche and financial position.

So the interesting question Is okay. What about today? Today. Should you be at

And In your normal balance. between the twin risks, or should it be different. Should you be in a higher risk position because uh so many things yield so little, or should you be in a lower risk position because there are so many uncertainties. And I actually think the latter. So

fully invested. And Being cautious does not mean being in cash, but everything you want to do in the investment business, there are higher and lower risk ways to do it. And I think today is a time for the lower risk ways. Uh So I uh

You know, this is the this is not the first time I've asked a question like this, but the last time I asked the first part of that, which was making a hundred grand a year, I've uh someone has a hundred grand to spend was actually at the Berkshire Hathaway shareholder meeting a long, long time ago. And it's my my f my first and only time there And I was I was so excited to be there. I mean it's Woodstock for you know investor nerds and uh it was it was There's so much excitement. People were camped out out front.

I was part of that and I asked someone working there where the microphone was that was hardest to get to. And then I sprinted over there and I was able to ask Uh Warren and Charlie. This question the and of course you know them and the responses can be very short.

And uh I said if someone hypothetically were making a hundred thousand dollars a year, they had a hundred thousand dollars to deploy in some way w how would you suggest they invest that capital and it was along the lines of invest in the S P five hundred or a low cost index fund in the SP five hundred and get back to work. I found that very Dissatisfying, but in retrospect.

Uh certainly not the worst advice that you could give give someone. Uh How How do you Uh what do you disagree with with Warren?

Most on. What do you guys not see eye to eye on? You know, Tim, there's a book out called The Warren Buffett Way, and I was asked to write the forward for the latest edition. And I wrote something called What Wakes Warren Buffett Warren Buffett? And I listed the things that characterize him. Extremely high IQ. Unemotional. Great analyst.

Understand what's important. Looks at the things that are important and figures out their import, ignores the things that are unimportant, and on and on like that. And the last one. One of the most important.

He's not afraid of getting fired. He doesn't have to worry about the the interim consequences of error. Most people do. And

Um So You know Okay. So you say y your a y your advice is

or his advice is invest in an index fund. Fine as far as it goes, but how much? Should the person who has a hundred thousand put the whole hundred thousand in the stock market? And especially should they do it today. And

If they do it all today. We're confident that twenty years from now they're gonna have a lot more money and they're gonna be really happy. What about a year from now? And And

Uh not everybody is financially able to live through A decline. uh and and emotionally able.

And So The first purpose of investing, especially for people who have more money than they need to eat. should be to make you comfortable.

When I started at the bank City Bank fifty years ago they had a cartoon on the wall. It said scared money never wins. And it's true. And so Everybody. should invest only up to their comfort level.

And Uh so I I I think I would the I I certainly agree with Warren that for most people they can improve on an index fund. But the uh but That's and I'm not saying that Warren says that everybody should put a hundred percent of their net worth in the in the index button, but Clearly they shouldn't.

And and I was once at a uh at a talk. And I was preceded by the uh by a college professor, I won't identify him. Uh Warren always does uh

Uh Praise by name, criticized by category. So I'll only say So I'll say I was I was preceded by a college professor, and here's what he said. And this guy is I known for Pro Stocks.

Attitudes. And he said If you are of average risk tolerance, you should have eighty five percent of your money in this time. No. If you're a below average risk tolerance, eighty five.

Average risk times 105. If you're r aggressive. A hundred and twenty five percent of your net worth should be in the stock market. And

I just think that most people can't live In the long run. uh in the short run. with the consequences of of being that much invested.

Uh and and and uh Yeah. Mm. Being human. We are our own worst enemy.

Everything that goes on in the world and the market conspires to make people buy when things are going well and prices are high and sell when things are going badly and prices are low. And and Fighting that is the number one theme of the book. And it's the number one theme of of success.

Uh just from personal experience and I mentioned this earlier, but looking at my response in say two thousand eight, I bought a house in two thousand seven with some very unfortunate uh mortgage terms. And uh made some very bad decisions also with money that I had in the stock market at that time. And I think in part It was because I I I couldn't have known how I would respond. Under those circumstances.

This very Templated form, of course, for whoever it was at the time. I won't mention any anyone by name, but it was To what extent would you be comfortable with a drop in your portfolio over one quarter or one year, whatever the the form of the question was and had ten percent, twenty percent, thirty percent? I thought but

Thirty percent. Maybe I mean pulling it answer out of thin air, had to answer it to get through the online form but I'd never experienced anything similar to that. And this just came to mind because I'm looking at a on a book Add a book on your shelf. Uh Bringing down the house about games. We were talking about games earlier.

As I understand it. Bill Gates, I think also Buffett play a fair amount of bridge. Uh, certainly many uh people in the investing world uh including some people who are really, really, really fantastic, uh some of the guys from Renaissance and so on. Poker Uh then you have backgammon. What do you play?

And what do you think the game that they select says about the person, if anything, and could playing those games help someone to assess their risk tolerance for Larger. types of investing or are there other ways to in any way accurately Determine that. I think

accurately to determine, yes. Quantify no. Mm-hmm. Uh but I think that we on our degree of risk tolerance, risk aversion.

And we should. And Um You know Uh

I was with uh my son and uh one of his friends this week and his friend is a great Uh chess player. The interesting thing about people who play chess is that in chess there's no randomness. uh you know, there's no dice to roll, there's no wind to blow.

Uh no card to pick from the deck. And and every all the information is on the board and everybody has all the information. So it tells you something about An intellectual process. Um And you know, all the way out Two

Craps. Which uh where everything's. Um you know, i in play all the time based on randomness. Um So w maybe which game we like

uh tells us something about ourselves, but how we play also tells us about ourselves. Backgammon, which is one of my Main games uh which is highly probability intensive. Um'cause it's all the dice. It's the dice and the skill, but the dice mean a lot.

Um You know, in with any throw of the dice there are aggressive and defensive ways to play. So

You know, probably uh the interesting thing was that if you played and I watched you for a couple of hours, I would know if you're aggressive or defensive, or risk averse or risk tolerant, and and and you should be able to do the same for yourself. The one of the as I said before, one of the great things is to understand ourselves. And and without that we're really in trouble. What are some of the things that

Otherwise smart people miss about cycles or misconceptions that they believe to be true, like you said with Mark Twain, that just ain't so. Mm. I think the Well the the the biggest mistake you can make is

Ignore the repetitive nature of the cyclical pattern. uh Ray Dalio in his in his book Principles. Oh.

Did you know? Uh the conclusion of which is the ability to look at what's going on in the world or in the market and say, Oh, that's another one of those. Life becomes very easy when you have studied the past to the extent that you've seen the recurring patterns and you can recognize them. So so

Uh I think that's I think that's extremely important. Um But the other thing is and I think the guiding quote of the book

Is uh History does not repeat, but it does rhyme. History does not repeat. The cycles are not ever the same in terms of amplitude.

Speed. Duration? Cause Or Ramifications.

But they Do there are themes that repeat that can help us to identify And properly respond to cyclical

occurrences. So I say in the book that i you know, I've been in the high yield bond business now for forty years. And there was a time when there arose a body of thought

That Most defaults occur I'm Second anniversary.

Sensations. And I don't I don't think there was anything magical about the second anniversary. And You know, if people believed that, then they would sell all the bond they had that were twenty three years uh twenty three months old and buy'em back when they were twenty five months. Old if they had survived.

But I don't think they would accomplish anything by that because they were I think they were They were uh assigning an import That was not

Uh valid. So I think it it's really important to recognize cycles and understand them. Uh

I think it's unimportant to assign importance to These Numbers. Or rules.

Uh but it's very important to understand what's going on around us. And when When When the recovery is old, the bull market is old, the psychology is elevated, the the uh The valuations are high.

Mm-hmm. then you should know that the odds are not on your side and you should take some money off the table and behave in a more cautious way and vice versa. which I suppose also on some level necessitates cultivating a fair degree of patience. Uh

There was a investment sage named Peter Bernstein, and he said the market is not an accommodating machine who will not give you high returns because you need or want them. And You know. I believe that right now we're living in a low return world.

And If you say Howard I need high returns in a low return world. The only way to try to get'em.

is by taking a lot of risk. And by definition, taking a lot of risk is is is not sure to work and could have negative consequences. So I believe that when you're in a low return world you have to U accept it.

And uh deal accordingly. Now this comes from Muj. which we started the interview with. Uh I talked about Mujo in a memo about twenty years ago entitled It Is What It Is. I think one of the most important things that we can do as adults be it be it in the investment world or the real world.

It is what it is. In other words, accept things for what they are. Deal with them as they are. Don't spend a lot of time wishing they were different. Uh you know

Act as if they were different. Uh We have to accept the realities. I've uh F not that d in my in my little tiny corner of investing.

Oh. Which is I mean the not even worth mentioning really in this conversation, but I I I I only bring it up to tie it to how helpful actually reading certain uh not gonna it's not quite scripture, but Buddhist thinking.

related to concepts like Mujo and stoic philosophy, Epictetus and so on. uh how helpful that has been to tempering emotional Reactivity. Uh

You mentioned someone I want to to come back to for a second. Uh Peter. Is it Bernstein or Stein? Bernstein. Bernstein. financial historian, uh sadly passed away. I think it was in two thousand nine. Yeah. I've read that you consider him one of the smartest people you've you've ever met. Why why is that? Are there any other things that you learned from him?

Forty eight years ago when I was a junior analyst following Xerox for the Citibank, and I would give the portfolio managers at the bank my opinions, one of them came up to me and said, Who is the best analyst on Wall Street on Xerox? And I said, Well, the one who agrees with me the most is so and so. We always think that the people who agree with us are really smart. And Peter. saw the world the way I did. But in many cases put it into words better. Uh

And um Um I wrote a memo uh Call risk. In O Six. r risk revisited in fourteen and then

Bizarre. one day I found a memo from him. You pa you mentioned he passed away in oh nine. In in sixteen I found a memo from him on my desk. My desk is a little messy and there's a lot of stuff floating around. And it was a great memo uh entitled uh can risk be reduced to a number. And I took a bunch of stuff

Um From that. in a redo of my memo entitled Risk Revisited Again. Uh but I just th I just think that Bernstein is great. And and and in on the subject of risk he said

Every day. We walk into the unknown. Um And And as I said.

the w you know, the future is a distribution of possibilities and some days we don't even know what the possibilities are. And and I conclude If I can borrow your copy of the book, I conclude. Uh.

Him. uh because I think it's so good. And uh If you're not going to be able to do it Quickly.

He said that The future is not ours to know, but it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong. of an activity whose outcome depends on an unknown future. And I think that that's a great way

to to think about the world we have to work in. And If you Except

And Inhale. The Unpredictability. Variability.

And randomness. Yeah. I think you're likely to do a lot. Better in it. Now.

That doesn't mean you can't invest. You can't invest Even boldly. What it means is you have to assume that things are not gonna always work out right away. Well, of course they're not always gonna work out. But they're certainly not always gonna work out right away, which means what? You have to have patience.

You have sustain power, you have the fortitude. You have to Uh Uh Uh

Preparing for an unknown world. Unpredictable. maybe even hostile world in the short run. is probably a lot smarter. than assuming everything's gonna go right and it's gonna go uh the way you expect it and it's gonna go that way right away and you're not gonna be tested uh and uh

So I I think that the th this is the kind of thinking that The But uh You know When I read Bernstein

Or or some of the other people I've mentioned. You know, I just go, Oh yeah, right, sure. That that gets it for me, you know? And that's why I love his stuff so much. Um

Warren Buffett has mentioned how fond he is of your writing. And that And I'm paraphrasing here, but if if he sees it in his inbox or he sees one of your letters, it's one of the first things or the first thing that he'll pick up to read. I'd love to ask you about your reading. Are there Any

say three to five specific newsletters or columnists or economists or Writers who you find yourself excited to read these days. Anyone Who comes to mind? I I think the best

Uh You know, I work mo mainly in the credit area, not the stock market. So you know, most people invest mainly in the stock market and and we've talked a lot about the stock market. But that's not what I do professionally. And uh our oak trees investing is largely in in something called credit.

Which means uh fixed income securities, bonds and notes. uh not issued by governments. That's the definition of credit.

Um And in in our world I think that is a great newsletter called Grants Interest Rate Observer. It's uh a little ironic because it

grants has nothing to do with interest rates, or almost nothing. But it's about credit. And it and and in particular. It exposes uh stupidity. And It exposes

Companies. Which seem to be where where people are not bringing enough uh scepticism. And deals.

that seem unwise and that kind of thing and and I think they do a great job. Now It I I I think it's fair to say that it has a negative cast. In other words, they're mainly talking about things which are which are which are rated higher than they should be, which you should ups

Bet against the right. I don't think they as often talk about the things that are rated lower than they should be and a and and present profit opportunities. But for credit guys like us. uh avoiding the losers is extremely important. And and I think that's a great uh a great newsletter. Not only for the content but for the

attitude. uh and the importance of identifying misperceptions. You know, the misperception is the key to operating in the in the markets. And the

You understand things differently from the way everybody else understands them is the key to success, assuming you're right. Uh if you understand everything just the way everybody else does, clearly you can't outperform. That's the death knell. for a would be uh professional investor. So you have to have you have to see things different

Uh from others. That's a necessary condition. for outperformance, but you also have to see it. Better than others. That's necessary too.

Uh that the the two the combination of those two is what I call second level thinking, which which I mentioned a couple of times. You also mentioned how widely read uh Charlie Munger is. And uh certainly in Poor Charlie's almanac, for instance, he p he talks uh quite a bit about if I'm not misr misremoting, uh, evolutionary biology and and and really is able to pull concepts

From seemingly unrelated disciplines into his sort of power zone of of investing. Uh and uh I I've had

Investors recommend certain books. are are much broader. Then uh Investing such as Lessons of History by Will and Ariel Durant, which I found really fascinating also. I mean talks about cycles in a way.

Uh are there any books that You found recommending a lot or that you've enjoyed in the last few years that are not specific to Investing. Uh not specific, yes. My my reading is usually closer in uh th than Charlie's. Uh so an example

uh is the book I'm working on now, which is called Factfulness. Um and Basically It It it unmasks

a lot of misperceptions that people have about the sty state of the world. Um And uh They hold these perceptions Uh

uh generally qualitatively, not based on data. And the author. Perceptions. Yeah.

uh he starts with a list of qu thirteen questions describing the state of the world and Uh fascinatingly. Uh. the a I guess uh he gives you the answer to one and you have to think about the answer to the other twelve. The average score on the twelve is two.

And he points out that if you flip the coin you'd get six right. So the average American Gets Two of the twelve right. And so not only are they systematically wrong. But they're wrong in the same direction, which is they always pick the more pessimistic

answer when the more optimistic one is true. And so he's he responds to our bias and he tries to overcome the ignorance and the bias uh by by using facts and and and and some great uh very communicative graphics. So I would recommend Um Factfulness. And I love the idea of unmasking biases.

You mentioned that uh and I if I get this wrong. As I'm restating, please correct me, but that in a low yield Environment. to get high yield. entails increased risk.

Uh I know you've written a little bit Uh about cryptocurrency before. Uh the last I saw was about I think I think from about a year ago Uh what is your what is your current view? Or thoughts on cryptocurrency, if any.

That's one place that people are going. Uh often With no understanding of the technology or anything else. I mean it scares me enough. I although anyway, I won't get into my view on that stuff. Uh

But people who are well outside of tech, well outside of all of that getting very, very bullish as it relates to cryptocurrency. But what are your thoughts? I am what is called a value investor. And that means you look at the situation, you don't look at the atmospherics, you don't look at the aesthetics. You look at the value, hard value.

Uh the The uh companies assets. And the cash flow that is business producers, and you value those things, and you come to something called the intrinsic value, and then you see if you can buy it for less.

I if you pay full intrinsic value, you'll probably get a fair return. If you pay more, you'll probably have an unsuccessful experience. But if you can buy it for less than the intrinsic value, you you should have an above average return. That's Value investing. And I think It is the

intellectually soundest form of investing. And nobody has been able to tell me the intrinsic value of a bitcoin. I believe there are assets in this world where you can come up to intrinsic value and they are the ones that produce cash flow. Companies.

Stocks. Buns. Buildings. That kind of thing. There are a lot of assets in this world that do not produce cash flow. You cannot put an intrinsic value on

Oil. Gold. Diamonds. Paintings. Bitcoin.

Does it apply to all currencies? Yes, it does. Yes, it does. Uh Mm-hmm. We cannot say

How many Pounds. A dollar is worth. Um We we

People look at him in terms of what's called purchasing power parity. But It doesn't really work very well. And the truth of the matter is

That These macro considerations the directions of economies and and and markets and uh currencies and p commodity prices. I mean what's the intrinsic value of an orange, you know? Um

predicted reliably. And in fact the so called macro funds have been doing quite poorly. For years. Um

So Uh There are some things that can be valued and some things that can't, and I believe that bitcoin is one of the ones that can't be valued. And everybody says to me, but you don't understand. And I wrote about this in my july uh seventeen memo and and uh and returned to it in in September. I learned something between July and September. That's why I put it in the next memo too.

Um People said you just don't understand. People are gonna want a currency that the government can't deflate. And that can't be counterfeited and can't be stolen and all these things. And

Um So uh that's why I returned to it. But I still don't understand how it can be valued. I don't it i in today uh uh bitcoin is sixty five hundred dollars Here on August the tenth.

And I don't see how you can say it's worth Seventy five hundred or fifty five hundred or anything like that. You can say it's gonna be useful in the future. You can say people want a currency, a a non governmental currency, but I don't see how you can put a value on it. And and uh uh

with all of its Attractions. Last year It went from one thousand to nineteen thousand.

Now I could be wrong, but that tells me it's speculative. Buying. Um And

By the way. The people who remember what I said about people who have opinions believing they are right. Obviously the people who it it traded at nineteen thousand. Somebody thought it was a good buy at nineteen thousand'cause it was going higher, and today it's a third of that. So For the most part.

reasonably valued value investments do not go up nineteen times in a year and then down by two thirds. Are are there any understanding that you are a value investor, uh You you mentioned a few other names in the b in the introduction of your book, Joel Greenblatt. Uh Who who I'm also

Uh a fan of Are there any growth investors, venture investors Who are Uh certainly approaching things differently, but are there are there any particular growth or venture investors or people who are playing a slightly different approach

who you have a lot of respect for or ad admire for Particular reasons. Sure. Let me say There are many ways to invest.

There are many people who engage in activities that I think can't be done. And there are many people in each one who do very well. So You know, I I don't I don't say mine is the only way.

Adventure is an example. And I'm not a futurist, I'm not a dreamer, I'm not highly risk tolerant. Uh I'm not bias to risk taking. And if if uh forty years ago w it when Citibank said to me they wanted me to start a high yield bond portfolio, if instead they would have said I want you to start a

venture capital fund, uh probably would have been a disaster. Um But In the venture field, you know, the the the firms that the success seems to be recurring.

Not random. You know? If If let's say twenty percent, ten percent.

Uh venture capital. Uh Funds are successful. You would think that Any given

Fire. Uh twenty percent of their funds would be successful, but there are firms which are repeatedly successful. Um you know Uh I I was lucky in the last year to get to meet Bill Gurley. Of of uh benchmark and and and Bill was nice enough to give me a blurb for the jacket in my book.

Uh And and I was very impressed by our conversation and by uh benchmarks. Um record of achievement.

And sequoia. has a great record. Um And um You know, Clana Perkins.

Et cetera. Uh So You can do it. Uh

But it wouldn't be right for me. That doesn't mean it's not right for them. Th uh Macro. There are there uh you know, I I said fifteen minutes ago that macro funds have had a pretty bad record. Some of the greatest investors in history have been macro investors. Uh George Soros and and Stan Druckenmiller, for example.

uh have been fabulous. They they they probably have the highest returns of of everybody. Um And uh quantitative investing, renaissance and so forth. So Uh again it would be a terrible form of hubris to say my uh my way is the only way. My way is the way the way that works for me. And by the way,

If you look at the others the the the success ratio is not terribly high. Uh but certainly there are people who've done it great. Yeah, there's a very high concentration of success in a handful. At least with Inventure.

Uh Yeah, Bill's a very smart guy. Uh all all the firms you mentioned have done really, really well. Uh So I I've heard said, uh this is not not from not from you in these words, I don't think, but that you know, the right decision at the wrong time.

is the wrong decision. And Uh I'm I'm Very

Excited about The new book. And The literacy of cycles that you are helping people to do develop.

With this. Uh And uh we're gonna wrap up in just a few questions. Uh Are there any particular

Uh mental models or heuristics that are in this book or that you've used in your investing life that you think are particularly valuable kind of across the board. in life. I know that's a big question and you probably have Uh

quite a few different directions you could go with that. But just in terms of becoming a m a clearer thinker. a better operating human being. Does does uh does anything come to mind that we haven't discussed so far as it relates to any type of mental model. That would be worth mentioning before we wrap up.

Well You know, Tim When I finished writing the book and I was thinking about Cycles. I said to myself.

So for example, the economy grows about two, two and a half percent a year. On average. Why doesn't it just grow? Two and a half percent every year. Why is it sometimes four and sometimes one and sometimes five and sometimes negative?

And the answer is Excesses. And their correction. And People get too excited.

and they overexpand their businesses or they invest too much or they invest too much using debt. And then something goes wrong. Excesses Uh produce booms. And then something goes wrong and those excessive activities turn out to be unsustainable, and they are then corrected by selling off inventory, closing plants, or or liquidating a a leverage portfolio, and those produce busts.

So Excesses and their correction. And I think th the best thing that people can do is be on the lookout for those things. And when Other people are engaging in excesses to the upside.

We should turn cautious. And when other people are over correcting to the downside, we should turn aggressive. And uh and and I think You know, it's been a big part of what Bruce and I have accomplished for the Oak Tree investors.

And my other c partners and and colleagues too. Uh and and it's something that everybody can do. If they Um

If they turn their mind to it. Well Howard, I really appreciate the time today. Good. This is this is very fun for me. And uh hopefully.

Just to mention a few things of course people can find it. Mastering the market cycle. Subtitled Getting the Odds on Your Side. Everywhere Books Are Sold. Uh, you can also learn more at mastering the marketcycle.com. People can learn more about Oak tree at oak tree capital dot com. And on social media, you have Twitter, Facebook, and LinkedIn, all the same Howard Mark's book.

Is there anything else that you would like to say to the people listening? Any Recommendation. Question they should ponder. action you might ask them to take anything at all uh besides uh

Besides the book itself, which I encourage people to check out. Well, first of all, we've made repeated reference to my memos. They're all available online at Oaktree Capital dot com Uh uh under the heading of Insights, Chairman's Memos, you can Get the left.

twenty nine years worth you can also s sign up for a service that'll notify you when when one is published. The price is right. Uh because they're free. uh and and I hope people will will read'em. And and and I just want to say that I like to hear from people. So uh I I don't always have time to answer everybody, but my writing of the memos and the books has been enormously rewarding because I get lovely m memos from people which say uh that I made

uh complex things seemed clear. Um that's the one that gets me going the most. So uh if people want to comment or if they Wanna take issue or Or ask a question, I I'll try to get back to him. And is th is the best way to reach out to

send you a note on social media or I I would advise against giving out any type of email address that will get deluged. But um or maybe the answer is they should figure it out. Well we're on social media. And and we'd be glad to hear from them there. Perfect. Uh well, Howard, thank you again so much for the time. And for everybody listening, links to everything we discussed.

uh will be in the show notes, as usual at Tim.blog forward slash podcast. And until next time, thank you for listening. Hey guys, this is Tim again. Just a few more things before you take off. Number one, this is Five Bullet Friday. Do you want to get a short email from me? Would you enjoy getting a short email from me every Friday that provides a little morsel of fun before the weekend? And Five Bullet Friday is a very short email where I share the coolest things I've found or that I've been pondering over the week. That could include favorite new albums that I've discovered. It could include gizmos and gadgets and all sorts of weird shit that I've somehow dug up in the the world of the esoteric as I do. It could include favorite articles that I've read and that I've shared with my close friends, for instance. And it's very short. It's just a little tiny bite of goodness before you head off for the weekend. So if you want to receive that, check it out. Just go to fourhourworkweek.com. That's fourhourworkweek.com all spelled out and just drop in your email and you will get the very next one. And if you sign up, I hope you enjoy it.

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