Howard Marks: 79 Years of Investing Wisdom in 55 Minutes

0:00 All right. Here's what I said. I said describe Howard Marks in two hundred eighty characters. Here's what it gave you. Howard Marks is a legendary investor and co-founder of Oak Tree Capital. Known for his sharp memos, contrarian thinking, and risk focused approach, he made billions zigging when others zag, especially in crises. When he writes Wall Street lessens. Pretty flattering.

0:18 Pretty pretty good, yeah. I feel like I can rule the world, I know I can be what I want to. I'm putting my law in it like my day song. On the roadless travel, never looking at the black. So I wanna ask about the SP because you don't know much about us, but the the short version of uh of the guy you see across from you there, Sam, is Uh, Sam's an entrepreneur. Sam builds his company. He sold his company and he took the money that he made and he said, look, I worked hard for this money.

0:51 Now I want this money to work hard for me, but I need it to be safe. And says Sam went into a a mostly You know, best practice. Low cost index funds in the SP five hundred. And any time I ask Sam about his strategy or I tell him Dude, you gotta buy Bitcoin. Ethereum, you gotta buy this, you gotta put some money over here. Cause I'm I'm like You know, if Sam is vanilla, I don't even know what I am. I'm some flavor off on the side. That's how about strange Tutti Frutti.

1:15 Yeah, I'm Tie Fruity over here. And I keep trying to pull him over here, but he says no, no, no, I like vanilla and so he um He basically just says The long term average of the SP five hundred is ten percent. If I just hold this for fifty years, I'm gonna double you know this many times.

1:29 I'm good. Very very boring. Very boring. Yeah, he repeats that like on loop, like he's a one of my kids' toys. You push the button, it just keeps saying the same line. Uh but you know, I do get a little wary when um Anything seems too safe or too too certain or I guess too taken for granted that this ten percent number over the long term will be the be what it'll be. I guess what would your message be to Sam? If Sam just you know, is he right? Is he wrong? Would you give him a caution of warning if if he was your nephew, he looks like he might be your nephew. If if he was your nephew, what would you be telling him?

1:56 Well On the one hand, Sam, you're right. Because if you if you have more money then you need to eat. The first person First.

2:06 should be to make you comfortable. It doesn't make any sense. Buffett says. Don't risk what you have and need.

2:16 It d makes no sense. For somebody with a Surplus of money. Two

2:24 Make their daily life less pleasant. By going to investments. that put them under pressure. But there's gonna be a but on your statement, it sounds like

2:36 Okay. Yeah. On the other hand The riskiest thing in the world is the belief that there's no risk. The risk in the markets does not come from the companies.

2:47 The securities. Or the institutions like the exchanges. The risk in the markets comes from behavior of people. And it's that for that reason that Buffett says When others are imprudent, you should be

3:02 Prudent. When other people are carefree You should be terrified. Because their behavior Unduly.

3:12 raises prices. And makes them precarious. When other people are terrified. You should be aggressive. Because their behavior their behavior

3:21 suppresses prices to the point where everything's a giveaway. So I don't I mean Look.

3:28 In the long run, you're right about the S P And Over the over the coming years. American Unbalance.

3:39 are going to Produce prosperity. What what's that defined as long term? And the Well, I I would say

3:49 Uh twenty or more. Is is is the is the real long term. And I'll tell you in in a minute how I get there. Yeah. But

3:58 My favorite cartoon. I have a file of cartoons. from over the years. My favorite one There's a guy. He's got his is a Car pulled over to the side of the road.

4:08 The guy's in a phone booth, so you know it's an old uh cartoon'cause there are no more phone booths. And there's a fa as a factory. Going up in the background. And he's screaming into the telephone.

4:20 I don't give a damn about prudent diversification sell my Fenwick chemical. In other words. Prudent diversification. Calls for certain investment positions and a variety of them in a certain

4:34 Composition. Reality. Says I see Fenway chemicals. Burning to the ground, get me out. And you have you can't ignore reality.

4:45 Now why do what's reality? In this case, for you. Reality. is recognizing where things stand. And

4:55 J P Morgan Uh. Publish the chart. Uh around the end of Twenty.

5:00 And it was a scatter diagram. Showing over the years. If you bought Yeah, the relationship. Between

5:08 The S P five hundred at purchase. And the return. Of the annualized return. Over the next ten years. And it looked like this.

5:19 On this axis we had return. And on this axis we had P E ratio. And it was a it was a a Negative correlation. Which means

5:30 The higher the PE ratio you pay. the lower the return you should expect. Makes perfect sense. And it showed There was a number here, twenty three.

5:41 And uh P ratio. Access. And it showed and which is what the PE ratio on the S P was at the time. And it showed

5:49 That historically If you bought the S P When the PE ratio was twenty three. In every case. There were no exceptions in every case.

6:03 Your annualized return over the next ten years was between two and minus two. That's all you have to know. And what what are we today? Wha what is it today? Twenty three or twenty four, twenty four, twenty five? Because why? Because

6:20 This Prices have risen. Now maybe the outlook has risen. So maybe it's still twenty three, but I think let's say I think twenty four. Um So

6:30 You can say The S and P has returned ten percent a year on average for a hundred years. I I'm happy with ten I'm in. Or you can say. It doesn't always return ten. By the way, one of the most interesting things about the S P, if you do the research and I did it for a memo.

6:49 On average, it has returned ten percent a year for a hundred years. But do you know? That the Annual return is almost never between eight and twelve. Yeah, like it it it kills it.

7:02 Or it Yeah. Think about what that means. The the The The norm.

7:09 is not the average. But the the issue For someone like me, so um a lot of our listeners um of uh I'm one of them. Uh you know, I I was fortunate. I had a business. I I made a b uh a relatively large sum of money at a very young age. But I'm not an investor. Yeah.

7:25 Like I don't know anything about public markets. And so when I hear you say that I think Well, I don't have an alternative. Well, the y you you do have an alternative. You could figure out an algorithm to rebalance your position based on relative price.

7:42 And you could put it on autopilot. I don't recommend You know, making judgments about The future. And the appropriateness of today's price for the future you perceive.

7:52 But you can do that. And and uh There are ways to do these things. Even if you just use common sense. What what would you be rebalancing into? So let's say S P PE is high. What would be the second best uh for the sort of non full time active investment. Okay, so I I've tried to suppress my tendency to talk my book until now.

8:12 But But I I think an alternative is is bonds. You know? And in nineteen

8:18 I joined Citibank in the investment research department in nineteen sixty nine as an equity analyst. And the bank did so horribly. That in seventy eight I was banished to the bond department. And the bond department was the equivalent of Siberia.

8:31 The good news is that at that time American corporations pretty much gave lifetime employment. So I didn't get sacked. But um in the bond department. And I get a phone call from the head of the bond department saying that there's some guy in in California named something like Milken.

8:47 And he he invests in something called high yield bonds. Can you figure out what that means? And I said yes. and I became a high bond investor. And

8:57 And you know what? When you buy a bond There's a contract. That says The borrower will pay you interest every six months and give you your money back at the end, and you can figure out The return.

9:10 That is implied by that contract. And if they if the borrower doesn't keep that contract Over generalizing, oversimplifying. The creditors get the company.

9:21 through the bankruptcy process. So the borrower has a lot of incentive to pay you, and they almost always pay. I've been involved in high yield bonds. For forty seven years. And I can tell you. They've almost all paid.

9:35 So Today you can buy high yield bonds, whether it be the US or Europe, or variations on that theme, what we call low grade Uh Credit. And you can buy buy it to get yields of seven

9:49 To eight. Now seven to eight is pretty close to ten. So that's Yeah, that's a good thing. N the bad thing is you have to pay tax every year.

9:59 On the On the income. That's a bad thing. But For those of us who are cautious like you and me. We might say

10:08 I'll take. You know? Eight. Which in the long run. Will give me four.

10:15 After tax. As opposed to ten. Which after capital gains taxation will give me seven. Or Maybe I'll

10:24 Mix'em. Maybe I'll own a little less S P and a little more debt because I'm Yeah. Because I'm worried. It's not all or nothing.

10:34 And that's why I when I'm on T V shows And they say, Well is this a sell or buy? Is this risk on or risk off? I resist that formulation because it's

10:45 Never. One or the other. It's w it's a mix. And the only question that's relevant is what makes? I think the way when you manage your portfolio The

10:57 The operative Continuum. is the continuum that runs from Aggressive to defensive.

11:06 And I think about a a speedometer in the car. So zero Is no risk. A hundred. is max risk.

11:13 Hundred percent aggressive. You should have A sense For your Appropriate normal posture.

11:21 And it sounds to me like Sam, you're a little conservative guy. You've made so much money, you Can't believe it, but you don't want to give it back. So so I would say that Yeah, you're a you're a sixty five. And especially given your youth, you may be a fifty five.

11:38 For your cohort. So I and and I think you should figure out every every listener Every investor should figure out The right place for them. And try to stay there most of the time.

11:50 We need to get a couch here and you could just I'll call you Doctor Marks and you can get my thing. You know what? I run I once wrote a memo called On the Couch. Because I think that once in a while the market needs a trip to the shrink. Hey, let's take a quick break. You know, HubSpot helped Tumblr solve a big problem. Uh Tumblr needed to move fast, they were trying to produce trending content, but their marketing department was stuck waiting on engineers to code every single email campaign. But now

12:13 They use HubSpot's customer platform to email real time trending content to millions of users in just seconds. And the result. was huge. Three times more engagement and double the content creation. If you want to move faster like Tumblr, visit hubspot.com. Alright, back to the show. I went back and I read a bunch of your old memos.

12:31 And the one that stood out to me was The uh bubble dot com one. So he wrote this back in two thousand and I I actually have a few of these where I feel like There's been moments in time, maybe two thousand. Two thousand eight. Twenty twelve, twenty twenty, where

12:45 I It seemed like consensus was going one way, maybe it was Max Greed. And you went the other way. Or is Max fear and panic and then you you were actually very aggressive. Um, you did the thing where Buffett says, be fearful when others are greedy and greedy when others are fearful. It's cool to say, but it's hard to actually do.

13:04 And I thought it'd be fun if you could Kinda walk us through a couple of those moments. And I don't know, like Yeah, not to go too far down memory memory lane, but just You know

13:13 Take us back to, you know, the the one in two thousand. What'd you see? What'd you do? How did it you know, how did it play out? What'd you learn from that? Take us through a couple of those, because I think that's Your superpower. First of all. Uh one of my sayings is we never know where we're going, but we sure as hell oughta know where we are. And

13:30 At Oak T, yeah, uh we Loudly. Proclaim. Our uh inability to make macro forecasts.

13:40 And are non reliant on macro forecasts. But If we want it. Do the right thing vis vis vis the macro. We

13:49 Should be able to figure out what's going on at the present time. And what that implies for the future. Yeah, it may not happen the thing you think it implies. But it probably has a

14:01 higher chance of happening than not happening. If you're logical. and and understand history and patterns. And I I wrote a book called Mastering the Market Cycle.

14:10 Which was published in eighteen. And Uh Uh I th I always say it's a cheesy title. But it wasn't my idea. The publisher wanted that title'cause they thought it would sell more books.

14:21 But I like the subtitle. And the subtitle says Getting the Odds on Your Side. And I believe that where we stand in the cycle determines what probably is gonna happen.

14:34 And how likely it is. And Understanding that Can improve your odds. It can't make you a sure winner.

14:43 But it can improve your odds and that's the best we can do in an uncertain world beset by randomness. So You know, I I don't know if you know that I started writing the memos in nineteen ninety. Uh uh bubble dot com on the first day of two thousand. Was the first one

14:59 that ever garnered a response. I went ten years. Not only did nobody say, Hey, that was good, nobody even said, I got it. And and and and so one of the mysteries is why I kept it. Who are you sending them to?

15:12 To our clients. How many? Crickets. Well, you know, i in nineteen ninety A hundred. Okay.

15:20 You know, and by mail, of course. I wrote bubble.com. January the second of uh two thousand. And it had two Virtues.

15:29 It was right. And it was right. Fast. If you're right slow. It doesn't look like you were right.

15:37 One of the great sayings in our business is that being too far ahead of your time is indistinguishable from being wrong. So the the the answer is I I was not too far ahead. Uh In in the fall of

15:50 Ninety nine. I read a book. Cold. Devil take the hindmost. It it's a h it's a history of financial speculation.

15:59 Were you looking for books about that'cause you had a hunch or you just randomly read this book? No, I I don't remember why I read it. Uh The idea comes first. My books my memos are not research based. They're based on ideas that resonate with me.

16:14 And so I'm reading this book. Oh, I am interested in financial speculation. I'm interested in cycles. I'm interested in in the extremes of uh Financial behavior. Uh so that's probably why I read it. But I'm reading this book and it talks about all these crazy things that people did, especially in something called the South Sea bubble.

16:33 Uh Britain. had this big national debt. And they concluded that they could uh pay it off. By starting a company called the South Sea Company.

16:44 uh and they granted them a license to trade with the South Sea Not Samoa, but Brazil. And

16:53 And they would charge them a a license fee. And that would pay off the debt. And It was one of the One of the great bubbles.

17:02 And so I'm reading in the book. about what people were doing in seventeen twenty. And You know, people were quitting their day jobs. And

17:12 Hanging out in alehouses. The shares. Of the South Sea. company.

17:21 Et cetera, et cetera, et cetera. And I said That's what's going on now. in the tech bubble.

17:28 People you may recall that. People were quitting their jobs, becoming day traders. People with no money could trade stocks as long as they didn't ca cov carry any balance overnight. And Um

17:40 And And uh young people were quitting MBA programs. Because they had an idea. And if they waited until they graduated, somebody else would take it.

17:49 So So it just resonated. And one of the quotes I use the most now is from Uh Mark Twain. who said history does not repeat, but it does rhyme.

17:59 There are certain themes. That rhyme. From generation to generation and cycle to cycle. Because they are embedded in human nature. And so they recur.

18:09 And so And when you When you get older in our business You know, obviously One of the things I uh hasten to point out is there is no such thing as knowing something about the future.

18:22 And if you don't know about the future And you want to figure out the future. There's no such thing as analysing the future. It doesn't exist. And

18:31 The only thing you can do to get a handle on the future. is look at the past. And Uh Look for

18:40 The repetition of patterns, as Twain said. And Try to figure out if they apply. Today. So

18:49 This was very easy. So I wrote this memo, bubble dot com, and it said what they were doing. And I point tried to point out the folly. Of what I saw. Going on.

19:00 Companies with no Profits and no revenues. We're being highly valued. Maybe no product, just an idea. And

19:09 That is the epitome of a bubble. So I wrote the memo. Uh As I say, January the second. Sometime around mid year. The the tech bubble.

19:18 Started to collapse. So as I said in the introduction to one of my books After ten years I became an overnight success. Did you actually bet against it or did you just preserve capital by not FOMOing into every you know tech company basically. W what was the what was the win of that for you?

19:37 First of all, we're not involved Who are basically not involved in the US stock market. And we're not involved at all in technology. So we wouldn't have a chance. Two.

19:48 Apply that. But I think what we did Is we Recognize that. And and by the way.

19:56 Things don't happen. In Isolation. Uniquely. So

20:02 When you when you see something like I describe in the tech bubble You should realize that maybe there are ramifications in other world. Parts of the world. And

20:13 We figured out that people were engaging in Optimism. Not pessimism. Greed not fear. Uh credulousness, not skepticism.

20:22 Risk tolerance, not risk aversion. And When Yeah, as Buffett says A bad prudence.

20:29 When nobody's afraid Unwise deals can get done easily. Simple as that. And The people who buy that stuff.

20:40 It usually ends badly. The way that you explain it, I think everything makes sense and I totally buy into it. But that's actually quite challenging to understand this like macro environment and to say this is where we are. Yeah. Well.

20:53 Uh But you have to be clinical. You have to observe. And And without emotion.

21:00 understand what's going on and what the re what the implications are. And Of course. The what we call what I call h emotion. Is

21:10 Part of what's called Human nature. If you succumb to human nature. it tends to get you to do the wrong thing at the wrong time. I came across a great quote within the last year.

21:23 From a guy who's a retired trader When the time comes to buy you won't want to. And and that and that encapsulated encapsulates So much wisdom. Because

21:37 What is it? That causes the great moments to buy. It's probably the point of lowest uh consensus of but when most people don't believe would be the time that the price is gonna be the lowest. Right. It's the time with either the most uncertainty

21:53 Or the most pessimism, or the most fear. Most conservatism. Uh, so you also want to be all those things. What causes those things? You're talking about you're talking about the manifestation. What's the cause? Uh Bad news? I don't know. Bad events. Bad news.

22:13 Either either exogenous or geopol or or in the economy. Faltering Corporate fortunes. Declining stock prices. Widespread losses. And

22:27 A proliferation of articles about how terrible the future looks. So The point that's why you don't want to buy. At the low. Who would want to buy?

22:36 Under those circumstances. Right. So You you talk Before

22:42 In your introduction. Uh About Zigging when other zag. The only thing I'm sure of is that if you zig when they zig

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23:56 Do you still feel that fear? uh, you know, the of you like when you know you're supposed to buy, do you still feel Or do you feel like Nice. Hello, my old friend. I love this emotion. This is what I'm supposed to do. Right.

24:10 Yeah, I mean It's not easy. But You have to know you have to do it. You have to know that if

24:18 That What what makes buying opportunities. And If you think about it.

24:24 The fortunes of companies And the outlook for companies much. What and I'm I'm writing a memo about this that'll come out one of these days. And what changes is how people think about what's going on and think about the future.

24:40 And co so what changes is the relationship of price to what I'll call value. Sometimes they hate'em, sometimes they love him. When they love him too much. You should expect them to probably go down. That sounds like

24:56 A bull market or a bubble? And when they hate him too much. You should expect them to go up. That sounds like a bear market or a crash. And so

25:06 You have to do the opposite. And and The the same developments in the environment. That

25:12 That affect everybody else. Will affect you. You're subject to them, you feel them, you read about them, you hear about them, everybody tells you how dire the outlook is. And Yeah you know, uh

25:25 It's hard to ignore them. But you have to do the right thing in the face of them. Uh nineteen ninety eight. We had Uh uh the Russian ruble devaluation.

25:37 They Debt crisis in in South East Asia. And Um The meltdown.

25:43 And one of our portfolio managers who who was young And he said, I think this is it. I think we're gonna melt down. I think it's all over. I'm terribly pessimistic. I said, Tell me why. He went through his reasoning.

25:58 I I said okay. Now go back to your desk and do your job. Yeah. A a a battlefield hero and I don't want to c compare what we do to being a battlefield hero. But a battlefield hero

26:11 Is Not somebody who's unafraid. It's somebody who does it anyway. And that's that's the way you have to be. Can I actually yeah, can I ask let me ask you about that because

26:23 So it's funny. Interestingly enough, even though I'm the conservative one, I'm actually way more emotional. Sean's like a more uh mostly is is is a pretty stable guy emotionally. I I go up and down, which I think is actually closer to the average for um Uh average folks. You said something really you said a bunch of stuff about emotion, uh, in the past. I think you said to be a good investor You better uh be able to invest without emotion or at least act. As if you don't have a lot of emotion.

26:49 Has there ever been anything like a mindset shift or a practice or something that you've had to use in order to learn to be less emotional when investing? No, these things are not intentional on my part. You think you were born like I was born unemotional. By the way, and and I want to point out here Yeah,'cause my wife's downstairs having lunch. that that uh I I wrote in my book that it's really important to be unemotional in investing.

27:15 Uh not so good. To be unemotional in life. Uh in in arenas like marriage. Uh So i there it's not an advantage.

27:24 But uh no, for me it came naturally. I don't have to I don't have to say, Oh, there I go again, I'm getting emotional. I have to restrain that, blah, blah, blah. It's it and and and my partner, Bruce Carsh. who's been my partner successfully for thirty seven years. He's pretty much the same. So that makes it easy.

27:41 I don't have to restrain him. We we've gassed you up about some of your your best moves. What's the worst mistake you made due to an emotional mistake? Where you you didn't control your temperament properly and you made a mistake. My worst mistake is not and I know you're talking about a point in time. My worst mistake is that I have always been too conservative.

28:03 My parents were traumatized by the depression. I always say th the the question is not whether your parents were alive during the depression, but whether they were adults. My parents were adults. They were born in the nineteen aughts.

28:17 And so in the depression they were in their thirties. And they were depressed. They you know, and the tr depression was really traumatic. Nobody No. What it was like.

28:27 And it Ground on for Over ten years. And And so

28:33 You when you grow up with parents of the depression. They say things like, Don't put all your eggs in one basket save for a rainy day. You know, that kind of stuff. And I ended up too conservative. And I if I if I wasn't as conservative, I'd be richer today.

28:50 I'm not sure I'd be happier. Uh Because what's an example. What do you mean you were too conservative? Like I I guess like how what what makes you say that? What would you have done differently had that not Had that wiring not been done in you. Well, I mean

29:02 Yeah. I I don't know. I might have I might have gone to an uh into an A more aggressive asset class. Then credit. Like equities.

29:10 I might have become a venture capitalist. Uh or uh, you know, like my son Andrew. Or a private or a leverage buyout investor. But You know, the reason I was talking about the appropriateness of credit for Sam

29:24 Is because While the returns are a little lower, there's much less uncertainty and downside. So I I would say that if I I've been in this business fifty six years, if I would have spent those fifty six years in Less conservative asset classes.

29:39 Uh I would have made more money. Having said that. It happens that I went into things like high yield bonds in seventy eight and distress debt in eighty eight. And if I had not been a conservative person, I probably wouldn't have had any clients.

29:52 Because they would have been scared off by the risk. So it served me well in in pioneering in those businesses. But that was my I I mean, I n we never had a mistake like We were. Two

30:04 Defensive. at a uh in a crisis. Or too aggressive. In a bubble. We just I just was too

30:12 Conservative. All my life. And that kinda makes sense because you I don't think you start Oak Tree until your late forties, right? Just short of my forty ninth birthday. Yeah, and so well, I I guess leading up to it, were you already financially successful? Were you were you a success leading up to that? Yeah. And and so was it a big risk to start oak tree? I was secure.

30:34 I w I wasn't rich. By today's standards. May not have been rich by the standards at the time. But I had I had

30:43 Line. I had good money and I lived well. So I started m running money in seventy eight. I joined my Oak Tree founder partners in eighty five, is eighty six, eighty seven, eighty eight. We did a great job.

30:56 Through a a variety of environments. And we weren't worried. About the ability to do a good job. And we had enough money to eat. So

31:05 It it wasn't I mean but it it it it I had to overcome My innate caution. My wife had to give me a kick in the ass. Uh which she uh Happily did.

31:16 Um I I may not have done it without her, probably wouldn't have. You uh you said you Your Too conservative, but there's been times when you've been very aggressive. Oh yeah and uh You know, I think the sort of oh seven, oh eight financial crisis. I read something that

31:31 As the crisis happens, you go raise ten billion dollars'cause you see the opportunity. And you started deploying Something like six hundred million dollars a week. Which is It just sounds badass, to be honest. I don't even maybe that's

31:45 Maybe that's not not not as crazy in the financial world, but it sounds crazy to me. Well, We did not raise ten billion. After the crisis hit.

31:57 Because Remember what I said about the guy who said when the time comes to invest you won't want to? You can't raise money in a crisis. You if you went to people, you say world's melting down, we're gonna buy all this stuff, we're gonna it's gonna be a bonanza, we're gonna get rich, nobody will give you money. Why? Because the same factors that influence the world influence the people you talk to and no everybody will stick their hands in their pockets and say maybe later after the

32:20 After the dust settles and and light and a lot of people say Uh you know, we're not tr gonna try to catch a falling knife. And I believe that you you make the big money catching falling knives carefully. So What happened is we uh like I described about the tech bubble in two thousand, we detected in oh five six

32:39 That the world was behaving in a in a carefree manner. And And I I would wear out the

32:48 Look at this piece of junk. That got issued yesterday. There's something wrong. If a deal like this can get done. The world is exercising inadequate prudence.

33:01 Specifically on mortgage is or or just generally about mortgage. I never heard of mortgages. I never heard of sub I n I don't think I ever heard the word subprime. I don't think I ever knew what a mortgage backed security was. It just seemed that the world was operating in a pro risk fashion. And when people are pro risk They they they they permit

33:20 Bad deals and they pay prices higher than they should. So What happened was On on the first day of O seven We went out to our clients and we said we think there's an opportunity.

33:32 Uh we didn't I don't Think we raised funds in oh five or six for his Uh distressed dead area. But it on the first day of O seven we went out and we said we think there's

33:41 A great opportunity coming. We'd like to have three billion. The at that time the biggest distress debt fund in history was our A one fund which preceded the Enron meltdown and so forth. And it was two and a half billion.

33:55 And so Two and a half. Yeah, around there. So Uh we went out to clients we said we'd like to have three. That would be the biggest distress to fund in history.

34:06 So Within a month we had eight. And We said, you know, we can't do anything with eight billion. It's it's it exceeds our ability to invest it wisely.

34:17 So we're gonna take three and a half billion. And we're gonna close the fund. But we would like to have the remainder of your interest in a standby fund That will implement if the stuff hits the fan. So the first one was seven.

34:33 And it was three and a half billion. And the next fund was seven B. And by the time we finished raising money for it A year later. It was eleven billion.

34:43 And with and we and Fund seven got fully invested. So we started investing, gradually investing seven B. Uh in June of oh eight. It's sitting there on the shelf. And by September.

34:57 eighteen. Fifteen. It was Um eighteenth. It was uh

35:04 Uh twelve percent invested. So just over a billion. And Lehman Brothers declares bankruptcy. And

35:13 So th the question Which you Implied. Was Do you invest it or not?

35:18 You're sitting there with all that money. But the w it looks like the world's gonna melt down. Do you invest it? Very simple. And

35:26 Uh this as you say, I think this was one of our Uh best moments. Because I reached a very simple conclusion. If we invest it and the world melts down, it doesn't matter what we did.

35:40 Yeah. But if I don't invest it And The world doesn't melt down. Then we didn't do our job.

35:49 QED. You have to move forward. I also wrote That It's hard to predict the end of the world. It's hard to assign a high probability to it.

35:58 It's hard to know what to do. If the world is gonna melt down. If you do those things and the world doesn't melt down, it's probably a disaster. And most of the world Time the world doesn't melt down.

36:09 That was the That was the sum of our analysis because there was nothing to analyze. There had never been a global financial crisis before. The the meltdown of the financial sector had not been Anticipated since the A great depression.

36:25 And there was there was there were no past patterns to extrapolate. So you have to resort to logic. That was the logic. So As you say.

36:34 We invested four hundred and fifty million a week. for the next fifteen weeks in that fund, which was seven billion. And oak tree overall. Invested an average of six hundred fifty. million a week.

36:46 For the next fifty week. Uh fifteen weeks. How did that turn out? Uh-huh. So that's what you put in. How did what was the sort of result of that that investing during that time? Well, it was great. Except for I mean we got good buys and we made good money. But

37:02 The Fed mobilized. Uh uh. Very astutely. Cutting interest rates to zero for the first time in history at the beginning of O nine. And y introducing QE.

37:15 And those two things Saved the economy. So we didn't get the meltdown that everybody was afraid of. And there were relatively few bankruptcies.

37:26 Especially outside the financial sector. that result from the global financial crisis. So we had We've had some barn burner funds.

37:36 Uh this was very good, but not a barn burner. You've you you've you've done something that I love, which is um You well, you you've quoted a ton of different people. You've quoted Mark Twain a bunch of times. You you've have all these quotes which like clearly shows that you retain information that you read. And I imagine you read a lot. Can I ask you about your reading habits? How do you pick what books you read? I've never read

37:59 any books about how to be an investor. Like You know, multiply this by that and add this and subtract that and The books I've found most interesting have always been the ones about investor behavior. I mentioned

38:12 Devil take the highmost. Uh Ninety nine. Uh Uh one of the greatest books I ever read was uh Before that.

38:20 uh John Kenneth Galbraith's book uh uh called The Short History of Financial Euphoria. That was really pivotal for me. And since I'm a slow reader. Uh I like the fact that it was only about a hundred pages. And then

38:33 You know, back in Back in uh seventy four, I think, Charlie Ellis wrote an article, Winning the Losers Game. Where he said that because Uh you can't predict the future. Uh active investing doesn't work.

38:47 He was a believer in the efficient market. So rather than Try to hit winners. Yeah, like the tennis player. You should try to avoid hitting losers and keep the ball in play.

38:56 Um and that has always defined my Uh investing style. In fact, I wrote a memo in the summer of twenty four or twenty three. Called Fewer Winners. Fewer losers or more winners.

39:08 And that's the basic choice. of investing style. There's a great la I think like sort of math paradox that you've pointed out, which is that you know a fund I don't know if it was your fund, but any fund it could be You know, never above never in the top ten percent, but sort of never in the bottom fifty percent. And there's a strategy of just consistently being above average will place you in the top five percent. Right. It'll it'll place you in the top percent.

39:33 Uh, can you unpack that idea a little bit? I just I just sort of butchered it. In in uh nineteen ninety I wrote a memo called The Root to Performance. And I had uh dinner in Minneapolis with my client Dave Van Benscoat, who ran the General Mills Pension Fund. And he Dave explained to me

39:49 That He had run the fund for fourteen years. And in fourteen years the the equities, General Mills equity portfolio was never above the twenty seventh percentile or below the forty seventh percentile. So fourteen years in a row solidly in the second quartile. Now, if you said to the normal person, not in the investment business, so this thing fluctuated between the twenty seventh and the forty seventh, where do you think it was

40:13 Yeah. They would say, Well let me think. Probably around thirty seven. The answer is fourth. So if you if you can do well for fourteen years in a row

40:26 And avoid the tendency to shoot yourself in the foot. in a bad year, you can pop up to the top. At the same time A another investment management firm had a terrible year because they were deep value investors and they were heavy in the banks and the banks suffered terribly, so they were at the bottom.

40:43 So Yeah. President comes out and of course things people in the investment business are great rationalizers. And communicators.

40:51 And he says the answer is simple. If you wanna be in the top five percent of money managers, you have to be willing to be in the bottom. Well that makes great sense. Except that my clients don't care. If I'm ever in the top five.

41:04 And they absolutely don't want to see me in the bottom five. So my reaction is the first guy's approach is the right one for me. So That's why at Oak Tree we go for fewer losers, not more winners. Yeah, I love that because it's one of the um

41:19 Unsexy ideas. Any idea you can't You know, make a movie about Or won't make you sound really cool. are generally undervalued ideas when they when they actually logically math out the way the way that one does.

41:32 And so I I sort of That was one that stuck out to me is like nobody's gonna nobody's gonna give you a motivational video about being consistently above average and just never shooting yourself in the foot. Right. Uh it's all about heroic greatness. But huge risks you can take and you know being willing to do it. And so, you know, that's all you hear. But but you know, uh the uh Financial Times of London.

41:54 Every Saturday. They ha they have an article uh called the Lunch with the F T. And they take somebody to lunch and they write an article about the person, the restaurant, and the food. And they Did that with me in late twenty

42:06 Two. And Uh I uh Took the reporter to

42:12 uh my favorite Italian restaurant near the office in New York where I go a hundred percent of the time. If I have a lunch. And I and I said to her. Mm.

42:22 Eating in this restaurant is like investing at Oak Tree. Always good. Sometimes great, never terrible. Now that to me, that sounds like a modest

42:34 Bost. But if you can do that. For forty or fifty. I think it'll compound to great results. Uh if you never shoot yourself in the foot. And I think it's I th I

42:46 I don't know if the SEC is listening. But I think it's descriptive. of what of what we've accomplished. There's like this um class of investor that's like kinda become like folk hero. you know, like Warren Buffett's an obvious one where the like a folk hero is sort of uh their high integrity to they make uh greatness seem achievable and relatable.

43:07 uh which is like a whole skill in itself. And and you've become one of these like folk heroes. Um, you know, and a lot of them they have in common where they like write a lot, they write well, they've got wonderful sayings. Uh they make challenging things easy to understand. Did you purposely try to become Like this public figure. Well, first of all, you can't ask uh somebody who did whether they did,'cause they'll say no.

43:31 Nobody will admit that. Nobody will say my my public persona is a facade. We me and Sam were joking before this. We were saying it's cool how uh it's interesting how I think when you started as an investor, there was like no celebrity investors. There's no like famous person who was doing what you were doing. And then now you have whether it's Buffett or Munger, there's like

43:52 The investment guys are now like the philosophers. Yeah. Tex EO nerds are now like the power players of the world. Right. Uh Podcaster comedians are now like the new trusted media. It's like this very strange shift on all fronts where um

44:10 You know, influence has sort of shifted, but I I find that like Investment. crossover life philosopher to be just like one of the really wholesome ones that I person I personally really like, you know? Well, you know, I I I hesitate to put myself in the same category, but I think Warren has always tried to just educate people and share his knowledge and And people say, Well, why do you give away your secrets? Aren't you afraid that other people will emulate you and and and catch up with you?

44:35 But I I don't think so because Y you know, we can tell them all day long What what you should do, but it's hard to do. Like we said at the beginning of the Podcast. Friend of mine.

44:44 Richard Oldfield in London. Uh entitled Simple but not easy. I think the things we have to do are simple. They're just not easy to do.

44:54 I think Buffett. Makes Investing seems simple because he bo boils it down to the essential ingredients. By the way, you said there were no favorous investors.

45:05 I but I think Buffett started around fifty three. If I'm not mistaken. Um he just wasn't famous. Uh yeah. Uh but and and there were a few people who were famous in the investment business, but I don't think anybody was was was uh

45:19 Famous in the pu in the w wider world. Oh, what's interesting for like the normal guys like me and sh and and Sean is like we learn from you about how to live life. And you just and you and And that's kind of cool. And it just like investing is just your way of like testing if your

45:35 Way of living is true. Right. Well, investing is a lot like life. But But and and by the way, uh I'm working on a book.

45:43 Along those lines. Sam. What's it called? Uh I don't know yet. Uh but

45:48 But uh Uh i if you wait a few years, I think it'll be out. Well We appreciate you coming. Uh I I do want to leave you with one It's a question for for for you. So we've asked you a bunch of questions, but I I actually think it'd be interesting.

46:01 Um What question do you think people who listen to this should ask themselves? What's a what's a useful question? Yeah, you think people could ask themselves as a as a final final note here. Well

46:12 I would. Think in terms of the mistakes that investors made and I would ask yourself whether you make them. Uh So what are the Big

46:21 Mistakes investors make. Uh I I can think of three. Number one. Do you think you hold uh do you think you understand what the future holds? And uh and do you reasonably

46:34 Uh number two. Uh I think the biggest single mistake that investors make is that they think the world will remain the way it is. The the things that are working today will continue to work. The things that aren't working will continue not to work. the the the trends or the motion will continue.

46:51 And that there won't be any new trends. So do you do you are are you part of that? And then number three is do your emotions Uh Rise and fall and get you to do what they want.

47:03 As opposed to what you should do. Uh so uh I think you just have to have a checklist. You know, in my first book, the most important thing, I had a thing in there called The uh Poor man's guide to market assessment. And

47:17 And it it it says on the left A bunch of things and on the right there's a bunch of things and and and It was half tongue and cheek, or m maybe more than half. But I mean it says You know.

47:28 Uh are the is the market rising or falling? Are the are the T V shows about investing popular or unpopular. If an investor goes to a cocktail party, is he mobbed or shotten? Uh are are do deals get done easily or hard? Do people rate are are are deals oversubscribed or left begging? You know, that kind of thing. And you can tell. You can figure out from that checklist.

47:50 Whether The market is Overheated and too popular. Or Uh frigid.

47:57 And and and too shunned. And this can tell you a lot of what to do. If you're methodical and clinical. Well, um Sean and I have have read your stuff forever. We've listened to so many of your podcasts. It's been an honor. We really appreciate you doing this. I think the best part of our uh best part of our job is we have an excuse to hang out with amazing people who are way out of our leagues and uh this is this is one of those occasions. So thank you so much. Well thank you, Sam. Thank you, Sean. I've enjoyed your questions and let's do it again sometime.

48:24 Alright, do the best. We appreciate you. Bye bye. I feel like I could rule the world. I know I could be what I want to. I put my all in it like my day song on the road, less travel, never looking back. My friends, if you like MFM, then you're gonna like the following podcast. It's called A Billion Dollar Moves. And of course, it's brought to you by the HubSpot Podcast Network. The number one audio destination for business professionals. Billion dollar moves. It's hosted by Sarah Chen Spelling. Sarah is a venture capitalist and strategist, and with billion dollar moves, she wants to look at unicorn founders and funders, and she looks for what she calls the unexpected. Leader Many of them were underestimated long before they became huge and successful and iconic. She does it with unfiltered conversations about success, failure, fear, courage, and all that great stuff. So again, if you like my first million.

49:14 Check out billion dollar moves. It's brought to you by the HubSpot Podcast Network. Again. Billion dollar moves. All right, back to the episode.

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