Avoid Disaster w/ Superinvestor Howard Marks (RWH063)

Summary

• AI: Marks believes AI will change the world but warns profits may not accrue to investors, likening sentiment to past bubbles and cautioning against lottery-ticket speculation.
• Fixed Income: He highlights a post–sea change environment where credit instruments can deliver solid returns, emphasizing the appeal of contractual cash flows and the “negative art” of avoiding losers.
• High Yield Bonds: Discussed as a viable source of mid-to-high single-digit yields, with a reminder that most investors should access this via diversified funds/ETFs due to the arcane nature of credit analysis.
• Distressed Debt: He underscores contrarian deployment in crises, citing Oaktree’s aggressive 2008 buying as an example of idiosyncratic, committee-free decision-making in inefficient markets.
• Gold: Skeptical stance given lack of intrinsic value and cash flows; notes long-term returns trail equities despite recent gains and warns against being swayed by short-term performance.
• Bitcoin: Similarly flagged as non-cash-flowing and hard to value analytically; inclusion in portfolios is belief-driven rather than intrinsic-value based.
• Market Outlook: Advocates “taking the market’s temperature” over forecasts, becoming defensive at exuberant extremes and more aggressive in fear-driven lows, with AI enthusiasm compared to the late-1990s internet boom.
• Risk Management: Emphasizes choosing between “fewer losers” and “more winners,” calibrating risk posture, avoiding leverage-driven blowups, and maintaining patience and discipline.

Transcript

(00:00) I wrote a memo called fewer losers or more  winners. You have to make a choice. And if you're   going to try to win in investing, which means win  in our business means having superior results.   How can you possibly get superior results? And the  answer is you either have more of the things that   go up or less of the things that go down or both. (00:26) Most people can't do both because the   skillful aggressive player might be able  to get more of the winners. The skillful   defensive player might be able to have fewer  of the losers. Very few people have enough   equipment to do both. Most people that means you  have to choose. Before we dive into the video,   if you've been enjoying the show, be sure to click  the subscribe button below so you never miss an   episode. It's a free and easy way to support us  and we'd really appreciate it. Thank you so much.  (00:56) Hi folks. I'm absolutely thrilled to  welcome back a very special guest today, Howard   Marx, who's the chairman of Oak Tree Capital  Management. It's been a landmark year both for Oak   Tree and Howard. Oakree recently celebrated its  30-year anniversary and since Howard co-founded   the firm in 1995, it's been a spectacular success. (01:18) It's grown into a globally revered   leader in alternative investments with  something like $218 billion in assets under   management and more than,400 employees  around the world. And a few weeks ago,   Howard also celebrated another landmark which is  35 years of writing his extraordinary memos which   are such a trove of clear and lucid investment  wisdom that they've earned a devoted following   of I think more than 300,000 subscribers. (01:45) Howard marked that anniversary by   publishing a free compilation of 45 of the  best memos which I spent the last couple of   days rereading. I would say personally that  nobody other than Warren Buffett has done   more to distill and share the enduring truths of  investing. So today we're going to focus in some   depth on some of the most important things  that Howard's figured out in his 56 years.  (02:10) not only as one of the great investors of  our time, but I would say also one of the great   teachers of the investing world. So, Howard, it's  lovely to see you again. Thank you so much for   joining us. Thank you, William. With a with a uh  introduction like that, I'm tempted to say go on.   Okay. Well, we're off to a good start then. (02:29) I wanted to start by asking you   about a really important dinner that you had in  Minneapolis in 1990 that had a profound impact on   you both in terms of inspiring your first memo but  also I think subsequently in shaping Oak Tree's   investment philosophy. Why was that dinner such  a seminal event and what did you learn from it?   Well, I had dinner with a guy named David Van  Bencotton who ran the pension fund for General   Mills and uh he was a good friend and good  client and he told me that he'd been running   the plan for 14 years and in the 14 years  that their equity portfolio had never been   above the 27th percentile of pension fund (03:12) equity portfolios or below the 47th   so solidly in the second quarter for  14 years in a row. But interestingly,   as a result, for the 14 years overall,  they were in the fourth percentile. Now,   that's incredible math. You would say, well,  if you bounce back and forth between 27 and 47,   on average, you're probably about 37. No, fourth. (03:40) How could that be? And the answer turns   out to be that most investors shoot for the stars  and occasionally shoot themselves in the foot and   wreck their record. And once you have a big loss,  it takes a long time to get back to scratch. So   I thought that was really important. So I wrote  the first memo called the route to performance.   As you say, it had a great impact on us. And I  knew you were going to ask this question. So I   went back and looked at the first memo. (04:03) And it happens to say in there,   simply put, what the pension funds record tells me  is that in equities, if you can avoid the losers   and losing years, the winners will take care of  themselves. And when we started Oak Tree in 1995,   I wrote that down and that became our motto  and it still is. If you can avoid the losers,   the winners will take care of themselves. (04:29) I think that's an extremely important   thing in investing. investing success is  not about a swing to the fences. It's about   steadily steady excellence, shall we say. And  it's interesting. I remember you pointing out   in one of your memos that Graham and Dodd  had written all the way back in 1940 that   there's something very distinctive about  bond investing that's congruent with this,   that it's a negative art, as they put it. (04:55) Can you explain that? I went back   to read the 1940 edition because the owner of  the book asked Seth Clarman to update it and   Seth asked me to do the part on fixed income.  So I went back and reread it and I got kind   of mad when I saw that. I said why are they  denigrating what I do calling it a negative   art and then I realized what they were saying. (05:16) What they were saying was that if there   are a 100 bonds out there and they're all 8% bonds  and you know that 90 will pay and 10 will default,   it doesn't matter which of the 90 that pay you  buy because they're all 8% bond. They all get   the same return. The only thing that matters is  that you don't buy any of the 10 that default.  (05:41) So in other words, you improve  your performance not by what you buy,   by what you exclude. So it's a negative art  and in fixed income where you're promised a   return and the only moving part that's remaining  is whether the company keeps its promise that all   you have to do is weed them out and you get the  promised return. So that that's what I meant when   I said the winners take care of themselves. (06:06) And it was a very good mindset when   I started the high yield bond business in 78  to think that way. I didn't have those words   for it but I thought that way. And then when  we went into other businesses like Bruce K's   distressed debt funds in 88 and emerging  market equities in 98 and things like that   now we're not doing straight fixed income. (06:25) It's not enough to just not have any   losers. We actually try to find some winners but  we maintain that motto because I think that the   risk conscious mindset is a great guidepost.  You've written several memos over the years,   usually about one a decade, about the  parallels between investing and sports, and   you're obviously a keen tennis player yourself. (06:50) And one of my favorites is called What's   Your Game Plan, which is, I think, from  2003. And you talk about the best tennis   players and best baseball players and the  lessons. And one of the things that struck   me as I was rereading it the other day  is you point out that it's very important   for them to play within themselves and yet  there's also when you look at the greatest   tennis players for example this need at  times to be maximally aggressive and and   it tallies with what you've said to  me before about how risk avoidance   usually goes handinhand with return avoidance. Can (07:22) you unpack that a little bit? This nuance   that it's it's not about risk avoidance. It's more  about the intelligent bearing of risk. William,   it's a great coincidence. I happened to have  lunch yesterday with a guy named Charlie   Ellis and Charlie Ellis wrote the article in I  believe 1975 that gave rise to this whole line   of thinking and it was called the losers game  and he said there are two styles of tennis.  (07:53) The professional has to win a winner to  win a point because if he hits a mild return,   his opponent will hit a winner and put the  point away. So, they have to hit winners,   but they're so good at what they do that  it's mostly under their control. And in fact,   in professional tennis, they keep track of  something called unforced errors because there   are so few. But the amateur tennis player, because  they don't have control as much, has to just try   to content themselves with not hitting losers. (08:25) And if I can get it over the net and   within the bounds of the court 10 times in a  row, chances are good that my opponent will   stop at nine and I'll win the point, not having  hit a winner, but only avoided hitting losers.   So the point is, if you think about it, that  investing is not like championship tennis because   we don't have that much control of the outcome. (08:43) There's too much randomness, too much   uncertainty, too many things that are unknowable.  And so if you're in a game like we're in, swinging   for the fences, trying to hit winners, it can  get you carried out. I think it's better to play   within yourself, emphasize consistency, not take  the big risk, you know, the grand gesture, but   rather strive for consistency and and competency. (09:08) That's a lot of what we've done. You've   written a lot over the years about various  dazzling blowups like Amarance, the energy fund   that imploded back in 2006, or Long-Term Capital  Management, which imploded back in 1998. When you   think about the lessons of all of the firms that  didn't survive over the period that Oak Tree has   gone from strength to strength, what is it that we  need to learn both as professional investors or as   regular amateur investors? Well, one of the quotes  that I've been using the most in the last decade   or so, William, is attributed to Mark Twain, (09:47) and he said, "It ain't what you don't   know that gets you into trouble. It's what you  know for certain that just ain't true. And if   you think about it, no sentence that starts  with I don't know but or I could be wrong but   ever got anybody into big trouble. You get big  trouble when you say I'm 100% sure that XYZ.  (10:08) And then you take bold bets and if you  take a bold bet on a premise which turns out   to be incorrect, you can be finished long term.  did that because they thought that their method   was infallible and it produced tiny skinny  tiny returns. But they would lever that up   into big returns by using a lot of borrowed money. (10:29) But when you have a problem on leverage,   your losses are magnified and you can get  carried out as they were. And I think that   Amaran too bet boldly and incorrectly and  got carried out. You wrote a great memo. I   think it was called pigeed, which is the less  glamorous name for amaranth. And um right,   there was a lovely sentence in there where you  said, "You can successfully invest in volatile   assets if you're sure of being able to ride  out a storm, but if you lack that certainty and   face the possibility of withdrawals or margin (11:00) calls, a little volatility can mean   the end." And then you said in this very  pathy way, you have to be able to survive   life's low points. Can you talk a little  bit about that? That seems like such a   simple but really critical point about investing. (11:19) Well, another of my favorite implications   is never forget about the 6-ft tall person who  drowned crossing the stream that was 5 ft deep on   average. And people have to think about that for  a minute. But if you think about it, I think you   realize that the notion of surviving on average  is meaningless and irrelevant. You have to survive   every day in order to reach the finish line. (11:43) And that means you have to survive on   the worst days. And if you have a portfolio or  an investment which is directed at maximizing   the results if everything you hope comes  true, chances are you expose yourself to   the possibility of being carried out if what  turns out to be true is something different.   So that's really what it's about. (12:07) And a lot of investment management   decisions come down to the question of whether  you're going to try to maximize your gains if   things go the way you hope and believe or minimize  your losses if they don't. You can't do both at   the same time. There's no strategy having maximum  returns under good fortune but being fine if   things turn out badly. You have to make a choice. (12:35) And in fact, this brings us back in a way   to what we were discussing a minute ago. Uh few  years ago, I wrote a memo called fewer losers or   more winners. You have to make a choice. And  if you're going to try to win in tennis or in   investing, which means win in our business  means having superior results. How can you   possibly get superior results? And the answer  is you either have more of the things that go   up or less of the things that go down or both. (13:08) Most people can't do both because the   skillful aggressive player might be able  to get more of the winners. The skillful   defensive player might be able to  have fewer of the losers. Very few   people have enough equipment to do both.  Most people are subject in some way to   their biases, either aggressive or defensive. (13:27) So most people that means you have to   choose but it should be a conscious choice. And  how many people ever sit down and say I'm going   to succeed by having more winners or I'm not going  to pursue that many winners. I'm going to succeed   by having fewer losers. But if you don't answer  that question and make a conscious decision,   how can you find a winning strategy? You wrote  an important memo related to this back in 2024   called ruminating on asset allocation where you  talked about how one of the keys is to achieve   this desired balance between aggressiveness (13:58) and defensiveness or maximizing growth   of capital or maximizing preservation of capital.  And you talked about the importance of finding   a targeted risk posture and then recalibrating  around that appropriate posture. And it strikes me   as such a profoundly important and practical idea. (14:19) Can you talk about that? This idea that   we should figure out our risk profile and how we  should do it. I mean, what what we should think   about in terms of our intestinal fortitude or  our our responsibilities or our time horizon.   What's the process that we should go through to  decide what that targeted risk posture should be?   Well, I always think about and guess  at the process that people follow.  (14:47) And I don't think that many people  are that rigorous in their thinking. And I   think most people say, well, you know, I'm going  to make investments. What does that mean? Well,   I'm going to try to buy a bunch of things  that'll go up and make me money. But I   think especially if you're an institutional  investor or investing for others, you have to   be a little more thoughtful. So, I wrote a memo. (15:04) You probably remember when I'm going to   guess eight years ago or something called  calibrating. Yeah. In which I said well   you think about the speedometer of a car and  zero is no risk and 100 is maximum possible   risk and every person every institution every  money manager should figure out where in that   continuum they should be normally for this client  or for me or for my employer or my institution.  (15:36) What is the right risk posture for  me normally? And as you say, let's talk about   individuals. It's the function of age, wealth,  income, the relationship between wealth and   income and needs, number of dependence, level of  aspiration, proximity to retire, and then the last   one you touched on is intestinal fortitude. (15:59) So you take all that together and you   figure out where in zero to 100 is the right  place for you. normally and you say, "Well,   I'm young. I don't have that many dependents.  I'm aggressive. I can stay with it. If I make   a mistake, I I have plenty of time left in  my career to recover." So, I can be an 80 or   an 85. You say, "Okay, that's my posture. (16:22) " And you figure out, by the way,   there's no place you can look to find out, well,  which combination of assets will produce an 85.   But it's just a mind. It's just a way to direct  your thinking. and and 85 you would say well   that's pretty risky and it's aggressive but  you know we're trying to do better and we're   willing to take the risk of doing worse. (16:41) Then the question is after that   is do you going to stay there all the  time or are you going to try to vary it   over time as the opportunities arise in the  marketplace and then the next question is if   if you will try to vary it what about today?  Where do you want to be today? I think it's   a constructive way to think about your posture. (17:01) I wrestle with that question a lot and I   was thinking about it a lot this week as I was  rereading your memos because you said I think   in a memo called what really matters investors  should find a way to keep their hands off their   portfolios most of the time and and earlier  in one called selling out you said when I was   a boy there was a popular saying don't just  sit there do something but for investing I'd   invert it don't just do something sit there  and so there's this tension where for most of   us we just do better not to do anything. (17:32) And yet sometimes you do have to   recalibrate. I had dinner a couple of weeks  ago with Nick sleep and I was saying to him,   I'm kind of worried at the moment, you know, like  because I've done well over the last 16 years,   thank God. I don't really want to give back  50%. And he sort of said to me, don't fiddle,   William. Just don't fiddle. Stop fiddling. (17:51) And he's like, if it goes down 50%,   that's fine. You'll just buy more and it'll be  fine. you know, how do you wrestle with this   question as a regular investor? Well, you look,  first of all, on all these questions that we're   talking about today and the many more that I'm  sure you have for me, there are no right answers.  (18:08) There's only a range of possibilities.  There are choices, none of them perfect. And the   question is, where do you want to come out on the  continuum? Usually, you don't want to be at either   extreme. You don't want to trade every day, and  you don't want to never trade. for example, most   people are not 100% maximizers or 100% preservers.  So, it's a choice and it's a personal choice and   and as I say, importantly, no right or wrong. (18:32) Now, I I mean, Nick's attitude is a little   too idealistic in my opinion. And you know,  I believe that there are good opportunities   once in a while, not every day, once in a while,  there are good opportunities to become a little   more aggressive or a little more defense. And I  wouldn't do a lot because it's easy to be wrong,   but I wouldn't let all those opportunities go. (18:59) And and you know that I think we've done   good things for our clients by doing that. But you  know, I was talking to my son Andrew when I wrote   my book, Mastering the Market Cycle, and I said,  "I thought our calls had been about right." And he   said, "Yeah, Dad, that's because you did it five  times in 50 years." So certainly not every day.  (19:16) There's not every something wise  to do every day. And by the way, that memo,   what really matters, I think, is is one of  the better ones that garnered roughly the   least attention or response. But I told the  story in there about there was a study done   of clients at fidelities and they concluded  that the best performance belonged to the   accounts of the people who were dead. (19:41) Now then added that Fidelity   has not been able to find that study and  neither has anybody else. So it's probably   apocryphal but you get the point. And I think that  overtrading is a mistake. And not only is it not   productive on balance and costly, but it can be  counterproductive because if you get excited and   buy at the high and then depressed and sell at  the low, you're doing the opposite of what you   should do and buy and hold is highly superior. (20:14) I just think that for people who have   ability and temperament, there are occasions  when you want to behave counterally and become   a little more defensive because the market  is precarious and a little more aggressive   because it is generous. You've written a lot  about the futility of making macro predictions   and forecasts and how rarely one should use them. (20:41) And so I was particularly struck when I   was reading one of your memos and you were talking  I think it was probably taking the temperature   from 2023 where you were talking about those five  very successful market calls which really are not   even over 50 years they're actually over the last  25 years I think in 2000 then 2004 to7 2008 2012   and 2020 can you explain the nuance here because  I think it's really important right that there   are times where the market is sufficiently  crazy that you've actually sort of jettisoned   your usual disdain for macro forecasts.  I guess it's just that the odds of of you   being right about it being so extreme have been (21:18) better. Can you talk about unpacking that   kind of nuance there? Well, number one, I think,  as you say, there were five times essentially   you say they're all in the last 25 years. So,  well, that means it took me 30 years to get   up the nerve and feel that I had enough insight  to make a call. And the first one was the first   day of 2000. It was about the tech bubble. (21:41) And the second thing that's worth   noting is that I didn't know anything about tech  stocks or technology or the internet or or any   of those things. And I call the process taking  the temperature because what it is, it's about   assessing the behavior of the people around me.  You know, Buffett always says everything best   and he said that the less prudence which others  conduct their affairs, the greater the prudence   with which we must conduct our affairs. (22:08) So when everybody is behaving   like they're carefree, not a worry in the  world, there's no risk they don't think   they can surmount and anyway they don't see  that many risks, then we should run for the   hills because their exuberance has probably  moved prices so high that that it's dangerous.  (22:27) And then in contrast, when people  are depressed and they can never think   that there'll ever be another positive step or  another upday in the market and all they want   to do is get out and they've had it, all that  stuff, their pessimism and level of depression   usually renders things so cheap that that's  the time to become highly aggressive. It's   called contrarian. It's called counteryclical. (22:52) I think that as my son said five times   in 50 years, there were compelling times to do  it. Times when the argument was the logic was   compelling and the probability of being right was  high. And so we made the call. We took action.   I can tell you that I never did it without  trepidation. As Mark Twain says, I was never   certain, but it felt like the right thing. (23:16) And so it was worth trying. But,   you know, in the investment business, even  when you're even when you think you're right,   you shouldn't assume that it's more than 8020 and  maybe it's really 7030 or something like that.   But if you know what you're doing, it's worth  trying. But nobody gets it right all the time.  (23:34) And by the way, I always say, William,  if instead of five times, what if I had tried to   do it 50 times or 500 times? Or I think about the  fact that after 56 years, you multiplied that by   365. So I'm approaching 20,000 days of my working  career if you count the weekends. And what if I   had made 5,000 calls, made a call every four days. (24:03) What if I said I every four days I got   either say buy or sell? I think that my record  would be 50/50 at best. So you just can't do   it all the time. You have to wait until it's  compelling and then pray that you're right.   I was very struck by a quote from David Swenson  that's one of your favorite quotes from him that   comes I think from pioneering portfolio management  which I'll read because it's very related to this   ability to take idiosyncratic positions. (24:30) and he said, "Active management   strategies demand uninstitutional behavior  from institutions, creating a paradox that   few can unravel. Establishing and maintaining  an unconventional investment profile requires   acceptance of uncomfortably idiosyncratic  portfolios which frequently appear downright   imprudent in the eyes of conventional wisdom. (24:50) And I'm curious how you've managed to   create an institution that even as it grew huge  never became bureaucratic or ruled by consensus or   overly conventional and hidebound because I think  that's actually part of the success of Oak Tree is   that somehow you and Bruce Kh and and Sheldon and  the like you've managed to maintain this kind of   willingness to be idiosyncratic and unconventional  Even as you've become kind of much more   institutionalized and more globally important. (25:22) Well, I don't think we have become   institutionalized. I think we just become  bigger. My dad used to say that marriage   is a wonderful institution for people who like  living in institutions. And I don't. And the best   lessons we learn are learned early. And my first  job was at City Bank and I was there 16 years.  (25:41) And I learned that I don't like  institutional living. And at the bank, if   you would say, well, let's try to do this or let's  pay this person this or let's promote that person   that, they would say, you know what, listen, we  can't because there are institutional constraints.   And this word institutional is a hell of a word. (25:59) By the way, when I was a boy,   if they said, oh, he lives in an institution,  that meant an insane asylum. But anyway, I try   like crazy to avoid bureaucratic tendencies.  And I wrote a memo in in the early days,   it must have been around 05 or so, called  Dare to Be Great. And it was mostly a rant   against bureaucracy and committees because  when I was 29 and at the tender age of 29,   I became the director of research at City Bank. (26:30) They put me on five committees and as   I recall, they would meet for a minimum of 16  hours a week and I almost shot myself. I have a   short attention span and I don't talk that much  and I don't like to listen to other people that   much. And I found that those meetings went  as long as the person who wanted them to   go to the longest wanted them to go. (26:48) And if you think about it,   if you come up with some brilliant insight,  what David called idiosyncratic. And you know,   you give it a shot. By the way, it's  idiosyncratic. Why? Because everybody   else is doing the opposite. That's what makes it  great. and you want to do it because you think you   have some insight about why they're all wrong and  their actions have made it wrong in the market.  (27:12) Can you imagine trying to convince  a committee of 10 people to get the majority   of them to support it? Well, how the hell can you  do that? Because there's a reason why most people   in the market aren't taking that approach because  it's hard to see. So, if most people are doing A,   how can you convince the majority of a committee  to do B? If you have idiosyncratic insight,   if you have a young Warren Buffett working for  you, you better just let him do his thing rather   than say, "Well, you Warren, you can't make  any trades until you convince the majority of   the committee." So, this is one of the most (27:44) important things in investing and   bureaucracy and great investing are  counterindicated as the doctors would   say. When Lehman Brothers went bankrupt  in midepptember of '08, we had raised the   biggest distress debt fund in history by a factor  of about three, we had 10 billion dollars sitting   on the shelf. Lehman goes under. Most people  think the financial world is going to melt down.  (28:10) Question is, where do you spend the  money? And you know, people would say, well,   why don't you just analyze the future? There  is no such thing as analyzing the future,   especially when you have unprecedented events  taking place. And so Bruce and I figured out   that we should spend the money. He ran the fund  in question and he bravely invested an average of   $450 million a week for the next 15 weeks. (28:27) That's $7 billion in one quarter.   But I don't think we could have convinced the  committee. The good news is we had pre-raised   the money so we didn't have to convince the  clients the best time to invest is during a   crisis. You can't raise any money during the  crisis because people are frozen into inaction.  (28:47) So it was certainly idiosyncratic.  I talked to a friend of mine who wrote for   one of the newspapers. He said, 'What are you  doing? I said, 'Oh, we're buying.' He says,   'You are like, we were insane. It was certainly  idiosyncratic and it was certainly uncomfortable.   We certainly weren't sure we were right, but it  seemed like the right thing to do. So, you do it.  (29:06) You have to overcome your discomfort.  I wouldn't try to convince 20 people that I was   right. And what is it, Howard, that makes Bruce  so extraordinary as an investor? because I've   never really heard him talk much. And then  I was listening a couple of days ago to a   conversation that you'd had on your podcast, the  Oak Tree podcast, where you and he and Sheldon   talked about the early days of the firm. (29:29) And I was surprised that sort of   he just came across this really affable,  decent, smart guy with a tremendous focus   on on family and decency and building an enduring  institution. Tell tell us what he's like because   he's so clearly been a key figure in in Oak  Tree's success. Yeah. Well, he approached   me. I was at TCW. He approached me in ' 87. (29:51) He was a lawyer. He had done some   investing for Eli Broad, who was the biggest  leader in LA. And he had this idea of forming   a distress debt fund, which we did in 888. And  I think it was the one of the very first from   a mainstream financial institution. We raised  on the first closing, we raised $65 million.  (30:12) And then the second close brought it up  to a grand sum of 96. We thought we had all the   money in the world. But the point is that Bruce  is extremely analytical. He's like a chess player.   He and he is a chess player. And he looks moves  ahead, highly competitive in a what you describe   a low-key manner, but you know really smart  and really focused and great executor. And we   have enjoyed a partnership for now 37 years, 38. (30:44) And it's one of the one of the shining   things in my life, you know, after my family  relationships and friendships. You know,   Warren Buffett wrote a letter a couple weeks  ago about stepping down and he talked about   his relationship with Charlie Motor. (31:02) And he he said that in Charlie,   he had a big brother who was protective.  And the way I see it, Charlie was the wise   philosopher who gave Warren advice and Warren was  the six years younger implement who performed the   analytical leg work and did the investing. What  I really loved in that brief mention he said and   the words I told you so were never mentioned. (31:32) And you know, so what Bruce and I have   done with each other, our relationship is very  similar to that. We both acknowledge so healthily,   we both acknowledge that the other can do things  we can't do, which is such a great thing because   that's the only basis for a healthy partnership. (31:50) Once you start thinking that you can do   everything you can do and everything the  other person can do, your partner should   is doing. But we both acknowledge that each  can do things the other can't. And it's been   extremely complimentary and nobody has ever  said I told you so on any mistakes. There   are plenty mistakes made all the time. And I  think that we have supported each other and   spending 7 billion in the fourth quarter of of 08  would have been very difficult without support.  (32:22) You got to buck somebody up and never  say I would I would never have done that.   You know this fact also that he came to you  originally and said let's get into distressed   debt raises a really important point that I  think comes up in a lot of your writing going   back I think as far as the getting lucky memo  in 2014 where you said the easiest way to win   at investing is by sticking to inefficient markets  and I think actually way back in 1995 in how the   game should be played you wrote study the micro  like mad in order to know your subject better than   others you can expect to succeed only if (32:53) you have a knowledge advantage.   Can you talk about that because it strikes me  as something that I see again and again with   the great investors like with your friend Joe  Greenblat where he initially got rich partly   through his brilliance in special situations or  Bill Ruain who told me I just try to learn as   much as I can about seven or eight good ideas  and it seems like this focus on specializing   narrowly but also in a in an inefficient market  has been absolutely central to your success.   Well, let's take the counterfactual. (33:27) So, remember I said you got   to be thoughtful when you sit down to  start investing. You have to think,   what are the elements that are going to make  me a success? And again, success means doing   better than others. So, you can't say I'm smart.  You're not the smartest person in the world, and   everybody else in in the business is pretty smart. (33:45) You can't say I went to the best schools.   That doesn't count for that much. You can't say  you know I have this generalizable intelligence   that I can apply to every asset class and  know more than others in every asset class.   You have to develop a knowledge advantage and  you have to usually that comes from number one   developing an an approach which is the right  approach and that you implement consistently   and from knowing more than the other people.  It may be having more data, although that's   hard because the SEC's job is to make sure (34:16) that everybody has the same data.   Or it may be doing a better job with the data or  having more insight in looking at it. Or it may   be in what you said going into inefficient markets  where the information is not evenly distributed.   But you got to have some source of superiority. (34:40) Otherwise, how can you expect to win? You   know, investing is an incredibly competitive  game and winning consists of beating a   bunch of other people who are similarly  intelligent, numerate, computer literate,   hardworking and very highly motivated. So  you you have to have an edge and I think that   specialization is one way to try to get an edge.  The other thing though is it's really important   the concept of the less efficient market. (35:08) When I try to illustrate market   efficiency to people what I say is well what if  when I got out of University of Chicago in ' 69   I had been approached by a guy and he says look  I'm a bookmaker and I book bets on football and   I have concluded that I can make a lot of money  on football if I know which team is going to   win the coin toss at the beginning of the game. (35:30) So, I'm going to give you 15 PhDs and a   Cray superco computer and all you have to do  is predict the coin toss at the beginning of   every game. Now, if it's a fair coin, it can't  be done. It's a waste of time because there's   no edge. And that's an efficient market. (35:50) An efficient market is a market   where everybody knows as much as you do and  there's no edge and you're wasting your time.   So, our definition of a less efficient market  is a market where hard work and skill can pay   off. Later this year, I'm going to be launching  a richer, wiser, happier master class for a very   small select group of people who like to  study with me over the course of a year.  (36:15) We're going to meet once a month over  Zoom, typically for about 2 hours per session,   to discuss the themes in my book, Richer, Wiser,  Happier. We'll also meet in person at a couple of   really special events. I'm going to cap the group  at a maximum of 20 people. So, this is an unusual   opportunity to study very directly with me and  a small group. What sort of people am I looking   for to join the master class? Well, really anyone  who's deeply interested in exploring how to live   a life that's truly richer, wiser, and happier. (36:45) This is the second time that I've taught   a richer wiser happier master class and I'm  planning to do this again because it's really   been a totally joyful experience for me over  the last year. The group has included an amazing   array of 20 people from six different countries  and I can tell you that the current members are   an incredibly interesting, accomplished  and really delightful array of people.  (37:10) They include some extremely successful  fund managers, some investment analysts,   wealth advisers, heads of family offices,  CEOs, entrepreneurs, a management consultant,   really renowned physicist turned quant investor,  and a friend of mine who's a highly successful   professional gambler. The common denominator  here, I think, is that they're all united   in this desire to live a truly abundant  life, and they're also all great learners.  (37:35) One of the most joyful things for me  personally has been to see the friendships   form between these remarkable people as  they learn from each other and support   each other. In any case, if this sounds  like something that might appeal to you,   please email my friend and fellow podcast host  Kyle Grievy, which is kyle etheinvespodcast.com.   Are you looking to connect with highquality people  in the value investing world? Beyond hosting this   podcast, I also help run our tip mastermind  community, a private group designed for serious   investors. Inside, you'll meet vetted members  who are entrepreneurs, private investors, and  (38:15) asset managers. People who understand  your journey and can help you grow. Each week,   we host live calls where members share insights,  strategies, and experiences. Our members are   often surprised to learn that our community is  not just about finding the next stockpick, but   also sharing lessons on how to live a good life. (38:34) We certainly do not have all the answers,   but many members have likely faced similar  challenges to yours. And our community does not   just live online. Each year, we gather in Omaha  and New York City, giving you the chance to build   deeper, more meaningful relationships in person. (38:52) One member told me that being a part of   this group has helped him not just as an  investor, but as a person looking for a   thoughtful approach to balancing wealth and  happiness. We're capping the group at 150   members. And we're looking to fill just five spots  this month. So, if this sounds interesting to you,   you can learn more and sign up for the weight  list at thevestorpodcast.com/mastermind.  (39:15) That's thespodcast.com/mastermind.  or feel free to email me directly at   claytheinvestorspodcast.com. If you enjoy  excellent breakdowns on individual stocks,   then you need to check out the  intrinsic value podcast hosted   by Shaun Ali and Daniel Mona. Each week, Shawn  and Daniel do in-depth analysis on a company's   business model and competitive advantages. (39:42) And in real time, they build out the   intrinsic value portfolio for you to follow along  as they search for value in the market. So far,   they've done analysis on great businesses like  John Deere, Ulta Beauty, AutoZone, and Airbnb.   And I recommend starting with the episode on  Nintendo, the global powerhouse in gaming.  (40:03) It's rare to find a show that consistently  publishes highquality, comprehensive deep   dives that cover all of the aspects of a  business from an investment perspective.   Go follow the intrinsic value podcast on  your favorite podcasting app and discover   the next stock to add to your portfolio or watch  list. You know, I was as you said in I wrote in   getting lucky in January 14th that I was lucky to  find some inefficient markets early in my career.  (40:33) August of 78, I got the phone call  that changed my life from the head of the bond   department at City Bank. He says there's some  guy named Milin or something in California and   he deals in something called high yield  bonds. Do you think you can figure out   what that is? That was it. But they were  called junk bonds. Most people wouldn't   touch them with a 10-ft pole. That was 78. (40:53) You know, the big pools of money in   America are the public pension funds, states,  mostly cities. I didn't get my first public   pension fund account for 18 years. They wouldn't  go there because they were reputationally and   politically unpalatable. Oh, great. (41:12) You mean it's an asset class   that I can buy that nobody else will buy at any  price? Well, maybe it's full of bargains. That's   the way these things work. But if you look at  the things that everybody thinks are great and   will gladly buy it at any price, why should you  think you can get a bargain there? You know,   when I started in 1969, City Bank, where I  worked, was an investor in what were called   the Nifty50, the greatest stocks in America. (41:36) And if you bought them the day I got   to work in September of 69, and you held  them tenaciously, faithfully for 5 years,   you lost about 95% of your money because at  the time you bought them, everybody thought   they were the greatest thing since sliced bread. (41:54) So, it's something you have to watch out   for and you have to look at the things  that are less the road less taken. You   talk about the nifty50 and and that blow  up which obviously had a profound effect   on your career and your philosophy. And I've  been thinking a lot about this question that   you raised in some of your memos about how we  can prepare for these extreme exogenous events,   whether it's a market crash or a pandemic or  a war or or whatever it might be given that   we can't predict them. And you wrote in one of  your memos, I think it was the second of your   memos on uncertainty in 2020. We can do (42:25) so by recognizing that they will   inevitably occur and by making our portfolios more  cautious when economic developments and investor   behavior render markets more vulnerable to damage  from untoward events. Can you talk a little   bit about that? Because I I think this whole  question of how to deal with uncertainty is at   the absolute core of what you do as an investor. (42:53) Well, first of all, one of the great   sayings is that there are two kinds of people  who lose money in the market. The people who know   nothing and the people who know everything. So,  I hope I never know nothing, but I never think I   know everything. And specifically, I believe that  the macro future is unpredictable. But there are   things that can give us a hint at what lies ahead. (43:13) So I wrote my second book, Mastering   the Market Cycle, published in 2018, and  it talked about tendencies. And I said,   we never know what the market's going to do, but  we can have a feeling for when its tendency will   be to do well or its tendency will be to  do poorly. And its tendency will largely   be determined by where we are in the cycle. (43:39) So when things have been going great   and prices have been rising as you say for 16  years and PE ratios are high and bond yield   spreads which are a barometer of fear are narrow  we can assess that the tendency of the market may   be to do less well and act accordingly.  You don't have to make any predictions.  (44:02) None of those five calls I talked about a  little while ago was based on a prediction. It was   based on an observation. And what I say, William,  is we never know where we're going. We sure as   hell ought to know where we are. And are prices  and valuations high. Is risk being ignored? Are   people acting in an exuberant, buoyant way? These  are the questions that can tell you what the odds   are even though you don't know what the future  holds. And I never care for the title of that,   but I had a more ariodite title in mind. (44:31) I thought Mastering the Market Cycle   was a little cheesy, but it's what the publisher  wanted because they thought they'd sell more   books. But I like the subtitle of the book, and  of course, subtitles don't get much attention, but   the subtitle of that book was getting the odds on  your side. You never know what's going to happen.  (44:52) You can have a sense sometimes for  what the odds of a certain event are. And   when the market is high in its cycle, the odds  are against you. And when it's low in a cycle,   the odds are in your favor. But you know, the  odds can be in your favor and you can lose money   for the next year or two or three and vice versa. (45:11) I think when I wrote my book richer wiser   happier where you you were one of the central  characters. I think in a way that was my biggest   revelation over the five years of working on  the book and digesting that material was that   we have this fundamental problem that the future  is unknowable and yet as you often write we have   to make decisions about the future. (45:30) And it struck me,   I think probably deeply influenced by you,   was that there are all of these ways in  which you, even though you have no control,   you can very subtly stack the odds in your in  your favor. It kind of is simultaneously like   most truth sort of benal and incredibly profound. (45:51) Can you talk a little bit about that idea   because it seems like a sort of guiding principle  that actually I think runs through all of the   great investors lives is this ability. I mean, you  see it with someone like Ed Thorp, right, who you   know, like just to very subtly stack the odds by  say not playing games that you're illquipped to   win or by making sure you analyze the evidence  in a very rational independent way, whether it's   about COVID or markets or anything like that. (46:18) Can you unpack that a little? Well,   you know, I mean, there are so many thoughts  on that subject, but one of the things that   Warren Buffett has been most outspoken about is  in baseball, you should get up to the plate and   you should wait for a good pitch. And  first of all, you have to have a sense   for what's a good pitch and what's a bad one. (46:35) And he tells the story that Ted Williams,   not only was Ted Williams waiting for good  pitches, but he he was very studious about his   accomplishments and he charted all his batting and  he figured out where was the pitch and what was   the result. and he figured out he broke the  the strike zone into 18 spots. And he said,   "Well, if the ball is in spot number one,  two, or four, I tend to get a single. If   it's in five or six, I tend to get a double. (46:55) And if it's if it's in seven or eight,   I tend to strike out." So, you got to figure out  what's a good pitch and you got to wait for it,   he says. And Buffett has always advocated patience   and not hyperactivity. But he points  out that in investing, unlike baseball,   in baseball, if you stand there with the  bat on your shoulder and you let three   pitches go by in the strike zone, you're out. (47:17) But in investing, you can wait more. You   don't get called out on strikes. Now, it's not  exactly true because if you're a professional   investor, you're investing for others, and you sit  there with the bat on your shoulder and the market   goes up for 16 years, you might be called out. (47:34) Warren had the particular benefit that   he was never thought he might get fired. But  the rest of us might. But still patience is   very important and waiting for a good pitch  objectively and your kind of pitch, your kind   of investment. You can do that. You know, we  talked before about playing within yourself.   Figure out the kinds of things you're looking for. (47:54) You can't buy something because you think   it's attractive to others. It has to be attractive  to you and has to satisfy your criteria. And you   should have a set of criteria. So these are the  things you can do to get the odds on your side.   I think there's another really critical  related lesson that I've tried to deeply   internalize from you over the years, which  is not to fool oneself about the conditions,   the environment in which we find ourselves. And  I often I couldn't find it when I was rereading   your memos this week, but there's a really (48:24) beautiful quote from your intellectual   hero Peter Bernstein that I often quote that I'll  probably go garbble where he said something like,   "The market is not a very accommodating  machine. it won't give you high returns   just because you need them or want them. Right. (48:42) And can you talk about that because I I   think that's also so distinctive to your approach  and and it's such a profound and central idea.   This idea of of accommodating yourself to reality  as it is, not as you wish it might be. Well,   first of all, the good news is that on the  occasion of the anniversary of the memos,   we published an online digital compilation. (49:03) And uh by the way it's free so the   price is right but uh it's searchable so if  you want to find that quote you can find it   next time you know I mean the thing is don't  kid yourself and Charlie Mer always used to say   delightfully he used to quote the philosopher  deastines who said for that which a man wishes   that he will believe and we tend to do that  and that's injurious let's say you're a stock   broker and you get paid on commission and you  say well there's always something good to buy   and so you buy every day for your clients  and you make a lot of commissions. Well,   guess what? Some days there's nothing good to (49:36) buy and you have to accept that and be   mature about it and be patient and hold  back. It all goes with being mature,   analytical, patient, insightful,  understanding yourself and your biases,   understanding the process of how money  is made, and then waiting until the odds   are on your side to turn up the wick. (50:01) Now, I believe you should have   investments all the time, but sometimes you  do it more aggressively and sometimes you do   it more defensively. You wait for those golden  moments to really turn up the wick and become   more aggressive. And you've made the point that  Charlie really made most of his hay on about   four big bets in the course of his lifetime. (50:18) Well, Charlie used to say that four   big bets. And I think he either he or Warren  said that Warren had eight, but Charlie Yeah,   Charlie would say that he made all his money  on four things. You've written a a lot about   Charlie over the years, mentioning, for example,  his great line, I think, at a lunch that you had   with him once, where he said, "It's not supposed  to be easy. Anyone who finds it easy is stupid.  (50:38) " Can you talk a little bit about what you  learned from Charlie, not just about investing,   but really about a life well-lived? Well, look,  he was brilliant. He was extremely well read.   He loved thinking and he would just think  about stuff and he developed these things   he called mental models for thought and he  had what he called the lattis work of mental   models and you know it's like a toolkit. (51:05) A lot of what we do as adults and   as investors is what you might call pattern  recognition. And the great thing about having   lived a while and paid attention to what's gone  around you and applying some intelligence is that   you know XYZ happens. You don't have to stay one. (51:25) What was that? What is it? Why did it   happen? What does it mean? What should I do  about it? At some point, you might reach a   point where you say, "Oh, that's one of those. I  know what to do about that." And you have to have   a toolkit so you know which tools to apply. And  that was Charlie. And so very smart, incredibly   thoughtful in interior life, very outspoken, said  exactly what he thought all the time regardless   of who he was saying to or what it was. (51:51) You know, he was a good kind person,   but he was the furthest thing from PC that  you ever met. And he would just say what he   thought was right. And in fact, I think he  has a biography. Yeah. There's a biography   of him out. It came out maybe 20 years  ago or something. And the title is Damn   Right. Because that's what he would say. (52:10) He's Well, Charlie think, you know,   and uh emphatic. I mean he just was obviously  brilliant but had this process and unharnessed   brilliance will get you only so far but he  harnessed it into a process and you know he   came up with a lot of the philosophical points  that guided Warren. The big one he's credited   with is that he convinced Warren to stop  looking in the gutter for cigar butts that   others had thrown away that had one puff left. (52:37) And instead, instead of trying to buy   okay companies at great prices, try to buy great  companies at okay prices. And that's why Buffett   and Berkshire became what they did. You talked  there a little bit about patent recognition and   the ability to say this is one of those. (52:58) And obviously there's a lot of   interest at the moment in your view of the  current investment environment. And I know   you've been on a big trip around Asia and the  like over the last 3 weeks meeting with lots   of clients. I'm sure you're hearing a lot of  these questions. In August you wrote a piece   called the calculus of value where you said the  market has moved from elevated to worrisome.  (53:16) And I'm wondering when you look at this  period compared say to 197374 or 99 2000 or 2007   to 2008 what is it that rhymes in terms of where  we stand in the pendulum between greed and fear   and optimism and pessimism and risk tolerance and  risk aversion? And what makes you not think that   we're at that kind of extreme yet? if that's still  the case that you don't yet think we're at that   kind of extreme most likely. Well, I don't have  my finger on the poll, so I don't know where we   are today or this week or but I think that (53:51) when you look for comparisons, the   strongest comparison, not a perfect comparison,  and I'm not saying this is true in degree,   will you, but in kind, the strongest comparison  is to the TMT internet.com bubble of 98, 99,   2000. The nifty50 was different because it was  not around one novel technology and it was around   established great companies for the most part. (54:29) I mean there were no technological   marvels that crapped out in the nifty50  and then the years 0567 with the subprime   and the mortgage back securities  subprime mortgage back securities   is not comparable because that was not  a technological innovation that was a   financial invention. Nobody thought that  subprime mortgage is going to change the   business of housing. The houses were unaffected. (54:48) It's just that they said well we can make   money by giving financing to a new class of  buyers which turned out to be a bad idea.   People who wouldn't document their earnings  or their assets. So this is comparable to   the internet bubble. You know people said the  internet will change the world. Guess what it   did? Can you imagine today's world without  the internet? It's completely changed in   a million ways including the fact that we're  talking over it. So this is comparable. It's a   technological innovation that I think is going to (55:19) change the world. But my recollection is   we had a clearer view of how the internet  would change the world. And the view of   many in 99 2000 has become true. And I think  a lot of the excitement surrounded e-commerce   and e-commerce has become a major force. (55:41) It just feels to me like we had a   vision of how that was going to work out and it  mostly came true. Today, I think we have less of   that. I personally, I'm not an expert. I'm the  furthest thing from an expert in the world. But   I've never heard anybody tell me how AI is going  to change the world. We know it's a powerable   force. It can think, it can process data. (56:01) It has access to all the data that's   ever been compiled. Exactly what it's going  to do, how that's going to be a business,   how people are going to make money  at it, how it's going to impact life,   I think is less clear. But I I do think that  the two are comparable. And in both cases,   there was a new new thing that fired the  imagination. And most bubbles are around something   new. In ' 69, it was growth stock investing. (56:22) In ' 06, it was subprime mortgages. In 99,   it was the internet. In 1720 was the South Sea  Company. And in 1620, it was Tula Bulbs in Hollow.   So I always make this point that the  bubbles are very very around something   new because the imagination is untrained  and it can go off in a flight of fancy and   you can imagine trees growing through the sky. (56:47) You're never going to have a bubble in   paper stocks or timber stocks. You know it's  too prosaic. People can say well you know we   can tell how many houses you're going to build.  We know how much wood is needed in each house.   We can't tell where we're going to get it from. (57:05) So, you know, you can't have these tree   sky moments in the prosaic areas.  It's always something new. You had   a very interesting conversation recently, Howard,   that I was listening to yesterday with Edward  Chancellor, author of Devil Take the Heindmost,   which had had an important impact on  you when you first saw the 2000 bubble,   right? And one of the things you said in that  conversation, you made two bold statements.   You said, number one, AI will change the world. (57:29) Number two, most of the companies people   are investing in today, in other words, to profit  from AI will end up worthless. And then you said,   when the naive or hopeful investor takes the  leap that the irresistible trend will produce   sure profits, that's when you get into trouble.  Well, I should go back and reread that memo,   I think. But I, you know, that's right. (57:50) And and change the world and   investors making money are not the same thing.  And in fact, Warren Buffett pointed out and I   think he said this about the internet. I think  it was his in his 2000 annual meeting. There's   no doubt that the internet will produce  a great increase in productivity. It's   not clear that it'll have a positive impact on  profitability. And I think the same is true of AI.  (58:16) My concern is I saw that CNN is running  an ad. I on my travel I watch CNN International   and they're drumming up interest in a  show and the anchor says to a guest,   you say that AI has the ability to eliminate  half of entry-level jobs. That was the whole   conversation cuz then they cut to something else.  But the point is that may be true and obviously   if you can reduce the US GDP and eliminate  half the entry- level jobs, it could be more   profitable or or certainly more productive. (58:47) But the question is will it be more   profitable? To whom will the savings acrew? If  different companies are competing to provide the   AI service, maybe they'll compete on price to  the point where it's not profitable for them.   Or if the people who employ AI service compete  for market share, maybe all the savings will   go to the consumer in the form of lower prices. (59:12) So exactly how the laborsaving tool with   AI is going to turn into profits, I don't think  anybody can say. You often like to ask Howard,   what's the mistake here? And so obviously we  don't have any idea how this is going to pan out,   but when you ask yourself what would be the likely  mistakes worth avoiding at a time like this,   particularly for either naive and credulous  investors or just for smart investors who   get sucked into euphoria, what are the likely  mistakes we ought to be trying to avoid here? What   I've seen in euphoria after euphoria is number (59:47) one, you shouldn't make the assumption   that today's leaders are certain to be  the leaders of tomorrow. They may well be,   but you should bet your life on. Number two,  you shouldn't assume that because the leaders   are selling at high prices that it's a good idea  to invest in the lagards because they're cheaper.  (1:00:04) People say, well, they have a low  probability of success, but maybe a big payoff,   so I should buy it. And that's what I call lottery  ticket mentality. And you know if they have a low   probability success you should accept that that  means chances are good of unsuccess. And then   on the AI, I'm led to believe that you can make  binary bets in companies that have nothing else   going on, which will be sinker swim bets, or you  can invest in pre-existing great tech companies,   which will get moderate benefits from AI if  they're successful, but still be in business and   profitable if it's not that big a deal. And now (1:00:45) we're back to the very beginning of   our conversation. Do you want to have a novel  entrepreneurial startup pure play which has   no revenues and no profits today but could be a  moonshot if it works or do you want to invest in   a great tech company which is already existing  and making a lot of money where AI could be   incremental but not life-changing. It's a choice. (1:01:11) What's your style? What's your game   plan? I mean, if you're going to make binary  bets on novel companies, you have to understand   how risky that is. There's also been a lot  of speculation, obviously, both on gold,   which recently hit more than $4,000 an ounce,  and on Bitcoin. And I I was looking back at one   of your old memos where you were saying  either you believe in gold or you don't.  (1:01:35) and you you compared it to whether  you believe in God or not that there's there's   no analytical way in my opinion you wrote to value  an asset that doesn't produce cash flow and I've   never been able to bring myself to buy Bitcoin  either and it's it's now down about a third since   uh October to $90,000 a coin and you you've  debated this obviously a lot with your son Andrew.  (1:01:56) Um, how do you feel now when you  look at Bitcoin and gold and you kind of   try to wrestle with whether they belong in  someone's portfolio? Well, you know, look,   I and Oakree consider ourselves value investors.  And what the value investor does is you look at a   situation, whether it's a stock, a company,  a bond, a building, whatever it might be,   and you try to figure out its intrinsic value. (1:02:26) And then you see how the price today   compares to that intrinsic value. And  intrinsic value invariably comes from   the fact that it can make money, that it can  be profitable and produce cash flow. And so,   you know, let's say I have a building and it  produces a million dollars a year in profit.   I'd like to sell it. You'd like to buy it. (1:02:43) We can have a discussion. And I say,   I'd like $12 million for it. In which case,  you'll get an 8% rate of return. and you say,   "No, I want to pay $8 million for it because I  want a 12% return because it's risky." And I say,   "No, you can have to pay $11 million because I'll  give you a 9% return, but that'll go up over time.  (1:03:01) " So, we can talk, but we're talking in  a range centered around the value. But if you're   doing Bitcoin or gold or diamonds or paintings,  there is no intrinsic value. And I always talk   about oil. Oil, as I recall, oil, William, was  $147 a barrel in June or July of '07 and then $35   a barrel in January. Nothing changed about oil.  It was still black. It still made the lights go.   We were using it faster than we were finding it. (1:03:32) Oil doesn't have an intrinsic value.   And all these assets, all they're worth, their  price is what the market will bear. How can you   invest analytically? If I say to a gold fan  or a Bitcoin fan, well, what do you think the   price will be in a year, how do they reach that  conclusion? What do they base it on if they don't   have cash flow to base that conclusion  on? And what I think I said in the memo,   you can invest in it out of superstition. (1:04:03) Gold, you can invest in it because   you think it'll go up. You can invest in it  because you think it'll be a store of value   because it always has. But you can't invest  in it analytically on the basis of something   called intrinsic value. I still think that's  true. So the people who bought gold a year ago   have made a ton of money. I just happened  to look at the numbers at my lunch before   coming here to do this phone call with you. (1:04:28) And if you uh bought gold at the   end of 2010, I think you've had a 7.7% annual  return since then. And if you bought the S&P   at the same time, you've had a 12.7% rate of  return. So, it's not that gold is a disaster,   but you shouldn't be distracted by the gains of  the last month. It's been a lackluster investment.   you wrote a really important memo called  Sea Change in I think December 2022 where   you talked about really the end of an era where  we could rely on declining interest rates that   had gone on since 1980. And one thing you wrote  in that memo was investors can now potentially  (1:05:11) get solid returns from credit  instruments, meaning they no longer have   to rely as heavily on riskier investments to  achieve their overall return targets. Can you   talk a little bit about the best way for regular  investors to take advantage of opportunities in   areas like high yield bonds and the like? Because  this is an area where my ignorance really runs   deep and obviously your knowledge runs very deep. (1:05:35) Like if we actually want to get equity   like returns in a fairly worrisome environment,  what do you do? What's a smart practical way   for a regular investor to do that? Well,  you know, high yield bonds, for example,   are part of a group of assets. I call them  lending assets. The world calls them debt   or fixed income or bonds or notes or loans,  but they all fall under the same heading.  (1:06:06) And they're all instruments  where you give somebody your money,   they rent it from you, and they promise to  pay you interest every six months and then   give you your money back at the end. And you  can take those facts and do a calculation and   figure out what the rate of return will be if  you lend them money at that rate of interest   today and and they pay you back at the end. (1:06:24) And it's called fixed income because   the outcome is fixed. It's a contractual  relationship that promises a fixed return.   And so there's only one moving piece in  the whole equation. Once you've bought   it and the interest rate is set and the price  at maturity is set, you've paid a fixed price.  (1:06:44) There's only one moving piece which  is the probability that they'll keep the promise   of interest in principle and it's the job of  the credit analyst to assess that and it's a   fairly arcane thing. You know people buy  stocks because they like the idea of the   company or they like the product or something  like that. I don't think it's a great idea but   they do. Credit analysis is more arcane. (1:07:01) You can't say well I like they   make good hamburgers so I'm going to buy their  ponds. It's a totally different story. So for   most people who are listening, well, let  me say this. In most areas, the amateur   should go into funds or ETFs or some managed  product. Remember what Charlie Mer said. It's   not easy. Investor thinks it's easy as stupid. (1:07:24) So that's true in the things I do,   but it's also true in my opinion for  stocks, mutual funds, ETFs, index funds,   something like that. And investing is a funny  business. It's very easy to get an average return.   It's very hard to get an above average return. (1:07:44) But if you're content with an average   return, uh you can get managed products  at a relatively low cost and have a high   probability of getting an average return. And  the point is that you know high yield bonds   yield around seven. Other forms of credit  may have a slightly higher return. And if   you're happy with that, there are lots  of managed products that'll deliver it.   Going back to this general question that  we've been discussing about dealing with   risk and dealing with uncertainty. (1:08:07) You often quote one of your   favorite addages which is um from Elroy Dimson who  said risk means more things can happen than will   happen. And it feels like the range of possible  things that can happen today is wider than it's   been in in the past. And I'm wondering how  you deal with it not only as an investor   but actually personally this sense you know as  you as you talk to your kids or as you talk to   your grandkids like how one actually keeps an  even keel in a period where you often quote a   lovely line from Peter Bernstein who said we walk  every day into the great unknown. How do we deal  (1:08:45) with it? Well, first of all, I've  concluded in the last few months, William,   that the toughest questions I get are the ones  that start with how. Huh? Because I I can tell   you what you have to do. You have to keep an even  keel. I can tell you that it may be desirable if   you if you want to be quote safe to have a more  defensive portfolio, but how to make that decision   and how to keep an even keel is a little harder. (1:09:19) But obviously if you let your emotions   run away with you, if you buy when things  get exciting, which usually means when   prices are high, and you sell when things get  depressing, which usually means prices are low,   it's obviously going to be very counterproductive. (1:09:37) Uh, so I think the even keel is   essential, and I think most of the people that  you've met with and written about have a pretty   even keel. So that's my strongest recommendation.  And this goes back to not being hyperactivity,   not trading, not trading all the time. Don't just  do something. Sit there. Let you know investing   is not a it's not a fluke that it works. (1:09:58) It's not a pachinko game or a   roulette wheel. It works over time because  economies grow and companies improve their   profitability over time. And the most important  thing for investors is to get on that gravy train   and stay on it. Invest. Invest early,  invest a lot, and don't tamper with it.  (1:10:24) And having your your emotions under  control is essential if you're going to be able   to do that last thing of don't tamper with it. And  getting on the gravy train and staying on it and   not tampering with it is much more important than  getting on, getting off, picking the right times   to get in, picking the right times to get out,  picking exactly the stocks that'll go up the most   and avoiding the stocks that will go up the least. (1:10:43) That's all kind of just embroidering   around the edges. The most important thing is  to be a long-term investor. You also said to   me something that really helped me in  the chapter that I wrote about you in   my book about just not overreaching. like  the big question being how much you push   the envelope. And I I I think that's another  really key thing is just ensuring survival.  (1:11:06) But I was also very struck you  quoted something in your risk revisited   again memo from 2015 where you said in my  personal life I tend to incorporate another   of Einstein's comments which is I never  think of the future. It comes soon enough.  (1:11:22) And I was wondering whether you were  being kind of fasile and a little bit facicious   or whether actually that is something that helps  you get through uncertainty that that idea. I'm   not a futurist. I don't think that my vision of  the future is bound to be more right than anybody   else's. So no, I don't think about it that much. (1:11:41) And I just try to do, you know,   all these things are a little bit counterintuitive  and a lot little illogical. I just try to think of   we're laboring in the here and now to buy  things that are going to do okay. Well,   then you say, "Yeah, but Howard, in order  to know whether someone's going to do okay,   don't you have to have a view of the future?"  Yeah. Well, you kind of do, but don't think you   know everything. Don't think you have it right. (1:11:59) You quoted Elroy Dempson. The future   is not a set single thing that if you're smart  enough, you can figure it out what it's going   to be and it's going to materialize and make you  right. It's a probability distribution. It's a   range of possibilities in each thing whether  it's GDP growth next year or inflation next   year or who's going to win the next election and  who's going to win the next World Series or you   know whether we're going to have geopolitical  peace or any of these things. Only one thing   will happen but many things can and you (1:12:29) should accept that. You should   accept that it introduces uncertainty  into the equation and you shouldn't form a   certainty around one outcome and bet heavily on  it unless you have special expertise which very   few people do. So I think that humility  is a great way to stay out of trouble.  (1:12:52) And I once wrote in some memo or other  about my favorite fortune cookie. You probably   read that one too. But it said that the cautious  seldom error or write great poetry. Every person   has to decide for themselves. Do I want to try  to write great poetry and get rich if my bets   are right or do I want to avoid erring and be  sure that I'll do okay if my bets are wrong?   It's a choice. You can't have both. (1:13:18) Or you can try to do both,   but you have to put your emphasis on one or the  other. You can't emphasize both at the same time.   And so, you know, this is a matter of mindset  that I think most people should adopt. And life   is uncertain, the future's uncertain, investing  is uncertain. Are you going to go for winners   or are you going to try to avoid losers? I  wanted to ask you one last quick question.  (1:13:41) I was struck the other day when I  was listening to a conversation between you   and your oak tree co-founders Bruce Kh and  Sheldon Stone that Sheldon said that when he   first met you back in 1983 and came to work  with you in high yield debt, you talked even   then about the importance of having a balanced  life and having time to enjoy your personal life.  (1:14:04) And Bruce also talked about the  importance of family to you and and all of   the founders of Oak Tree. And I was very  struck as I was looking back on your life   that you found plenty of time to play tennis  and bat gammon and card games with friends   like Bruce Newberg and to buy and decorate  and fix up houses and spend time with your   kids and grandkids. And you mentioned even that  you'd spent thousands of hours playing back gam   and card games with Bruce Newberg over 40 years. (1:14:29) What advice do you have for investors   or or other professionals who clearly need to  work really hard to compete and yet you also   want to have a balanced life in some form and  you don't want to just look back and be like,   "Yeah, I made an enormous amount of money  and I never got to hang out with my family   at all or my friends or to enjoy my hobbies. (1:14:49) " Well, you know, we all have to   choose what's important to us. Charlie Mer used to  say, "Oh, that guy that guy's a maniac." a maniac   was somebody who only cared about working  hard and making money. You have to decide   whether that's for you and it's not for me. (1:15:06) And uh the trightest of all the   sayings is that nobody on their deathbed ever  said, "I wish I worked more." And I think it's   true. And that's not how I'm living my life.  And I have, as you say, pursuits that I enjoy   greatly. I wouldn't give them up. And once you  have enough money or more than enough money,   why should you give away part of your enjoyment  to have more? I think the greatest saying that I   always use when I give advice to young  people is from the writer Christopher   Moley who said there is only one success to  be able to live your life in your own way.  (1:15:39) Now the hard part is figuring out  what your way is. What is it that you know   you're 22 you're figuring out a career course.  What is it that will make you happy at 70? Not   easy to know. We change. We sometimes  have an inaccurate vision of ourselves.  (1:15:59) If I described myself to you 40 years  ago, I would not describe the person I am today.   Mainly because I maybe I was wrong and maybe I  changed. But yet, our goal should be to get to   the end and say, "I'm happy with the choices  I made." Again, that that should be a choice   that is made consciously and just pursuing work  and money and career and prestige because other   people are doing it because it's glorified in  the media or because you want to emulate XYZ,   become the richest man in the world. You  shouldn't do it unless it's really right for   you. And I don't think it's right for most people. (1:16:32) So, I think live your life your way.   Figure out what's good for you and pursue  it. I feel like when I look at your life,   you've done a great job of setting  things up so that it suits you. So,   you're you're writing memos, which you love doing.  You're not making individual investments yourself.   You're not managing lots of employees. (1:16:50) You're you're setting the firm's   investment philosophy and meeting clients. And  there's something really lovely about seeing   the way you've set yourself up in this  sort of very internally aligned way. So,   it's a great model for us all. Thank you. (1:17:11) Well, you know, William, my idol,   Warren Buffett, always says he skips to work in  the morning and I feel I do and I'm happy to go   to work and I like what I do. I hope to keep  doing it for a long time to come. I hope so,   too. Thank you so much, Howard. It's been  a real delight chatting with you, and I've   really learned so much from you over the years,  and I really tried to not just read these memos,   but really truly internalize the lessons. (1:17:30) And I know that I'm one of many   thousands of people whose lives are actually  tangibly better because you've shared these   lessons. So, thank you. Thank you. It's  a pleasure speaking with you and let's do   it again. I look forward to it. All right.  Take care. Thanks, Howard. People say we're   always bearish. That's not actually true,  but we are almost invariably skeptical.  (1:17:48) What doubting Thomas's this is a  market of credul conformity. Actually, you know,   people nothing succeeds like success anywhere,  but especially on Wall Street. I think George   Soros himself said we'll see a bubble just jump  on it to get there early and uh you will get it   in time. No, just I'll tell you when you'll know. (1:18:07) But there are so many ways to make money   on Wall Street. I happen to have cultivated  a following that is innately skeptical.