169: Unlocking Investment Wisdom - With Howard Marks, Co-Founder of Oaktree Capital Management
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I think it's really important to know the difference between data and information and wisdom or insight. And you have to accept early that success doesn't come from knowing everything. It comes from knowing the things that are important.

Welcome to the Money Maze Podcast. If this is your first time joining us, I'm the host, Simon Brewer. And in this show, we talk to proven leaders and thinkers from the worlds of business, investing and beyond. To stay up to date with every episode, please do sign up to our newsletter via moneymazepodcast.com. At

episodes are also published on our youtube channel and we're active on all major social media platforms thank you for listening when warren buffett singles you out for praise as he has done with our guest today it might be fair to say that they have summited the investment equivalent of k2 anna perna and kachin chunga most palette challenging peaks to scale

in a capricious investing world where success is often transient, reputations easily tarnished and hubris punished to have not only stayed the course for 55 years, but thrived, built oak tree capital into one of the largest investors in the world.

in distressed securities worldwide and cemented a vast and loyal following is extraordinary. His investment memos written over the years are world-class, engaging, lucid, and approachable. There's been so much wisdom imparted, I actually wasn't sure where to start while preparing for this today's conversation. So for our listeners and viewers, you'll see why it's such a privilege today to be talking to Howard Marks. Howard, welcome to the Money Maze podcast. It's a pleasure to be on with you.

Well, we love to start by just jogging back to the early days. I understand you were born in Queens, New York, and I remember you told Nikolai Tangen, who's one of the great friends of the show, that you were a left-brain person, logical and liking symmetry. And I wondered, how and when did that show up in your childhood? Prominently, I would say when I was 16, and for some unknown reason, I took a course in high school in accounting.

And of course, the soul of accounting is the double entry bookkeeping system, which is

the most symmetrical thing in the world. And it just clicked with me intuitively. I just understood every principle without even having to think about it. So I guess that was the first big clue. So I know you go to Wharton for a BSc in finance, then you go to Chicago where you do an MBA in accounting and marketing. It just struck me that today we hear a lot about the CFA, slightly less about the accountancy degree. And if you were choosing equal individuals and one had the accounting versus the CFA, which one do you think might be more valuable?

I think that accounting is to the person in business as a good course in English is to somebody who wants to write a book. These are the languages of the respective fields, and I think they're essential. Necessary, but not sufficient, but absolutely necessary. Then mastering the lessons of finance is

through either an MBA or a MS in finance or a CFA charter. This is the next step. But of course, you wouldn't want to start writing a novel

in English if you didn't know English. Right. So your journey starts at Citibank. As I was just saying before we started, you joined in 1969. I joined the year you left. Some might laugh at that. That was 1985. And I know you started in the world of equities. And then a few years later, you were asked to look after converts and high yield. We don't talk a lot about converts these days, and yet they're a fascinating instrument. And I wondered as a bridge to the world you ended up with, what did they equip you with?

Well, first, it's not that I was asked to look at converts. I was asked to leave the equity department. The bank had been a nifty-fifty investor, and the performance was so terrible that everybody associated with that

activity kind of got removed. But I was fortunate in that the American corporation in those days pretty much gave lifetime employment. So I wasn't fired. I was asked to move to the bond department, which was Siberia. But the chief investment officer was pretty creative and he had had a good experience at a previous employer with convertibles. So he asked me to start a convertible bond fund, which Citibank didn't have.

So I went from a very large and organizationally important bureaucratic position with a big budget and a big staff and all kinds of committee memberships to the bond department where I didn't have any of that. No subordinates, no budget, no committee memberships. And I was ecstatic because all I had to do was study 40 securities and understand them better than anybody else. And for me, that was what it was all about.

And at some point I've heard you say your boss then said to you, go figure out what Mike Milken was doing in high yield. And he's been a guest on the show and just even a fantastic source of inspiration as well. Why were you asked that? Well, number one, because I was probably underemployed. You know, I was pulling down a big salary at the time and only studying 40 securities and investing $15 million or something in Convert. So I was probably viewed as idle hands.

But also, the other thing is that traditionally, proper bond analysis consisted of studying history and current assets and income and not conjecturing about the future.

But if you're going to stray into Mike Milken territory and lend money to non-investment grade companies, you better think about the future. And with my background in equities, that's all we do is think about the future. So I think that it was the turning point when forward thinking bond analysis stopped being an oxymoron.

And with my equity background, I was well positioned to do it. So hopefully I got the job on the merits and not just the fact that I was available. But it was a great thing for me to be tapped to join the high yield bond industry at its beginning.

Yeah. Now, we're going to refer to a number of your great memos. One, the most important thing, and I'll quote you, although you know it because you wrote it, is if you don't know the difference between buying good things and buying things well, you should not be in this business. It's not what you buy, it's what you pay that counts. And I wondered when you first learned that. Well, I learned it, again, because I was part of the Nifty Fifty administration.

And we bought the best companies in America. And if you bought them the day I reported to work in September of 1969, and if you held them tenaciously for five years, you lost about 95% of your money. So there's a lesson in that. And I think that if I were to describe how I got to where I am in life, I would say that I was conscious of the lessons as they arose.

One of my favorite sayings is that experience is what you got when you didn't get what you wanted. And you have to learn painful lessons in the investment business. And it's better to learn them early, but it's very important that you pay attention. So here we are investing in IBM, Xerox, Kodak, Polaroid, Merck, Lilly, Hewlett-Packard, Perkin, Elmer, Texas Instruments, Coca-Cola, AIG, and on and on.

and losing almost all the money. So it can't be buying good things that holds the secret to success. It has to be buying things well. So 78, I'm managing money in high-yield bonds. And now I'm investing in the worst public companies in America, and I'm making money safely and steadily.

Because investing in them through the format of bonds on the basis of forward-looking credit analysis enabled us to buy things well. And that's when that difference struck me. And that's when I wrote it down.

And were you and Mike Milken a very small tribe of people who were looked at with great suspicion? Well, let's say skepticism. Skepticism. Yeah, I think so. And, you know, our business was called Junk Bonds. And not only were they considered junk equality, but people would actually say, well, young man, I'm sure you could make money doing that, but it wouldn't really be proper.

And so there was skepticism around what we were doing. But there always is when you do something that nobody else is doing. What do they say? It's the pioneers who get the arrows. But what I've learned, and that was one of the great object lessons, was that in investing, the main way you gain unusual success is by doing things other people don't want to do.

It's hard by definition, if you think about it mathematically, it's hard to achieve singular success by joining the herd. It's like a contradiction in terms that if you do the same thing, everybody else, you'll be uniquely successful. It's impossible. The only way to be uniquely successful is do things that nobody else is doing and have them turn out well. Of course, that latter point is important too. Just being a contrarian is not enough.

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and a leadership position in sustainability. With a 220-year history of successful adaptation and innovation, Schroeder's have always focused on serving clients. Remember, capital is at risk when investing. So when you've been a contrarian, you've positioned yourself advantageously, and then the cycle, momentum, the healing, you know, comes to play. One of the big challenges is, of course, how long you ride the wave.

And that whole question over selling is so difficult. And I wondered, what have you learned specifically about exiting positions because that down wave is coming? Well, if I may interpose my view, the great challenge after you've done something unusual isn't figuring out when to get off it. It's figuring out how long you can stay on before it works.

Because if you do something and it doesn't work for six months or for a year or for two years or for three months, might you be wrong? And commercially, can you endure, et cetera? So-

This is the first challenge. Figuring out when to get off of a winner, that's a minor problem. Figuring out how long to stay with something that isn't working, that's a big problem. And I use all these sayings in the memos in my books and that I've learned from other people and I've learned so much. The first of the great sayings that I ever learned in the early 70s was that being too far ahead of your time is indistinguishable from being wrong.

So, remember what I said. To be an unusually successful investor, you have to see something other people don't see. Or you have to see something differently from the way the masses see it. So, you see something, you think this is better than most people think, you invest in it,

That doesn't mean they're going to change their minds the next day and say, you know, Howard, you were right and bid it up. That process can take a long time. How do you last? And that's the first question. And of course, the answer is you need a strong stomach, good constitution, not too much emotion and the resolve to stay with it. But if you stay with it for 20 years and it doesn't work, then you're an idiot and you're out of business. So there has to be some happy medium there. But anyways.

That's what I wanted to say in response to your question. Now I'll respond to your question. When do you get off? And it's interesting because of all the books that have ever been written about investing and all the words, I would guess that less than 1% have been written about selling. They're almost all about buying, when to invest, what to invest in, how to choose what to invest in.

And I wrote a memo. By the way, this is a good time to say that if anybody's interested in reading the memos, they're all available at the Oak Tree Capital website under the heading of Insights, Memos from Howard Marks. And they're all free, so the price is right. So I wrote a memo sometime around 2016 or 17 called Selling Out. When do you sell?

And I say half facetiously, I say that most people sell for two reasons. They sell things because they went up and they sell things because they went down. They went up and they say, I better sell some because if it goes back down and I haven't harvested any profits, I'll kick myself and I'll look like an idiot. Or they buy it and it goes down and they say, well, I bought it and I lost half my money. I better sell it before I lose the other half.

and I'll feel like an idiot. So a lot of selling is designed not to do the smart thing, but to avoid feeling like an idiot. Now, if you accept that people sell things because they're up and sell things because they're down, then by definition, they can't be both right. Because taking the same action in response to two diametrically opposed events, how can they both be right? And the answer is neither is right. You shouldn't sell things just because they're up,

Because if they were a good buy in the first place, maybe they have further to go. And you shouldn't sell things just because they're down. Because if they were a good buy in the first place, maybe they're better now that they're cheaper. So selling because something's up or selling them because something's down, neither one is right on its face. There can be personal situational reasons to sell. Like you need the money.

Or you need $10 million to retire and you're at 15. And if you go back to six, now you don't have enough money. So there are legitimate reasons to sell which are unrelated to the merits of the investment. But if you're free from those and you're just concerned about the merits of the investment, then obviously there's only one reason to sell, which is you reanalyze it

You examine your prior thesis. You look to see if your prior thesis is still correct. You look to see if there is still room for appreciation under your prior thesis. You maybe reformulate your thesis to update it. And then you say, is it an investment I would make today? And if the answer is absolutely not, then you probably shouldn't hold it.

But most people who are doctrinaire, who are, I would say, smug, say everything's either a buy or a sell. I don't think that's true. I think there are things that legitimately holds. That is to say, you bought it when it was 10. Now it's 20. You update your thesis. When it was 10, you thought it was going to go to 20. You update your thesis. Now you say, I think it can go to 25. Well, maybe you don't want to buy it for the trip around.

from 20 to 25, but maybe you're feeling good enough about the trip from 20 to 25 that it's still worth holding. So there's some more juice in the orange.

So you've written terrifically on mastering the market cycle. I've been listening on Spotify to your work there. And at some point in your work, you have quoted, which I hadn't come across. And of course, he didn't actually say it in English. He would have said it in French. He said about Voltaire, Voltaire said, history never repeats itself, but man always does. So you have these opportunities created by this polarity of greed and fear. And wouldn't

And would it be fair to say that actually that's an enduring condition and that leaves one always hopeful that markets will react and overreact and therein lies opportunity? I think that's right. And I think I go on and, by the way, if you want to really perform a public service, cite my book. You should cite my book so people will go out and buy several copies each, hopefully. But I wrote a book in 2018 called Mastering the Market Cycle.

And basically, it concludes that there will always be cycles because cycles arise from excesses and then corrections of the excess. And the excesses are usually emotional, psychological, whatever you want to call them. Economies don't fluctuate that much. Up one, up two, down one, up three, up

Companies fluctuate a little more, up 5 or 10 in profits or down 5 or 10, mainly because companies are subject to the economy, but they're levered. They have operating leverage and financial leverage. But stock prices fluctuate like mad, up 50, down 50, up 100, down 100, et cetera. Why so much? Emotion.

People get too excited and then they get too depressed. And I wrote a memo called On the Couch around 2017 or 16 or 15 maybe, because I said that, you know, every once in a while the market needs a trip to the shrink. And I said there, or maybe in the next follow-up memo, which was called What Does the Market Know? I said that in the real world, things fluctuate between pretty good and not so hot.

But in investors' minds, things fluctuate between flawless and hopeless. When people think it's flawless, that's an excess and it corrects because you shouldn't think that. But then the way people operate it, it goes through reason and ends up at hopeless, which is also excessive. And the truth is usually somewhere in between. But as long as we have humans involved in the pricing of securities –

I think we'll have excesses of optimism and pessimism, and that will create fluctuations for the steady-minded person to take advantage of. And I guess that that's why you say that, and I'm paraphrasing it, you would have the following words removed from investment committees, never, always, forever, can't, won't, will, and has to. And what is it about those words that make them the guilty men? They

They're absolute and they exude certainty. And I believe absolutely that there is no place in our profession for certainty because we live in an uncertain world. And I have a slight idea what's going to happen tomorrow. I have a suspicion of what's going to happen in a year, but I absolutely don't think I know for sure. And so how can anybody be certain about anything?

And how can anybody say has to or can't or always or never? I just think that anybody who thinks that way is getting into trouble. You mentioned the quote from Voltaire. Americans think that it was Mark Twain who said that. There are a lot of quotations attributed to Twain, but usually with the word purportedly. He's purported to have said that history does not repeat, but it does rhyme.

He also is purported to have said something extremely important, which is that 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 there's nothing wrong with not knowing something. And in fact, I had lunch with one of my colleagues today just now, and I was talking to him about all the stuff I don't know. And I think it's very, very important that

for your success and your self-protection to be extremely brutally frank about all the stuff you don't know. And that way, you'd never get into trouble. If I had to drive from London to Leeds, what would I do? I'd get a map. I'd turn on the GPS. I would ask directions. And I would drive slowly to make sure I don't pass my exit.

But if I think I know the way, I don't get a map. I don't turn on the GPS. I don't ask directions. I drive fast as hell because I'm confident of the route. And if it turns out I was wrong, I end up in Devon.

Right. Right. And what is slightly scary about what you just said, Howard, is you've described me, unfortunately, rather accurately. I wish I'd been given one of your memos when I'd started at Citibank a long time ago. But may I interject? Yes, yes. Someone said, I can't remember who, two kinds of people get into trouble. The people who know nothing and the people who know everything.

So it's not good to say, I don't know anything, you know, because if you feel you don't know anything, you clearly can't succeed in a future-oriented business. Nassim Nicholas Taleb, who wrote Fooled by Randomness, would say you should become a dentist because there are no vagaries in dentistry, according to him.

So you're not going to succeed if you know nothing, but you're also not going to succeed if you think you know everything, because then you don't take advice and you don't hedge your bets and you plunge and you put all your chips on black. And that's a good way to get carried out. So I'm a big believer in something called intellectual humility. And intellectually, humility is just another word for the other person could be right.

So before we continue this conversation, we're going to take a short break to have a note from our sponsors.

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That leads us into one of your really terrific papers, The Illusion of Knowledge. A friend of ours, Senior Portfolio Manager at Rothschilds, Hugo Capel-Cure, said to me it's been a guiding light in their approach. And I'll quote this one sentence which you wrote, which is, "...no amount of sophistication is going to allay the fact that all of your knowledge is about the past and all of your decisions are about the future."

And I thought just for a few minutes about that, and I then dug up this quotation from General Eisenhower, which was, in preparing for battle, I've always found that plans are useless, but planning is indispensable. And I just wonder what type of forecasting and wargaming and scenario planning you do think is valuable.

First of all, let me point out for the benefit of the listeners that I didn't say what you said I said. And by the way, Yogi Berra, who was a great catcher for the New York Yankees and the source of many of our greatest sayings, nonsensical though they may seem at first blush, Yogi said, I never said half the things I said. But there was a guy named Wilson who ran GE who said that. And it's a very, very important. It's one of my favorite quotes.

I wrote a memo, I think it was 2002, if I'm not mistaken. And the title was, You Can't Predict, You Can Prepare. And I stole that. That was the tagline from the advertisements of the Massachusetts Mass Mutual Life Insurance Company, one of our big, good life insurance companies. I think it's very provocative because there's a tendency to say, well, if you can't predict, how can you prepare?

Predicting is how you understand what's going to happen and preparing is making ready for what's going to happen. So how can you prepare for what's going to happen if you don't know what's going to happen? And the answer is, if you think you know what's going to happen, you're an idiot. So preparing really means not preparing for one outcome, but for having a portfolio or approach to life, which prepares you for a range of outcomes.

That's where success lies. And too many people in the investment business say, I think this is going to happen in the economy. This is going to happen with rates. This is going to happen with markets. This is going to happen with this industry. And this is what's going to happen with this company. And if you get all five of those right, then you end up rich as creases. But what's the probability of getting all five right?

I call that single scenario investing. And if you specify that single scenario and invest as if you're right out of certainty, and it turns out a few of those things surprise you, might the investment portfolio you have fashioned be absolutely wrong and out of phase and disastrous? So preparing for a single outcome, I think, is a mistake in an uncertain world.

And all we can do as investors is prepare for a variety of outcomes. We want a portfolio that will do well if the things we think are most likely happen, pretty good if the other things that we think are likely happen, and not terribly if the things we don't think will happen happen.

Now, that's not easy. And it's complicated by the fact that there's nothing you can do that can prepare you optimally for all scenarios. So you have to say, which scenarios do I want to prepare for? Which range of scenarios do I think will fall into? And if I'm ready for them, will make me good money? And which ones do I not have to prepare for? You can't prepare for them all by definition.

So let's use that lens for a current situation. I was having an exchange with a former guest, Colm Kelleher, who's chairman of UBS, was president of Morgan Stanley. And he said, given the declines in the PE space and maturities in funds happening, he said perhaps 30,000 companies will need to find a buyer. Realistically, when do investors get their money back and at what multiple? Well, that's a great question, isn't it? Because private equity from, I would say roughly from 04-05,

to 21 was viewed as what I call the silver bullet. When I was growing up, there was a guy on TV called the Lone Ranger. He had a white hat and a black mask and he rode around on his horse and he solved all the problems. And he had a gun and in the gun, he had silver bullets. And because he had silver bullets, he never missed. So investors are always looking for the silver bullet, the thing that will make them rich without risk and without fail. But by definition,

It can't exist. But as my mother used to say, hope springs eternal. And I would say that from 04 until 21, private equity was knighted as the silver bullet. And I wrote a memo in December of 22 called Sea Change. And I said in there that in 1980, I had a personal loan outstanding from a bank and I got a slip of paper in the mail and it said, the rate on your loan is now 22 and a quarter.

And in 2020, 40 years later, I was able to borrow from a bank at two and a quarter. So rates went down by 2000 basis points or 20 percentage points over 40 years, pretty monotonically. And declining rates are great for people who own assets because the value of an asset is the discounted present value of the future cash flows. And if the rate at which you discount the future cash flows declines, the rate, the value goes up.

Declining interest rates are also great for borrowers because their cost of capital goes down. So what about people who buy assets using borrowed money? When rates go down, they get a double bonanza. And that's what happened to the private equity industry.

And private equity tries to make money, I think, tries to make money four ways. Buy things for less than they're worth, lever them up to magnify the return on equity, add value by making them work better, and sell them at non-bargain prices, maybe elevated prices. And for a time, it did that.

But think about it. Owning assets with borrowed money was the ideal strategy for a declining interest rate environment. Now, were the people who did that activity smart enough to know the rates would come down? Or did they engage in an activity and were they lucky enough to encounter an ideal environment? I tend to think the latter.

I think that performance is what happens when a portfolio encounters the future. I tend to think of it kind of like an accidental encounter.

But private equity was great under those circumstances. And of course, private equity was invented in that period. If you invent a mechanism and then encounter an environment for which it is ideally suited, it shouldn't come as a surprise that it produces great success.

You know, Einstein said that a definition of insanity is doing the same thing over and over again and expecting a different outcome. I think another version of insanity is doing the same thing in a different environment and expecting the same outcome. If you came into this business like you did since 1980, almost everybody did. There aren't too many people who've been in the business 45 years because you have to be 70 or so.

If you came in since 1980, pretty much all you've seen is declining interest rates or ultra low interest rates or both until 22. And that was ideal for private equity and other leveraged strategies, not just private equity. The sea change memo that I wrote in December of 22 said it's over. And for the next decade, you will not be able to describe interest rates as

in general, or secularly declining, or as consistently ultra low. The Fed funds rate was zero most of the time from the beginning of 2009 when the Fed cut rates to fight the global financial crisis until the end of 21 when they decided to raise rates to fight inflation. Between the beginning of 2009 and the end of 21, an unusual 13-year period, the Fed funds rate was zero most of the time and I think averaged about a half a percent.

My view, you're not going back to that. And if not, then private equity will still be good for people who can buy things at bargain prices and add value. But the beneficial impact of declining rates and ultra low rates will not be present and it will not be the success it was. And it will be shown not to be a silver bullet.

Which leads us very nicely to your memo, which I think was called Looking Ahead. And I'll just quote you, successful investing has to be more about superior judgments concerning qualitative, non-computable factors and how things are likely to unfold in the future. I know that's a more general observation of assets, but just explain that a little bit because I was intrigued by it.

I don't think there was ever a memo called looking ahead. I don't know which one you're referring to, but I would love to stand corrected. I think that I must be wrong. And as Yogi would say, maybe I said something I didn't think I said. But there is a memo called something of value. And at the very beginning of the pandemic, March the 13th of 2020, my son and his family moved in with my wife and me.

Then the pandemic hit and we stayed together for several months. It was just wonderful to have three generations living together under one roof. It never happens these days anymore. My son is an investor and we spent a lot of our time talking about value investing. I wrote this memo in January 21 called Something of Value. It was a play on words and

which I plead guilty to because number one, we were discussing value investing and number two, it was of great value for us to live together. So he's so smart and so insightful and his clients are so lucky that again, mathematically, it can't make you an unusual success.

And by the way, if you look at the SEC today, I think they consider one of their main jobs to making sure that everybody has the same information at the same time, right? There's something called Reg FD, Regulation Fair Dealing. A company has to tell everybody everything at the same time. So readily available quantitative information about the present can't make the difference. If you want to be a superior investor, what can?

I think that's the essence of your question, right? Yep. So what can? I can think of three possibilities. Maybe there are others. Number one, you take that information and you do a better job of extracting its importance. Now, again, everybody has the same computer. They all run the same software. They can all do the same screens. So that's not going to be the secret.

But, you know, when Andrew was in college and studying to become an investor, he would come home on breaks and he would say to me something like that. We should buy Ford stock because they're coming out with a great new Mustang. And my answer was always the same for pedagogical reasons. I would say, Andrew, who doesn't know that?

So the point is that if you know something and everybody else knows it, then it's already probably discounted in the price of the stock. You can't gain a march by investing in the stock because everybody else has already incorporated that factoid in the price and being paid for that truth. So you have to know something other people don't know. You have to do a better job of interpreting the information and extracting its importance. Number two is,

Maybe you can do a better job because you do a better job than anybody else of understanding qualitative things. Not everybody knows the qualitative. And by definition, qualitative things are harder to assess. So which company has the best research effort? Which has the best product pipeline? Which has the best management?

Most creativity. I wrote a memo in 2016 or 17 called Investing Without People about indexation, passive investing, algorithmic investing, and then ultimately even AI and machine learning. And I said in there that I don't think that a computer can sit down with five business plans from VC companies and figure out in advance which one is Amazon. I think that requires a unique human approach.

Of course, most people can't do it either. So merely taking the computer out of the equation and turning it over to people is not a – but at least when a person subjects themselves to a qualitative task like that, they have the possibility of doing something in an exceptional way. So that's number two, qualitative. And number three is future-oriented.

And if all the information about the present is universally known, then clearly the superior investors will be the people who know more than others about the future. And the greatest oxymoron at all, or the greatest challenge is that investing, what is investing? It's positioning capital to benefit from future events. That's all it is. And yet I believe the future is unknowable.

So how do you do it? And the answer is nobody does it flawlessly. Nobody knows it all. Some people have more insight than others. I like to believe that the smartest computer in the world will not have as much insight as the most insightful individual. But the problem for the profession is that the smartest computer may have more insight than 80% of people.

or 90 or some number like that. So the answer is you better try to not go into the investment business if you're not in the top few. Yeah. So in one of your memos, it actually was about risk. You quoted Professor Elroy Dimson, who's Professor of Finance at Cambridge Judge Business School. So I had an exchange with him and he said, 25 years ago, we published the Triumph of the Optimists

And of the many countries for which we assembled a long-term financial market history, the US had performed the best. We didn't expect that to continue, but it did. He said, we're about to publish our, you know, on the 4th of March, their new returns. He said, my question is, does Mr. Marx expect this exceptionalism to continue? Well, first of all...

I am not a futurist. And no, I'm not. It's not my makeup. So I don't think about things like that. I'll express an opinion. I'll get around an answer to your question. I'll get around to expressing an opinion. But I would never bet 10 cents on it. You know, I eschew macro forecasting and the memo illusion of knowledge. But I say it's okay to have opinions. It's something very different to have an opinion than to bet on it. I don't bet on my opinions. I think that America has a great system.

And there's something in America in the combination of the embrace of the free enterprise system, private ownership, capitalism, economic incentives, the rule of law, which we think we can depend on, the spirit of innovation. Maybe it's the fact that we were invented only 250 years ago and not 900 years ago.

educational institutions that we have and the embrace of the pioneer and the risk taker and all these things. Somehow or other, that combination of things has produced outstanding success. And from a standing start two and a half centuries ago, I described the US as having been preeminent for the last hundred years since the end of World War I.

And obviously preeminent economically, but not just that, because we've accomplished great things in all walks of life and, you know, the arts and the sciences and so forth. I would not be so cavalier as to say it's sure to continue. I would not be such a pessimist as to say it's sure to stop. The odds are against perpetuation. You know, trees don't grow to the sky most of the time.

Things are still going well here. And for tell Elroy, who I think of so highly, that for the US to lose its exceptionalism, some of those forces have to abate, but also somebody else has to step forward. Who's that going to be? What other society is likely to exude the combination that I described earlier?

of free enterprise, innovation, incentive, pioneering spirit, education, etc. And so we may not be as great as we were for the last hundred years. The 20th century is described as the American century. And I would not be insistent that the 21st century will also be the American century, but who's going to take our place?

That's very nicely expressed. And that actually leads me to one of my points, which is about luck, because too few people in our industry admit to luck's vital role in their success. And I had two questions around it. One was, how did it feature in your career? And secondly, how do you think people help themselves to be lucky?

I'm a great believer in luck. I believe I'm the luckiest person alive. And I wrote a memo entitled Getting Lucky in January of 2014.

The first half of it talks about how much I believe in luck and how lucky I've been. And I describe in there a dozen or so ways in which I was lucky. And I talk about where I was born and when I was born. I was conceived during World War II. And if you read the Malcolm Gladwell book, Outliers, it's all about something he calls demographic luck, which I call right time, right place.

And merely being in the right place at the right time is a great advantage. So if you were born in World War II, you were conceived, you were at the front of the line when the world economy boomed in the post-war period. I went to the public schools in Queens, New York, not Queens Club, by the way, Queens, New York. And I got a fine education in the New York public schools for free. And I got into Wharton, which I was told I wouldn't get into.

and on and on like that. And then I got booted out of the equity department at Citibank and asked to start high-yield bonds. That was my sentence in Siberia.

And that was the greatest luck imaginable. And then meeting my partners over the years and starting Oak Tree 30 years ago. And then the world deciding in the last 20 years that they weren't so crazy about stocks and bonds, but they wanted to be active in something called alternative investments. And guess what? We were there. Now, again, remember what I said about private equity 15 minutes ago.

My partners and I didn't say the world is going to crave something other than stocks and bonds. They're going to want something called alternative investments. We should be there in 2005 to supply it to them. Rather, we had some ideas of what we could do well and make money at. And we set about doing it. And the world said, okay, now we want it.

So your second question was, what can you do? How can you take advantage? And there are many sayings about luck, one of which is that luck is what happens when preparation meets opportunity. So for private equity, for me and high-yield bonds, for Oak Tree with alternatives, what happened is we were prepared, not necessarily for the specific future that unfolded, but we were prepared to

to do a good job. And then an opportunity arose that we were ready for. And that's the way I like to think about success rather than some genius. I wrote, maybe it was in Getting Lucky, I tell the story about, you know, a guy walks into a pub and he walks by the dart game. And as he walks by, one of the darts players loses a terrible dart throw.

But as the guy walks by, he knocks the target off the wall. And as it falls, the dart hits the bullseye. That's luck. But I think that's the way life is. Rather than premeditate and prepare brilliantly for the outcome that obtains, I think you work your ass off and you try to do a good job. And depending on how the future unfolds, you may be in position to benefit from it.

Howard, one of the things that we, in all worlds these days, walks of life, but particularly in the investment world, we are bombarded with information from all sources. It reminded me of that T.S. Eliot poem, The Rock. The line is, you know, where is the knowledge that we've lost in information? How do you process so many things coming at you? I think it's really important to know the difference between data and information and wisdom or insight. And

You have to accept early that success doesn't come from knowing everything. It comes from knowing the things that are important. And I grew up reading the Wall Street Journal. And every day in the Wall Street Journal, and especially in earnings season, you open the journal and there's a page where they tabulate companies' earnings, sales, earnings, EPS, 10, 20, 30, 40, 50 companies in earnings season.

And I used to look at them. And then after a short time, I stopped looking because I said, just a minute, looking does me no good if I don't know what was expected. You see a company made $20 last year and $30 this year. You don't know if that's good or bad. If it made 20 last year and people were expecting 20 this year, then 30 is a bonanza. But if they're expecting 40, it's a big disappointment. So merely reading that they made 30 doesn't tell you a damn thing. Why waste your time?

So you have to give up on knowing the minutiae and not think that being well-informed means knowing all the facts. And you have to look at, for example, Buffett and Munger. And Charlie, in particular, who I was fortunate to spend a lot of time with, in part because we both lived in LA, he used to say, wisdom does not come from batting back a bunch of facts.

And there's a book out called The Warren Buffett Way. And I was asked to write the foreword for, I don't know, maybe it's the current edition or some edition. And I wrote an article called The Exception. What makes Warren Buffett Warren Buffett?

And I talked about the things that are singular about him. And one of the important ones is that he figures out which few things are important and then he studies the hell out of those as opposed to trying to know all the facts. And usually, to go back to Andrew Marks and the readily available quantitative information at the present, usually those few things that are the most important are not current data.

But they are the forces that will make the company successful or unsuccessful in the company. And so it takes a singular intelligence to figure out what they are and then a singular insight to predict what's going to happen with regard to those few things. But that's how you reach success, not by being an encyclopedia.

You've seen so much that one of the things that must have surprised you will have been the explosion of government debt globally, but the US particularly. It's the ultimate credit conundrum for many of us who just kind of think, is it just going to be monetized? How are they going to deal with it? I know you're not in the predicting game long term, but...

What's your sense of how a powerful country, which isn't able to run a primary balance at the moment, deals with this debt issue? Well, of course, the last time we had a budget surplus was when Clinton left office, which was around 2000. And now deficits over the next 25 years became routine. And in the last several years, they became enormous.

fighting the pandemic gave rise to enormous deficit spending. And then when it was over, people said, well, what the hell? Why don't we just keep doing it? I don't know if they said it consciously, but anyway, they kept doing it. And last year, we had a deficit approaching $2 trillion in prosperity. Lord Keynes, who was described as the father of deficit spending,

had the idea or codified the idea that it was okay to spend more money than they brought in in times of sluggishness to stimulate the economy, to produce the jobs we wanted. But then when we had prosperity, the government should bring in more than it spent and take the surplus and pay down the debt. So it was kind of circular. And everybody likes the first part and everybody has forgotten the second part because the second part is not fun.

And unfortunately, politicians have figured out that they can be more popular the more stuff they give away. And the politician who stands up for austerity and says, no, let's apply some discipline, let's spend what we make or less and pay down the debt, he's unlikely to be returned to office.

because people can characterize him as a scold. So it's really unfortunate. It's a failure of our leadership. It's also kind of a 21st century mentality of instant gratification. You know, I'd like to have that and that and that and that. You know, this business about making choices and living within your means seems terribly old fashioned. So what's ever going to change it? Well, interestingly, of course,

For example, Trump looks like he may change it. And Trump is going around taking an axe to government spending.

And, of course, he also wants to cut taxes. And the blueprint for American finance, which I think the House approved this week, will reduce spending by $2 trillion over the next decade, but taxes by $4.5. So that's not a great step in the direction of prudence or balanced budget. But on the other hand, if they just check the rate of growth –

of the deficit and the debt. And let's say, what if we get to a place where they were running deficits every year, but the debt grew slower than GDP rather than faster? Most people would probably say that would be a really good outcome today.

And I think it's possible. So as you say, I'm not a futurist. I'll say it again. And I don't have a forecast on the subject and I don't bet on it, any money of my clients or myself. And I think it's the worst thing about America today. I read off 15 minutes ago, a list of the advantages we have, which have made us preeminent to use Elroy's word. I think the worst thing about it is our profligacy, lack of discipline.

appetite for delayed gratification and our deficit spending. But there's a chance that Trump will market a turning point and that maybe in the future, politicians will compete to get elected, not by promising more junk for free, but by promising reasonable discipline. Got it. Very good. There's a chance. So three very short, quick closing questions. Who's the most interesting person you've ever met?

Jacob Rothschild was extremely interesting because he was a great investor. He was well-versed in finance. He was a Renaissance man, great in the arts, civic service, service to the country. I learned a lot from him and enjoyed his company in many areas. And I was lucky to live in London a third of the year from 06 to 18. And we spent a lot of time together.

Secondly, if you were going to give your favorite book to a close friend, what would the book be? I think I would recommend a book called A Short History of Financial Euphoria by John Kenneth Galbraith, which it is a short book. I like short books because I'm a very slow reader. It's about 100 pages. But it gives you, it gave me a great feeling for the psychological fluctuations that so dominate the market.

And really influenced me on the course toward emphasizing an understanding of that, which has been a rule for me over the last 30 years.

And finally, if you were only allowed, and I know it would be deeply painful and not correct, but only allowed to give one piece of advice to somebody starting in finance, what would that one piece of advice be? Well, I would step back and question whether or not to start in finance. But what I would say to a young person starting off in life, there's a writer called Christopher Morley, and I love to quote him because he said, there's only one success to be able to live your life your own way.

And that sounds simplistic, but what it means is that in choosing your course, you should not do it on the basis of the dictates of society, your friends, your classmates, your mother, or the mere pursuit of money. But you should figure out what will make you really fundamentally happy. And I don't mean in a hedonistic sense, but fulfilled. And that's what you should do.

It's not easy because, you know, you're doing it at age 20. You don't know what's going to make you fulfilled at age 60. But I would rather try than just pursue the job that the peer pressure pushes you toward or the pursuit of money pushes you toward thoughtlessly with regard to what it is that's going to make you happy.

Howard, you've been very generous with your time. I've written down so many things, but in essence, anybody listening or watching this needs to go to the Oat Tree website. They need to look at your memos, the insights, because they are a volume of erudition of the many things you said to stay with me, perhaps because I wish, as I said earlier, I had it brandished on my face, which is there is no place in our profession for certainty. And secondly, I think you've articulated very well, you can't predict, but you can prepare.

And I've read a lot of your memoirs for many years and I've listened and learnt a lot.

And as I spoke to people ahead of this interview, the unanimity of praise and appreciation was extraordinary. And I think your legacy will be as one of the most influential investors of our time. So thank you for everything. And thank you for being here today. Well, it's a pleasure. And what you said, of course, makes me very happy. And I hope I did leave some things for the people who will follow based on what I learned from the people who preceded me. Fantastic.

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