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

Howard Marks (@howardmarksbook https://twitter.com/howardmarksbook) is co-chairman and co-founder of Oaktree Capital Management https://www.oaktreecapital.com/, a leading investment firm with more than $120 billion in assets. He is the author of the new book Mastering the Market Cycle: Getting the Odds on Your Side http://www.amazon.com/exec/obidos/ASIN/1328479250/offsitoftimfe-20, and his previous book on investing, The Most Important Thing: Uncommon Sense for the Thoughtful Investor http://www.amazon.com/exec/obidos/ASIN/B004U5Q1O0/offsitoftimfe-20, was a critically acclaimed bestseller. Warren Buffett has written of Howard Marks: "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something." Marks holds a B. S. Ec. degree from the Wharton School of the University of Pennsylvania with a major in finance and an M. B. A. in accounting and marketing from the University of Chicago. In this conversation, we discuss: How his firm was poised to capitalize on the bubble in 2008 and put massive amounts of capital to work. His thoughts on understanding market cycles for making better decisions. The three stages of a bull market. Newsletters he reads. Thoughts on Bitcoin and cryptocurrencies. Much, much more... Studying what Howard says transcends the world of investing—it's really a study in clearer thinking. I hope you enjoy and learn as much as I did! This episode is brought to you by Inktel http://www.inktel.com/tim/. Ever since I wrote The 4-Hour Workweek, I've been frequently asked about how I choose to delegate tasks. At the root of many of my decisions is a simple question: "How can I invest money to improve my quality of life?" Or "how can I spend moderate money to save significant time?" Inktel http://www.inktel.com/tim/is one of those investments. They are a turnkey solution for all of your customer care needs. Their team answers more than 1 million customer service requests each year. They can also interact with your customers across all platforms, including email, phone, social media, text, and chat. Inktel removes the logistics and headache of customer communication, allowing you to grow your business by focusing on your strengths. And as a listener of this podcast, you can get up to $10,000 off your start-up fees and costs waived by visiting inktel.com/tim http://www.inktel.com/tim/. This podcast is also brought to you by Helix Sleep https://helixsleep.com/tim. I recently moved into a new home and needed new beds, and I purchased mattresses from Helix Sleep https://helixsleep.com/tim. It offers mattresses personalized to your preferences and sleeping style — without costing thousands of dollars. Visit Helixsleep.com/TIM https://helixsleep.com/tim and take the simple 2-3 minute sleep quiz to get started, and the team there will match you to a mattress you'll love. Its customer service makes all the difference. The mattress arrives within a week, and the shipping is completely free. You can try the mattress for 100 nights, and if you're not happy, they'll pick it up and offer a full refund. To personalize your sleep experience, visit Helixsleep.com/TIM https://helixsleep.com/tim and you'll receive up to $125 off your custom mattress. *** If you enjoy the podcast, would you please consider leaving a short review on Apple Podcasts https://podcasts.apple.com/us/podcast/the-tim-ferriss-show/id863897795?mt=2/iTunes? It takes less than 60 seconds, and it really makes a difference in helping to convince hard-to-get guests. I also love reading the reviews! For show notes and past guests, please visit tim.blog/podcast https://tim.blog/podcast/?utm_source=podcast&utm_medium=podcast&utm_campaign=podcast-description. Sign up for Tim’s email newsletter (“5-Bullet Friday”) at tim.blog/friday https://go.tim.blog/5-bullet-friday-1/. 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• 0:01Tim Ferriss?

  At this altitude, I can run flat out for a half mile before my hands start shaking.

• 0:06Speaker 01

  Can I ask you a personal question?

• 0:08Speaker 02

  No, we're just seeing an appropriate time.

• 0:12Speaker 01

  I'm a cybernetic organism, living tissue over metal endoskeleton.

• 0:24Tim Ferriss?

  This episode is brought to you by InkTel. And I've used them personally. Ever since I wrote The Four Hour Workweek, I've been asked over and over again how I choose to delegate tasks, how I do 80/20 analysis, and so on. At the root of many of those decisions is a simple question, actually two questions. Number one, how can I invest money to improve my quality of life? I use that in investing as well. The second, how can I spend a little money, or moderate money, to save significant time? InkTel is one of those investments. They're a turnkey solution for all of your imaginable customer care needs. I used InkTel during the launch of The Four Hour Body, which was very, very involved. And they provided 24/7 customer service for my Land Rush campaign,

• 1:08Tim Ferriss?

  because it was critical for me to take care of every person who purchased my books and participated. This allowed me to focus on the things that I am better at, my strengths, like the marketing plan that we'd worked on for six months, implementing that. InkTel trains their experienced customer service reps to know your business and your products inside and out, and make your customers raving fans. They answer more than a million customer service requests every year, and they can do so across all platforms, including email, phone, social media, text, even chat. Leaving your customers with poor service, or just mediocre service, which, by the way, in a competitive pool is a huge liability.

• 1:48Tim Ferriss?

  Long wait times or unanswered messages carries a massive cost and risk to your business. InkTel removes the logistics and headaches of this type of communication, allowing you to focus on your strengths and grow your business. It can be a real competitive advantage. And I see many, many e-commerce companies and tech companies thinking of customer service. Service as a good enough checkbox or an afterthought. And just like Airbnb used design and innovative ways to be a competitor and to win, you can do the same thing with customer service. So as a listener of this podcast, you can get up to $10,000 off.

• 2:28Tim Ferriss?

  It's a big discount, $10,000 off your startup fees and costs by visiting inktel.com/tim. So check it out. For more info, go to inktel.com, I-N-K-T-E-L.com/tim.

• 2:45Tim Ferriss?

  This episode is brought to you by Helix Sleep. Last year, I focused on dramatically improving a few things. Surprise, surprise. Most notably, the quality of my sleep, which seems to affect just about everything. This led me to revisit, you name it, my daily routine, morning routine, exercise, diet, all the way to what I slept on. And I ended up getting all new beds here in Austin, Texas, including mattresses from Helix Sleep. Helix has built a sleep quiz that takes two minutes to complete, and they use the answers to match your body type and sleep preferences to the perfect mattress. Whether you're a side sleeper, hot sleeper, cold sleeper, or you like plush, you like firm, with Helix, there's no more guessing or confusion. Just go to helixsleep.com/tim,

• 3:30Tim Ferriss?

  take their two-minute sleep quiz, and they'll match you to a mattress that will give you the best sleep of your life. That is their promise. For couples, Helix can even split the mattress down the middle, providing individual support needs and feel preferences for each side. They have a 10-year warranty, and you can test drive your mattress for 100 nights, risk-free. Right now, Helix is offering up to $125 off of all mattress orders. So check it out. Get up to $125 off at helixsleep.com/tim. That's helixsleep.com/tim for $125 off your mattress order. Take a look, helixsleep.com/tim.

• 4:14Tim Ferriss?

  Well, hello, boys and girls. This is Tim Ferriss and welcome to another episode of The Tim Ferriss Show, where it is my job to interview world-class performers to tease out the habits, routines, thinking frameworks, life lessons, favorite books, et cetera, that you can apply and test for yourself. This episode features someone who is very, very well-known in the world of investing, but studying what he says is really a study in clearer thinking, and it transcends investing in business in so many different ways. Howard S. Marx is co-chairman and co-founder of Oak Tree Capital Management, a leading investment manager with more than $120 billion in assets. He is the author of the new book, Mastering the Market Cycle, subtitle, Getting the Odds on Your Side, and his previous book on investing,

• 4:59Tim Ferriss?

  The Most Important Thing, subtitle, Uncommon Sense for the Thoughtful Investor, was a critically acclaimed bestseller. To give you an idea of who reads his memos and his writing, Warren Buffett has written of Howard, quote, "When I see memos from Howard Marx in my mail, they're the first thing I open and read. I always learn something," end quote. I'm going to keep this short because it covers a lot of ground. We talk about the three stages of a bull market, newsletters he reads, thoughts on Bitcoin and crypto, his thoughts on understanding market cycles for making better decisions, how his firm was poised to capitalize on the bubble in 2008 and put massive amounts of capital to work, and more, and more, and more, and more. We really cover a lot of ground, and I had

• 5:39Tim Ferriss?

  a lot of fun. So, without further ado, maybe I've already said that, here is Howard Marx.

• 5:49Tim Ferriss?

  Howard, welcome to the show.

• 5:50Speaker 03

  Thank you, Tim. I've been looking forward to being here.

• 5:52Tim Ferriss?

  I am thrilled to be sitting here with you because I have so many fans of your work and thinking in my friend circles.

• 5:58Speaker 03

  Well, that's great to hear.

• 5:59Tim Ferriss?

  When I went out to a handful to ask for potential topics or questions, they were very, very forthcoming. But what I thought I would do in this particular episode, I've never done in a podcast episode before, which is to start with a poem. This is always risky, risky business, but this was suggested by a friend. And he said, "I would use an A. E. Houseman poem." This captures effectively the, I think, what he views as the spirit of much of your writing.

• 6:29Tim Ferriss?

  And you can agree or disagree. Here we go. "I, to my perils of cheat and charmer, come clad in armor by stars benign. Hope lies to mortals, and most believe her, but man's deceiver was never mine. The thoughts of others were light and fleeting, of lovers' meeting, or luck or fame. Mine were of trouble, and mine were steady, so I was ready when trouble came." And that is a shropshire lad, the name of the poem. And I thought that we could certainly talk about that specifically. But in the course of doing research for this conversation, I discovered that you had studied not only finance and what you might look at as vocational subjects when you were an undergrad, but also seems like Japanese.

• 7:13Tim Ferriss?

  And that there was this concept of mujo that popped up when I was doing my reading. Would you mind describing that time and that concept?

• 7:21Speaker 03

  Well, I went to Wharton at an enlightened time when you were required to have a non-business minor and then a semester of the literature of a foreign country in English. I never learned Japanese. But I started off, for some reason, which it's interesting that I have no recollection of what motivated me, but I decided not French literature or English, but Japanese literature. It must have been the exoticism. And I liked it so much that I turned Japanese studies into my minor and took 15 credits at the graduate level.

• 8:02Speaker 03

  And that's what turned me from an indifferent teenager into a student, really. But the professor for most of those courses, a guy named A. Dale Saunders, was an inspirational speaker and Oxford Don and aesthete. And so I took this course in Japanese philosophy. And...

• 8:26Speaker 03

  We came across Mu Zhou. Mu Zhou literally means the turning of the wheel of the law. In other words, the operation of life. And the essence is impermanence. And because the wheel does turn. And also, the unpredictability of the future. And these were really formative for me. And they have unconsciously informed everything I've done. And I think that personally, that in the investment business, and also in life, you are better off if you realize, number one, that if life is always going to change on you,

• 9:10Speaker 03

  and there will always be new things coming down the pike, and you can't control it. And what we have to do is live with it.

• 9:23Tim Ferriss?

  In the course of the reading, I've done prep for this, which is not only the new book, but also many of your letters, which I'd already been a fan of, but went back to revisit.

• 9:35Tim Ferriss?

  I came across many people who had tried to select favorite quotes. And one that came up a lot, so you could certainly correct this if it is not accurate, is something along the lines of, "You can't predict, you can prepare." And that leads me to 2008.

• 9:56Tim Ferriss?

  And we're going to bounce around chronologically quite a lot, I suspect. But during the 2008 bubble, which of course was a time in which many investors were pulling out of the market, Oaktree did exactly the opposite. And you put more than a half a billion dollars a week to work over 15 weeks. Why did you do that? Were you predicting? Were you prepared? What led to?

• 10:23Tim Ferriss?

  That type of decision.

• 10:25Speaker 03

  Sure. Well, you mentioned the memos. I've been writing the memos since 1990. And I wrote one about 20 years ago, late 90s, called "You Can't Predict, You Can't Prepare." I stole the tagline from an ad from Northwestern Mutual Life Insurance. But I think that's true of life. Now, it sounds like an oxymoron, because how can you prepare if you can't predict? But the answer is, we never know what's going to happen. But we can consider the likely scenarios and prepare for some of them. You can't, by definition, prepare for every eventuality.

• 11:08Speaker 03

  But I would say that we did have a sense. My partner Bruce Karsh and I had a sense in '05 and '06 that the world wasn't running right. And the main thing that made us conclude that was the crappy deals that were getting done. And he and I would spend the day walking into each other's office, saying, "Look at this piece of crap that got issued yesterday. There's something wrong. A deal like this should not be doable." The fact that investors are buying this tells me that they're not being skeptical. They're not being demanding. They're not applying standards.

• 11:52Speaker 03

  And Buffett has a saying, "The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs." And it's absolutely true.

• 12:05Speaker 03

  And so, we knew that the market was dangerous because of the behavior of others. Now, you can't... So, we were prepared. We sold a lot of assets. We liquidated large funds. We replaced them with small funds. We became very selective in our buying. We raised a very large fund for investment if a crisis bursting would come into being.

• 12:34Tim Ferriss?

  Was this for a distressed debt?

• 12:35Speaker 03

  For distressed debt. Now, the interesting thing, though, so you can't prepare. You can't predict. The thing that caused the bubble to burst was the...

• 12:49Speaker 03

  Unsubstantiality of mortgage-backed securities and especially subprime. If you read the memos, you won't find a word about it. We didn't predict that. We didn't even know about it. It was occurring in an odd corner of the securities market. Most of us didn't know about it. But it is what brought the house down, and we had no idea. But we were prepared because we knew simply that we were on dangerous ground, and that required cautious preparation.

• 13:22Tim Ferriss?

  Let me ask, and I may embarrass myself with questions that display my ignorance about many topics in this interview, but when you raised money for a distressed debt fund, did you emphasize to the LPs or whoever gave you those funds that you had a specific timeline in mind for deploying those funds? Or did you emphasize the importance of patience with those people and that you'd be looking for indicators and that they needed to look at it as a long-term investment? How did you manage the question of when from those people?

• 14:02Speaker 03

  The question of when is one of the hardest ones in our business. And I always say that we may have an idea of what's going to happen, but we never know when it's going to happen. You can't call these things. As one of my partners says, if you name a price, don't name a date, and if you name a date, don't name a price. And then you can't be wrong. But we never did name a date. We probably, I can't even remember, we probably had a limit. In other words, if we hadn't deployed it within X years, then it got canceled, the commitments. But I think there was an understanding that we thought it was coming within the next one, two, three years, something like that.

• 14:40Tim Ferriss?

  Now, the subtitle of this new book, of course, the title, Mastering the Market, subtitle, Getting the Odds on Your Side. Why this book? And how does one, and this is, of course, something we could discuss for many, many hours on end, but why this book and how does someone in this context get the odds on their side?

• 15:05Speaker 03

  So I started writing the memos in 1990. I wrote them for 20 years. I always concluded that I would write a book and pull them together into a philosophy when I retired. And then I got a letter from Warren Buffett in 2010 saying, "If you'll write a book, I'll give you a blurb for the jacket." So that was enough to get me off my ass and get me to do it in real time. I wrote a book called "The Most Important Thing" because I found myself sitting in clients' offices saying, "The most important thing is buying cheap." And then 10 minutes later, I would say, "The most important thing is not losing money." And then 10 minutes later, I would say, "The most important thing is contrarian behavior." So I wrote a book called "The Most Important Thing," which has 21 chapters, and each one

• 15:46Speaker 03

  starts off, the title is "The Most Important Thing Is," and then it's a different thing. One of those most important things is knowing where we stand in the cycle. And as I say, I don't believe in forecasts. I always say, "We never know where we're going, but we sure as hell ought to know where we are." I mean, I can't tell you what's going to happen tomorrow, but I should be able to assess the current environment, and that's the kind of thinking that helped us prepare for the crisis. I think that the two most important things are where we stand in the cycle and the broad subject of risk.

• 16:25Speaker 03

  And in fact, where we stand in the cycle is the primary determinant of risk. So I think that this is really an important topic, and it can really help you do better. Getting the odds on your side. What that means is, we don't know what's going to happen. Nobody can tell you. But there are times when the future is, the outlook is better, and there are times when it's worse. And it's largely determined by where we stand in the cycle. When we are low in the cycle, that is to say, we're coming off a bust. The economy is starting to warm up.

• 17:08Speaker 03

  Investors are just barely starting to switch from pessimism to optimism.

• 17:15Speaker 03

  And and prices are starting to rise. Clearly, the odds are in your favor. The outlook is better. It doesn't mean you're going to make money, but the chances are good. On the other hand, when the cycle has gone on, the up cycle has gone on for a long time. When when when valuations are high, when optimism is rampant, when everybody thinks everything's going to get better forever, when the economy's been moving ahead for 10 years and it looks like it's never going to stop. Then usually, the enthusiasm has carried the prices to such a high level that the odds are against you. And just knowing that is is a huge advantage in investing. You should know that when the when we're low in the up cycle,

• 18:00Speaker 03

  that's a time to be aggressive and put a lot of money to work and buy more aggressive things. And when we when the cycle has gone on for a long time and we're elevated, that's the time to take some money off the table and behave more cautiously.

• 18:13Tim Ferriss?

  Question about 2008, or you could pick another period, a bus cycle that you're familiar with, whether from firsthand experience or from research that you've done. You raise these funds, and I want to revisit the question of when. From a personal standpoint, and I'll admit it very freely, I think I've had a very fear-based mentality when it comes to public markets. I've done reasonably well in privately held technology startups because I lived in the middle of the switch box in San Francisco, and that's the only thing I paid attention to. And it protected me in a way from my lesser behaviors because I wasn't allowed to sell.

• 18:52Tim Ferriss?

  But in the public markets, I've almost always held on to cash, waiting for some cataclysmic event, but then lost my nerve in some fashion. I'd be I'd love to hear, and maybe the catching falling knives is a way to segue into this. I don't know. I found that very, very interesting to read about. But how do you think about sitting on a position like that and timing? What what what determines the go command for deploying?

• 19:25Speaker 03

  You have really touched on an extremely important topic.

• 19:31Speaker 03

  Most of us have an inherent bias. Most of us are essentially cautious or essentially aggressive. Probably more people are essentially cautious than aggressive. So one of the most important things is to assess ourselves, understand our biases, and try to overcome them. Now, the Tim Ferriss that I heard you describe, I take that to mean that maybe you were lucky or smart enough to turn cautious leading up to the bubble. The markets fell apart, you're sitting on cash, you patted yourself on the back for

• 20:13Speaker 03

  being so smart as to not get caught, and you watched. What you didn't do is you didn't turn aggressive at the bottom. That's right. And it's common not to do so. It's common to, as you say, for people to say, "I'm not going to jump in while this thing's collapsing down. I'm going to wait till the dust has settled and the future is clear. I'm not going to try to catch a falling knife." But it is when the knives are falling that the people are most terrified, that the best bargains are available. So if you wait until the dust settles, the bargains are gone. And that's what happened at the end of '08.

• 20:56Speaker 03

  You mentioned that we, in distressed debt, we put 500 million a week to work in the last 15 weeks, following the bankruptcy of Lehman Brothers, and across the firm, something like 650 million a week for 15 weeks. That's $10 billion. But the key is, it was at a time when essentially nobody else would, you get great bargains. By the time the end of '08 rolled around, the hedge funds that were getting withdrawals had either satisfied their withdrawals or gated.

• 21:27Speaker 03

  And

• 21:28Tim Ferriss?

  What does gated mean?

• 21:29Speaker 03

  Uh, told clients they couldn't have their money back for a while.

• 21:32Tim Ferriss?

  Gotcha.

• 21:33Speaker 03

  Um, and, uh, so the, the selling abated. A few people saw that, that, uh, the great values and with this, with the selling and thus the fear having reduced, they were able to come forward. Prices started to move up, then it's too late. Because if you're trying to buy in a falling market, you can buy all you want at successively lower prices. But if you're trying to buy large amounts in a rising market, your own buying puts the price up, you're your own worst enemy. You can't get much at low prices. So, you know, one of the keys to successful investing is to either be unemotional or at minimum, act like you are.

• 22:16Speaker 03

  Uh, you know, the great investors I know are behave in an unemotional fashion. You know, Warren Buffett couldn't care less. Uh, David Tepper couldn't care less and, and, uh, and so forth. Um, uh, my, my own partner, Bruce Karsh, very, very, very stalwart. But part of it is that we support each other at the bottom. It's not easy, you know? And, and I say in the book that I recount some of the things we've done right with regard to cycled extremes, but I absolutely don't want to give the impression that it's easy. It's terrifying. Others are terrified. That's why they're selling. That's why they're saying, I don't care what the price is, just get me out. That's what, that's when you want to buy.

• 23:00Speaker 03

  But the things that terrify them into selling will also terrify you. You have to overcome it.

• 23:07Tim Ferriss?

  How much of that stoic resilience or stoic composure is, uh,

• 23:16Tim Ferriss?

  nature versus nurture, born versus trained in, in, from what you've observed and experienced? And, and if, if a portion of it is trained, how, how would you suggest to someone that they develop that ability?

• 23:30Speaker 03

  I don't want to answer categorically. I think it's a hell of a lot easier if you're born that way. You know, to, to, to teach yourself to be unemotional is to, is to counter human nature. And by definition, it can't be easy.

• 23:48Speaker 03

  This is other than as to, you know, where are we in the cycle and what's going to happen in the coming six months. This is probably the question I get the most often. How can you teach yourself to be unemotional, to be contrarian, to be a second level thinker?

• 24:04Speaker 03

  And there is no easy answer. In the first book, on the subject of what I call second level thinking, I say, in basketball, they say you can't coach height. All the coaching in the world will not make your team taller. So I don't know, frankly, whether you can, whether people can teach themselves to be unemotional. But clearly, if you are as emotional as others, you will probably succumb to the same errors.

• 24:36Tim Ferriss?

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

• 25:01Speaker 03

  Thirty-one now.

• 25:02Tim Ferriss?

  Thirty-one?

• 25:03Speaker 03

  Because Oaktree is twenty-three years old, but we worked together for eight years before that.

• 25:06Tim Ferriss?

  Prior to that, all right. So if you were trying to hire a, say, twenty-five-year-old version of Bruce, what would you be looking for?

• 25:18Speaker 03

  Well, I'll tell you what he is.

• 25:19Tim Ferriss?

  Let's, let's do that.

• 25:20Speaker 03

  He's super smart. That goes without saying. He is highly competitive. You know, he's a chess player. And, and, and most of the people that, again, that I know who are good investors are, are games players, either backgammon, or, or chess, or something like that. We are inherently competitive.

• 25:50Speaker 03

  He's also very analytical and he's kind of a grinder. And I would describe myself as being intuitive and a quick decider, thinking slow and fast. Kahneman, I'm a fast thinker. You tell me a problem, I tell you my answer in short order and I'm done with it for the most part. Bruce will think about it longer, come to his conclusion, and then he'll come back the next day and say, you know, I was thinking about it last night, I don't think that's right, and here's why, or I don't think you were right, and here's why. And he'll grind on it for hours and days.

• 26:32Speaker 03

  I think this is part of the secret to our success. Again, something I once wrote on the subject of a good partnership, I said, I said, shared values and complementary skills. If you have a partner who has different values than you do, for example, Bob wants to make the most money possible and Ed wants to operate with integrity. Those are largely contradictory. So I think it's very important to share values, but I also think it's important to not be the same person, a copy of yourself. If you're, if it's a copy of yourself, you don't need it.

• 27:15Speaker 03

  The person should bring skills that you don't bring and maybe operate in ways you don't. And I think it's probably helpful that I'm intuitive and he's analytical.

• 27:26Tim Ferriss?

  I've heard, well, heard, that's not the right, not the right verb, I've read. I believe it was Buffett who said that Charlie Munger has the, something along the lines of the best 60-second mind he's ever encountered. It sounds like you also have a very highly developed.

• 27:47Tim Ferriss?

  Fast thinking capacity is, how is it similar or different from Charlie Munger's 62nd?

• 27:56Speaker 03

  Well, first of all, it's a daunting comparison. I would never put myself in the category with Charlie. He's brilliant and one of the best thinkers there is. But, you know, I mean, the main thing is that he has read more broadly. He's had, he's had another 22 years to read further and he was probably always a broader reader than I was. And so it's, it's his ability to call on these references, you know?

• 28:29Speaker 03

  In a way, it's kind of silly to think we have to, or that we can reinvent all the wisdom in the world. It's great to borrow from others and Charlie does that broadly and I try to do it, but he just knows more.

• 28:42Tim Ferriss?

  I think we'll, we'll almost certainly come back to Warren and Charlie more in this conversation. But I want to return to Bruce because you mentioned the complementary skill sets and you've, you've written about him, of course, quite a bit. Mentioned him quite a bit and I want to pull up quickly just a few lines in the new book. So Bruce and I have exchanged ideas and backed each other up almost daily over that period. This is preceding text and my give and take with him, especially in the most difficult of times, has played a particularly indispensable part in the development of the approaches to cycles on which this book is based. Could you share an example of a, of back and forth or disagreement during a difficult time or with a particular decision?

• 29:28Tim Ferriss?

  Is that possible? Just so that we have a real world example of, of the interplay between the two of you?

• 29:34Speaker 03

  We normally don't debate individual investments because he operates more at that level and I operate more at the big picture level within Oaktree.

• 29:45Speaker 03

  But, I mean, I think a good example is in the period we've been talking about a couple of times now, we've mentioned the last fifteen weeks of '08. You know, it was really a very tough period because Lehman Brothers had gone bankrupt and Bear Stearns had disappeared and Merrill Lynch had been absorbed by Bank of America and Washington Mutual and Wachovia Bank and, you know, and it looked like falling dominoes. And, you know, people were talking about the fact that Morgan Stanley was next and Goldman was right behind that. And so you just had to conclude that the world, that the financial world was either gonna end or it wasn't. You couldn't analyze it, you couldn't prove anything about the future, and so it required

• 30:30Speaker 03

  an almost gamesman-like approach to whether you buy or not. And, you know, we would talk about that in that sense, and we were both very comfortable talking about it in that sense. And what we concluded was that if the world ended, it didn't matter what we did. But if the world didn't end and we hadn't bought, we hadn't done our job. So buck up and do your job. Now, the great thing is that half the days Bruce would come to me, because he would be lying in bed at night thinking about this stuff, and he would come to me and he would say, "You know what? I think we're going too fast. I think we should slow down."

• 31:15Speaker 03

  And half the days, he would say, "I think we're going too slow." And, you know, so I would play devil's advocate and support his decision, but try to show him the other side. And he would do that with me. And that's why we got it done. But I, as I say in the introduction to the book, from which you read... I think that, I don't think either of us could have done as good a job alone. I think that the devil's advocacy and, but in a supportive way, really held the key. I wrote, in one of my memos, I wrote about a reporter.

• 31:59Speaker 03

  And he called me up a few days after the bankruptcy of Lehman, and he said, "What are you doing?" I said, "We're buying." He said, "You are?" like it was the craziest thing he ever heard. And, you know, my reaction was, "If we're not buying now, when will we?" But, you know, it's been a great partnership, as you say, 31 years. Never an argument. Never an argument. Never an argument. I mean, intellectual disagreements, but never an emotional argument. And never, and the key is respect.

• 32:35Speaker 03

  Even when we disagree, we respect. And the great thing about that is, you sit down, you disagree, you, maybe you don't come to a conclusion. And then you go back to your corners, and he says, "Well, you know what? Maybe Howard's right." And I say, "Maybe Bruce is right." And then you can have a productive discussion. If, if you, if your reaction is, "That moron," then you can't benefit from what he has to say.

• 33:03Tim Ferriss?

  For, for people who are hoping to exhibit that type of poise and respect for someone else, are there any tactical recommendations you might have? And the reason I ask that is, I no longer live in Silicon Valley, but I was there for 17 years, and you see co-founders split all the time. Some of them go the distance, but a lot of them end up fatalities. And you can almost see the writing on the wall when the respect goes out the window. And it's just a matter of time for a lot of these guys. For, for people who are in partnership, let's just for the time being assume it's in a business capacity or an investing capacity. What are some of the tools of the trades that it doesn't escalate? Do you walk out of the room if you're starting to get heated there?

• 33:46Tim Ferriss?

  Or do you avoid in some systems way, given policies of the firm, any types of sort of mission critical, single decisions from becoming an object of argument? If that makes any sense.

• 34:02Speaker 03

  Sure.

• 34:03Tim Ferriss?

  Because when the stakes are high, what are some recommendations you would have? When things, when perhaps emotions are starting to escalate?

• 34:11Speaker 03

  Well, the only issue I would take, Tim, is you started with, assume you're in partnership. I think you have to start sooner.

• 34:19Tim Ferriss?

  Okay.

• 34:19Speaker 03

  Who do you get in partnership with? And, you know, you have to, you have to share values. And you shouldn't be partners with somebody you're not going to like, enjoy spending time with, and be able to work with constructively when the stuff hits the fan. That's really the key. So I mean, I believe that, that most solving, most personnel or managerial problems start at the beginning with the hiring decision or the combination decision. So, so, you know, just don't get into business with somebody you're not going to be able to live with. It's kind of like a marriage.

• 34:56Tim Ferriss?

  Do you stress test their ability to handle potential high-stress situations in some real or simulated fashion? Do you look back at, in say, hiring decision? Do you look back at their history and reference checks to assess that? How do you assess whether someone is going to keep their cool or not?

• 35:15Speaker 03

  Well, we don't do simulations or war games or anything like that. But we do, you know, I mean, that's an important part of reference checking. You have to, you have to look beyond whether it's the person is smart and whether the person's a moneymaker. You know, we have a no assholes rule.

• 35:34Speaker 03

  At Oak Tree. And I think that saves, solves a lot of problems. And, you know, there are lots of people in the world who can make you a lot of money. But you, you may not want to be in business with them. And it may not be viable long term. Now, it's, it's hard to absolutely follow that rule. Because really smart moneymakers are very tempting. But I think it's, I think it's really important. But, but then, you know, once, once you are in business together. And you have the inevitable disagreement. I think one of the most important things is to, number one, acknowledge the limits on what you know. If you, if you go in with some humility.

• 36:19Speaker 03

  Then you're unlikely to have a fight to the death. That is, to the death of your partnership over an issue. And, and it's, it's, you know, it's great to say, I mean, people should wake up in the morning. And start the day by practicing, I don't know. I don't know. It's a great thing to say and not enough people say it. And, and the, the, the flip side of I don't know. Is what I said before about our discussions. Maybe he's right. You know? And so I think that's important, humility. Number two, again, a control of emotion. Don't get into fights just to show who's, who's more manly.

• 37:03Speaker 03

  Or, you know, or, or equate winning the argument with success. Because if you're, if you're in a business situation. And you're fighting for something that ultimately proves out to be a mistake. Your success in winning the argument will lead to a failure. So don't confuse winning the argument with coming to the best decision. And, you know, again, try to limit the testosterone. I think that really gets in the way.

• 37:38Tim Ferriss?

  One of the many things that I really enjoy about your writing is that it serves, for me at least, as a reflection on clear thinking that transcends investing. It applies to so many, if not all, areas of life, at least those governed by anything in the prefrontal cortex. And one that caught my eye when I was reading, which is page 15 in the new book, is the following, and I'd just like to read it, it's not very long. "In addition to an opinion regarding what's going to happen, people should have a view on the likelihood that their opinion will prove correct. Some events can be predicted with substantial confidence. Example given: will a given investment in grade bond pay the interest it promises? Some are uncertain.

• 38:23Tim Ferriss?

  Example: will Amazon still be the leader in online retailing in 10 years? And some are entirely unpredictable. Example: will the stock market go up or down next month? It's my point here that not all predictions should be treated as equally likely to be correct, and thus they shouldn't be relied on equally. I don't think most people are as aware of this as they should be." Could you expand on this a bit, if that's possible? Maybe give some examples of how you or other people you respect use that type of heuristic when making decisions, or just, I suppose, reflecting reality in their own minds or perceiving things?

• 38:59Speaker 03

  Sure. You know, we all have opinions, and we hold our opinions because we believe in them. Nobody ever says, "You know, my opinion is X, and I think I'm wrong." We all think that our opinions are correct. But, and again, the world becomes a better place, an easier place to navigate, if we admit that even though there are opinions, they may be wrong. And, you know, how does an investor like me deal with the fact that he doesn't believe in future predictions?

• 39:40Speaker 03

  And the answer is, I say, and I have opinions on all these subjects, but I say it's one thing to have an opinion, and it's another to believe and act as if it's right. And if you just say, maybe I'm wrong, the world gets easier, in my opinion. Easier to succeed, less easy to navigate day to day. You know, and a big theme of the book is that we have to view the future not as an event which is predetermined and predictable, or, you know, determined already, but as a range of possibilities, as a probability distribution.

• 40:24Speaker 03

  And, you know, I went to the World's Fair in Flushing in 1964, I think it was, and I stood before an exhibit that IBM had, and it was, you know, typical of technology fifty odd years ago. It was the most simplistic thing you could imagine. They had, they had a slot at the top and a bunch of balls, and the balls came through the slot, and then there were a bunch of pegs in a grid. And when the balls hit the pegs, they started to diffuse, and by the time they got to the bottom, they were in a bell-shaped distribution. And I think that was probably my first exposure to a distribution, but it's beautiful, and that's how life is.

• 41:09Speaker 03

  The future is a distribution of possibilities. And if we're really smart, we know what the distribution, what the possibilities are, and we may have an idea of which are more likely and less likely, but we still don't know what's going to happen. And, and, and I think we have to behave that way. Now, some things we know more, some things we know less. We shouldn't get confused, but the, the, the most important single thing is to not have the same degree of conviction about all of our opinions.

• 41:40Tim Ferriss?

  Do you apply a, say, one to 10 numerical value? Is it more of a light, medium, strong? How, how do you think about that yourself?

• 41:50Speaker 03

  Yeah, well, I think it's, it's certainly not, you know, I'm not, for the most part, a quantifier. If you read the book, I would hope you would be struck by how few numbers there are in it.

• 42:04Speaker 03

  And, you know, one of the great quotes, which is broadly attributed to Einstein, I don't think it was Einstein, is that not everything that can be counted counts, and not everything that counts can be counted. So, the most important insights to life are non-quantitative. But I try to be conscious of, when I have an opinion, of how likely it is to be correct, and I try really hard not to always assume that I'm right. By the way, let me add one thing. Henry Kaufman, who was the chief economist of Solomon Brothers in the 70s, at a time

• 42:46Speaker 03

  when America was riven with hyperinflations, 15, 16, 17% a year, nobody could figure out how to stop it, and the world was really a very difficult place to live. Kaufman, there was two guys, Kaufman and Al-Wajallawar first, Boston, they were called Dr. Gloom and Dr. Doom. But Kaufman said, "Two kinds of people lose a lot of money. The people who know nothing, and the people who know everything." And it's, very few of us know nothing, but it's really important to assume, to not assume we know everything.

• 43:22Tim Ferriss?

  Is there any reading you've done, or maybe it's just real-life experience in the trenches of doing this day in, day out, but for people who want to develop that, I saw that you're, it seems like a reader or fan of some of what Nassim Taleb has put out, and he talks about epistemological arrogance quite a bit, thinking that we are believing we know it all, or more than we actually know. How would you suggest, are there any resources, letters, books, memos, talks, that you might recommend to people who want to really cultivate that awareness of limited knowledge?

• 44:02Speaker 03

  Well, when you started to ask that question, I did fast forward to...

• 44:08Speaker 03

  Nassim Nicholas Taleb and his book Fooled by Randomness. I think it's a really important book in terms of its ideas. And it's really about how much randomness there is in our world. Now, it's primarily about investing, not the general world, but the world of investing. And, you know, his example is that if you're a dentist, he picks on the dentist a lot in the book. But if you're a dentist- Picks on economists, too. Yes. And you always fill a tooth the same way, you always get a successful filling. Whereas in the investment business, there's nothing that you can do that if you do it

• 44:49Speaker 03

  the same every time, you're going to get a successful outcome because of the changeability and randomness in the world. And this is extremely important. And, you know, we have to think about the world as a probability distribution. When we, you know, one of the things that interests me most is when you look at history, you say, "Well, I don't know so much about the future." But the history, that's done, that's settled. We know what happened, we know what the truth was. But Taleb uses a concept called alternative histories. The other things that reasonably probably could have happened but didn't.

• 45:30Speaker 03

  And so when you look at a historical event, you have to say, was it, was that outcome inevitable? In which case it demonstrates a truth? Or was it subject to randomness? And could other things have happened just as well? You know, I wrote a memo, in a memo around '06, I talked about the Rose Bowl game between USC and University of Texas. And USC was highly touted as the best team in the history of college football. And I won't go through all of it. I hope readers will take a look at it.

• 46:13Speaker 03

  But in the end, they lost on one play. And so, nobody talked about them as being the best football team in history. My point was, and I entitled this section "What's Real."

• 46:26Speaker 03

  Maybe they were the best team in history. And maybe the fact that they weren't successful on that one play that the whole game done, maybe it was because the wind was blowing left to right rather than right to left at that moment. And so, we should not be too firm in our conclusions. I guess the recurrent theme is a lack of certainty. But I really would push people to fool by randomness. There's a little book by John Kenneth Galbraith called The Short History of Financial Euphoria, and a great quote, he said, "We have two kinds of forecasters, the ones who don't know, and the ones who don't know they don't know." And that has been very inspirational for me.

• 47:09Tim Ferriss?

  I was, I don't think this was attributed to you, but I came across it in looking at some highlights of your memos in prep for this conversation. And I don't think it's attributed to you, but someone said dumb money can become smart money if it accepts its limitations. I don't know if you would agree with that, but it's stuck with me as maybe, not necessarily forecasters, but at least people who cultivate becoming aware of what they don't know.

• 47:40Speaker 03

  Sure, well, I think, first of all, knowing what you don't know is one of the keys to success in anything. You know, Dirty Harry said, "A man should know his limitations." I wouldn't say, it's not my quote, I wouldn't necessarily say that dumb money can be smart money, but I would say that one of the ways to avoid being dumb money is to not act as if you know things you don't know. Maybe by the time I get done giving the quote, I'll be able to remember who said it. But somebody very wise said, Mark Twain, that's it. "It's not what you don't know that gets you into trouble. It's what you know for certain that just ain't true." That is so important.

• 48:25Speaker 03

  There's nothing more dangerous in life than being sure you know something that you don't know. If you have excess certitude, you will do things boldly, in dangerous ways, and to dangerous extents that have the ability to get you into trouble, get you killed. But a sentence that starts off with "I'm not sure, but" is unlikely to lead to fatal action. The distinction to me is so clear and so unarguable that I think this is one of the most important things for life. Know your limitations.

• 49:02Tim Ferriss?

  You mentioned a little bit earlier how you could potentially say to yourself in the morning, "I don't know, I don't know. Maybe he or she is right, maybe he or she is right." It makes me think of some of these memento mori-type quotes that may be apocryphal from ancient Rome, where they'd have someone behind the emperor when he's being paraded through the streets saying, "You're just a man, you're just a man," something like that. I know this is seemingly maybe not on the same topic, but nonetheless, I want to ask about it. Do you have any particular routines or habits in the first, say, hour or two of your day? Whether it's now or whether you were kind of...

• 49:46Tim Ferriss?

  if there were particularly productive period in your professional life where you feel like those routines or habits in the morning were important? Does anything come to mind?

• 49:58Speaker 03

  I don't have stylized routines. I mean, I would just say that my life is pretty calm, and I try to keep it that way.

• 50:08Tim Ferriss?

  What would be a symptom of it not being calm? And how would you respond to that?

• 50:12Speaker 03

  Well, watching too much political TV and getting exercised about what you see on TV would be a good example. I mean, that's negative energy. That's not going to contribute to your effectiveness in the day. Now, the fact that I don't get exercised about what I see on the news shows is not purposeful.

• 50:35Tim Ferriss?

  So up to this point, we've talked a fair amount about the importance of avoiding hubris, of understanding your limitations, the incompleteness of your knowledge. How do you balance that with perhaps knowing your strengths well enough or having conviction in evidence to the extent that you can then take action?

• 50:54Speaker 03

  Sure. Well, that's a great question, Tim. And clearly, it's essential to balance. You don't want to be the person who thinks he knows everything, but you can't be very successful in life, and especially not in investing, if you think you're the person who knows nothing. There is no magic in it. There is no rule, no method. It's just an awareness. But we have to feel we know enough to take action. Now, most successful people, most smart people have, don't have a problem in that area.

• 51:37Speaker 03

  They have a history of having their ideas validated, for the most part.

• 51:44Speaker 03

  But I think it's, I mean, it is one of the great conundrums, which is unanswerable methodologically. You know, you buy a stock at eighty, it falls to sixty. You say, "Well, I think it's cheaper now. I like it more. I'm gonna buy more." You buy more, and now it falls to forty. Is there a point at which you say, "Well, maybe I'm wrong, and maybe the market's right"? You know, if you throw in the towel and sell every stock you buy, when it goes down a little, you can never be successful. But if you ignore the possibility that you're wrong, you can never be successful. And you have to strike a balance.

• 52:23Speaker 03

  So when you buy a stock and it goes down a little, you take another look at your analysis. Is there anything you missed? Did your analysis hold water? And so forth. Maybe you talk to some people that you respect to get their opinions. But, you know, again, if you're too sure, you're in trouble. And if you're too unsure, you're in trouble. You have to strike a balance.

• 52:50Tim Ferriss?

  If we come back to the hypothetical example you gave. Someone buying at sixty, drops to forty, drops to thirty, drops to twenty. To avoid being in that position where you are offering yourself the option of buying or selling at each of those check-in points, what are you deciding in advance so that you don't make those interim mistakes? Or you don't even make those decisions or look at them to begin with?

• 53:18Speaker 03

  That's not my approach or Oaktree's approach. We don't have preset rules. Everybody says, "Well, why don't you just set a rule"? There are things called stop-loss orders. You buy something, it goes down twenty percent, you sell it every time. There is no rule that will ever work, in every case. You have a rule that goes down twenty, you're out. So it goes down... Twenty-one, you sell, then it goes up a hundred. You know, or it goes down ten, you don't sell, and it never goes up again. There can't be a rule that always works. One day, just before the publication of my other book, I had lunch with Charlie Munger.

• 53:59Speaker 03

  And at the end of the lunch, when I got up to go, he said, "Now, just remember, none of this is meant to be easy. Anybody who thinks it's easy is stupid. These things cannot be reduced to a rule. The market operates so as to confound rulemakers."

• 54:21Speaker 03

  You know, and I wrote a memo five years ago called "It's Not Easy." It all comes down to judgment. We have to have, if we're going to have superior investment performance, we have to have superior judgment. And you, I mean, you can work on your processes, both intellectually and emotionally, but you can't, I mean, superior judgment isn't something you can order up, and not everybody can necessarily attain it. But, I mean, I think that one of the most important things is to dismiss the concept of a process or a rule that always works, in the absence of superior judgment.

• 55:05Tim Ferriss?

  Is the judgment the decision to take a certain path versus another? In other words, and I know I'm going to be bastardizing this, but if an advantage could take the form of access to better information, better analysis of that information, making a better decision with that information that is available, having the courage to act on it, and then the emotional fortitude to either act on it or also sit with that decision. And there may be other behavioral, psychological advantages or disadvantages, I'm sure there are. When you talk about judgment, is that a particular link in that chain? Is it...

• 55:48Speaker 03

  I think judgment is everything. For example, just to follow your taxonomy. Judgment is knowing when you have information that others don't. And if you think you know something that others don't, it's knowing when yours is likely to be valid and knowing whether you're likely to be offbeat. It's understanding how to analyze it. Judgment is the reaching of conclusions based on your analysis. And judgment is all we have to tell us when something goes against us, whether we should hang in or give up. So, as I say, I think it's all judgment.

• 56:31Tim Ferriss?

  I would imagine a lot of people read your memos and your writing to develop, in hopes of developing better judgment. And that while there is no one rule that will work for all circumstances, all cases, there may be certain questions or tools that prove helpful in a greater percentage of cases than others. And to that, I would love to refer to a few things that I have in front of me. One is a letter that you sent to me along with the book. And towards the end of the letter, it says, "I draw on my 50 years of investing experience

• 57:15Tim Ferriss?

  to provide an orientation to the usual cycles in the economy, corporate profits, the availability of credit, and the securities markets, as well as some of the less ordinary ones. For example, in distressed debt, investor psychology, and even in success." But I think potentially the most useful chapter, the most useful is the chapter on the cycle and attitudes towards risk. How investors are thinking about risk and behaving toward it at a point in time might be the single most influential determinant of markets' position in the cycle. And thus, the best indicator of how we should behave with regard to. And I read that chapter, I believe I had the right chapter. And there's a point in this chapter that is, that has a few lines bolded, which I really appreciate, by the way.

• 57:57Tim Ferriss?

  And it is, "If I could ask only one question regarding each investment I had under consideration, it would be simple: how much optimism is factored into the price?"

• 58:07Tim Ferriss?

  Could you talk about this question and perhaps give some examples of using it or how people might use it?

• 58:15Speaker 03

  Sure. You know, I started in the business in a summer job at Citibank, summer of 68, 50 years ago. And the bank was an investor in the fifth, what was called the nifty 50, the 50 best and fastest growing companies in America. And if you bought the stocks the year I showed up and held them five years, you lost almost all your money in the best companies in America. Then 10 years later, I switched to the so-called junk bond business, high-yield bonds. Now I'm lending money to the worst companies in America and I'm making money steadily and consistently. So clearly, buying good things can't be the secret to success in investing and avoiding bad things. It has to be the price you pay.

• 58:59Speaker 03

  It's not what you buy, it's what you pay. And there are, there's no asset which is so good that it can't become overpriced. This is, of course, something that people have to bear in mind when they look at the FAANG stocks. And on the other hand-

• 59:14Tim Ferriss?

  For those who don't know, could you-

• 59:15Speaker 03

  FAANG, Facebook, Amazon, Netflix, Google, and they throw in Alphabet, too. And so there is no asset which is so good that it can't be overpriced. There are very few assets which are so bad that they can't be underpriced and thus a bargain. So what we have to look for if we're going to be successful investors, now my school, which is called value investing, puts more emphasis than perhaps venture capital or growth investing, which largely looks for brilliant futures. But the key is paying a low price relative to something called intrinsic value.

• 1:00:00Speaker 03

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

• 1:00:16Speaker 03

  So we want low price to value. How do you get low price to value? And the answer is low optimism. There are other ways to describe it.

• 1:00:26Tim Ferriss?

  You mean looking for low overall optimism?

• 1:00:28Speaker 03

  Right. If, if, if, in short, the things that everybody feels good about are likely to be the things that are high priced and the things that everybody feels bad about are likely to be low price. So if you could find out that here's, here's a stock. Nobody thinks this company can ever have a good day. Maybe there's a chance that it'll produce some favorable surprises and make you a lot of money. If there's a, if there's a company like the Nifty Fifty back in 68, everybody assumed literally, Tim, nothing bad could ever happen to these stocks. Then clearly there has to be so much optimism in the price that it's, that there'll never,

• 1:01:12Speaker 03

  there can never be a favorable surprise. We make money from favorable surprises. And if, if the conviction of, positive conviction is so high, then by definition, there can never be a favorable surprise. So I, I think that this is a number one concept.

• 1:01:31Tim Ferriss?

  You, you, you, you mentioned it this, I think, I think you said the word never in this sort of hypothetical, uh, exuberant enthusiasm, what someone might say. And what, what, I believe you, there are certain words you dislike using or pay, pay, pay attention to when they come up.

• 1:01:50Speaker 03

  It's all part of the, of this, uh, lack of intellectual hubris.

• 1:01:56Tim Ferriss?

  Right.

• 1:01:57Speaker 03

  We should never say, never, always, has to, can't.

• 1:02:07Speaker 03

  You know, these expressions are far too absolute to be winners in a world beset by uncertainty and randomness. And when you use those words, you tend to get into big trouble.

• 1:02:26Tim Ferriss?

  When assessing public sentiment, it could be really wide. Let's say, anyone participating in the S&P 500, it could be narrower. But let's assume we're looking at the broad, the broadest collection of market participants, at least, let's just say, S&P 500. I was texting with a friend of mine, who's a successful investor, very different stylistically than yourself. And I asked him, I said, "What would people use, or what do investing pros use, or what do some of them use to measure how fearful or greedy, and then in quotation marks, the market is? Are there go-to indices or polls?"

• 1:03:09Tim Ferriss?

  And he said, "People use the VIX as a measure of fear, V-I-X." And then, he said, "Some people might use something like yield on junk bonds as a measure. In other words, low yield equals complacent market." What are, let's say, it seems so difficult to keep track of the media as a whole, although certainly it becomes obvious at some point if it's all negative or all positive. Are there particular indicators that you like to pay attention to, or your firm likes to at least keep an eye on?

• 1:03:43Speaker 03

  In the old book, there's a chapter that talks about the importance of taking the temperature of the market, knowing where we stand. And it has a, it includes with a checklist, largely tongue-in-cheek, called "The Poor Man's Guide to Market Assessment." And basically, it asks some simple questions. "What's going on?" Are, are, if a new fund comes out, does it sell out immediately or does it struggle? Um, if, um, if, uh, if an investor goes to a cocktail party, yeah, there you are. It's also in the new book. Oh, it's also in the new book? No, it's great. Good.

• 1:04:22Speaker 03

  You know, if you, if, if, if an investor like me goes to a cocktail party, is he, is he the center of attention that everybody wants to talk to? Well, that's probably a, a sign that, that interest in the market is too high. Or is he pushed into a corner and everybody wants to talk to, to the, uh, athletes and the, and the venture capital guys? And that's probably an indication that interest in my part of the market is too low and that bargains may be available. Uh, you know, and when you turn on TV, uh, is it all they want to talk about is the good news or the bad news? And, um, I, I have some cartoons in, in, in the new book. Uh, old cartoons dredged up from my files, uh, but you know, um, it, it just, they demonstrate

• 1:05:06Speaker 03

  that virtually everything in the world and in the markets is subject to either positive or negative interpretation. And if, if, if everybody is interpreting everything positively, that tells me that the, that the spirits are too high and, and perhaps ready to be dashed and, and vice versa. You know, the greatest thing I was ever taught was back around seventy-three, seventy-four. Somebody said, "I'm going to tell you about the three stages of the bull market." And in the first stage, just a few incredibly insightful people understand that there could be improvement. And in the second stage, most people recognize that improvement is actually taking place.

• 1:05:52Speaker 03

  And in the third stage, everybody and his brother believes that things will only get better forever. Now, I think this is, number one, this is a very accurate description of the world. Number two, clearly, if you buy in the first stage, when only a few people understand the potential for improvement, you're going to pay a low price because there isn't much optimism in the price. Then, as you progress to the second and third stage...

• 1:06:24Speaker 03

  The unanticipated improvement takes place. That gives the market a favorable surprise. The stock prices or the asset prices rise in response to those favorable surprises. And but you eventually reach a point where the good news convinces people that it's gonna go on forever. And when everybody believes that things will get better forever, clearly it's likely that so much optimism is in the stock price that it's dangerous and unlikely to yield a profit. So I think that the three stages of the bull market and conversely of the bear market

• 1:07:06Speaker 03

  are really important, not as a money-making rule, but as something to bear in mind and watch out for.

• 1:07:16Tim Ferriss?

  I'm gonna ask you a few questions that that you may not like, but that my fans will kill me for if I don't ask. So where I guess number one is, where do you think we are at the moment? And of course, this has to be time stamped, and we're talking in August 2018. And what has you worried? What has you optimistic, if you're optimistic about anything?

• 1:07:45Speaker 03

  Sure. Well, where are we? For the last 10 years, ever since the crisis, people have been asking that question in the form of what inning are we in? When they asked it in late 08, what they really meant was, how much longer will the pain go on? Now, what they're asking is, how much longer will the pleasure go on and the bull market and the economic recovery? I think we're in the eighth inning. Now, you don't have to timestamp it because I've been saying this for a while, and I'm likely to continue to do so. But about a year ago, I came to the realization that that observation, even if accurate, is of limited use because unlike baseball, we don't know how many innings there are in a

• 1:08:30Speaker 03

  game. This is a big distinction. In a normal baseball game, we know there are nine innings. If I say we're in the eighth, and if I say it accurately, that means the good times are about to end. But in economies and markets, there is no fixed duration. So the bull market, this is the 10th year. That's a long time. In the economic recovery, this month, we have begun the 10th year. The longest economic recovery in recent history is 10 years. So, these observations start to tell you, not that it's going to end, but that the likelihood of its continuing is declining. The odds are not on your side.

• 1:09:13Speaker 03

  When you're in the 10th year, the odds of having 10 more years of recovery seemingly are not good. We don't know if there's some reason why there has never been a recovery of more than 10 years, but we have to wonder if there is. But, on the other hand, we can't be too sure. Now, I believe that this economic recovery for many years was the slowest on record. That is probably helpful because that kept excesses from coming into existence that have to be corrected with a downturn. So, you asked about the good news. The good news is that the economy is functioning at a high level. We just had a quarter of unusually rapid growth.

• 1:09:57Speaker 03

  Unemployment is declining. Our economy is the envy of the world. Stock prices, which were very high when measured by price earnings ratio last year, are not so expensive this year because the earnings have been supercharged by the tax bill. The projected earnings of the S and P 500 are way up this year, 23%, I think, which is unusual. And higher earnings, everything else being equal, means a lower price earnings ratio. So, by most measures, stocks are only slightly expensive at this point in time. So, that's the good news.

• 1:10:38Speaker 03

  The bad news is, number one, interest rates are likely to increase, and interest rates increase the burden of debt on companies. And when bonds yield more, they offer more competition for stocks. Clearly, there are a lot of uncertainties in the macro world, in the geopolitical world, and in the political world. The greatest of which is the possibility of a trade war, which...

• 1:11:08Speaker 03

  Almost everybody thinks would be extremely negative, not only for the US and for the people who engage in the trade war, but for everyone. And I think that, interestingly, what we've been talking about is assessing the level of investor psychology. I don't believe that investor psychology is terribly frothy. The way I've put it in the past is that people are not thinking bullish, but they're acting bullish. A lot of people have moved into higher-risk investments in order to get the returns they want because, right now, safe investments, treasuries and high-grade bonds and cash and money markets, offer so little.

• 1:11:51Speaker 03

  So people have been forced to move out the risk curve and take more risk, and that makes the world a riskier place for you and me. I borrowed a phrase from my late father-in-law, who said that those people could be described as handcuffed volunteers. They're doing things not because they want to, but because they have to. But the effect on the market is the same. When people move to riskier actions, it makes the market riskier for everyone.

• 1:12:19Tim Ferriss?

  So if we were to consider all of that, if you had, say, three people come to you, and you had to give them some response, because it's like a mother-in-law, people in the family, so you have to give them some kind of response. And I might be, feel free to ask some clarifying questions, but let's say someone has 100K to invest, 1 million, 10 million to invest. So 100K, 1 million, and 10 million, they make $100,000 a year. That is going to remain stable and predictable, let's just assume that on the income side. They are very cautious, I think like a lot of people, the loss aversion and pain of losing

• 1:13:02Tim Ferriss?

  $100 hurts much more than the joy they derive from making $100. And they have their investable funds, in this case, 100K, 1 million, 10 million, in cash or cash-like equivalents, or some of these safe vehicles currently. And they say, Howard, I don't know what to do. What are your thoughts?

• 1:13:23Speaker 03

  I think that... One of the most important things in investing is to make people comfortable. It's a mistake to sit there and say, "You should do this, you should do that," regardless of people's comfort level. Because if you violate their comfort level, if you force them into things that are too risky for them, and then things go bad, they're unlikely to do the right thing. They're more likely to panic and sell on the lows, which is the cardinal sin of investing. So it's very important to assess people's needs and ability to withstand tough times. Clearly, the person who makes a hundred and has a hundred doesn't have a big margin of

• 1:14:08Speaker 03

  safety for tough times, and they should invest more conservatively. The person with 10 million, depending on his psychology, or her psychology, probably would be willing to stomach some losses in the pursuit of big gains. Now, people always overestimate in advance the equanimity with which they would greet losses. You know, back in 1997, '08, '09, when the stock market and the tech stocks were rocketing along, what a lot of people, I think, said is, "Well, you know, my 401K's been doing

• 1:14:51Speaker 03

  so great, I wouldn't mind if I lost a third of my money. It's okay." Believe me, when they lost a third of their money, they weren't okay. But, you know, our mantra, my mantra for the last few years, has been move forward but with caution. And so, in varying degrees to those three people, what I would say, we are investing every day. We are endeavoring to be fully invested today, other than in funds that are strictly designated as standby funds for the crisis. We are definitely taking risk.

• 1:15:30Speaker 03

  But with caution. We're a cautious firm. We invest in risky asset classes, high-yield bonds, distressed debt, real estate, emerging market stocks and bonds, et cetera. These are risky assets. And Oaktree has always taken a low-risk approach, a controlled-risk approach, to those asset classes. So when I say with caution, I mean with more caution than usual. I think this is a time for more caution than usual. And that's what I would tell those people. But I don't... So I think that the outlook is not so bad and the prices are not so high that you have

• 1:16:10Speaker 03

  to practice maximum defensiveness and go to cash and suffer a 1% return on cash. But I think the outlook is not so good and prices are not so low that this is time for aggressiveness. And I wouldn't be aggressive. I think one way that I help myself make these decisions, and it might be helpful to your listeners, is I constantly remind myself and others that as an investor, there are really two key risks that we face every day. Now, the first one is obvious, and everybody knows about it. It's the risk of losing money. What's the second? Not so obvious, a little more subtle. It's the risk of missing opportunity.

• 1:16:52Speaker 03

  And most people, if reminded of the twin risks, they would say, "Well, I think that's right." And the truth is that I don't want to lose a lot of money, but on the other hand, I don't want to miss all the opportunities. So I'm going to compromise. I'm going to balance the two. I'm going to do something kind of in the middle. And that makes sense. Everybody, you know, other than daredevils and scaredy cats, everybody should do something in the middle. Exactly where in the middle is debatable. And should be tailored to their own psyche and financial position. So the interesting question is, okay, what about today? Today, should you be in your normal balance between the twin risks?

• 1:17:36Speaker 03

  Or should it be different? Should you be in a higher-risk position because so many things yield so little? Or should you be in a lower-risk position because there are so many uncertainties? And I actually think the latter. So, fully invested...

• 1:17:51Speaker 03

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

• 1:18:06Tim Ferriss?

  So I, you know, this is not the first time I've asked a question like this, but the last time I asked the first part of that, which was making a hundred grand a year. Someone has a hundred grand to spend. It was actually at the Berkshire Hathaway shareholder meeting a long, long time ago. And it was my first and only time there. And I was so excited to be there. I mean, it's Woodstock for investor nerds. And it was, it was, there was so much excitement. People were camped out, out front to be in line. I was part of that. And I asked someone working there where the microphone was that was hardest to get to. And then I sprinted over there and I was able to ask Warren and Charlie this question. And of course, you know them.

• 1:18:51Tim Ferriss?

  And the responses can be very short. And I said, if someone hypothetically were making a hundred thousand dollars a year, they had a hundred thousand dollars to deploy in some way, how would you suggest they invest that capital? And it was along the lines of invest in the S and P 500 or low cost index fund in the S and P 500 and get back to work. And I found that very dissatisfying. But in retrospect, certainly not the worst advice that you could give someone. How, how do you, what do you disagree with Warren most on? What do you guys not see eye to eye on?

• 1:19:29Speaker 03

  You know, Tim, there's a book out called The Warren Buffett Way. And I was asked to write the foreword for the latest edition. And I wrote something called What Makes Warren Buffett Warren Buffett? And I listed the things that characterize him. Extremely high IQ, unemotional, great analyst, understand what's important, looks at the things that are important and figures out their import, ignores the things that are unimportant, and on and on like that. And the last one was the most, one of the most important. He's not afraid of getting fired.

• 1:20:01Speaker 03

  He doesn't have to worry about the interim consequences of error. Most people do. And so, you know, okay, so you say your advice is, or his advice is, invest in an index fund. Fine as far as it goes, but how much? Should the person who has a hundred thousand put the whole hundred thousand in the stock market? Right. And especially should they do it today? And if they do it all today, we're confident that twenty years from now, they're going to have a lot more money and they're going to be really happy. What about a year from now?

• 1:20:38Speaker 03

  And, and not everybody is financially able to live through a decline and emotionally able. And so, as I said, the first purpose of investing, especially for people who have more money than they need to eat, should be to make you comfortable.

• 1:21:03Speaker 03

  When I started at the bank, Citibank, fifty years ago, they had a cartoon on the wall. It said scared money never wins. And it's true. And so, everybody should invest only up to their comfort level. And so, I, I, I think I would, I certainly agree with Warren that for most people, they can improve on an index fund. But, but that's, and I'm not saying that Warren says that everybody should put a hundred percent of their net worth in the index fund, but clearly they shouldn't. And, and I was once at a, at a talk, and I was preceded by, by a college professor, I won't identify him. Warren always says, praise by name, criticized by category.

• 1:21:47Speaker 03

  So I'll only say, so I'll say, I was preceded by a college professor, and here's what he said. And this guy is known for pro stocks attitudes. And he said, if you are of average risk tolerance, you should have eighty-five percent of your money in the stock. No. If you're below average risk tolerance, eighty-five. Average risk tolerance, one-hundred-and-five. If you're aggressive, one-hundred-and-twenty-five percent of your net worth should be in the stock market. And I just think that most people can't live, in the long run, in the short run, with the consequences of being that much invested.

• 1:22:30Speaker 03

  And being human, we are our own worst enemy. Everything that goes on in the world and the market conspires to make people buy when things are going well and prices are high, and sell when things are going badly and prices are low. And fighting that is the number-one theme of the book, and it's the number-one theme of success.

• 1:22:57Tim Ferriss?

  Just from personal experience, and I mentioned this earlier, but looking at my response in, say, two thousand and eight. I'd bought a house in two thousand and seven with some very unfortunate mortgage terms and made some very bad decisions also with money that I had in the stock market at that time. And I think in part, it was because I couldn't have known how I would respond under those circumstances. And when I filled out this very templated form, of course, for whoever it was at the time, I won't mention anyone by name, but it was, to what extent would you be comfortable with a drop in your portfolio over one quarter or one year? Whatever the form of the question was, and it had ten percent, twenty percent, thirty percent.

• 1:23:41Tim Ferriss?

  And I thought, well, thirty percent, maybe. I mean, pulling an answer out of thin air, had to answer it to get through the online form. But I'd never experienced anything similar to that. And this just came to mind because I'm looking at a book on your shelf, Bringing Down the House, about games. We were talking about games earlier. As I understand it, Bill Gates, I think also Buffett, played a fair amount of bridge. Certainly, many people in the investing world, including some people who are really, really, really fantastic, some of the guys from Renaissance and so on, poker. Then you have backgammon. What do you play? And what do you think the game that they select says about the person, if anything?

• 1:24:21Tim Ferriss?

  And could playing those games help someone to assess their risk tolerance for larger types of investing? Or are there other ways to, in any way, accurately determine that?

• 1:24:32Speaker 03

  I think accurately determine, yes. Quantify, no. But I think that we can get a handle on our degree of risk tolerance, risk aversion, and we should. And, you know, I was with my son and one of his friends this week, and his friend is a great chess player. The interesting thing about people who play chess is that in chess, there's no randomness. There's no dice to roll, there's no wind to blow, no card to pick from the deck, and all the information is on the board, and everybody has all the information.

• 1:25:16Speaker 03

  So it tells you something about an intellectual process. And, you know, all the way out to craps, where everything's in play all the time based on randomness. So maybe which game we like tells us something about ourselves, but how we play also tells us about ourselves. Backgammon, which is one of my main games, which is highly probability intensive, because it's all the dice. It's the dice and the skill, but the dice mean a lot. You know, in any situation, with any throw of the dice, there are aggressive and defensive ways to play.

• 1:25:59Speaker 03

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

• 1:26:21Tim Ferriss?

  What are some of the things that otherwise smart people miss about cycles? Or misconceptions that they believe to be true, like you said with Mark Twain, that just ain't so?

• 1:26:34Speaker 03

  I think the, well, the biggest mistake you can make is ignore the repetitive nature of the cyclical pattern. Ray Dalio, in his book Principles, talks about how much analysis he and his partners did, the conclusion of which is the ability to look at what's going on in the world or in the market and say, "Oh, that's another one of those." Life becomes very easy when you have studied the past to the extent that you've seen the recurring patterns and you can recognize them when they come up again. So, I think that's extremely important.

• 1:27:16Speaker 03

  But the other thing is, and I think the guiding quote of the book is another one from Mark Twain, "History does not repeat, but it does rhyme." History does not repeat. The cycles are never the same in terms of amplitude, speed, duration, cause, or ramifications. But they do, there are themes that repeat that can help us to identify and properly respond to cyclical occurrences. So, I say in the book that, you know, I've been in the high-yield bond business now for

• 1:28:00Speaker 03

  40 years, and there was a time when there arose a body of thought that most defaults occur on bonds' second anniversary since issuance. And I don't think there was anything magical about the second anniversary, and, you know, if people believed that, then they would sell all the bonds they had that were 23 months old and buy them back when they were 25 months old if they had survived. But I don't think they would accomplish anything by that because they were, I think they were assigning an import to a number that was not valid. So, I think...

• 1:28:45Speaker 03

  It's really important to recognize cycles and understand them. I think it's unimportant to assign importance to these numbers or rules, but it's very important to understand what's going on around us. And when the recovery is old, the bull market is old, the psychology is elevated, the valuations are high, then you should know that the odds are not on your side and you should take some money off the table and behave in a more cautious way and vice versa.

• 1:29:20Tim Ferriss?

  Which I suppose also on some level necessitates cultivating a fair degree of patience.

• 1:29:27Tim Ferriss?

  I mean, it would seem to me.

• 1:29:28Speaker 03

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

• 1:29:47Speaker 03

  And if you say, "Howard, I need high returns in a low-return world," the only way to try to get them is by taking a lot of risk. And by definition, taking a lot of risk is not sure to work and could have negative consequences. So I believe that when you're in a low-return world, you have to accept it and deal accordingly. Now, this comes from Mu Zhou, which we started the interview with. I talked about Mu Zhou in a memo about 20 years ago entitled "It Is What It Is." I think one of the most important things that we can do as adults, be it in the investment world or the real world, is to say, "It is what it is."

• 1:30:31Speaker 03

  In other words, accept things for what they are, deal with them as they are, don't spend a lot of time wishing they were different, you know, certainly don't act as if they were different. We have to accept the realities.

• 1:30:49Tim Ferriss?

  Not that, in my, in my little tiny corner of investing, which is, I mean, not even worth mentioning really in this conversation, but I, I, I only bring it up to tie it to how helpful actually reading certain, I'm not gonna, it's not quite scripture, but Buddhist thinking related to concepts like Mujo and Stoic philosophy, Epictetus and so on, how helpful that has been to tempering emotional reactivity. You mentioned someone I want to come back to for a second, Peter, is it Bernstein or Stein?

• 1:31:27Speaker 03

  Bernstein.

• 1:31:28Tim Ferriss?

  Bernstein, financial historian, sadly passed away, I think it was in 2009. I've read that you consider him one of the smartest people you've, you've ever met. Why, why is that? Are there any other things that you learned from him?

• 1:31:42Speaker 03

  Forty-eight years ago, when I was a junior analyst following Xerox for Citibank, and I would give the portfolio managers at the bank my opinions, one of them came up to me and said, "Who is the best analyst on Wall Street on Xerox?" And I said, "Well, the one who agrees with me the most is so-and-so." We always think that the people who agree with us are really smart. And Peter saw the world the way I did, but in many cases, put it into words better. And I wrote a memo called Risk in '06, Risk Revisited in '14, and then bizarrely, one day I found a memo from him, you, you mentioned he passed away in '09, in, in '16, I found a memo from him on my desk.

• 1:32:27Speaker 03

  My desk is a little messy and there's a lot of stuff floating around. And it was a great memo entitled, "Can Risk Be Reduced to a Number?" And I took a bunch of stuff from that in a redo of my memo entitled Risk Revisited Again. But I just, I just think that Bernstein is great. And, and, and on the subject of risk, he said, "Every day, we walk into the unknown." And...

• 1:33:02Speaker 03

  And as I said, you know, the future is a distribution of possibilities. And some days, we don't even know what the possibilities are. And, and I conclude, if I can borrow your copy of the book. Yeah, of course. I conclude with, with a quote from him, because I think it's so good. And if I can find it quickly, he said, "The future is not ours to know, but it helps to know that being wrong is inevitable and normal. Not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity

• 1:33:46Speaker 03

  whose outcome depends on an unknown future." And I think that that's a great way to, to think about the world we have to work in. And if you accept and inhale the unpredictability, variability, and randomness of the world, I think you're likely to do a lot better in it. Now, that doesn't mean you can't invest. You can't invest even boldly. What it means is, you have to assume that things are not going to always work out right away. Well, of course, they're not always going to work out. But they're certainly not always going to work out right away, which means what?

• 1:34:31Speaker 03

  You have to have patience. You have sustaining power, you have the fortitude. You have to not invest so much that if it goes against you, you're going to panic and get out. Preparing for an unknown world, unpredictable, maybe even hostile world in the short run, is probably a lot smarter than assuming everything's going to go right, and it's going to go the way you expected, and it's going to go that way right away, and you're not going to be tested. And so I think that this is the kind of thinking that, that, that, you know, when I read Bernstein, or, or some of the other people I've mentioned, you know, I just go, "Oh yeah, right, sure." That, that gets it for me, you know?

• 1:35:16Speaker 03

  And that's why I love his stuff so much.

• 1:35:19Tim Ferriss?

  Warren Buffett has mentioned how fond he is of your writing and that, and I'm paraphrasing here, but if he sees it in his inbox or he sees one of your letters, it's one of the first things or the first thing that he'll pick up to read. I'd love to ask you about your reading. Are there any, say, three to five specific newsletters or columnists or economists or writers who you find yourself excited to read these days? Anyone who comes to mind?

• 1:35:46Speaker 03

  I think the best, you know, I work mainly in the credit area, not the stock market. So, you know, most people invest mainly in the stock market and we've talked a lot about the stock market, but that's not what I do professionally. And our Oaktree's investing is largely in something called credit, which means fixed income securities, bonds and notes and loans, not issued by governments. That's the definition of credit. And in our world, I think that there's a great newsletter called Grants Interest Rate Observer. It's a little ironic because it, grants has nothing to do with interest rates or almost

• 1:36:29Speaker 03

  nothing, but it's about credit and in particular, it exposes stupidity and it exposes companies which seem to be, where people are not bringing enough skepticism and deals that seem unwise and that kind of thing and I think they do a great job. Now, I think it's fair to say that it has a negative cast. In other words, they're mainly talking about things which are rated higher than they should be, which you should avoid or bet against.

• 1:37:09Speaker 03

  I don't think they as often talk about the things that are rated lower than they should be and present profit opportunities, but for credit guys like us, avoiding the losers is extremely important. And I think that's a great newsletter, not only for the content, but for the attitude and the importance of identifying misperceptions. You know, misperception is the key to operating in the markets. And variant perception, you understand things differently from the way everybody else understands them, is the key to success, assuming you're right. If you understand everything just the way everybody else does, clearly you can't outperform.

• 1:37:53Speaker 03

  That's the death knell for a would be professional investor. So you have to have, you have to see things different from others. That's a necessary condition for outperformance, but you also have to see it better than others. That's necessary too. The combination of those two is what I call second level thinking, which I mentioned a couple of times.

• 1:38:15Tim Ferriss?

  You also mentioned how widely read Charlie Munger is. And certainly in Poor Charlie's Almanack, for instance, he talks quite a bit about, if I'm not misremoving, evolutionary biology and really is able to pull concepts from seemingly unrelated disciplines into his sort of power zone of investing. And I've had investors recommend certain books that are much broader than investing, such as Lessons of History by Will and Ariel Durant, which I found really fascinating also. I mean, talks about cycles in a way.

• 1:38:58Tim Ferriss?

  Are there any books that you found recommending a lot or that you've enjoyed in the last few years that are not specific to investing?

• 1:39:08Speaker 03

  Not specific, yes. My reading is usually closer in than Charlie's. So an example is the book I'm working on now, which is called Factfulness. And basically, it unmask a lot of misperceptions that people have about the state of the world. And

• 1:39:34Speaker 03

  They hold these perceptions generally qualitatively, not based on data. And the author tries to substitute facts for these perceptions. He starts with a list of 13 questions describing the state of the world. And fascinatingly, I guess he gives you the answer to one, and you have to think about the answer to the other 12. The average score on the 12 is two. And he points out that if you flip the coin, you'd get six right. So the average American gets two of the 12 questions right.

• 1:40:14Speaker 03

  And so not only are they systematically wrong, but they're wrong in the same direction, which is they always pick the more pessimistic answer when the more optimistic one is true. And so he responds to our bias, and he tries to overcome the ignorance and the bias by using facts and some great, very communicative graphics. So I would recommend factfulness, and I love the idea of unmasking biases.

• 1:40:46Tim Ferriss?

  You mentioned that, and if I get this wrong, as I'm restating, please correct me, but that in a low-yield environment, to get high yield entails increased risk. I know you've written a little bit about cryptocurrency before. The last I saw was about, I think from about a year ago. What is your current view or thoughts on cryptocurrency, if any? That's one place that people are going, often with no understanding of the technology or anything else. I mean, it scares me enough, although, anyway, I won't get into my view on that stuff. But people who are well outside of tech, well outside of all of that, getting very,

• 1:41:30Tim Ferriss?

  very bullish as it relates to cryptocurrency. But what are your thoughts?

• 1:41:34Speaker 03

  I am what is called a value investor. And that means you look at the situation. You don't look at the atmospherics. You don't look at the aesthetics. You look at the value, hard value, the company's assets and the cash flow that its business produces. And you value those things. And you come to something called the intrinsic value, and then you see if you can buy it for less. If you pay full intrinsic value, you'll probably get a fair return. If you pay more, you'll probably have an unsuccessful experience. But if you can buy it for less than the intrinsic value, you should have an above-average return. That's value investing.

• 1:42:14Speaker 03

  And I think it is the intellectually soundest form of investing. And nobody has been able to tell me the intrinsic value of a Bitcoin. I believe there are assets in this world where you can come up to intrinsic value, and they are the ones that produce cash flow. Companies, stocks, bonds, buildings, that kind of thing. There are a lot of assets in this world that do not produce cash flow. You cannot put an intrinsic value on oil, gold, diamonds, paintings, Bitcoin. Does it apply to all currencies? Yes, it does.

• 1:42:58Speaker 03

  Yes, it does. We cannot say how many pounds a dollar is worth. People look at them in terms of what's called purchasing power parity, but it doesn't really work very well. And the truth of the matter is that these macro considerations, the directions of economies and markets and currencies and commodity prices, I mean, what's the intrinsic value of an orange, you know? These things, I think, can't be predicted reliably.

• 1:43:41Speaker 03

  And in fact, the so-called macro funds have been doing quite poorly for years. So there are some things that can be valued and some things that can't. And I believe that Bitcoin is one of the ones that can't be valued. And everybody says to me, "But you don't understand." And I wrote about this in my July 17 memo and returned to it in September. I learned something between July and September. That's why I put it in the next memo, too.

• 1:44:10Speaker 03

  People said, "You just don't understand. People are gonna want a currency that the government can't deflate, and that can't be counterfeited, and can't be stolen, and all these things." And, um, so, that's why I returned to it. But I still don't understand how it can be valued. I don't, i- i- in today, uh, Bitcoin is sixty-five-hundred dollars, here on August the tenth, and I don't see how you can say it's worth seventy-five-hundred, or fifty-five-hundred, or anything like that. You can say it's gonna be useful in the future. You can say people want a currency, a, a non-governmental currency. But I don't see how you can put a value on

• 1:44:48Speaker 03

  it. And, and, uh, with all of its attractions, to the extent that people find attractions in it, last year, it went from one-thousand to nineteen-thousand. Now, I could be wrong, but that tells me it's speculative buying. Uh, and, by the way, the people who, remember what I said about people who have opinions believing they are right. Obviously, the people who, it, it traded at nineteen-thousand. Somebody thought it was a good buy at nineteen-thousand 'cause it was going higher, and today, it's a third of that. So, for the most part, reasonably valued value investments do not go up nineteen times in a year, and then down by two-thirds.

• 1:45:32Tim Ferriss?

  Are there any, understanding that you are a value investor, uh, you, you mentioned a few other names in the, in the introduction of your book, Joel Greenblatt, uh, who, who I'm also, uh, a fan of. Are there any growth investors, venture investors, who are, uh, certainly approaching things differently, but are there, are there any particular growth or venture investors, or people who are playing a slightly different approach, who you have a lot of respect for, or admire for particular reasons?

• 1:46:06Speaker 03

  Sure. Let me say, there are many ways to invest. There are many people who engage in activities that I think can't be done, and there are many people in each one who do very well. So, you know, I, I don't, I don't say mine is the only way. Venture is an example. And I'm not a futurist, I'm not a dreamer, I'm not highly risk tolerant. I'm not biased to risk-taking. And if forty years ago, when Citibank said to me they wanted me to start a high-yield bond portfolio, if instead they would have said, "I want you to start a venture capital fund," I probably would have been a disaster. But in the venture field, you know, the firms that...

• 1:46:50Speaker 03

  success seems to be recurring, not random. You know? If, let's say, twenty percent, ten percent of venture capital funds are successful, you would think that any given firm, twenty percent of their funds would be successful. But there are firms which are repeatedly successful. You know, I was lucky in the last year to get to meet Bill Gurley of Benchmark, and Bill was nice enough to give me a blurb for the jacket of my book. And I was very impressed by our conversation and by Benchmark's record of achievement. And Sequoia has a great record.

• 1:47:35Speaker 03

  And, you know, Kleiner Perkins, et cetera. So, you can do it. But it wouldn't be right for me. That doesn't mean it's not right for them. Macro, there are... you know, I said fifteen minutes ago that macro funds have had a pretty bad record. Some of the greatest investors in history have been macro investors. George Soros and Stan Druckenmiller, for example, have been fabulous. They probably have the highest returns of everybody. And quantitative investing, Renaissance, and so forth. So, again, it would be a terrible form of hubris to say, "My way is the only way." My way is the way that works for me.

• 1:48:20Speaker 03

  And by the way, if you look at the others, the success ratio is not terribly high. But certainly, there are people who've done it great.

• 1:48:30Tim Ferriss?

  Yeah, there's a very high concentration of success in a handful, at least within venture. Yeah, Bill's a very smart guy. All the firms you mentioned have done really, really well. So I've heard said, this is not from you in these words, I don't think, but that the right decision at the wrong time is the wrong decision. And I'm very excited about the new book and the literacy of cycles that you are helping people to develop with this. And we're going to wrap up in just a few questions. Are there any particular

• 1:49:15Tim Ferriss?

  mental models or heuristics that are in this book or that you've used in your investing life that you think are particularly valuable, kind of across the board in life? I know it's a big question and you probably have quite a few different directions you could go with that. But just in terms of becoming a clearer thinker, a better operating human being, does anything come to mind that we haven't discussed so far as it relates to any type of mental model that would be worth mentioning before we wrap up?

• 1:49:47Speaker 03

  Well, you know, Tim, when I finished writing the book and I was thinking about cycles, I said to myself, so for example, the economy grows about 2%, 2.5% a year on average. Why doesn't it just grow 2.5% every year? Why is it sometimes 4% and sometimes 1% and sometimes 5% and sometimes negative? And the answer is excesses and their correction. And people get too excited and they over-expand their businesses, or they invest too much, or they invest too much using debt, and then something goes wrong. And their excesses produce booms.

• 1:50:32Speaker 03

  And then something goes wrong and those excessive activities turn out to be unsustainable and they are then corrected by selling off inventory, closing plants, or liquidating a leveraged portfolio, and those produce busts. So excesses and their correction. And I think the best thing that people can do is be on the lookout for those things. And when other people are engaging in excesses to the upside, we should turn cautious. And when other people are over correcting to the downside, we should turn aggressive. And I think, you know, it's been a big part of what Bruce and I have accomplished for the Oaktree Investors and my other partners and colleagues too.

• 1:51:17Speaker 03

  And it's something that everybody can do if they turn their mind to it.

• 1:51:24Tim Ferriss?

  Well, Howard, I really appreciate the time today.

• 1:51:29Speaker 03

  Good.

• 1:51:30Tim Ferriss?

  This is very fun for me and hopefully, and I believe will be valuable for people listening, just to mention a few things, of course, people can find Mastering the Market Cycle subtitled Getting the Odds on Your Side everywhere books are sold. You can also learn more at masteringthemarcacycle.com. People can learn more about Oaktree at oaktreecapital.com. And on social media, you have Twitter, Facebook, and LinkedIn, all the same, Howard Marks Book. Is there anything else that you would like to say to the people listening? Any recommendation, question they should ponder, action you might ask them to take, anything at all besides the book itself, which I encourage people to check out?

• 1:52:14Speaker 03

  Well, first of all, we've made repeated reference to my memos. They're all available online at oaktreecapital.com under the heading of Insights, Chairman's Memos. You can get the last 29 years' worth. You can also sign up for a service that'll notify you when one is published. The price is right because they're free and I hope people will read them. And I just want to say that I like to hear from people. So I don't always have time to answer everybody, but... My writing of the memos and the books has been enormously rewarding because I get lovely memos from people who would say that I made complex things seem clear. That's the one

• 1:52:56Speaker 03

  that gets me going the most. So if people want to comment, or if they want to take issue, or ask a question, I'll try to get back to them.

• 1:53:05Tim Ferriss?

  And is the best way to reach out to send you a note on social media? Or I would advise against giving out any type of email address that will get deluged, or maybe the answer is they should figure it out?

• 1:53:19Speaker 03

  Well, we're on social media, and we'd be glad to hear from them there.

• 1:53:23Tim Ferriss?

  Perfect. Well, Howard, thank you again so much for the time. And for everybody listening, links to everything we discussed will be in the show notes, as usual, at tim.blog/podcast. And until next time, thank you for listening. Hey, guys. This is Tim again. Just a few more things before you take off. Number one, this is Five Bullet Friday. Do you want to get a short email from me? And would you enjoy getting a short email from me every Friday that provides a little morsel of fun before the weekend? And Five Bullet Friday is a very short email where I share the coolest things I've found, or that I've been pondering over the week. That could include favorite new albums that I've discovered. It could include gizmos and gadgets and all sorts

• 1:54:07Tim Ferriss?

  of weird shit that I've somehow dug up in the world of the esoteric, as I do. It could include favorite articles that I've read and that I've shared with my close friends, for instance. And it's very short. It's just a little tiny bite of goodness before you head off for the weekend. So if you want to receive that, check it out. Just go to fourhourworkweek.com. That's fourhourworkweek.com, all spelled out, and just drop in your email, and you will get the very next one. And if you sign up, I hope you enjoy it. This episode is brought to you by Helix Sleep. Last year, I focused on dramatically improving a few things. Surprise, surprise. Most notably, the quality of my sleep, which seems to affect just about everything.

• 1:54:51Tim Ferriss?

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• 1:55:36Tim Ferriss?

  needs and feel preferences for each side. They have a 10-year warranty, and you can test drive your mattress for 100 nights risk-free. Right now, Helix is offering up to $125 off of all mattress orders. Check it out. Get up to $125 off at helixsleep.com/tim. That's helixsleep.com/tim for $125 off your mattress order. Take a look, helixsleep.com/tim. This episode is brought to you by InkTel. I've used them personally. Ever since I wrote The 4-Hour Work Week, I've been asked over and over again how I choose to delegate tasks, how I do 80/20 analysis, and so on.

• 1:56:19Tim Ferriss?

  At the root of many of those decisions is a simple question, actually, two questions. Number one, how can I invest money to improve my quality of life? I use that in investing as well. The second, how can I spend a little money, or moderate money, to save significant time? InkTel is one of those investments. They're a turnkey solution for all of your imaginable customer care needs. I used InkTel during the launch of The 4-Hour Body, which was very, very involved. And they provided 24/7 customer service for my Land Rush campaign because it was critical for me to take care of every person who purchased my books and participated. This allowed me to focus on the things that I am better at, my strengths, like the marketing plan that we'd worked on for six months.

• 1:57:04Tim Ferriss?

  Implementing that, InkTel trains their experienced customer service reps to know your business and your products inside and out and make your customers raving fans. They answer more than a million customer service requests every year, and they can do so across all platforms, including email, phone, social media, text, even chat. Leaving your customers with poor service or just mediocre service, which, by the way, in a competitive pool is a huge liability. Long wait times or unanswered messages carries a massive cost and risk to your business. InkTel removes the logistics and headaches of this type of communication, allowing you to focus on your strengths and grow your business. It can be a real competitive advantage.

• 1:57:47Tim Ferriss?

  And I see many, many e-commerce companies and tech companies thinking of customer service as a good enough checkbox or an afterthought. And just like Airbnb, you design in innovative ways to be a competitor and to win, you can do the same thing with customer service. So as a listener of this podcast, you can get up to $10,000 off. It's a big discount. $10,000 off your startup fees and costs by visiting inktel.com/tim. So check it out. For more info, go to inktel.com, I-N-K-T-E-L dot com forward slash tim.