Avoid Disaster W Superinvestor Howard Marks Rwh063

TITLE: Avoid Disaster w/ Superinvestor Howard Marks (RWH063) CHANNEL: The Investor’s Podcast DATE: 2025-12-13 URL: https://www.youtube.com/watch?v=hmHk_lqv_6s

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I wrote a memo called Fewer Losers or More Winners. You have to make a choice. And if you’re gonna try to win in investing, which means win in our business means having superior results, how can you possibly get superior results? And the answer is, you either have more of the things that go up, or less of the things that go down, or both. Most people can’t do both because the skillful, aggressive player might be able to get more of the winners. The skillful defensive player might be able to have fewer of the losers. Very few people have enough equipment to do both. Most people, that means you have to choose.

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Hi, folks. I’m absolutely thrilled to welcome back a very special guest today, Howard Marks, who’s the chairman of Oaktree Capital Management. It’s been a landmark year both for Oaktree and Howard. Oaktree recently celebrated its 30th anniversary, and since Howard co-founded the firm in 1995, it’s been a spectacular success. It’s grown into a globally revered leader in alternative investments with something like $218 billion in assets under management and more than 1,400 employees around the world. And a few weeks ago, Howard also celebrated another landmark, which is 35 years of writing his extraordinary memos, which are such a trove of clear and lucid investment wisdom that they’ve earned a devoted following of, I think, more than 300,000 subscribers. Howard marked that anniversary by publishing a free compilation of 45 of the best memos, which I spent the last couple of days rereading. I would say personally that nobody other than Warren Buffett has done more to distill and share the enduring truths of investing. So today, we’re going to focus in some depth on some of the most important things that Howard’s figured out in his 56 years not only as one of the great investors of our time, but I would say also one of the great teachers of the investing world. So, Howard, it’s lovely to see you again. Thank you so much for joining us.

Thank you, William. With an introduction like that, I’m tempted to say go on.

Okay. Well, we’re off to a good start then. I wanted to start by asking you about a really important dinner that you had in Minneapolis in 1990 that had a profound impact on you, both in terms of inspiring your first memo, but also, I think, subsequently in shaping Oaktree’s investment philosophy. Why was that dinner such a seminal event and what did you learn from it?

Well, I had dinner with a guy named David Van Benschoten, who ran the pension fund for General Mills. And he was a good friend and a good client. And he told me that he’d been running the plan for 14 years. And in the 14 years, their equity portfolio had never been above the 27th percentile of pension fund equity portfolios or below the 47th. So solidly in the second quartile for 14 years in a row. But interestingly, as a result, for the 14 years overall, they were in the fourth percentile. Now, that’s incredible math. You would say, well, if you bounce back and forth between 27th and 47th on average, you’re probably about 37. No, fourth. How could that be? And the answer turns out to be that most investors shoot for the stars and occasionally shoot themselves in the foot and wreck their record. And once you have a big loss, it takes a long time to get back to scratch. So I thought that was really important. So I wrote the first memo, called The Route to Performance. As you say, it had a great impact on us. And I knew you were going to ask this question, so I went back and looked at the first memo, and it happens to say in there, simply put, what the pension fund’s record tells me is that in equities, if you can avoid the losers and losing years, the winners will take care of themselves. And when we started Oaktree in 1995, I wrote that down, and that became our motto. And it still is. If you can avoid the losers, the winners will take care of themselves. I think that’s an extremely important thing in investing. Investing success is not about swinging for the fences. It’s about steadily, steady excellence, shall we say.

And it’s interesting, I remember you pointing out in one of your memos that Graham and Dodd had written all the way back in 1940 that there’s something very distinctive about bond investing that’s congruent with this, that it’s a negative art, as they put it. Can you explain that?

I went back to read the 1940 edition because the owner of the book asked Seth Klarman to update it, and Seth asked me to do the part on fixed income. So I went back and reread it, and I got kind of mad when I saw that. I said, why are they denigrating what I do, calling it a negative art? And then I realized what they were saying. What they were saying was that if there are a hundred high-yield bonds out there and they’re all 8% bonds, and you know that 90 will pay and 10 will default, it doesn’t matter which of the 90 that pay you buy because they’re all 8% bonds. They all get the same return. The only thing that matters is that you don’t buy any of the 10 that default. So in other words, you improve your performance not by what you buy, by what you exclude. So it’s a negative art. And in fixed income, where you’re promised a return, and the only moving part that’s remaining is whether the company keeps its promise, that all you have to do is weed them out, and you get the promised return. So that’s what I meant when I said the winners take care of themselves. And it was a very good mindset when I started the high-yield bond business in ‘78 to think that way. I didn’t have those words for it, but I thought that way. And then when we went into other businesses like Bruce Karsh’s distressed debt funds in ‘88 and emerging market equities in ‘98 and things like that. Now we’re not doing straight fixed income. It’s not enough to just not have any losers. We actually try to find some winners, but we maintain that motto because I think that the risk-conscious mindset is a great guidepost.

You’ve written several memos over the years, usually about one a decade, about the parallels between investing and sports, and you’re obviously a keen tennis player yourself. And one of my favorites is called What’s Your Game Plan, which is, I think, from 2003. And you talk about the best tennis players and best baseball players and the lessons. And one of the things that struck me as I was rereading it the other day is you point out that it’s very important for them to play within themselves. And yet there’s also, when you look at the greatest tennis players, for example, this need at times to be maximally aggressive. And it tallies with what you’ve said to me before about how risk avoidance usually goes hand-in-hand with return avoidance. Can you unpack that a little bit, this nuance, that it’s not about risk avoidance, it’s more about the intelligent bearing of risk?

William, it’s a great coincidence. I happened to have lunch yesterday with a guy named Charley Ellis. And Charlie Ellis wrote the article in, I believe, 1975 that gave rise to this whole line of thinking. And it was called The Loser’s Game. And he said there are two styles of tennis. The professional has to win a winner to win a point, because if he hits a mild return, his opponent will hit a winner and put the point away. So they have to hit winners, but they’re so good at what they do that it’s mostly under their control. And in fact, in professional tennis, they keep track of something called unforced errors because there are so few. But the amateur tennis player, because they don’t have control as much, has to just try to content themselves with not hitting losers. And if I can get it over the net and within the bounds of the court 10 times in a row, chances are good that my opponent will stop at nine, and I’ll win the point, not having hit a winner, but only avoided hitting losers. So the point is, if you think about it, that investing is not like championship tennis, because we don’t have that much control of the outcome. There’s too much randomness, too much uncertainty, too many things that are unknowable. And so if you’re in a game like we’re in, swinging for the fences, trying to hit winners can get you carried out. I think it’s better to play within yourself, emphasize consistency, not take the big risk. You know, the grand gesture, rather strive for consistency and competency. That’s a lot of what we’ve done.

You’ve written a lot over the years about various dazzling blow-ups like Amaranth, the energy fund that imploded back in 2006, or Long-Term Capital Management, which imploded back in 1998. When you think about the lessons of all of the firms that didn’t survive over the period that Oaktree has gone from strength to strength, what is it that we need to learn both as professional investors or as regular amateur investors?

Well, one of the quotes that I’ve been using the most in the last decade or so, William, is attributed to Mark Twain. And he said, it ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true. And if you think about it, no sentence that starts with I don’t know, but, or I could be wrong, but, ever got anybody into big trouble. You get big trouble when you say, I’m 100% sure that X, Y, Z. And then you take bold bets, and if you take a bold bet on a premise which turns out to be incorrect, you can be finished. Long-Term did that because they thought that their method was infallible, and it produced tiny, skinny, tiny returns, but they would lever that up into big returns by using a lot of borrowed money. But when you have a problem on leverage, your losses are magnified and you can get carried out, as they were. And I think that Amaranth, too, bet boldly and incorrectly and got carried out.

You wrote a great memo, I think it was called Pigweed, which is the less glamorous name for Amaranth. And there was a lovely sentence in there where you said you can successfully invest in volatile assets if you’re sure of being able to ride out a storm. But if you lack that certainty and face the possibility of withdrawals or margin calls, a little volatility can mean the end. And then you said in this very pithy way, you have to be able to survive life’s low points. Can you talk a little bit about that? That seems like such a simple but really critical point about investing.

Well, another of my favorite incantations is never forget about the six-foot-tall person who drowned crossing the stream that was five feet deep on average. And people have to think about that for a minute. But if you think about it, I think you realize that the notion of surviving on average is meaningless. And irrelevant. You have to survive every day in order to reach the finish line. And that means you have to survive on the worst days. And if you have a portfolio or an investment which is directed at maximizing the results if everything you hope comes true, chances are you expose yourself to the possibility of being carried out if what turns out to be true is something different. So that’s really what it’s about. And a lot of investment management decisions come down to the question of whether you’re going to try to maximize your gains if things go the way you hope and believe, or minimize your losses if they don’t. You can’t do both at the same time. There’s no strategy having maximum returns under good fortune, but being fine if things turn out badly. You have to make a choice. And in fact, this brings us back in a way to what we were discussing a minute ago. A few years ago, I wrote a memo called Fewer Losers or More Winners? You have to make a choice. And if you’re going to try to win in tennis, or in investing, which means win in our business means having superior results, how can you possibly get superior results? And the answer is, you either have more of the things that go up, or less of the things that go down, or both. Most people can’t do both, because the skillful, aggressive player might be able to get more of the winners. The skillful defensive player might be able to have fewer of the losers. Very few people have enough equipment to do both. Most people are subject in some way to their biases, either aggressive or defensive. So most people, that means you have to choose. But it should be a conscious choice. And how many people ever sit down and say, I’m going to succeed by having more winners? Or I’m not going to pursue that many winners. I’m going to succeed by having fewer losers. But if you don’t answer that question and make a conscious decision, how can you find a winning strategy?

You wrote an important memo related to this back in 2024 called Ruminating on Asset Allocation where you talked about how one of the keys is to achieve this desired balance between aggressiveness and defensiveness or maximizing growth of capital or maximizing preservation of capital. And you talked about the importance of finding a targeted risk posture and then recalibrating around that appropriate posture. And it strikes me as such a profoundly important and practical idea. Can you talk about that, this idea that we should figure out our risk profile and how we should do it? I mean, what we should think about in terms of our intestinal fortitude or our responsibilities or our time horizon. What’s the process that we should go through to decide what that targeted risk posture should be?

Well, I always think about and guess at the process that people follow. And I don’t think that many people are that rigorous in their thinking. And I think most people say, well, you know, I’m going to make investments. What does that mean? Well, I’m going to try to buy a bunch of things that’ll go up and make me money. But I think especially if you’re an institutional investor or investing for others, you have to be a little more thoughtful. So I wrote a memo, you probably remember when, I’m going to guess eight years ago or something, called Calibrating. In which I said, well, you think about the speedometer of a car. And zero is no risk, and 100 is maximum possible risk. And every person, every institution, every money manager should figure out where in that continuum they should be normally. For this client, or for me, or for my employer, or my institution, what is the right risk posture for me normally? And as you say, let’s talk about individuals. It’s a function of age, wealth, income, the relationship between wealth and income and needs, number of dependents, level of aspiration, proximity to retire, and then the last one you touched on is intestinal fortitude. So you take all that together and you figure out where in zero to 100 is the right place for you normally. And you say, well, I’m young, I don’t have that many dependents. I’m aggressive, I can stay with it if I make a mistake. I have plenty of time left in my career to recover. So I can be an 80. Or an 85. You say, okay, that’s my posture, and you figure out… By the way, there’s no place you can look to find out, well, which combination of assets will produce an 85. But it’s just a mind, it’s just a way to direct your thinking. And an 85, you’d say, well, that’s pretty risky, and it’s aggressive, but, you know, we’re trying to do better, and we’re willing to take the risk of doing worse. Then the question is, after that, is, are you going to stay there all the time? Or are you going to try to vary it over time as the opportunities arise in the marketplace? And then the next question is, if you will try to vary it, what about today? Where do you want to be today? I think it’s a constructive way to think about your posture.

I wrestle with that question a lot, and I was thinking about it a lot this week as I was reading your memos. Because you said, I think in a memo called What Really Matters, investors should find a way to keep their hands off their portfolios most of the time. And earlier in one called Selling Out, you said, when I was a boy, there was a popular saying, don’t just sit there, do something. But for investing, I’d invert it. Don’t just do something, sit there. And so there’s this tension where for most of us we’d just do better not to do anything. And yet sometimes you do have to recalibrate. I had dinner a couple of weeks ago with Nick Sleep, and I was saying to him, I’m kind of worried at the moment, you know, because I’ve done well over the last 16 years, thank God. I don’t really want to give back 50%. And he sort of said to me, don’t fiddle, William, just don’t fiddle. Stop fiddling. And he’s like, if it goes down 50%, that’s fine. You’ll just buy more, and it’ll be fine, you know. How do you wrestle with this question as a regular investor?

Well, look. First of all, on all these questions that we’re talking about today, and the many more that I’m sure you have for me, there are no right answers. There’s only a range of possibilities. There are choices, none of them perfect. And the question is where do you want to come out on the continuum? Usually you don’t want to be at either extreme. You don’t want to trade every day, and you don’t want to never trade. For example, most people are not 100% maximizers or 100% preservers. So it’s a choice, and it’s a personal choice, and as I say importantly, no right or wrong. Now I… I mean, Nick’s attitude is a little too idealistic in my opinion. And, you know, I believe that there are good opportunities once in a while, not every day, once in a while there are good opportunities to become a little more aggressive or a little more defensive. And I wouldn’t do a lot, because it’s easy to be wrong, but I wouldn’t let all those opportunities go, and you know that… I think we’ve done good things for our clients by doing that. But, you know, I was talking to my son, Andrew, when I wrote my book, Mastering the Market Cycle, and I said, I thought our calls had been about right. And he said, yeah, dad, that’s because you did it five times in 50 years. So certainly not every day. There’s not a smart thing to do every day. And by the way, that memo, What Really Matters, I think is one of the better ones, that garnered roughly the least attention or response. But I told the story in there about, there was a study done of clients at Fidelity, and they concluded that the best performance belonged to the accounts of the people who were dead. Now, and then I added that Fidelity has not been able to find that study, and neither has anybody else. So it’s probably apocryphal. But you get the point. And I think that over-trading is a mistake. And not only is it not productive on balance, and costly, but it can be counterproductive. Because if you get excited and buy at the high and then depressed and sell at the low, you’re doing the opposite of what you should do, and buy and hold is highly superior. I just think that for people who have ability and temperament, there are occasions when you want to behave countercyclically and become a little more defensive because the market is precarious and a little more aggressive because it is generous.

You’ve written a lot about the futility of making macro predictions and forecasts and how rarely one should use them. And so I was particularly struck when I was reading one of your memos, and you were talking, I think it was probably Taking the Temperature from 2023, where you were talking about those five very successful market calls, which really are not even over 50 years, they’re actually over the last 25 years. I think in 2000, then 2004 to ‘07, 2008, 2012, and 2020. Can you explain the nuance here? Because I think it’s really important, right, that there are times where the market is sufficiently crazy that you’ve actually sort of jettisoned your usual disdain for macro forecasts. I guess it’s just that the odds of you being right about it being so extreme have been better. Can you talk about unpacking that kind of nuance there?

Well, number one, I think, as you say, there were five times… Essentially you say they’re all in the last 25 years. So, well, that means it took me 30 years to get up the nerve and feel that I had enough insight to make a call. And the first one was the first day of 2000. It was about the tech bubble. And the second thing that’s worth noting is that I didn’t know anything about tech stocks, or technology, or the internet, or any of those things. And I call the process taking the temperature because what it is is it’s about assessing the behavior of the people around me. You know, Buffett always says everything best, and he said that the less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. So when everybody is behaving like they’re carefree, not a worry in the world, there’s no risk they don’t think they can surmount, and anyway they don’t see that many risks, then we should run for the hills. Because their exuberance has probably moved prices so high that it’s dangerous. And then, in contrast, when people are depressed and they can never think that there’ll ever be another positive step or another up day in the market, and all they want to do is get out and they’ve had it, all that stuff. Their pessimism and level of depression usually renders things so cheap that that’s the time to become highly aggressive. It’s called contrarian, it’s called countercyclical. I think that as my son said, five times in 50 years, there were compelling times to do it. Times when the argument was, the logic was compelling, and the probability of being right was high. And so we made the call, we took action. I can tell you that I never did it without trepidation. As Mark Twain says, I was never certain, but it felt like the right thing, and so it was worth trying. But, you know, in the investment business, even when you’re, even when you think you’re right, you shouldn’t assume that it’s more than 80/20, and maybe it’s really 70/30 or something like that. But if you know what you’re doing, it’s worth trying, but nobody gets it right all the time. And by the way, I always say, William, if instead of five times, what if I had tried to do it 50 times? Or 500 times? Or, I think about the fact that after 56 years you multiply that by 365. So I’m approaching 20,000 days of my working career, if you count the weekends. And what if I had made 5,000 calls, made a call every four days. What if I said every four days, I got to either say buy or sell? I think that my record would be 50/50 at best. So you just can’t do it all the time. You have to wait until it’s compelling and then pray that you’re right.

I was very struck by a quote from David Swensen that’s one of your favorite quotes from him that comes I think from Pioneering Portfolio Management which I’ll read because it’s very related to this ability to take idiosyncratic positions. And he said, active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel. Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios which frequently appear downright imprudent in the eyes of conventional wisdom. And I’m curious how you’ve managed to create an institution that even as it grew huge, never became bureaucratic or ruled by consensus or overly conventional and hidebound. Because I think that’s actually part of the success of Oaktree is that somehow you and Bruce Karsh and Sheldon and the like, you’ve managed to maintain this kind of willingness to be idiosyncratic and unconventional even as you’ve become kind of much more institutionalized and more globally important.

Well, I don’t think we have become institutionalized. I think we’ve just become bigger. My dad used to say that marriage is a wonderful institution for people who like living in institutions. And I don’t. And the best lessons we learn are learned early. And my first job was at Citibank, and I was there 16 years, and I learned that I don’t like institutional living. And at the bank, if you would say, well, let’s try to do this, or let’s pay this person this, or let’s promote that person that, they would say, you know what, listen, we can’t because there are institutional constraints. And this word institutional is a hell of a word. By the way, when I was a boy, if they said, oh, he lives in an institution, that meant an insane asylum. But anyway, I try like crazy to avoid bureaucratic tendencies. And I wrote a memo in the early days, it must have been around ‘05 or so, called Dare to Be Great. And it was mostly a rant against bureaucracy and committees. Because when I was 29, and at the tender age of 29 I became the director of research at Citibank, they put me on five committees. And as I recall, they would meet for a minimum of 16 hours a week. And I almost shot myself. I have a short attention span, and I don’t talk that much, and I don’t like to listen to other people that much. And I found that those meetings went as long as the person who wanted to go the longest wanted them to go. And if you think about it, if you come up with some brilliant insight, what David called idiosyncratic, and, you know, you give it a shot… By the way, it’s idiosyncratic. Why? Because everybody else is doing the opposite. That’s what makes it great. And you want to do it because you think you have some insight about why they’re all wrong, and their actions have made it wrong in the market. Can you imagine trying to convince a committee of 10 people to get the majority of them to support it? Well, how the hell can you do that? Because there’s a reason why most people in the market aren’t taking that approach, because it’s hard to see. So if most people are doing A, how can you convince the majority of a committee to do B? If you have idiosyncratic insight, if you have a young Warren Buffett working for you, you better just let him do his thing rather than saying, well, Warren, you can’t make any trades until you convince the majority of the committee. So this is one of the most important things in investing. And bureaucracy and great investing are counter-indicated, as the doctors would say. When Lehman Brothers went bankrupt in mid-September of ‘08, we had raised the biggest distressed debt fund in history by a factor of about three. We had $10 billion sitting on the shelf. Lehman goes under. Most people think the financial world is going to melt down. Question is whether you spend the money. And, you know, people say, well, why don’t you just analyze the future? There is no such thing as analyzing the future, especially when you have unprecedented events taking place. And so Bruce and I figured out that we should spend the money. He ran the fund in question, and he bravely invested an average of $450 million a week for the next 15 weeks. That’s $7 billion in one quarter. But I don’t think we could have convinced a committee. The good news is we had pre-raised the money, so we didn’t have to convince the clients. The best time to invest is during a crisis. You can’t raise any money during a crisis because people are frozen into inaction. So it was certainly idiosyncratic. I talked to a friend of mine who wrote for one of the newspapers. He says, what are you doing? I said, oh, we’re buying. He says, you are? Like we were insane. It was certainly idiosyncratic, and it was certainly uncomfortable. We certainly weren’t sure we were right. But it seemed like the right thing to do. So you do it. You have to overcome your discomfort. I wouldn’t try to convince 20 people that I was right.

And what is it, Howard, that makes Bruce so extraordinary as an investor? Because I’ve never really heard him talk much. And then I was listening a couple days ago to a conversation that you’d had on your podcast, the Oaktree podcast, where you and he and Sheldon talked about the early days of the firm. And I was surprised at sort of, he just came across as this really affable, decent, smart guy with a tremendous focus on family and decency and building an enduring institution. Tell us what he’s like, because he’s so clearly been a key figure in Oaktree’s success.

Well, he approached me, I was at TCW, he approached me in ‘87. He was a lawyer. He had done some investing for Eli Broad, who was the biggest leader in LA. And he had this idea of forming a distressed debt fund. Which we did in ‘88. And I think it was one of the very first from a mainstream financial institution. We raised, on the first closing, we raised $65 million. And then the second close brought it up to a grand sum of 96, which we thought we had all the money in the world. But the point is that Bruce is extremely analytical. He’s like a chess player. He… and he is a chess player, and he looks, moves ahead. Highly competitive in a, what you describe, a low-key manner. But, you know, really smart. And really focused. And a great executor. And we have enjoyed a partnership for now 37 years. 38. And it’s one of the… one of the shining things in my life, you know, after my family relationships, friendships. You know, Warren Buffett wrote a letter a couple of weeks ago about stepping down, and he talked about his relationship with Charlie Munger. And he said that historically, he had a big brother who was protective. And the way I see it, Charlie was the wise philosopher who gave Warren advice, and Warren was the six years younger implementer, who performed the analytical legwork and did the investing. What I really loved in that brief mention, he said, and the words, I told you so, were never mentioned. And, you know, so what Bruce and I have done with each other, our relationship is very similar to that. We both acknowledge, so healthily, we both acknowledge that the other can do things we can’t do. Which is such a great thing, because that’s the only basis for a healthy partnership. Once you start thinking that you can do everything you can do and everything the other person can do, your partnership is doomed. But we both acknowledge that each can do things the other can’t. And it’s been extremely complementary. And nobody has ever said, I told you so, on any mistakes. There are plenty of mistakes made all the time. And I think that we have supported each other. And spending $7 billion in the fourth quarter of ‘08 would have been very difficult without support. You got to buck somebody up. And never say, oh, I would never have done that, you know.

This fact also that he came to you originally and said let’s get into distressed debt raises a really important point that I think comes up in a lot of your writing, going back I think as far as The Getting Lucky memo in 2014, where you said the easiest way to win at investing is by sticking to inefficient markets. And I think actually way back in 1995, in How the Game Should Be Played, you wrote, study the micro like mad in order to know your subject better than others, you can expect to succeed only if you have a knowledge advantage. Can you talk about that, because it strikes me as something that I see again and again with the great investors, like with your friend Joel Greenblatt, where he initially got rich partly through his brilliance in special situations, or Bill Ruane, who told me, I’d just try to learn as much as I can about seven or eight good ideas. And it seems like this focus on specializing narrowly, but also in an inefficient market, has been absolutely central to your success.

Well, let’s take the counterfactual. So, remember I said, you got to be thoughtful when you sit down to start investing, you have to say, what are the elements that are going to make me a success? And again, success means doing better than others. So you can’t say I’m smart. You’re not the smartest person in the world, and everybody else in the business is pretty smart. You can’t say I went to the best schools. That doesn’t count for that much. You can’t say, you know, I have this generalizable intelligence that I can apply to every asset class, and know more than others in every asset class. You have to develop a knowledge advantage. And you have to, usually that comes from number one, developing an approach, which is the right approach and that you implement consistently. And from knowing more than the other people. It may be having more data, although that’s hard because the SEC’s job is to make sure that everybody has the same data. Or it may be doing a better job with the data or having more insight in looking at it. Or it may be in what you said, going into inefficient markets where the information is not evenly distributed. But you’ve got to have some source of superiority. Otherwise, how can you expect to win? You know, investing is an incredibly competitive game, and winning consists of beating a bunch of other people who are similarly intelligent, numerate, computer literate, hard-working, and very highly motivated. So you have to have an edge. And I think that specialization is one way to try to get an edge. The other thing, oh, is, it’s really important, the concept of the less efficient market. When I try to illustrate market efficiency to people, what I say is, well, what if when I got out of the University of Chicago in ‘69, I had been approached by a guy, and he says, look, I’m a bookmaker, and I book bets on football. And I have concluded that I can make a lot of money on football if I know which team is going to win the coin toss at the beginning of the game. So I’m going to give you 15 PhDs and a Cray supercomputer, and all you have to do is predict the coin toss at the beginning of every game. Now, if it’s a fair coin, it can’t be done. It’s a waste of time. Because there’s no edge. And that’s an efficient market. An efficient market is a market where everybody knows as much as you do, and there’s no edge. And you’re wasting your time. So our definition of a less efficient market is a market where hard work and skill can pay off.

You know, I was, as you said, I wrote in Getting Lucky in January 14, that I was lucky to find some inefficient markets early in my career. August of ‘78, I got the phone call that changed my life from the head of the bond department at Citibank. He says, there’s some guy named Milken or something in California, and he deals in something called high-yield bonds. Do you think you can figure out what that is? That was it. But they were called junk bonds. Most people wouldn’t touch them with a 10-foot pole. That was ‘78. You know, the big pools of money in America are the public pension funds, state, mostly, cities. I didn’t get my first public pension fund account for 18 years. They wouldn’t go there because they were reputationally and politically unpalatable. Oh, great. You mean it’s an asset class that I can buy that nobody else will buy at any price? Well, maybe it’s full of bargains. That’s the way these things work. But if you look at the things that everybody thinks are great, and will gladly buy at any price, why should you think you can get a bargain there? You know, when I started in 1969, Citibank, where I worked, was an investor in what we call the Nifty 50, the greatest stocks in America. And if you bought them the day I got to work in September of ‘69 and you held them tenaciously and faithfully for five years, you lost about 95% of your money. Because at the time you bought them, everybody thought they were the greatest thing since sliced bread. So it’s something you have to watch out for, and you have to look at the things that are less, the road less taken.

You talk about the Nifty 50 and that blow-up, which obviously had a profound effect on your career and your philosophy. And I’ve been thinking a lot about this question that you raise in some of your memos about how we can prepare for these extreme exogenous events, whether it’s a market crash or a pandemic or a war or whatever it might be, given that we can’t predict them. And you wrote in one of your memos, I think it was the second of your memos on uncertainty in 2020. We can do so by recognizing that they will inevitably occur and by making our portfolios more cautious when economic developments and investor behavior render markets more vulnerable to damage from untoward events. Can you talk a little bit about that, because I think this whole question of how to deal with uncertainty is at the absolute core of what you do as an investor.

Well, first of all, one of the great sayings is that there are two kinds of people who lose money in the market. The people who know nothing and the people who know everything. So I hope I never know nothing, but I never think I know everything. And specifically, I believe that the macro future is unpredictable. But there are things that can give us a hint at what lies ahead. So I wrote my second book, Mastering the Market Cycle, published in 2018, and it talked about tendencies. And I say, we don’t know what the market’s going to do. But we can have a feeling for when its tendency will be to do well, or its tendency will be to do poorly. And its tendency will largely be determined by where we are in the cycle. So when things have been going great, and prices have been rising as you say for 16 years, and P/E ratios are high, and bond yield spreads, which are a parameter of fear, are narrow, we can assess that the tendency of the market may be to do less well. And act accordingly. You don’t have to make any predictions. None of those five calls I talked about a little while ago was based on a prediction. It was based on an observation. And what I say, William, is we never know where we’re going, we sure as hell ought to know where we are. And are prices and valuations high? Is risk being ignored? Are people acting in an exuberant, buoyant way? These are the questions that can tell you what the odds are even though you don’t know what the future holds. And I never cared for the title of that book. I had a more erudite title in mind. I thought Mastering the Market Cycle was a little cheesy. But it’s what the publisher wanted because they thought they’d sell more books. But I like the subtitle of the book. And of course, subtitles don’t get much attention. But the subtitle of that book was, Getting the Odds on Your Side. You never know what’s going to happen. You can have a sense sometimes for what the odds of a certain event are, and when the market is high in its cycle, the odds are against you. And when it’s low in its cycle, the odds are in your favor. But you know, the odds can be in your favor and you can lose money for the next year or two or three. And vice versa. I think when I wrote my book, Richer, Wiser, Happier, where you were one of the central characters, I think in a way that was my biggest revelation over the five years of working on the book and digesting that material was that we have this fundamental problem that the future is unknowable, and yet, as you often write, we have to make decisions about the future. And it struck me, I think probably deeply influenced by you, was that there are all of these ways in which you can, even though you have no control, you can very subtly stack the odds in your, in your favor. It kind of is simultaneously like most truths, sort of banal and incredibly profound. Can you talk a little bit about that idea, because it seems like a sort of guiding principle that actually, I think, runs through all of the great investors’ lives, is this ability, I mean, you see it with someone like Ed Thorp, right, who you know. Like just to very subtly stack the odds by say, not playing games that you’re ill-equipped to win. Or by making sure you analyze the evidence in a very rational, independent way, whether it’s about COVID or markets or anything like that. Can you unpack that a little?

Well, you know, I mean, there are so many thoughts on that subject, but one of the things that Warren Buffett has been most outspoken about is in baseball, you should get up to the plate and you should wait for a good pitch. And first of all, you have to have a sense for what’s a good pitch and what’s a bad one. And he tells the story that Ted Williams not only was Ted Williams waiting for good pitches, but he was very studious about his accomplishments, and he charted all his batting, and he figured out, where was the pitch and what was the result. And he figured out, he broke the strike zone into 18 spots, and he said, well, if the ball is in spot number one, two, or four, I tend to get a single. If it’s in five or six, I tend to get a double. And if it’s, if it’s in seven or eight, I tend to strike out. So you got to figure out what’s a good pitch, and you got to wait for it. He says, and Buffett has always advocated patience and not hyperactivity. But he points out that in investing, unlike baseball. In baseball, if you stand there with the bat on your shoulder and you let three pitches go by in the strike zone, you’re out. But in investing, you can wait more. You don’t get called out on strikes. Now, it’s not exactly true, because if you’re a professional investor and you’re investing for others, and you sit there with the bat on your shoulder and the market goes up for 16 years, you might be called out. Warren had the particular benefit that he was never thought he might get fired. But the rest of us might. But still, patience is very important. And waiting for a good pitch, objectively, and your kind of pitch. Your kind of investment. You can do that. You know, we talked before about playing within yourself. Figuring out the kinds of things you’re looking for. You can’t buy something because you think it’s attractive to others. It has to be attractive to you. It has to satisfy your criteria, and you should have a set of criteria. So these are the things you can do to get the odds on your side.

I think there’s another really critical, related lesson that I’ve tried to deeply internalize from you over the years, which is not to overreach. Like the big question being how much you push the envelope. And I think that’s another really key thing is just ensuring survival. But I was also very struck you quoted something in your Risk Revisited Again memo from 2015 where you said, in my personal life, I tend to incorporate another of Einstein’s comments, which is, I never think of the future, it comes soon enough. And I was wondering whether you were being kind of facile and a little bit facetious or whether actually that is something that helps you get through uncertainty, that that idea.

I’m not a futurist. I don’t think that my vision of the future is bound to be more right than anybody else’s. So no, I don’t think about it that much. And I just try to do, you know, all these things are a little bit counterintuitive and a little illogical. I just try to think of laboring in the here and now to buy things that are going to do okay. Well, then you say, yeah, but Howard, in order to know whether something’s going to do okay, don’t you have to have a view of the future? Yeah, well, you kind of do. But don’t think you know everything. Don’t think you have it right. You quoted Elroy Dimson, the future is not a set, single thing that if you’re smart enough you can figure it out what it’s going to be, and it’s going to materialize and make you right. It’s a probability distribution, it’s a range of possibilities. In each thing, whether it’s GDP growth next year or inflation next year, or who’s going to win the next election, or who’s going to win the next World Series, or, you know, whether we’re going to have geopolitical peace or any of these things. Only one thing will happen. But many things can. And you should accept that. You should accept that it introduces uncertainty into the equation. And you shouldn’t form a certainty around one outcome and bet heavily on it, unless you have special expertise, which very few people do. So I think that humility is a great way to stay out of trouble. And I once wrote in some memo or another about my favorite fortune cookie. You probably read that one, too. But it said that the cautious seldom err or write great poetry. Every person has to decide for themselves, do I want to try to write great poetry and get rich if my bets are right? Or do I want to avoid erring and be sure that I’ll do okay if my bets are wrong? It’s a choice. You can’t have both. Or you can try to do both, but you have to put your emphasis on one or the other. You can’t emphasize both at the same time. And so, you know, this is a matter of mindset that I think most people should adopt. And life is uncertain. The future is uncertain. Investing is uncertain. Are you going to go for winners? Or are you going to try to avoid losers?

I wanted to ask you one last quick question. I was struck the other day when I was listening to a conversation between you and your Oaktree co-founders, Bruce Karsh and Sheldon Stone, that Sheldon said that when he first met you back in 1983 and came to work with you in high-yield debt, you talked even then about the importance of having a balanced life and having time to enjoy your personal life. And Bruce also talked about the importance of family to you and all of the founders of Oaktree. And I was very struck as I was looking back on your life that you found plenty of time to play tennis and backgammon and card games with friends like Bruce Newberg and to buy and decorate and fix up houses and spend time with your kids and grandkids. And you mentioned even that you’d spent thousands of hours playing backgammon and card games with Bruce Newberg over 40 years. What advice do you have for investors or other professionals who clearly need to work really hard to compete, and yet you also want to have a balanced life in some form, and you don’t want to just look back and be like, yeah, I made an enormous amount of money, and I never got to hang out with my family at all or my friends or to enjoy my hobbies?

Well, you know, we all have to choose what’s important to us. Charlie Munger used to say like, a guy’s a maniac. A maniac was somebody who only cared about working hard and making money. You have to decide whether that’s for you. And it’s not for me. And the truest of all the sayings is that nobody on their deathbed ever said, I wish I worked more. And I think it’s true. And that’s not how I’m living my life. And I have, as you say, pursuits that I enjoy greatly. I wouldn’t give them up. And once you have enough money, or more than enough money, why should you give away part of your enjoyment to have more? I think the greatest saying that I always use when I give advice to young people is from the writer Christopher Morley, who said, there is only one success, to be able to live your life in your own way. Now, the hard part is figuring out what your way is. What is it that, you know, you’re 22, you’re figuring out a career course. What is it that will make you happy at 70? Not easy to know. We change. We sometimes have an inaccurate vision of ourselves. If I described myself to you 40 years ago, I would not describe the person I am today, mainly because I maybe I was wrong and maybe I changed. But yet, our goal should be to get to the end and say, I’m happy with the choices I made. Again, that should be a choice that is made consciously. And just pursuing work and money and career and prestige because other people are doing it, because it’s glorified in the media, or because you want to emulate X, Y, Z, become the richest man in the world, you shouldn’t do it unless it’s really right for you. And it’s, I don’t think it’s right for most people. So, I think, live your life your way, figure out what’s good for you and pursue it.

I feel like when I look at your life, you’ve done a great job of setting things up so that it suits you. So you’re writing memos, which you love doing. You’re not making individual investments yourself. You’re not managing lots of employees. You’re setting the firm’s investment philosophy and meeting clients. And there’s something really lovely about seeing the way you’ve set yourself up in this sort of very internally aligned way. So it’s a great model for us all.

Thank you. Well, you know, William, my idol, Warren Buffett, always says he skips to work in the morning. And I feel I do. And I’m happy to go to work, and I like what I do. I hope to keep doing it for a long time to come.

I hope so too. Thank you so much, Howard. It’s been a real delight chatting with you, and I really learned so much from you over the years, and I really tried to not just read these memos, but really truly internalize the lessons. And I know that I’m one of many thousands of people whose lives are actually tangibly better because you’ve shared these lessons. So thank you.

Thank you. It’s a pleasure speaking with you, and let’s do it again.

I look forward to it. All right, take care. Thanks, Howard.

Okay, bye-bye.