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warren buffett called his last book a rarity in its usefulness my copy of his new book mastering the market cycle getting the odds on your side is already dog-eared which means it won't become like anything to prop a door open or something you put a cup on joining us right now we've got howard marks he's the co-chairman of oak tree capital which manages over a hundred and twenty billion dollars in assets he joins us now hello thank you jan nice to be here yeah great to have you so mastering the market cycle what is the difference between mastering the market cycle and timing the market i think timing the market is guessing at what's going to happen tomorrow in my opinion the key to mastering the market cycle is understanding where it is today we never know what's going to happen tomorrow and the people who think they do tend to screw up but if we have a sense for where it is we know something about the probability distribution of returns that we're facing and i think that's about the best we can do so uh with regards to the future i guess in your most recent memo you expressed some caution i think on the overall market uh can you just outline some of your thinking right now and what are maybe the biggest red flags that you're seeing across assets sure well i like your use of the phrase across assets because these factors affect basically everything when i've i've been doing this 50 years and when i've seen booms invariably they were characterized by three things too much optimism too little risk aversion and caution too much money chasing too few ideas and to some extent those things are present today so it's time to start thinking about caution can you talk about a few areas i suppose where as you call them the seven most dangerous words in investing um are most present i think what's interesting is also in that most recent memory we put out last week you know i wouldn't say sanguine on the equity markets but certainly not the red flag we're seeing perhaps in some debt markets yeah i think that you know in this in the in recent years not a lot of money has been flowing into equities a lot has been flowing into debt people like the idea of having a debt instrument which is going to pay interest and then give you your money back at a point in time they are assured by that so that makes the money flow in when the money flow in flows in that means the buyers at the auction have more money to spend and that tends to put the prices up and with securities price up future return down safety down risk up so credit is an idea uh uh i want to borrow some money jen says i want five percent you say i'll take four i say i'll take three you say you need a full set of covenants you say i don't need many covenants i say i'll take it without covenants i get to make a three percent covenant light loan but and i'm the winner of the or am i the loser that's the key and and this is a process i call the race to the bottom i wrote a memo by that title back in february 7.
famous memo and and to some extent it's happening now uh so i mean as you say or you quote a lot you know history doesn't repeat itself it rhymes maybe mark twain said that yeah so right now you've also written that it appears that debt instruments are going to be found at ground zero right when things go wrong this time uh you know we've been talking about leveraged loans they seem like the new boogie man on wall street what do you think of them well i mean that's the key for you and your viewers and everybody to understand is that there's no such thing as a good idea or a bad idea until we can talk about price it's not what you buy i always say it's what you pay so i think that leveraged loans are a great idea they they pay interest they repay principal they're senior in the issuers and they are generally tied to floating rate loads so you don't have interest rate risk all good things at what price and no matter how good the merits are it's possible for things to become overpriced when money is flowing in strongly and it is to leverage loans then they can become overpriced and some are what's the average investor though to do i mean parts of it you i read the book and i'm like i gotta go under the desk here and move to cash you already have that no i don't i don't want you to go under the desk and i don't want you to move to cash so yeah what should i do because it's scary sometimes when you you go through this and you hear oh my gosh he thinks it's we're in this really bad time let me set the scene there are two risks in investing the risk of losing money and the risk of missing opportunity you can eliminate either one but it puts you firmly in the crosshairs of the other or you can balance the two how should you balance them at this time should you worry more about losing money or worry more about missing opportunity and i would say the former so the point is i'm not saying get out of the market i'm not saying go to cash i'm not saying this is the worst thing i've ever seen i'm just saying i would emphasize caution to avoid losses over aggressiveness and the risk of missing out what does that mean anything you want to do in the investment business invest in stocks bonds loans mutual funds money managers whatever it might be you can do it aggressively or you can do it defensively and i think today is a time to overweight defense not to go entirely toward defense that means as you say cash get out of the market i'm not suggesting that we're not doing that i don't think anybody should do it unless they are hypersensitive to losses but i do think that this is a time for caution so to go back uh to a hot sector or not really a sector stocks in the stock market fang names last year you were writing about them um and said you know they may well be the winners of tomorrow but uh you also said you know given human nature the best will eventually become to be overpriced right even if they have great fundamentals so um have you changed or updated your thinking on those names or does the story really remain the same some of these stocks have doubled since you wrote that memo i wish you wouldn't say that miles but you know the truth of the matter is that i i mean i didn't wasn't picky on the fangs i'm not an expert we don't invest in the stock market at oak tree what i was saying is that the willingness of people to highly value companies not based on their present assets but based on their long-term potential is indicative of optimism faith risk tolerance my book is all about knowing what's going on in the market and that is an example that's all just an example now many of the fangs have had some severe hiccups yes in the last in the last nine months and if somebody owned them and then the gap down 20 and they lose faith and sell that's dangerous so the point is you have to assess and control the risk in your portfolio uh so you like to draw this i do draw the market cycle and i'm just wondering have the trump tax cuts at all changed like what's happening with your drawing let me say one thing go back two years there were two things everybody was sure of trump would lose but if perchance he won the market would collapse so trump won and the market went up that should convince everybody as it has me that we don't know what the future holds and we don't know how the what's going to happen and we don't know how the market's going to react to what happens but as to your question that the tax cut the tax cut is very stimulative it is it was very popular with business and it is causing companies profits to expand so that's good the question there are two questions number one no matter how good things go they can become overpriced have has that happened will that happen and number two since it is stimulative to an already healthy economy it raises the risk of the economy overheating bringing on higher inflation causing the fed to raise interest rates even more to cool it off and that will hurt some indebted companies so you know every the interesting thing in investing is that everything has two sides that's the problem but you don't know like i just want the answer well it doesn't seem like there are two sides of it and then sometimes you say on one hand on the other hand sometimes you say on the third hand so i don't know what to do good well then i'm communicating clearly you know you know charlie munger warren buffett's partner said to me when i was completing my last book and i in time to get it in the book he says none of this is meant to be easy and anybody who thinks it's easy is stupid we're talking about making money everybody wants to make money it's highly competitive why should it be easy um real quick we just had the alphabet chairman here john hennessy with his book he had like pages of recommendations of books he read you read a lot and you write about that in here what are you reading right now um i'm reading a book called factfulness which which encourages people not to respond to what's going on emotionally but to be analytical seek out the truth overcome the bias of panicking and and be factual and i think it's a great book all right we'll look into it if miles and i read it can we have a book club we can okay fantastic i love it howard marks he's the author of the new book mastering the market cycle getting the odds on your side thank you so much for coming by fascinating to talk with you of course we read your memos and so it's really fun to have you here thank you for having me
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