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so now uh i'll tell you an interesting story around 05 or 06 the the bible of investing is a book called security analysis written by graham and dot and uh they they wrote the first edition in 1934 but ben graham was warren buffett's teacher at columbia and the in many ways the father of value investing and he and david dodd wrote this book in 34 and they updated it in 40 and then several times after and the 40 edition is is is considered to be a great addition and so in o5 mcgraw-hill which owned the book said they want to update the book and they uh turned it over to seth clarkman who's a great dead investor at in boston at bao post and a professor um can't remember his name right now grant that's right bruce greenwald at columbia so you should be up here i'll sit down uh and uh they they turned it over to seth and and bruce uh to to bring out this this revision and they in turn asked people to revise the sections and they asked me to revise a section on debt and so that meant i had to go and read the 1940 edition in order to update it and i came across something fascinating and it was and it verified what i had always thought it said that bond investing is a negative art what does that mean what it means is i don't know how many of you know how bonds worked but a bond there's a promise to pay you give me a hundred dollars and i promise to give you five percent interest every year and then give you abundant back in 20 years fixed income it's called because all the events are fixed the contract is fixed the return is fixed assuming the promise is kept so all five percent bonds that pay will pay five percent no we'll pay six none will pay for all the ones that pay will pay five percent what does that mean it means it doesn't of the ones that pay it doesn't matter which ones you buy i'm gonna like this one i like that one a lot that pays five i like that one that pays five it doesn't make any difference you're not gonna be a hero by choosing among the bonds that pay the only thing that matters is to exclude the ones that don't pay so if there are 100 bonds 90 will pay they'll all pay the same thing it doesn't matter which of the 90 you choose the only thing that matters is excluding the 10 that don't pay negative heart the the the greatness of your performance comes not from what you buy but from what you exclude so i thought that was very useful i should have that up here too but anyway so that that milken was my fourth input so tuleb says that the future consists of a range of possibilities with the outcome significantly influenced by randomness and galbraith says that forecasting is futile and ella says that if the game isn't controllable it's better to work to avoid losers than to try for winners and milken says that holding survivors and avoiding defaults is the key in bond investing so if you put them all together that's how you get the philosophy that's in the book these were my origins so when we started oak tree april the 10th of 1995 almost exactly 20 years ago we wrote down our investment philosophy and here it is we published it we were a bunch of guys who had been working together for most of the previous 10 years at an at a different uh employer and we left there as a group and we started oak tree and so for a philosophy i believe in writing things down and like like learning at the lou says today write them down right so um uh we wrote down our philosophy we published it we'd never changed a word since and the clients like knowing what our roadmap is so these were the six tenets of the investor philosophy so the first one says that the the most important thing is risk control and we tell the clients we think that for a for excellence in investing the most important thing is not be making a lot of money it's not beating the market it's not being in the top quartile the most important thing is controlling risk that's our job that's what we'll do for you and the clients come to us who want to invest in our asset classes with the risks under control there are other people who who put less emphasis on controlling risk and they have better results in the good times and worse results in the bad times our clients want what we give them number two we have an emphasis on consistency so we say we don't try for the moon at the danger of crashing you know uh the first memo that i wrote in 1990 i'm sure you remember that rob uh talked about a guy who was head of an asset manager that had a terrible year and he said well it's very simple if you want to be in the top five percent of money managers you have to be willing to be in the bottom i have no interest in being in the bottom five percent i don't care about being in the top five percent i want to be above the middle on a consistent basis over the long term and there's a funny bit of math this will confound the uh what you call yourself data scientists this will confound the data scientists in the room but the so in that first memo i contrasted the comments from that uh that uh uh money manager with uh a comment from one of my clients who told me right about the same time it was the juxtaposition that caused me to write that first memo he told me that for the previous 14 years his pension fund had never been above the 27th percentile or below the 47th percentile so it was solidly in the second quartile every year for 14 years so let's see 27 47 the average of that is 37 right what percentile do you think that fund was in for the whole 14 years four and it if you think about it it's really almost mysterious why why the fourth not the 37th and the answer is that when people blow up they really blow up and so uh uh we said we want consistency we want to be a little bit above the middle all the time maybe we'll pop up to the top in the years when the markets are terrible and our risk control is rewarded but we think that over a long period of time we'll be very respectable that way and our clients will have an absence of bad experiences which i think for them is very important so then macro forecasting is not critical to investing we do not make our decisions based on macro forecasts as i explained to you we all have opinions we all we our official dictum is that it's okay to have an opinion you just shouldn't act as if it's right and and i think this is this is very important you know mark twain said 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 and and so we try to avoid holding strongly to those macro opinions and finally we don't do a lot of market timing which is very very hard to do we do long-term investing in assets that we think are underpriced so that's the oak tree philosophy you can see how the uh origins and inspirations that i went through fit into that and in fact it's all distilled in our motto which says that if we avoid the losers the winners to take care of themselves and if we avoid if we can make a large number of investors and just weed out the problems then we'll have just think of the bell-shaped curve we'll have a lot to do okay and an occasional one which is exceptional if we can read these out so a lot of money managers go into the clients and say we will get you in the top quartile into the great right hand tail i think it's hard to do on a consistent basis and if you aim for the right hand tail and you miss you end up in the left hand tail what we say is we'll just lop off the left hand tail and if we can do that successfully and we pretty much have then what will you have okay good very good great terrific but no terrible the average will be very good and that's basically what we've had so lastly i'll just leave you with what i consider my three greatest adages not mine but the ones i've encountered over my career and that have been the most helpful and they're all used in the book first of all what the wise man does in the beginning the fool does in the end in every trend in investing it eventually becomes overdone if you find an asset which is cheap and buy it that's great if everybody else figures it out that it's cheap then it'll go up every then people see that it's rising and more people jump on the bandwagon goes up up up and the last person to buy it is a is a fool and the first person to do it by it is a wise man it's the same asset just at different prices and and as people say first the innovator then the imitator then the idiot so that's another way to look at this adage number two never forget the six foot tall man who drowned crossing the stream that was five feet deep on average kind of like that skydiver who's right 98 of the time it's not sufficient depending on how you want to live your life to survive on average we have to survive on the bad days so we have to be able to survive the low spots in the stream your portfolio has to be set up to survive on the bad days so you won't be shaken out of your investments and then finally being too far ahead of your time is indistinguishable from being wrong and yet that's a great challenge because as i said before the things that are supposed to happen will not necessarily happen and they absolutely will not happen on time so you have to be able to live until the wisdom of your decisions is proved if at all so all of these things i think say something about modesty and humility of belief rather than sureness which i think is the greatest risk so with that sirab i'll stop talking
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