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A call from my boss , I looked around, and what did I see? There was no story. There was no centralized trading information. There was no performance data. Most people didn't know about them. Most people didn't understand them. They had a bad reputation. They were called "junk " bonds. 90% of investment organizations had a rule: do not buy bonds with a rating below A or below three Bs.
And Moody's, which assigns ratings, defined bonds with a B rating as follows: "Do not have the characteristics of a desirable investment." In other words, it's a bad idea. It didn't say at what price. Maybe it's a bad idea at face value, but a good one at 90, 80, or 70. But by their definition, it's a bad idea.
So, if you have so many negative reviews for something, isn't it logical to think that maybe you've found a good deal? That's exactly what happened. Back in the present, now everyone knows everything. All performance data is available to everyone. So there is no more ignorance to play on. And there are no more hesitations.
40 years ago, people would have said to me, "Well, young man, I can imagine you could make money at this, but it would be wrong to invest in 'garbage' ." That would be indecent. We couldn't do this . And today everyone is ready to do anything to earn a dollar. So, when you no longer have either ignorance or prejudice, where will the good deals come from?
So it's more complicated. And, perhaps, a lot of money has already been earned. What's going on, investors? With you AK from Frugal. If you don't recognize the person in the video, it's Howard Marks, founder of Oaktree Capital. Today, Oaktree manages $100 billion, and Howard's own fortune is almost $2 billion .
So things are going pretty well for them. You may have read one of Howard's investment letters to his clients, which are very popular in the investment community, because this guy is really smart. Oaktree Capital as a fund is known for its focus on distressed debt and high-yield bonds. And they were, in fact, one of the funds that held the Toys "R" Us debt.
If you don't understand what I'm talking about , I made a whole video about the Toys "R" Us situation, which I'll leave a link to above if you have n't seen it. Be sure to watch it. So , in this video, Howard talked about his entry into the high-yield bond market in the 70s. Back then, because the market was very new, it could leverage two advantages: informational and behavioral.
In general, there are three types of benefits available in the market. You have an informational and behavioral, as I said, as well as an analytical advantage. If you want to learn more about these benefits, I also made a video about it, the link to which will be above. Look at him . So, the first advantage he had at the time was informational.
No one was looking at high-yield bonds back then. There was no data, no price history, nothing. It was a fairly new market, so people didn't even know about it. And if they did know, they didn't understand how it worked. So simply having basic information and understanding puts you above everyone else.
And therein lies the benefit of working in a new market. If there is little information and people don't understand it, then even simple things give you a huge advantage. Many opportunities are hidden where there is not much popularity. One of the examples we gave in the previous video about the benefits was the microcap sector.
Few funds enter this sector because they have too much money. They can't invest a hundred million in a tiny company because it would change the price too much. They don't even look that way. But for small investors, if they look closely at micro-caps, they can find great opportunities. The information they receive about these companies is not common knowledge, and these can be considered new small markets each time.
Another example is cryptocurrencies a few years ago. Then, and now, most people had no idea what cryptocurrencies actually did. Blockchain and Bitcoin were just buzzwords, nothing more. But if you got into this new market early, you could have caught the trend and made a ton of money. I had friends who were in this market since 2015 and before, and now they are millionaires.
And they weren't the smartest people in the world or anything. They just happened to be in the right market at the right time. And their understanding was enough to outpace everyone else. By the way, if you have examples of new markets that you think are currently developing, be sure to write about it in the comments.
I would be very interested to know about them. But, you know, while new markets can be very lucrative, they can also be quite challenging. The flip side of market unpopularity can actually be significant. If no one is paying attention to it, it could mean that all assets in this market are garbage. And in any new market, there will be many things that won't work.
Entering such a market in itself can be a huge waste of time and failure. You may not get anything out of it . For example, in the cryptocurrency market, how many different coins have there been that never achieved anything? How many ICOs have actually turned out to be just scams? It was like a minefield, and finding the best investment was not easy at all.
In many ways, a new market is much riskier than one that has already formed. But if you know what you're doing, like Howard did in the high-yield bond market, you can make good money doing it. So, another advantage Howard had in this market was the behavioral factor or sentiment. As he explained, no one was a fan of high-yield bonds.
90% of funds had rules that prohibited them from investing in such assets at all. Credit agencies explicitly stated that these were bad investments and even called them " junk bonds." Moreover, they were not considered moral investments. And when you see a sector with such negative sentiment, it's likely an exaggeration , and there are probably bargains to be found there, which is exactly what Howard found.
By the way, this is my partner at MacroOps, Alex. This is his specialization. He loves going into these depressed sectors that everyone hates and finding hidden treasures there. He is a contrarian. One of the things he's been tracking recently is the " death of retail." Everyone thought that online shopping would completely destroy brick-and-mortar retail stores.
Therefore, many shares of retail companies were sold at a huge discount. Alex was able to intervene in time , find those that were severely undervalued, acquire them, and capitalize on their further growth . And we've been doing something similar on this channel with all the stocks that I've talked about that will survive the threat from Amazon.
You know, I've done videos about Stitch Fix , Best Buy, Etsy—all those companies that people thought Amazon would destroy. But most of them are doing pretty well, and you could have gotten them at a big discount during all this negativity. The last thing Howard talks about is how difficult it is now, since both the behavioral and informational advantages have already been exhausted.
Now everyone has all the necessary data about junk bonds, and no one has a problem investing in them . It has become just another popular asset class. So, when that happened, Oaktree had to move to a third type of advantage— analytical. In my opinion, this advantage is the hardest to realize because you are competing with a bunch of other people who have the same data.
And your task is to collect this data differently and come to a different, better conclusion than the rest of the people. It's really hard to get high scores there , but like I said, Howard is an extremely smart guy and he did a great job at Oaktree. This is one of the reasons why everyone loves reading his notes, which you should definitely check out if you haven't already .
So, think about your own trading advantage. Is it based on a new market that has not yet become popular? Or what tactics do you use to maintain your advantage? Let us know in the comments. And if you haven't already , be sure to subscribe to this channel and click the bell to be notified of new videos.
We publish three videos a week, all of which are market or business related. So, subscribe, and see you in the next video. Stay yourself. See you later.
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