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But the returns on the funds that were formed and and invested during the crisis years, which was only 6 years out of the 35, pulls up the average substantially to to 22 gross. The question is, how do you decide you're right and the herd is wrong? What methods do you have to avoid confirmation bias?
Well, first of all, I mean, that's the definition of value investing. You want to buy things for less than they're worth. Uh buying things for what they're really worth is not very exciting and buying things for more than they're worth is not definitely not a great idea. So, it's value investing is all about buying things for less than they're worth.
Uh and and I hasten to point out that that sounds like a reasonable way to spend your life and a reasonable goal. The challenge is that it requires assistance from somebody else who's willing to sell things for less than they're worth. And that doesn't seem such a great idea. So, the answer is our funds basically do best in crises when asset holders get scared and dump assets.
So, we have a 35-year record in distressed debt investing. On average, we've made a I think 22% a year before fees and 16% a year after. But the returns in the non-crisis years are pedestrian. But the returns on the funds that were formed and and invested during the crisis years, which was only 6 years out of the 35, pulls up the average substantially to to 22 gross.
You buy things that that for what you think is less than they're worth. What makes you think so? And and how do you how can you be sure that your decisions are not made based on biases? Well, there'll be a lot of things that you'll learn in the investment business then there'll be a lot of things we probably that we talk about today which where I can't tell you how.
There is no how. Uh you know, who was it? Uh John Kenneth Galbraith once said, "There's nothing intelligent to be learned about managing money because if there were, study would be intense and everybody with a positive IQ would be rich." You can't you know, and I I thought I I I I had a great day on on Monday.
I went up to West Point and spoke to a bunch of cadets there who were interested in finance and you know, who would have thought it. But this guy says to me, "How do you know when to sell? What's the right What's the amount where if it's up, you sell? What's the amount where if it goes down, you sell to prevent further losses?" I can't tell you.
Everything that you learn about making money and certainly everything that you learn here about how to invest it's a it's a it's an intellectual framework. It's it's what to do. Nobody can tell you how to do it. And you can sharpen your focus and think about things in better and worse ways, but uh I I I created a concept called second-level thinking which is thinking different from the herd deeper, hopefully more sophisticated but also better.
If you think different but worse, you don't you have a problem. So, second-level thinking, you have to think different and better. And in my first book, which is called The Most Important Thing, I have 20 chapters. Each chapter says the most important thing is and then it's a different thing because in investing, there is no one most important thing.
There are many many things that are very important. But the first chapter says the most important thing is second-level thinking. But I say in there and and and people ask me all the time, "Can you learn to be a second-level thinker?" And I say I don't I don't know, but I'm a little cautious on the subject.
And I said it it's like in basketball, they say you can't coach height. All the coaching in the world will not make your players taller. And it's true. And so there are certain requirements for being a successful investing investor, one of which is the ability to be a second-level thinker. And another is the ability to be unemotional.
Can you teach these things? And the answer is I don't know. I can explain to you why it's important but I don't know if I can produce it in you. It all comes down in the end to insight. Do you have it or don't you have it? And I don't know if people who don't have it can be made to have it. I think because it'll a lot of it is an art form.
We see the future and and the only way to think about the you know, our whole industry is based on forecasts. I don't believe in macro forecasts, economy market, currency, commodity uh uh interest rates, unpredictable. Um And you know, there's a real dearth of people out there who got rich by making macro forecasts and investing on that basis.
But we all have to think about the future. We all operate in the future. One of my favorite quotes is from Ian Wilson who ran General Electric who said, "All the sophistication in the world will not get you around the fact that everything you know is about the past and all your decisions are with regard to the future." But we have to deal with the future and we have to I think we have to deal with the future as a probabilist probability distribution.
And the question is who can draw in his mind or her mind a probability distribution of future events which is the best predictor? And in particular who can best look at a probability distribution of future outcomes and determine whether the expected return suggested by perhaps the central tendency is sufficient to compensate for the risks that that lurk in the left-hand tail.
And this is a judgment. And uh you know, I I don't I don't I as I said, I can explain to you what's important but I don't know if I can teach insight.
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