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Hello everyone. Later this year I am launching a new masterclass, " Richer, Wiser, Happier." If you are interested in studying with me for a year in a very small, intimate group, likely consisting of 10-20 people, please contact my friend and fellow podcast host Kyle Grieve for more information on dates, pricing, and other details.
His email address is: kyle (spelled k y l e) doggy theinvestorspodcast.com. Who is this master class for? Given the previous two groups, I would say this is ideal for fund managers, asset allocators, financial advisors, family office heads, CEOs, entrepreneurs, or just serious investors managing their own family funds.
Essentially, the masterclass is designed for passionate investors and those eager to learn who enjoy the idea of monthly classes with me and an incredibly successful and diverse group of people via Zoom, as well as in-person meetings at a few special private events in Omaha and New York City. According to my current plan, this will be the third and final master class “Richer, Wiser, Happier”.
So, if you are interested in this year-long journey to building a life that truly makes you richer, wiser, and happier, please don't delay. It would be great to spend time with you. Anyway, I hope the stars align well and I'll see you later this year. I was struck by a quote from David Swensen, one of your favorites, which I think I found in the book " Pioneer Portfolio Management ." I will read it because it is closely related to the ability to take one 's own, atypical positions.
He said: “ Active management strategies require non-institutional behavior from institutions, creating a paradox that few can solve.” "Establishing and maintaining an unconventional investment profile requires adopting uncomfortably idiosyncratic portfolios that often look downright unreasonable in the eyes of conventional wisdom." I'm curious how you managed to create an institution that, even as it became huge, did not become bureaucratic, did not succumb to consensus or become overly conservative and narrow-minded.
Because I think that's part of Oaktree's success: you, Bruce Karsh, Sheldon, and others have somehow managed to maintain this willingness to be atypical and unconventional, even as you've become much more institutionalized and globally significant. Well, I don't think we've become institutionalized .
I think we just got bigger. Ahem. My father said that marriage is a wonderful institution for those who like to live in institutions, but I don't. And we learn the best lessons early. My first job was at Citibank, I worked there for 16 years and realized that I didn't like institutional life. And in a bank, if you suggested: "Well, let's try to do this, or pay this person this much, or give that person a raise." They replied: "You know what, listen, we can't because there are institutional restrictions." And this word "institutional" is another word.
By the way, when I was a boy, if they said, "Oh, he lives in an institution," it meant a psychiatric hospital . But, be that as it may , I am desperately trying to avoid bureaucratic tendencies. Early on , around 2005, I wrote a memo called " Dare to Be Great, " and it was mostly a tirade against bureaucracy and committees.
Because when I was 29, at such a tender age, I became the director of research at Citibank, I was put on five committees, and as I recall, they met for at least 16 hours a week, and I almost shot myself . I have a short attention span, I don't talk much, and I don't really like listening to other people.
And I noticed that these meetings lasted exactly as long as the person who wanted them to last the longest wanted them to . And if you think about it, if you have some brilliant idea, what David called idiosyncratic, and you, you know, you give it a chance. By the way, why idiosyncratic ? Because everyone else is doing the opposite.
That's what makes it great. And you want to do this because you think you have an understanding of why they are all wrong and why their actions led to mistakes in the market. Can you imagine trying to convince a committee of 10 people to have a majority support this? Well, how, how can you do that? Because there's a reason why most people in the market don't take this approach, because it's hard to see.
So, if the majority does A, how can you convince the majority of the committee to do B? If you have an idiosyncratic vision, if you have a young Warren Buffett working for you, it's better to just let him do his thing, rather than saying, "Well, you can't make any deals until you convince the majority of the committee." So, this is one of the most important things in investing.
Bureaucracy and great investing are contraindicated, as doctors would say. When Lehman Brothers went bankrupt in mid-September 2008, we raised the largest distressed debt fund in history—about three times the size of previous ones. We had $10 billion lying idle. Lehman collapses. Most people believe that the financial world will collapse.
The question is whether to spend the money. And you know, people were like, "Well, why don't you just analyze the future?" There is no such thing as analyzing the future, especially when unprecedented events occur . So Bruce and I decided we had to spend this money. He managed this fund and boldly invested an average of $450 million per week for the next 15 weeks.
That's $7 billion in one quarter. But I don't think we could convince the committee. The good news is that we raised funds in advance, so we did n't have to convince customers. The best time to invest is during a crisis. During a crisis, it is impossible to raise money because people are numb from inaction.
So this was definitely an unconventional approach . I was talking to a friend of mine who wrote for one of the newspapers. He asked, "What are you doing?" I replied: " Oh, we buy." He says, "Really?" Like we're crazy. It was definitely unconventional and, of course, uncomfortable. We weren't exactly sure we were right, but it seemed like the right decision.
So, you do it. You have to overcome your discomfort. I wouldn't try to convince 20 people that I'm right. And what makes Bruce such an outstanding investor? Because I never heard him talk much, and a few days ago I was listening to a conversation on your Oaktree podcast where you, he, and Sheldon were talking about the early days of the firm.
And I was surprised that he seemed to me to be a very nice, decent, intelligent guy with a huge focus on family, decency, and building a lasting institution. Tell us what he is like, because he was clearly a key figure in Oaktree's success. Yes, well, he approached me. I was at TCW. He came out to me in '87.
He was a lawyer. He handled investments for Eli Broad, who was the biggest leader in Los Angeles. And he had the idea to create a distressed debt fund, which we did in '88, and I think it was one of the first such funds from a major financial institution. We raised $ 65 million in the first round , and the second closing brought the total to $96 million.
We thought we had all the money in the world. But the point is, Bruce is extremely analytical. He is like a chess player. He is really a chess player. He calculates his moves in advance. Very competitive in that low-key way that you talked about, but you know, very smart , focused, and a great performer.
And we've enjoyed a partnership for 37, 38 years, and it's one of the most rewarding things in my life, you know, after my relationships with family and friends. You know, Warren Buffett wrote a letter a few weeks ago about his retirement, where he talked about his relationship with Charlie Munger. He said that in Charlie he had an older brother who protected him.
To me, Charlie was a wise philosopher who gave Warren advice, and Warren was a six- year-younger executive who did the analytical work and dealt with investments. What I really liked about this reference was that he said, "And the words," I said, "were never spoken." And you know, what Bruce and I have, our relationship is very similar to that.
We are both very adept at recognizing that the other can do things we can't. This is great, because it is the only basis for a healthy partnership. As soon as you start thinking you can do everything yourself and everything the other person can do, your partnership is over. But we recognize that each can do what the other can't, and that complements us tremendously, and no one ever says "I told you so." As for mistakes, there are a lot of them all the time.
And I think we supported each other. Spending $7 billion in the fourth quarter of 2008 would have been very difficult without support. We need to encourage each other. And never say, "Oh, I would never do that." You know. This fact that he first came to you and said, "Let's deal with problem debts." It raises a very important question, which I think comes up often in your writings.
Going back, I think, to the 2014 "On Luck" memo, where you said, " The easiest way to win at investing is to stick with inefficient markets." "And, actually, back in 1995, in a paper on how to play this game, you wrote: ' Study the micro level like crazy to know your subject better than anyone else.'" You can only expect success if you have an advantage in knowledge.
Can you tell me more about this? Because it strikes me as something I see over and over again in great investors, like your friend Joe Greenblatt, who initially got rich partly because of his genius in special situations, or Bill Ruane, who told me, "I just try to learn as much as I can about seven or eight good ideas." And it seems that this focus on a narrow specialization, as well as an inefficient market, was absolutely key to your success.
Well , let's consider the opposite. So, remember, I said you have to be prudent when you sit down to invest. You have to think about what elements will make me successful. 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 everyone else in this business is pretty smart.
You can't say, "I graduated from the best schools." It does n't matter that much . You can't say, " You know, I have this universal intelligence that I can apply to every asset class and know more than anyone else in every class." You must develop a knowledge advantage, and this is usually achieved by first developing the right approach that you consistently implement, and knowing what others don't know.
It could be having more data, although that's difficult because the job of the Securities and Exchange Commission is to make sure everyone has the same data. Or it could be better data management or deeper insights into data analysis, or, as you said, tapping into inefficient markets where information is unevenly distributed.
But you have to have some source of advantage. Otherwise, how can you hope to win? You know, investing is an incredibly competitive game, and winning is about beating a bunch of other people who are just as smart, numerate, computer literate, hardworking, and very highly motivated. So, you should have an advantage.
And I think specialization is one way to try to gain an advantage. Another thing, however, is that it's really important in the concept of a less efficient market. When I try to explain market efficiency to people, I say, well, what if a guy came up to me after graduating from the University of Chicago in '69 and said, " Listen, I'm a bookie, I take bets on football, and I figured out that I could make a lot of money on football if I knew which team was going to win the coin toss at the start of the game.
So I'll give you 15 Ph.D.s and a Cray supercomputer, and all you have to do is predict the outcome of the coin toss at the start of every game." But if it's a fair coin, it's impossible to do. It's a waste of time because there's no advantage. This is what an efficient market is. An efficient market is one where everyone knows as much as you do, there is no advantage, and you are just wasting your time.
So our definition of a less efficient market is a market where hard work and skill can pay off. You know, as I wrote in Getting Lucky in January '14, I was lucky enough to find a few inefficient markets early in my career. In August of '78, I got a call that changed my life : the head of Citibank's bond department said, " There's a guy named Milken or something in California who 's doing something called high-yield bonds.
Do you think you can figure out what it is?" That was it. But they were called " junk" bonds. Most people did n't even come close to them . It was the 78th year. You know, the big pools of money in America are public pension funds, mostly from states and cities. I didn't receive my first state pension bill for 18 years.
They didn't want to deal with them because it was reputationally and politically unacceptable. Oh, great. So is this an asset class that I can buy and no one else will buy at any price? Well, maybe it's full of great deals. That's how these things are. But if you look at the things that everyone thinks are great and is willing to buy at any price, why do you think you can find something good there?
You know, when I started working in 1969, Citibank, where I worked, invested in what we called the " Nifty 50"—the best stocks in America. And if you bought them the day I started work in September of '69 and stubbornly held onto them for 5 years, you would have lost about 95% of your money. Because at the time you bought them, everyone thought they were the best thing that could be invented.
So, this is something to consider, and you should pay attention to things that few people are interested in. You mentioned the Nifty 50 and that crash, which obviously had a profound impact on your career and philosophy. I've been thinking a lot about the question you raise in some of your notes about how we should prepare for such extreme external events, whether it's a market crash, a pandemic, a war, or whatever else, given that we can't predict them.
You wrote in one of your notes, I think it was the second of your notes on uncertainties in 2020, that we can do this by acknowledging their inevitability and making our portfolios more cautious when economic shifts and investor behavior make markets more vulnerable to negative events. Can you talk a little bit about that, because I think this whole question of how to deal with uncertainty is at the core of what you do as an investor.
Well, first of all, there's a great saying that there are two types of people who lose money in the market: those who know nothing and those who know everything. So I hope I'll never be among those who know nothing, but I never think I know everything. And, in particular, I believe that the macroeconomic future is unpredictable.
But there are things that can give us a clue as to what lies ahead. So I wrote my second book, "Mastering the Market Cycle," published in 2018, which was about trends. And I said that we never know how the market will behave , but we can sense when it will tend to go up and when it will go down, and that tendency is largely determined by where we are in the cycle.
So when things are going great, prices have been rising, as you say, for 16 years, P/E ratios are high, and bond yield spreads , which are a barometer of fear, are narrow, we can assess that the market trend may be toward a slowdown and act accordingly. You don't need to make any predictions. None of those five predictions I mentioned earlier were based on foresight.
It was based on observation. And what I'm saying, William, is that we never know where we're headed. But we, damn it, need to know where we are. Are the prices and valuations high? Are risks being ignored? Are people behaving overly emotionally? These are questions that can tell you your chances of success, even if you don't know what the future holds.
And I never liked the title of that book. I had a more erudite name in mind. I thought Mastering the Market Cycle was a bit cliché, but the publisher insisted because he thought it would sell more copies. But I like the subtitle of the book, although subtitles, of course, receive little attention. However, the subtitle of that book was: "How to Turn the Odds in Your Side." You never know what will happen.
You can sometimes feel what the odds of a certain event are: when the market is at the peak of its cycle, the odds are against you, and when it is in a downturn, the odds are in your favor. But you know, the odds can be on your side, and you can lose money for a year, two or three, and vice versa . I think when I was writing my book "Richer, Wiser, Happier," where you were one of the main characters, my biggest discovery in five years of working on the book and researching the material was that we have a fundamental problem: the future is unknowable.
And yet, as you often write, we must make decisions about the future. And it struck me, probably deeply influenced by your ideas, that there are countless ways in which you, even without control, can very subtly tilt the odds in your favor. This is both something very banal and extremely profound. Can you talk a little bit about this idea, because it seems like a guiding principle that I think permeates the lives of all great investors—this ability.
I mean, you see that in someone like Ed Thorpe, right? Who, you know, very subtly tilts the odds in his favor, like by not playing games where he has little chance of winning, or by making sure he analyzes the evidence very rationally and independently, whether it's about COVID or the markets or anything else.
Can you elaborate on that a little? Well, you know, there are so many opinions on this topic, but one of the things that Warren Buffett has spoken about most candidly is that in baseball, you have to get into position and wait for a good throw. And above all, you must have an understanding of what a good throw is and what a bad one is.
He tells the story of how Ted Williams didn't just wait for good serves, he analyzed his achievements very carefully, tracking all his shots and figuring out where the serve was and what the result was. He divided the strike zone into 18 spots and said, “Well, if the ball is in spot one, two or four, I usually make a single; if in the fifth or sixth— double; and if it's in the seventh or eighth, I usually strike out ." So, you have to understand what a good serve is and wait for it.
He says, and Buffett has always advocated patience over hyperactivity. But he points out that in investing, unlike baseball, where if you stand with a bat on your shoulder and miss three pitches in the strike zone, you're out. But in investing, you can wait longer. You won't be called out for strikes.
Although this is not entirely true, because if you are a professional investor , investing other people's money and sitting with a bat on your shoulder while the market grows for 16 years, you can be " fired." Warren had the distinct advantage of never thinking about being fired. But the rest of us can.
And yet, patience is very important, as is waiting for a good serve, objectively, for your type of serve, your type of investment. You can do it. You know, we already talked about playing within your means. You are focused on what you are looking for. You can't buy something just because you find it attractive to others.
It has to be attractive to you, meet your criteria, and you have to have a set of those criteria. So, these are the things you can do to tip the odds in your favor. I think there's another extremely important related lesson that I've tried to learn deeply from you over the years: not to deceive ourselves about the conditions, the environment, in which we find ourselves.
I often couldn't find it when I was rereading your notes this week, but there's a very apt quote from your intellectual hero Peter Bernstein, which I often quote and probably twist, where he said something like , the market is not a very compliant machine. It won't give you high returns just because you need them or want them.
Yes. Yes. Can you talk about that, because I think that's also very characteristic of your approach, and it's such a deep and central idea—the idea of adapting to reality as it is, not as you would like it to be. Well, first of all, the good news is that on the occasion of the anniversary of the memoranda, we have published an online compilation, and by the way, it is free, so the price is quite reasonable.
But it is searchable. So if you want to find that quote, you can find it. Um. next time. You know, the thing is, don't kid yourself. Charlie Munger always said, he often quoted the philosopher Demosthenes, who said, " What a man desires, he believes." And we tend to do that, and it's harmful. Let's say you're a stockbroker, you get a commission, and you say, "Well, there 's always something good you can buy." So you buy every day for your customers and get a lot of commission.
Well, guess what? There are days when there is nothing worth buying. And you have to accept that. You need to approach this maturely, be patient, and exercise restraint. All of this requires maturity, an analytical mindset, patience, insight, understanding yourself and your biases, and understanding the process of how money is made.
And then wait until the odds are on your side to add momentum. I believe you should always have investments. But sometimes you act more aggressively, and sometimes you act more defensively. You wait for those golden moments to really turn up the heat and become more aggressive. You pointed out that Charlie actually made most of his fortune from four major bets throughout his life.
Well, Charlie said it himself. Four big bets. And he, I think either he or Warren said that Warren had eight of them. But Charlie, yes, Charlie said he made all his money from four things. You've written a lot about Charlie over the years, recalling, for example, his great line, it seems, from a lunch you once had with him, where he said: " This shouldn't be easy." "He who finds it easy is a fool." Can you talk a little bit about what you learned from Charlie, not just about investing, but generally about how to live a life with dignity?
Well, look, he was brilliant. He was extremely well- read. He loved to think. And he was just thinking about different things. And he developed what he called mental models for thinking, and he had what he called a mental model grid. And , you know, it's like a toolkit. Much of what we do as adults and investors can be called pattern recognition.
And the great thing about living for a while, paying attention to what's going on around you, and applying a little intelligence, is that when XYZ happens, you don't have to ask, "What, what was that? What is this? Why did that happen? What does that mean? What do I do about it?" At some point you might get to the point where you say, "Oh, this is one of those.
I know what to do with it." And you have to have a set of tools to know which ones to apply. That was Charlie. Very intelligent, incredibly thoughtful, with a rich inner world, very frank, said exactly what he thought, constantly, regardless of who he was talking to or what the topic was about. And you know, he was a kind, sincere person , but he was the least politically correct person you'd ever meet.
And he simply said what he thought was right. Actually, I think there's a biography of him, yeah, his biography came out , probably about 20 years ago or something. And the title is " Damn it, yeah." Because that's exactly what he said. He said, "Well, Charlie, do you think so? Hell, yes, I think so, you know?" And very emotional.
I mean, he was obviously brilliant, but he had his process. And unbridled brilliance will only take you so far . But he directed him into a certain process. And you know, he put forward many philosophical theses that Warren was guided by . The most important one attributed to him is that he convinced Warren to stop searching the gutters for cigarette butts that others had thrown away because they had only one puff left.
And instead, instead of trying to buy mediocre companies at great prices, try to buy great companies at reasonable prices. And that's why Buffett and Berkshire became what they are.
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