저자: HowardMarks · 외국인
요약 보기
Marks는 위험을 영구적 손실 가능성과 원하지 않는 결과의 가능성으로 정의하며, 변동성은 위험이 아니라고 주장. AI 버블은 과열이 기술 발전을 앞당기는 측면이 있으나 현재 AI가 버블인지는 단정할 수 없다고 봄. S&P500 상위 7개 종목 비중이 40%로 지수 대표성이 떨어지고, 나머지 493개 기업의 PER(약 19~20)이 역사적 평균(16)보다 높다고 지적. 영국의 EU 탈퇴는 경제에 부정적이라 평가. 프라이빗 크레딧 부실은 호황기에 나쁜 대출이 만들어진다는 신호로 해석. 마이크로캡은 불황에 변동성이 크고 호황에 성과가 좋다고 언급.
다듬은 글
What do I need to understand about myself to understand your success in life? Well , that's a real question. Howard Marks, co-founder of Oaktree Capital Management, is one of the most respected investors in the world. Doing what others think is crazy . That's how you make big money. Known for his work on risk, market cycles, and investor psychology, he shaped how professionals approach decision-making under uncertainty.
You should buy what no one else likes. In this interview, Marks explains how he defines risk, whether microcap companies can follow broader market cycles, why certainty is dangerous, and how disciplined investors act when markets are at their most uncomfortable. What possible reason could you have for thinking you're getting a good deal?
This is "Club Talks", which operates on the basis of MicroCap Club. Our goal is to provide our community with access to the best minds in investing and business. I'm Castle, the founder of MicroCap Club. MicroCap Club is a private community of the world's best stock picking experts. Since 2011, our members have profiled 1,500 companies, and over 300 of them have become multi-profile investors.
That's at least one big winner every month for 14 years. If you like finding great companies at an early stage, long before Wall Street takes notice, MicroCap Club is what you need. I hope to see you in our community. And now a short warning . The purpose of this conversation is for informational and educational purposes only and should not be construed as a recommendation to buy or sell any securities.
MicroCap Club is not a registered investment advisor. MicroCap Club, its partners, participants, subscribers, guests and affiliates may or may not have positions in one or more of the securities mentioned in this program and may trade such securities at any time. Please do your own due diligence and seek advice from a registered investment advisor before trading any securities.
I would like to ask you, what is the origin story of Oaktree? Well, it so happened that, uh, my partner Bruce Karsh and I started talking about, uh, starting a company in June of '94, and, uh, we started, uh, making some plans and, uh, thinking about our thought patterns and our credo. And, uh, and, uh , that's how my mind works, yeah, I need a working title, and a house in California, a Portuguese house, uh, it was called, uh, and I liked this house, it had beautiful oak trees, and the name of the house was Las Encinas, which is Spanish for "little oaks." So my working name was Oaktree, and when it was time to, uh, actually flip the switch and start a company, uh, I said to my partners, "What should we call it?" They said, "Sure, Oak Tree." So, this is the origin.
And of course, when we started, the first question a lot of people asked was, "Where did you get that name?" So, that's the explanation. Yes, I think it's a great title and a great story. So, starting from first principles, what is risk and can it be measured, or how do you approach risk so we're all on the same page?
Of course. Well, I think, first of all, I wrote three memos about risk. I hope your audience knows that I have been writing memos for clients for 35 years. October 12th marked 35 years. Risk is a very important theme that keeps recurring for me. I wrote three memos devoted exclusively to risk. The first was called "Risk 2006 ", "Risk Revisited 2014", " Risk Revisited 2015".
And in the area of risk, you know , in 2000 I went to the University of Chicago for a master's degree, and, uh, the Chicago approach taught me that volatility is risk. And I've never been comfortable with that because I don't think volatility is an important risk. I think that, uh, the Chicago theorists chose risk as the indicator of risk.
Uh, and this, this, this can be useful as an indicator, but volatility is not risk. And, uh, in the first memorandum of 2006, I said that in my opinion, the risk, the real risk that matters to investors, is the probability of permanent loss. Simple price fluctuations, with temporary price fluctuations, are not significant or should not be so.
They can be significant, uh, psychologically, but they don't have to be . Uh, on the other hand, uh, obviously, constant loss is a risk. Then, when I was writing the memorandum in 2014, I said, “Well, there are actually many types of risk. The possibility of permanent loss is one of them, and it is very important, but it is not the only possible type of risk.” And so I expanded on that by saying that risk is the probability of an undesirable outcome.
For example, uh, obviously, a permanent loss is one type of risk, but another type of risk is the possibility that the market will be very successful and you won't be in it. Yes, that's true. So, if you think about it, it's actually, you could say, the risk of not taking enough risks. See? So, the risk is multifaceted.
So, for now, I will say that risk is the possibility of an undesirable outcome. Desirable is a subjective term. What is undesirable for me may be undesirable for you in some way . So, this introduces the fact that risk is subjective. Uh, but I think so. And I think that, you know, if you work at an investment company and you have a bad year, you can get fired.
So the risk of a bad year is important to you , but it's not important to me because I can't be fired. Uh, you know what I mean? But, I... So, I ... So, I think the most commonly used definition is that risk is the possibility or probability of an undesirable outcome. This is great. And the great thing about this conversation is that you already started thinking about risk before I was even born.
So, I guess I'm really excited to learn more about it. But you recently wrote another memo that I highly recommend, and I read it in preparation for this interview about bubbles and the AI bubble , or whether we're in an AI bubble or not, and what we can look at to understand where we are. I really liked one concept that was new to me, and that was the concept of bubble benefits.
Could you expand on it so our audience can understand a little better? Well, I'm not a technologist, so writing a memorandum about whether artificial intelligence could be a bubble... Yeah, I had to learn a lot. And, my son Andrew, who is, um, a technologist and, you know, a progressive thinker, gave me a bunch of reading material.
So, um, I read the books and I quote them in the memorandum. By the way, we're talking about memoranda, um, David. I hope your audience knows that anyone who wants them can get the memoranda at oaktreecapital.com. Log in, click on "Ideas," click on Howard Marks's monuments, and they can get all the monuments they want.
They are all free. So, some of the material that Andrew gave me was from books about bubbles, and they're cited in the memo, so you can find them if you're interested. And they essentially said that everyone is worried about bubbles, but actually there is an advantage to bubbles. And the advantage is that the hype around this technological innovation is so strong that money is invested, and the thing, whatever it is, is built very quickly.
And I find that very interesting, and I think that's right. And what I'm saying in the memorandum is that, you know, when you have these bubbles, and you had the railroad bubble in the 1880s, the radio bubble in the 1920s, the internet bubble in 2000, or the fiber optic bubble in 1998, and so on. When you have these bubbles, if people remained objective, rational, skeptical, demanding, and risk-averse, it would take a long time for these things to blossom.
But because of the enthusiasm or hype surrounding the bubble, they blossomed much faster than they otherwise might have . So, this is the advantage of bubbles that they accelerate technological progress. But, of course, remember, these books are written by technologists, not investors. So the technologist thinks about it and says, "Oh, bubbles are great because they speed up progress ." The investor says, “Not so great.
I could lose money." The technologist doesn't care about the fact that people might lose money because of the beneficial impact on society. But anyway, I think to some extent it's a positive effect of bubbles that they get things done quickly. A bubble is a burst of enthusiasm. Uh , in 1996, Alan Greenspan, the chairman of the Fed, coined the phrase " irrational enthusiasm." And I would...
So what I'm saying in the memorandum is that a bubble is irrational enthusiasm. And if you look at AI today, you know there's enthusiasm. The question is whether it is irrational. But I can't tell you that because I don't know where AI will end up. AI may not be impossible to justify today's enthusiasm.
So I can't tell you whether it's a bubble or not. Perfectly. Yes, and speaking of bubbles, you also wrote about bubbles in January of this year in your memorandum on bubble surveillance. And you, I mean, you mentioned that the forward return of the S&P based on probabilities and historical data is likely to be lower than the short-term historical period.
So, if you could recalculate the S&P however you wanted, how would that change the forecast, in your opinion, or how would you approach it? I think it's not good for a representative index of 500 stocks to have seven of them make up 40% of the index. Therefore, you probably wouldn't weigh stocks based on their market value as it is today.
Right. Maybe you would weight it based on profit or something like that. Or maybe you would do a balance. But if that's the case, it's not much of a 500 stock index if seven of them make up 40%. Right? 1.4% of stocks make up 40% of the index. This is not very representative. But other than that, I mean...Interestingly, what I mentioned in another memo earlier this year is that seven stocks, the so-called magnificent seven, are overweight but not insanely expensive.
I mean, they have P/E ratios, which is a basic measure of value, of valuation. They have P/E ratios of about 30. And this is a high figure, but , in my opinion, not crazy. These are great companies and I would if I had to give my opinion, which I am not obligated to do because it is none of my business, but if I had to give my opinion, I would say that the Nifty 50 is not overvalued.
They exceed profits by about 30 times. When I came into this business as a young man, at the age of 29 , when I moved from Chicago, there was a bubble in what we called the Nifty 50, the 50 best and fastest growing companies in America. And they were selling at P/E ratios of 60 to 90. So 30 doesn't seem very expensive to me.
You see what I'm getting at. And, uh, but what I think is high is the P/E ratio for the other 493 companies, which averages around 20 or 19. The historical average for the S&P is 16. And that includes the highest-rated stocks, which are heavily represented by the overweight stocks . So, obviously, the P/E ratios for not only the most valuable but also the most highly represented stocks could have averaged 14 or 15.
And today they are close to 20. So that seems very high to me. Anyway, this is kind of off topic, but that's how my mind works. Let's. Perfectly. Yeah, so here at MicroCap Club, we're all focused on microcap companies, I guess. So, how do you look at market cycles when it comes to microcap companies?
Because they're likely to be overlooked and they...Are there opportunities regardless of the broader cycle, or is it how you think about it in terms of defensiveness and aggressiveness, if you lean more towards microcap companies? Yes. Well, I don't think about micro-cap companies myself, as you know.
I am not active in the stock market. My company Oaktree is basically an investment , which is called a loan or debt. So we don't invest in stocks or shares of micro-cap companies. But, if you asked me what to think, I would say that, uh, micro-cap stocks are an indicator of enthusiasm. Again , there is this word.
And um... because if you look at micro companies, I would imagine that most of them are technology-focused or future-oriented or in some way, uh, are a bet on a bright future. I mean, you don't want to invest a lot of money in a company that's worth $10 million today and, if you're lucky, it grows to $15.
You want to invest in a company that's worth $10 million today but could be worth a billion. And for that to happen, it has to be what we call a growth company, or a future-oriented company, a technology company, something like that. So I think my guess is , and you can correct me if I'm wrong, that when you say microcap companies, you're talking about small growth companies.
Er, actually I don't include growth in the definition. It's more like a market capitalization of less than $1 billion. That would be my definition of micro-capitalization. Well, whatever. So, I also include stable businesses that are just...well, small. Well, here's what I would say then. I would suggest that a stable, uh, business, a stable small-cap business is probably ignored because, you know, most people with significant...
To work in the money management business, you have to have significant money to make a living. And if you have significant money, then you can't pay much attention to companies worth less than a billion dollars. So, I would think it's a viable thesis that what you call micro-capitalization will be largely underestimated.
Uh, now, speaking of technology companies, uh, now you're talking about companies that can be quite risky. And because of that, I would assume, not knowing that microcap is a hot... volatile business, hot tech companies that are microcap will fluctuate in their selection and loss of popularity, and they will fluctuate according to investor psychology .
So, when investors are enthusiastic, relaxed, optimistic, things have been going well for a few years, no one has lost money for a few years, they are looking forward to the future, that's when these companies will truly succeed. But then, if some bad events happen and people become more cautious, that's when their affairs will get worse.
Hmm. So, I think we need to share what we're talking about . I think when you're talking about stable companies with stable businesses that are under a billion in capitalization, I would say yes, that 's probably a good place to look. But when you're talking about companies with exciting, future-oriented businesses, with a price tag below a billion, I would say they're probably pretty volatile.
Because they are likely to do really well in bullish times and really poorly in bearish times. Just my guess. That's right . That's right. And a lot of people get their first experience with micro-caps because they invested in these hot stocks during the bull run, and then they become micro-caps again.
So, this is a first experience for many people. And that brings me to one of my favorite sayings: experience is what you get when you don't get what you wanted. Right? That's a good expression, yes. You invest in a company worth 10 billion, and after a while it is worth 1 billion. In other words, your dreams didn't come true.
This is great. And actually I have a little surprise for you. I asked our mutual friend Richard Oldfield from Old Mutual Partners to send you a surprise question. And he said, “You spend a lot of time in London. Do you think the UK is really as broken as people say? And given the low price of British shares, do you see more pitfalls or opportunities?
Well, you know, listen, I think the British voters committed economic suicide. I think they made a terrible mistake by leaving the EU. They were manipulated by politicians who wanted this outcome. They were fed a lot of what we in America call nonsense. Um, and they got caught on this. And I think the UK is significantly weakened economically, uh , by not being part of the EU.
Being part of the EU had some negative aspects. But I think overall it was good for business . But the people who fought for the exit exaggerated the negative aspects, ignored the positive ones , provided incorrect information, and achieved their result. But I think that's very bad. This does not mean that England will go bankrupt.
This simply means that GDP will be lower than it would otherwise be . And growth will be less than it would otherwise be . And this deficit will burden the budget. And this will hinder England's growth prospects. That's what I believe. Uh, uh, not the end of the world, just really annoying. Do you understand?
I mean, uh, you know, you- you could be a partner at Microsoft. But you refused. This doesn't mean your life is over. Your economic life is over, but that means you could be much , much better than you probably are. That's all. Hmm. An unpleasant self-inflicted mistake. In football we call this an own goal.
Right? Do you know the term own goal? Yes. When you score a goal. It was an own goal. English voters voted to undermine the British economy . Hmm. Interesting. I don't invest much in the UK, but I'm sure Richard won't be so optimistic after hearing this. Well, he knows...He knows a lot himself. He doesn't need to believe my words.
Yes, of course. I also have another question about risks and things not going well. And it applies to private credit. Do you see any potential problems or systemic risks in private credit, given the speculative deals that have been happening recently and the management fee structures? Well, you know, I wrote a memo, uh.
When was that? You would know. Uh, October, I think it was, called "Cockroaches in a Coal Mine." And since there were several failures in the credit market, Tricolor and what else was there? First First Brands. Face First Brands. Yes. And so, since they happened around the same time , both probably had elements of fraud.
Oh, by the way , I think First Brands was just accused of fraud today. Well, okay. No, not First Brands. I think it's something else. Well, now in one of two. I don't remember which one. Well, when, when, when, when one thing happens, people may not notice it. When two things happen, they tend to think it's a pattern.
So they extrapolate that and worry about it. Oh, and I think, as I said in the memo, the importance of this development is that it shows how cyclical psychology is. Because, you know, the markets have been doing pretty well, with a few minor exceptions, for 17 years now, starting in late 2008 and the end of the global financial crisis.
And so when things go well for 17 years, people lose their vigilance, they lose their risk aversion , they stop being cautious, they stop being skeptical, they stop doing due diligence. And that's how bad deals are made. It's that simple. That is the importance of this experience. It's a reminder that bad deals are made in good times .
And that's exactly what happened. That's why these lenders, these companies, shouldn't have been able to borrow money. But they were, because we were in bullish times, you know. And, um, I say in the memo that there 's an old saying in banking that the worst loans are made in the best of times. Because good times distract the analyst from skepticism, pessimism, and risk aversion.
And this is not good. It is the reluctance to take risks that makes the market safe and prudent. And when people forget to avoid risk and start worrying more about losing money than about losing it, then the market becomes a dangerous place. Of course. And so when things aren't going so well, it can create opportunities for investors.
And you once said that you make a lot of money carefully catching falling knives. Yes. Yes. Uh, and you've done this successfully, I think, five times or so . So how do you do it? I know it's different every time, but what principles can help us in these moments? Well, I think the principle should be that your investing should be value-based.
That is, you have to look at the company. You can't think of securities as pieces of paper to trade. Because if you think of them just as pieces of paper to trade, then you have to say to yourself, “Well, I wonder if these stocks are going to go up or down tomorrow? Will people like them more or less ?
And, of course, it's unpredictable. Or when I say tomorrow, I mean maybe in a year or two. If you want to be a smart investor, you don't guess at the changes in popularity. You say that in my opinion this company has an intrinsic value of one hundred. It is on sale for 80. I would like to buy it. And hold until the value reaches a hundred.
You see, and then you will make money. If you are right. You must be right. But, but... So if you're a value investor, and you look at something and you say, "I think this is worth a hundred." It sells for 80. And then something bad happens and the price starts to drop. 80, 75, 70 , 65, 60, 55, 50. Then it's a falling knife.
But then you say, "This is great. It's like a department store. It's on sale now. Now I really want to buy more. See. And that's the key to making big money and catching falling knives. Uh, you have to do this . You have to buy things that nobody else likes. Things that nobody else likes are likely to be cheap.
Like you said earlier about microcapacitors. And your point is that nobody likes them because they're not noticed. They're too small to attract attention. And so you buy them. And you're happy buying them because nobody else wants to buy them. And if nobody else wants to buy them, the price is probably low.
But if you buy things that everybody likes, everybody feels good, everybody is optimistic, things that are on the front pages of newspapers every day because they're selling great. What reason do you have to think that you're getting a bargain? buy? If everyone loves it, how can you buy or steal it at a good price?
That's why I say our job is to carefully catch falling knives. You don't want to do it carelessly. But I think you don't want to shy away just because they're scary. You want to do what's scary. David Swensen, who successfully ran the Yale Endowment Fund from 1985 to 2020, 35 years. And he, you know, fund management is a game of inches, and he won the game by a wide margin.
He said that investment management requires taking uncomfortable idiosyncratic positions. Idiosyncratic means different from what everyone else is doing. And if you do something that's different from what everyone else is doing , let's say, you know what? I think Nvidia is overhyped. So everyone else is buying into it like crazy.
We're going to sell positions. It's definitely idiosyncratic. And if you're not uncomfortable, there's probably something wrong with you . But, but because you think you're you, in your logic, you do it anyway . But you're probably uncomfortable. And that's what we're talking about here, when you catch a falling knife.
And when we do these things, you say, "I've done it five times." And I want to assure you and your listeners, I've never done it without worrying. I've never done it with the words, "I'm doing something that's 100% guaranteed to work ." You know, if it's something peculiar, it's probably uncomfortable.
You have to say, "Well, I'm doing it because I think it's going to work, and I'm crossing my fingers." That's all you can say. Hmm. Which of these funds are you most proud of? I think it was a purchase in the fourth quarter of 2008. 2007, during the global financial crisis. You know, we were worried about the market, so we raised a lot of money for our $ 7 billion opportunity fund by 2007.
The largest distressed fund in history was $2.5 billion. And that was our 2001 fund , $2.5 billion . So in 2007-2008, we raised $11 billion. So 4.5 times the largest fund in history, because we thought there was a big opportunity coming. And we had this money, and it was sitting on the shelf , mostly unspent.
I think we invested 12% of that fund the day Lehman Brothers went bankrupt. So we had $11 billion sitting on the shelf , now it's 10/10. Are you going to spend it or not? Uh, the world was very scary. So, talk about falling knives. Most people thought that most people were worried that the global financial system would collapse.
And they weren't making this up, because in recent months Merrill Lynch, Bear Stearns, Wachovia National Bank, Washington Mutual, AIG, and now Lehman -- they've all failed or had to be bailed out. And if the death spiral had n't been stopped, you know, there's a chance that Morgan Stanley, for example, would be next.
Because these companies were highly leveraged and interconnected. Each one depended on the others. So like falling dominoes, right? But we decided that we needed to spend money. And my partner Bruce Karsh , who runs these funds, started buying stocks probably two or three business days after Lehman went bankrupt and invested an average of $450 million a week for the next 15 weeks.
So, in other words, $7 billion a quarter. It was certainly uncomfortable and peculiar. Well, yes , and it wasn't easy. It wasn't easy . And so I think I'm very proud of that. this. Have you ever had to explain to clients what you're doing and why? Well, I mean, I... We do this by investing in what are called closed-end funds.
People make commitments. We take money out over time. We invest it. We take it out when we have good things to buy, and we invest it when we want. They don't have the option to get out. Or tell us not to invest. So we don't have to explain it to them to convince them to participate. They've already made the commitment.
And I don't remember explaining it to them in too much detail . Of course, I'm sure we did, and we wrote letters explaining to them why we thought what we were doing was right. But I remember, and I wrote about it in one of the memos. That I was talking to a friend of mine who was a reporter for one of the major newspapers.
And he told me that, and he tells me that sometime in early October, that was the worst. He says, "What are you doing?" "I said, 'We're buying.' He says to me, 'Are you buying?'" "You know, we went crazy. And so, you know, people thought we were crazy. But it is, but I repeat. That's done by doing things that other people think are crazy.
That's how you make big money if you're right. Just doing it is not enough. You have to do it and be right, and it's not that easy. Right. But, but, but that's what we did, and they thought we were crazy. And, uh, you know, uh, people told us in 2001, 2002 , when the tech bubble burst, and in late 2008, when the global financial crisis hit, that we were the only buyers in the world.
But, just think about it. If you're the only buyers in the world, think about what a great deal you're getting. Nobody else is bargaining against you. And if someone wants to get out, they have to sell it to you at your at a price. What a wonderful thing. That's the value of being contrarian. And so, in the meantime, how do you make sure that you're investing in things that are going to recover?
Obviously, you're investing in credit, but maybe we can also draw some conclusions from that. Well, first of all, you're using the wrong terminology, David. You're not making sure that it's going to work. If... If... If you can make sure that it's going to work, then other people can make sure that it's going to work, and then they'll buy and bet against you, and you can't buy it at their low prices.
So you believe... What I encourage you to do in your investing career is never use the word "confident." Yes, I do, and I say it very strongly , there's no place for certainty in the investing world. And Mark Twain, the great American writer, said, "It's not what you don't know that's going to cause you trouble.
It's what you do know for sure, but it's not true." So try never to be certain about anything. to be confident. Okay? We'll make sure. Yes , we'll make sure. Okay. We'll make sure that we're not going to say I'm confident about anything. Okay. We have one question from the audience, and he asked, "How would you structure a portfolio in the current environment, especially balanced between equities and fixed income?" And I think this is very personal, but if you could at least give us some basis for thinking about this.
Well, I wrote a memo. And by the way, my wife keeps saying to me, " Will you stop saying that?" Because I say it all, because I say it all the time, and now, after 35 years, I've written a memo about almost everything . But I wrote a memo, I think it was last October of '24 , called "Thoughts on Asset Allocation." And I described the two major asset classes as property and credit.
Stocks, companies, real estate. That's property. Bonds, bills, loans -- that's credit. And I described that they have very different probability distributions, very different expectations. With C, when you, when you. The way I explain this to people, let's say, well, you're not a married man yet, but let's say your brother-in-law is starting a business, and your wife tells you that you should invest.
We should invest. This is my brother. So you can, you can invest as a partner. You give him money, you get an ownership stake. If it's successful, you make a lot of money. If it's unsuccessful, you lose everything. Or you can lend them some money. And if it's successful, all you do is get your money back.
You have no advantage. But if it's unsuccessful, hopefully you still get your money back. So you don't have too much of a loss. And that's the difference between ownership and lending. And when , you know, first of all, let me say right away that I'm overly cautious. I'm a professional worrier. And unless things are giving away, which they certainly aren't.
So I'm worried about today. I think the world is an optimistic place, the markets are an optimistic place, prices are high, not low. Uh, and so, worried, I would say you should have a lot of credit, a lot of loans in your portfolio and not too much ownership. So I would outweigh, you know, you would define your normal risk position.
I would shift it to the side of caution today . I would, actually, more credit and less ownership. Not zero. It's never black and white, again, certainty, right? You should never be certain. But, uh , you know, if, if your normal position is 80% equity and 20% lending, that might be appropriate for you, because you're a young guy with a long future.
Maybe today you should have 70/30 or 60/40. Not zero 100, yes. But weighted, shaded on the side of caution. Because, first of all, the yield available on credit instruments today, if you take non-investment grade credit instruments, which is what we're doing here, we're not doing AAA, AA, single A, we're starting at double B and down.
Hmm. If you do that today, you can get, um, 7 8 9%. Okay. That's pretty good. The alternative is investing in the stock market, but as you said at the beginning of the podcast, we we think the S&P 500 is priced at subnormal returns today, about two Mhm. or less. So if you can get, if you can buy the owner, if you can buy credit securities with the promise of a 78% return, why would you invest in speculative, uh, uncertain ownership strategies that promise, well, not very promising, but probably will return two or less?
By the way , excuse me for a second. I'm talking about, I'm talking about the S&P 500, which is not typical. So the S&P 500 is priced so high that it's probably going to give a low return, not all stocks or all stock indexes. I wanted to ask you, obviously you're used to dealing with institutions, but as a retail investor, or what's the most responsible way for a retail investor to access high-yield credit?
Well, buy a mutual fund or an ETF. But I think, I think credit analysis, determining which non-investment grade companies will be able to pay their debts and which ones won't, is a very technical profession, and I think most retail investors shouldn't think they can do it. I always tell people, you don't do your own legal work, you don't do your own medical research, you probably don't even fix your own car.
So what makes you think you're qualified to pick out loans? Hmm. So, let someone, let a professional do it . Go into a fund. Most people don't do their own dental work , right? I don't think anyone does. Changing the subject, I'd like to ask you a little bit more about yourself. And I really want to know what I need to understand about you to understand your success in life.
Well, that's a hell of a question. Um, well, it's helpful to have, uh, a high IQ. It helps to get a good education. I was very fortunate to get into Wharton for my undergraduate degree, and then the University of Chicago for my graduate degree. And I got a qualitative and quantitative, real-world and theoretical education.
I was able to combine the two. I was lucky enough to come into this business when there was a virgin forest. Uh, you know, when I started, when Citibank asked me to start a high-yield bond fund in 1978, that was the very beginning of the high-yield bond world. And if you've read Malcolm Gladwell's book "Exceptions," it's great to be at the beginning.
And I was lucky enough to be at the beginning. And then Bruce Karsh approached me in 1987 with the idea of starting a distressed debt fund. And our distressed debt fund at TCW in 1988 was the first from a mainstream financial institution. So, uh, that was a big stroke of luck. And then the world decided it was interested in something called alternative investing.
So that was a stroke of luck, because that's what we we're doing. Uh , and then of course, I think it helped that I'm , uh, relatively unemotional. So when other people were scared during the global financial crisis or when the tech bubble burst, I wasn't scared into inaction. So, I think, and, and, so, I think that's what it takes.
If you can, if you can, uh, if you can duplicate this list, I think you'll be fine. Great. Um, yeah, I think high IQ is hard to practice, but yeah. Well, you know, it's funny, David, but, uh, you know , uh, you read the memo, so you must know that I believe in luck. And I think I was lucky. And everything I described was elements of luck.
And, uh , there are people who claim they weren't lucky. What claim that their success was their own doing. And it annoys me. I hate being around people like that. Uh, and, uh. So I tell them, well, part of the reason you're so smart is because you're so smart. What did you do to earn your intelligence?
Did you go to the gym for mental training? You know, to increase your IQ? And the answer is no . A high IQ is a gift. And you don't deserve it or create it. And there's nothing you can do to make yourself even smarter. So I believe in luck, and I think when we're lucky, we should acknowledge it. Hmm.
Another question I'd really like to ask you is, you once said that your father was the world champion pessimist, and so you didn't have the habit of expecting that much . So how did you deal with your own success? Were you able to enjoy it all the time? I enjoy it immensely because I didn't expect it.
And I look at my place , and I look at where I am, and I say, "Oh , you know, this isn't enough. I should have more. There's something wrong with me because I don't have more. I'm thrilled with my success, and who, who, whoever ?" Again, if you're not successful, if you're not happy with where you are in life, then there's something wrong with you.
You know, one of the secrets to happiness is low expectations. And I would say I had low expectations, including for myself. Yeah, I think there are a lot of people who are successful, but maybe they don't enjoy their success, or maybe they're always striving for more, right? I think that's very sad.
The next question is: What are you optimizing your life for today? I would say for quality of life and satisfaction. You know, you only have a certain number of years in your life. And when you get to my age, you know, I'm almost 80, you only have a certain number of years left. I think the main thing is to enjoy your life.
That's what you optimize your life for. Anybody who's spending their ninth decade... So I'm about to enter my ninth ten...Anybody who spends their ninth decade trying to get rich, I think is a fool. Do n't you think so? Yeah, I think that's right. Great. And so I'm also really curious to know what your typical day looks like today when you're not working in business?
Well, uh, you know, I get up... I still get up at about 7:00 in the morning. Um, get some exercise, have some breakfast, not too much. I'm very lucky that I get to... In New York, one of the great joys of New York is being able to walk to work. So, if it's not raining, I walk to work , which is a great way to start the day.
It's just a pleasure not to have to rely on, you know, transportation. Um, and you know, of course, I get so many emails that it's just hard to keep up with the daily emails. Uh , you know, people ask me for things to do, or they write me notes that I want to respond to with ideas. Um, it takes a lot of time.
And then I try to read the newspapers and the emails that come in and I get ideas. And when I get enough ideas, I write a memo. And it takes a lot of time, but it gives me a lot of pleasure. And that's why I say my job is reading, thinking, writing, talking. Hmm. It's quite... It's quite, uh, a full life for me.
Hmm. That's interesting. So what written literature has influenced you the most as a professional investor? Do you listen to any podcasts? I know you listen to a lot of them , but do you listen to any? And if you do, I don't listen to too many podcasts. I'm not a listener, I like to read more. Okay.
So I try to read a lot, but I'm a very slow reader. So I don't... I don't have the opportunity to read a lot. Uh, I just can't process that much written material. material. My son Andrew, you know, who's a venture capitalist, sends me a lot of interesting stuff. He's more interested in the future and, uh, you know, current events.
Uh, he gives me a lot of reading. And he sends me so much stuff that I can't even keep up with. So I-- I still don't have enough time to do everything that I want to do. You know, a lot of people my age are retired and they're having a hard time filling their days, I think. I can't, I can't , I can't do everything that I want to do.
And I think I'm very lucky. Yeah, I think it's a privilege. Uh, yeah, because I mean, I don't know if I'll include it in the interview, but, uh, talking to my grandmother and all that , uh, of course, there are people who don't have much to do and they wish they had more, so yeah. Uh, that's good. And, putting on my operations hat, what do you think about incentives, given that you've built such a successful and hopefully sustainable organization?
What do you think makes them effective or ineffective? Well, I think the key is that you have to think about the behavior that you want, and then you have to give people the incentives that will encourage people to do that behavior. Uh , Charlie Munger always said, " Show me the incentives, I'll show you the behavior." But you can't get good behavior without constructive incentives.
And that's why, you know, at Oaktree we want team players. So, nobody at Oaktree gets paid based solely on the quantitative evaluation of their work. You know, there 's a school of thought in the investment business called " eat what you kill." And each person has a personal balance sheet, and at the end of the year you calculate how much money they've made for the organization, and you give them a percentage of that.
But that doesn't mean, I think it hinders team behavior, and it doesn't acknowledge things that can't be quantified. And I think that's really important. One of my favorite quotes is from Einstein, who said, "Not everything that matters can be counted, and not everything that can be counted matters ." And when I look at the employees, we have people who are doing great things for Oaktree that can't be quantified.
And, and, and so , if all the incentives are, uh , based on quantification, you don't see them. And I think that's a big mistake. Hmm. And if you're not a team player by nature, how can you get better? Well, you know, David, I've come to the conclusion over the last few months that all the hard questions that I get asked start with the word " how." Because because because because I can ...I can tell you what you need to do.
I just have a hard time telling you how to do it. Okay. Yeah. So. But on the other hand, solving a problem or achieving a goal has to start with identifying the problem or goal and giving it a high priority. So if you say to yourself, "I need to learn to be a better team player," that's the first step.
If you don't say it, it's impossible to do. So, all personal management goals have to start with identifying a goal. I think I need to work on that . Um, yeah, maybe I'll... I'll let you know if I find a "how." Okay. And how do you assess, I mean, other "hows, " but how do you assess and attract highly skilled people into your organization?
Well, I mean, we ... you know, you talk to people for a long time. You try to understand what they're really about. But we're looking for, I would say , three things mostly. Um. Nice people that we want to work with. Um, there's a lot of people in the world who are scum. They can make you a lot of money.
In my opinion, you shouldn't work with scum. just because it can make you money. We need team players who will contribute to the success of their colleagues. And we need, um, independent thinkers who will think differently than others. Um, and who is there who will see something in a situation that is different from what everyone else sees.
Again, what Swensen said is idiosyncratic. If your behavior is never idiosyncratic, how can you stand out from the crowd ? And we want to have excellent performance, not just average or normal. We want to have excellent performance. And to do that, you need to stand out from the crowd . And if your readers are going to read any memos , I would encourage them to also read a memo called " Dare to Be Great." I think it's also from 2015.
And it talks about the importance of having the courage to be different. That's what it's all about. And that's a big part of this talk about catching falling knives and all that stuff about courage. to be different. Hmm. And how dare you be different when things don't go exactly the way you want them to?
You're using that word again. How? Right? Um, how dare you be... Well, you, I mean, I can't tell you. You just have to do it. And if you don't have what it takes to be different when it's hard, then you can't do it. I can't tell you how to do it if you don't have what it takes, if it doesn't come naturally to you.
Or you, I mean, you don't have the ability, I would say. It may not come naturally. It may be hard, but since you're saying to yourself, "I, I, you know, I have to do something," I have to figure out if it's normal behavior or something else. I have to be either a man or a woman. I have to do it . Then you do it.
I can't tell you how. Great. And the last question doesn't start with "how," so, I think you'll be happy with that. Um, if our roles were reversed, what question would you ask yourself right now? If I were the interviewer? Yes. I would say, "David, what do you think is the key to a happy life?" " So I'm not going to answer that because, um, I'm too young, but I'm going to ask you, um, the other way around.
Well, I think, I think, I think, uh, balance. I think, uh, having a fascinating profession that you enjoy, and some things outside of your profession that you enjoy as well . Uh, just work and no fun makes Jack a dull boy. That's an old saying we have. And, uh, you know, add some fun to your life. Take care of people.
Have good relationships with people. Try to find a partner, or a business partner, or a life partner, or both, that will enrich your life, and where you can enrich their life. You know, Bruce Carson and I have had a mutually beneficial relationship for almost 39 years. It's one of the best things in my life.
I've been married for 40 years. It's great. And you have to have those things. It's you... I don't think many people... Well, I'm going to say something contradictory. Normal people can't be happy unless they have at least one of those two things, or both. I mean, if you're living without a business partner or a life partner, can you really be happy?
I don't think so. So I think balance is really important. And be kind to people, uh, all the people you meet, not just your partners, but be kind, be in a good mood, be upbeat, bring goodness into people's lives. Uh , you know, when you meet people, say nice things, smile, give them something. Being kind doesn't cost anything.
Uh, actually , I think with kindness, the more you have some kindness in your mindset, the more you give, the more you end up with . You feel better when you treat people well. So I think that's really important. And you know, there's a psychologist named Erik Erikson, who talked about eight stages of human development.
I don't know if you've ever encountered that. But he talked about where we are in our teens, in our 20s, in our 30s. What are our needs, what do we need to have to satisfy ourselves. And he talks about stage eight, which is where I'm at now. And at stage eight, you look and say, " Am I happy with the way I've lived my life?
Am I happy with how people think of me?" And I think it's really important to make that assessment, but I think it's important to realize that when you get to my age and you're at stage eight, if the answer is, " You know, I'm really not happy," it's too late to change. So you have to think ahead and live your life in a way that makes you happy that you lived." And Charlie Munger kept saying that you should write your own obituary.
You know, write an obituary that you hope will be published in the newspaper after you die, and then live your life in a way that deserves that obituary. And if you want people to say that he treated others, that he was a good person, that he treated people well. He was generous. Then you have to live in a way that deserves that.
I think that's a good rule. Yeah, I think that's a perfect way to end this conversation. And I just really wanted to thank you, because I know you don't pretend to be superhumans, and there are a lot of super investors or so-called super investors who seem superhuman, and that really helps beginners and people who are just starting out to get inspired.
So, yeah. Well, there 's a saying in English. He puts his pants on one leg at a time. And that's what I do. You know what that means? It means he's normal. He's normal. I'm a very normal guy who's lucky in a lot of ways that I've listed. And so I'm happy with who I am. If you enjoyed this conversation, I'm sure you'll enjoy microcapclub.com. And subscribe if you want to follow us. Thank you very much for your attention.
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