hi everybody I'm herin Oslo with the co-founder of Oak Tre Capital the investment Guru Howard marks great to have you here now you are one of the world's most impressive and respected investors and also very famous for writing various kinds of memos um now we'd love to start off by just asking you what got you started in finance in the beginning

you know I was very fortunate and I went to the public schools in New York and uh schools were crowded and different ult but uh one day one of my uh buddies said they're teaching a course in accounting we should take it and I took it I loved it

not many people love accounting not too many uh but you know it has a it has a symmetry that that a certain kind of mind responds to so I took it and I loved it and uh you know that I decided to become an accountant

excuse me what what is that certain kind of mind what is that

well I I think very left brain logical literal mathematical um and but it's really the Symmetry it's the balance between the left and the right debit and credits when I look when I walk through Oso and I see the very symmetrical architecture I enjoy it some other people might think it's boring uh or too regular uh but uh you know I responded very strongly

and so I went off to Wharton uh to become an accountant and then I was introduced to finance which is actually of course much more interesting and switch to finance

it's interesting because most places they say Finance but I Wen that they say Finance

I I think that's right yeah um

very good now um what is your investment philosophy now what is it

My Philosophy is I guess it's Oak tre's philosophy six very simple points uh number one risk control I believe it's easy to make money in the market that's especially true in the good years and most years are good years uh the challenge uh the real skill is to make money with the risk under control so that if it turns out to be a bad year instead you won't do too badly

number two is consistency U my clients don't want results that are all over the lot and uh at the top one year and at the bottom the next uh so we try to be just consistently a little bit above the middle but then thanks to risk control in the really bad years we do bounce up to the top

number three I believe there's such a thing as market efficiency and we Target only the less efficient markets

number four high degree of specialization you can't be a successful generalist in my opinion you have to know more than everybody else about a few things

number five we don't rely on macro forecasting to drive our investments

right right there has he changed over time

I knew all those things 50 years ago but I think my uh adherence to them has grown stronger my conviction

which ones in particular

well first of all I think market efficiency is a very important concept um my experience as an investor over the years uh showed me why uh and introduced me to uh to the limits on on uh un knowing more than others uh and um that leads into uh non-market timing

and then my experience with forecasters basically in my opinion showed me that it doesn't work macro forecasting

all the macroeconomists are useless

well you said that no no there was a question I'm sorry I my ination was wrong I would say they're not right consistently enough to follow and uh you

know when I it at the bank 55 years ago we used to say that an economist is a portfolio manager who never marks the market and I think that's true uh you know uh if you were an active investor uh you wouldn't uh hire somebody without looking at their record but no Economist ever presents his record

no they can't because they wouldn't be hired now which of these which of these rules um have been the most difficult to adhere to have you never been tempted to break some of them you must have been

what what are the limits of knowledge

number one Randomness or lock is every place in our business uh this is you're not dealing with physical laws like in physics or in engineering um you're dealing with in large part people I mean what are markets it's a collection of people uh how is history made through the actions of people and how do and the world is governed through the actions of people so uh you processes which are basically built around people can't be predicted

uh uh the the physicist Richard finans once said that uh physics would be much harder if electrons had feelings yeah people have feelings and so their behavior is unpredictable um and uh Randomness plays a very big part

yeah you you often talk about that um how you judge the quality of a decision yes tell me about that

well uh thanks to Randomness a good decision doesn't always work and a bad decision doesn't always fail m um the first book I read when I got to Wharton uh 61 years ago was uh decision making under uncertainty in oil and gas and the the greatest lesson I remember learning from that uh book is that you can't tell the quality of a decision from the outcome

now this is a concept that many many people wouldn't get well of course you you can but if you think about how random the world is you know that in the short run Randomness alone can produce just about any outcome

that's because also some stupid people get rich

well that's right we all know people we say oh he was he he was right for the wrong reason yeah and uh there are stupid people who get rich of course you know one of the things I say the ingredients in success are aggressiveness timing and skill and if you have enough aggressiveness at the right time you don't need much skill

uh now that that can make you right once or twice but to be right repeatedly over an entire career now you're talking about skill you can't rely on on luck for for decades

what does age do to investment process

I think that for the for the most part age um Mellows you I think you I I hope in time you you over you understand things more deeply M that's the key um

why are we more patient when we get older or just about to die well hopefully it's because we learn that quick action is not the answer we hopefully we we develop the wisdom to understand that uh if you want a good result you're more likely to get it if you take a little time to think about the question rather than act wh on a whim

no you're very um dism I of economic forecasting as we as we talked about but you are a strong believer in cycles and knowing where we are in the cycle why why is the understanding of Market cycle so important

well the world is cyclical uh and uh you know everybody knows that the market and the economy um and and uh politics um move cyclically and uh you know nothing moves in a straight line uh where human behavior is involved and if you were to count on it doing so you would uh get into big trouble

I've been thinking about writing a memo uh lately people have been asking me what is the biggest mistake that you've seen or what is the mistake that people make most often and I think it is that once the market is moving in One Direction that it will always continue to do so

in Truth uh regression toward the mean or the correction uh of uh excesses is much more dependable than continued moving in a straight line

why do things revert back

because the I wrote a book uh in 2018 called the mastering the market cycle and uh I'm a great believer in Cycles I'm a student of Cycles I I I've lived with cycles for a long time and yet when I got about 2third of the way through writing the book I said to myself why do we have Cycles the economy grows at 2% a year why doesn't it just grow 2% every year why sometimes one and sometimes three and sometimes minus one some what so what's the answer

the answer is that people go to excess and for example if the economy is growing well for a few years business uh heads say oh well we have to build a new Factory to get our increased share of the growth in our industry and so they do but so does everybody else now there are too many factories and now uh the uh Factory utilization Falls and the companies go into decline so then they pull back and they and they stop building factories

so straightforward greet and fair

greed and fear is is a good way to put it and you know uh you mentioned the the memos the second memo I wrote uh 1991 was called the pendulum greed and fear optimism and pessimism credulousness and skepticism

now you dismiss forecasting yet you are a great believer in no or trying to figure out where we are in the cycle isn't that kind of counterintuitive it sounds it on the face

but I think there is a time when when forecasting becomes more useful and that is when we're at an extreme uh now if think about what I said a minute ago that the biggest mistake people make is to believe that a process once in operation will continue non-stop forever that's what takes markets to extreme highs which we call Bubbles and lows which we call crashes

but when we're extremely high and people get excited and say hey this is going to go on for ever usually it will collapse eventually of its own weight so when the market is crazy high or crazy low I think we can uh make a profitable uh forecast

the only thing is uh ncai that we don't get too many opportunities uh I was speaking with my son when I was writing that book on cycles and I said you know I think my market forecasts have been about right he says yes Dad that's cuz you did did it five times in 50 years

five times the market has been at such an extreme that regression toward the mean has been dependable not in terms of when it will happen or what will cause it or how fast it'll happen but the fact that it will

where are we now I think we're in the middle ground I think we're a little bit above uh fair value but not so high that a decline is uh predictable or Dependable

you know are you are you talking about credit cycle now or talking no

I'm talking right now about about the stock market right pretty much and I'm not I'm not involved in the stock market directly uh you know most of Oak tre's activities are in the credit markets yeah but it's a I think the stock market is a good barometer because it's very it's very obvious uh we get a reading in the stock market every day we don't get frequent readings in the credit market and in private credit we never get readings it all takes place behind closed doors

so I take the stock market and particularly the S&P 500 stock index in the US as a very good indicator of what's going on in Psychology

how many more good years do you think we have

well see now now you've crossed the line into we going into prediction now into well but not only that but you've crossed the line into ask me to to make a prediction as to time

right one of my oak tree colleagues in his quarterly letter to his clients stated his rule if you name a price don't name a date if you name a date don't name a price yeah

and then you can never be wrong yeah

uh you know the mar here's the important thing to think about which I don't think many people do let's just say that you and I can agree that the S&P is 20% overvalued today which I think is probably a good estimate the PE Ratio is 21 the post-war Norm is 16 so 20 25% overvalued

and let's say let's say we agree on that and let's say we're right the next question is what is the probability that it's going to decline in the next year it's modest it's probably a little better than 50/50 but it's not 100 or 90

uh if you've lived as long as you and I have we've seen markets that were overpriced become more overpriced yeah and then more overpriced and then get into a genuine bubble uh if it was true that every time the Market's overvalued it corrects then you wouldn't get bubbles

but do you see any bubbles within the market now

on the positive side there are people who believe that uh that the AI stocks for example uh are are in a bubble and most bubbles do surround something that's new and this one does and something that uh everybody's very impressed by

um I don't know enough about AI to know if this is excessive or or Justified m but but you know you would look at the things that are most exciting uh to most people and and largely at the things that are new

now in in terms of excesses on the downside you would have to wonder about China I mean China has been marked down by everybody many people describe it as uninvestable um it has declined a lot that Chinese market

is it too cheap is it

well I again I don't know I I suspect that it may be but I I don't know enough about it uh to uh you know to uh make a statement and and one of the rules as you know is that it's okay to have an opinion on these subjects it's just not okay to bet the client's money

yeah that's an important principle in your firm right right

which brings us on to uh risk management what you say is that um your goal is to deliver Superior investment results with risk and under control now to you what is sound risk management

sound risk management first of all importantly is not risk avoidance risk avoidance usually results in return avoidance yeah um if you want to make a good return you have to take risk I put out a memo last week on the subject and I said uh you know if you want to make money uh you have to take risk but you should not expect to make money just for taking risk you have to do it skillfully

so there is a process that I call uh the intelligent bearing of risk for profit we try to engage in that it has to be risk you're aware of risk you can analyze risk you can diversify and risk you're highly paid to take if if those four necessities are uh satisfied then it it pays to take risk

when you talk about um probabilistic go comes what do you mean by that because we're not dealing with the physical sciences because we're not dealing with physics uh there can always be a variety of outcomes we we the future is never so certain that only one thing can happen

in fact there was a professor at the London Business School named Elroy Dimson and he said risk means more things can happen than will happen it's a very simple statement but it's very true and so you have to you have to uh appreciate the fact that under any set of circumstances a variety of outcomes are possible

and um you should always allow for the vagaries of the future uh Mark Twain the Great American humorist once said it ain't what you don't know that gets you into trouble it's what you know for certain that just ain't true in other words excessive certainty is the enemy acknowledging your limitations is your friend it keeps you from getting into trouble

what is the common wisdom now which you think may be wrong

uh in December what I thought might be wrong well you saw you know in December there was a high Dee degree of consensus that the FED would cut rat six times this year yeah and I said I thought that was excessively optimistic I described it as goldilock thinking remember Goldilocks not too hot not too cold yeah everything's it's just right everything's going to stay good forever that kind of thinking is dangerous because it it uh it it assumes an optimistic future

I thought that was too optimistic now most people now say two or three rate Cuts this year so that error I think has been corrected um

um um one of the reasons I think that that that you can't predict the direction of the stock market in the short term excuse me just one one thing are you surprised that the market hasn't reacted more negatively on that pretty big adjustment in expectations

yes I am I am a little bit surprised um but it's kind of like calculus and the second uh derivative you know I think that I think that the market is still governed by optimists just they're they're a little less optimistic but The Optimist is still holding sway

um but if you look at the if you look at the S&P it's kind of flattened out in the last 6 weeks and it hasn't gone down but it also stopped going up um so I do think that that the the level of optimism is is down

so how do you work with risk at Oak Tre separate risk people or just um how do you structure the process

no no uh I've always uh resisted having um a risk Management Department I think it's everybody's job to control risk and the the person who advocates for a given investment and studies it should be the person who not only thinks about the return but also the risk

and and uh you know the the the the concept that I am the investor my job is to make money I think about the upside there's somebody who who sits over there in the corner his job is to think about the risk I think that gets you into D dangerous territory uh because uh everybody says well I can count on somebody else to limit the risk I think that's I think that's not a good idea I think that that risk control is everybody's responsibility

and in fact uh I I listed our investment philosophy before risk control is number one I want and and by the way oak tree and I and my colleague started off doing straight fixed income when you when you buy bonds you buy an 8% bond in the long run the best you can do is 8% yeah there's no upside there's only downside

so uh so the the proper fixed income investor uh has to think about and avoid the downside doesn't have to worry about the upside a Graham and DOD in the Bible of security analysis well the title of the book is security analysis Ben Graham was Warren Buffett teacher they said in that book that fixed income investing is a negative art that the art is in avoiding the downside not in capturing the upside there is no upside in fixed income investing Beyond The Promised return

so when bonds had negative rates what did you think then

I thought it was unsustainable uh I mean uh but negative rates were not a market phenomenon they were uh administered by the central banks yeah uh and of course in the short run uh the central banks can do what they want there's an old saying in America don't fight the FED

uh you know and and by the way if you think about it uh in December I mentioned that the consensus was that there would be six rate cuts the Dot Plot which is the expression of the FED Executives opinions said there would be three m now what sense does it make for Market participants to say there will be six Cuts If the Fed itself is saying there will be three

so I think that so how did you read that

well I think that was I think that was a mistake yeah I think that was that was an excessive optimism

but but you know because uh risk control is job one in my opinion because we started off as straight fixed income investors we came up with the motto for oak tree if we avoid the losers the winners take care of themselves yeah yeah

now that that was good for the first 10 plus years after that we started getting into what I call aspirational strategies where we're trying to make not 8% but 15 or 20 avoiding the losers is not enough in that case you have to actually find some winners but we have kept risk control as tenant number number one of the investment philosophy because we do think it's extremely important and I want every uh analyst and portfolio manager be to be thinking about risk and not counting on the person in the risk Department to do so

you often talk about various types of games yes uh C games uh poker bridge backham and and you compare them and uh talk about how you taught your son to play and was so much fun right what kind of learnings have you drawn from this field

card games back Gam chess are all very helpful for investing and many many of the investors I know play one or more of them um it first of all it's risk-taking you put up money in the hope that you'll end up with more but you could lose your stake so it gets you used to the concept of risk taking

secondly it's all probabilistic uh you there's almost nothing you can do that will always work in in part because luck is involved and in part because you're playing against an opponent who is skillful so uh assessing probabilities is very very important uh structuring your bet knowing when you have an advantage knowing when you have don't have an advantage

do you look at financial markets as as a game

well not as a game as in haha but as as a as a gamble uh I don't use the word gamble negatively but our job for our clients is to take the money they've entrusted to us and try to turn it into more uh and uh there are very way few ways to do that riskless and the riskless ways don't have much reward

so you know ever since 1978 when City Bank asked me to move into the bond department and start up portfolios in convertible bonds on highi bonds I have been involved in in Market niches that are considered risky never anything as comfortable as highgrade bonds or uh S&P stocks uh these are real risk markets

and uh so I've had to develop uh what I call the intelligent bearing of risk for profit and implement it in a consistent way

now another person who shares your love for games is Annie Duke I think her work is great but why do you why do you like her work

well Annie Duke for the benefit of your listeners was uh at one point in time the best woman poker player in the world she was world champion not just for the women but for everybody in the world uh she most people don't know it but she uh well when I first met her five years ago she had completed all the coursework for a PhD in in decision analysis and now she has earned her degree um

and so she approaches poker professionally analytically um and with discipline and that's what my job is to do for my clients

your job for for your clients uh here at at the bank um and she wrote a book in 9 in 2019 called thinking in bets first of all I just love the title that we can reduce our um our uh analytical process to structuring things as bets and and uh I uh met her at that time was really impressive I the last memo I published before the pandemic in January of 2020 uh was entitled you bet it was really about Annie and and her approach and um and then I did a podcast with her that a lot of people have told me that they enjoyed

um and um I think it helps a great deal to think about the process of structuring bets um and most people people don't really understand it they think that well for example in let's say there's a uh uh basketball game and the Lakers are playing the Knicks there's usually very broad agreement uh which team is better which team is favored in that game but if you bet on the underdog you get odds you bet a if you bet a dollar and they win you get two or three

so now the question changes it's not what outcome is likely to happen but it's is the payoff better for investing in the team that will probably win sometimes the payoff is better for investing in the team that will probably lose and even the improbability of their success is overcome by the fact that you're offered sufficient op this is the way the markets work too absolutely

which brings us to the whole contrarian investing field so how important is it to be contrarian in finance

well I think it's it's essential uh contrarianism merely means uh betting against the consensus yeah in every on every subject there's a consensus there's what most people believe is is the case um when the consensus is too strong and there's too much optimism that the consensus outcome will uh uh apply maybe the odds for betting on the improbable outcome are so high that it's a compelling bet

um the consensus if you take that into the investment markets the uh the knowledge consensus is already embodied in the price of every asset maybe you can find times when you think the consensus is wrong and uh you can do better by betting against it um usually because the payoff is so high for doing the thing that is considered unlikely

now I want to stress that I don't think it's a good idea to routinely say well what does the consensus think let's do the opposite the process has to be much uh deeper than that you have to say what does the consensus think what do I think what's wrong with the consensus thinking why did they think that way what could make the error of their ways exposed so it's it's it's a very deep question

but uh you you don't usually make much money by betting on the thing that everybody else loves the big money is made by betting on the things they hate which as a result are cheap

if you're right does it take um certain amount of personality to be good at this

it does take a certain personality because number one you have to be uh a contrarian person yeah you have to be comfortable uh existing outside the mainstream

and what type of people is that

I think analytical and and and relatively tough uh because it's it's not pleasant uh you know you have 10 people in a room all 10 are buying a certain stock well maybe that means it's expensive maybe it's more expensive than it should be so uh you you don't buy it or you sell short you have to be very strong to be able to live with that

does it help to be a loner

you have to be a loner and and I wrote a memo called dare to be grade 2 in 2015 I think it was and what I said is that if you want to be an exceptional investor number one you have to be you have to dare to be different yeah your portfolio has to be different from other people or else you can't distinguish yourself

you have to be dare to be wrong uh because you have to take on these unpopular positions and number three you have to dare to look wrong because even if you're right that's probably not going to be clear for some time and in that period you're going to look wrong out of Step be criticized feel inadequate you have to be a to live with that

so how come Howard Marx managed to be wrong for a long period of time and sit through it

first of all I think it must be some Quirk of my personality

uh were you a loner when you were young

I guess so yeah and I I and I believe in the power of the brain uh you see

uh but number two I have a partner named Bruce K who gets less attention than I do uh popularly he likes it that way but uh he's been my partner since ' 87 and when we do these things which are cyclically difficult that is like for example we we were very steady buyers in the 15 weeks following the bankruptcy of Leman Brothers 650 million a week on average for 15 weeks that's $10 billion we support each other

and uh things that would be difficult individually become easier when you have somebody you respect who who supports you

I think that's a very very good point a lot of fantastic fund managers are uh you know work in in Paris right um but is it easier to do this when you have more experience and have been proven right a few times

I think that's right uh Nikolai you have to um I mean on the one hand you can reason out what you think is the right answer but uh I think that it helps to as you say have been proved right in the past and you gain a certain respect for your process

yeah um and U and also the other thing is that these kinds of behaviors which we we've done successfully on balance have been done when the world went to one extreme and we were contrarian and after you do it a few times you kind of it's kind of like muscle memory yeah and you kind of develop a feeling oh yes uh I think I said in my book on Cycles you just say to yourself oh yeah this is one of those yeah

do you think it's easier to be contrarian when markets are really frothy and uh bullish or when they are fearful

that's a great question um I think it's easier when the markets are frothy because but froth is difficult to measure right

well it is but and and uh you know I I use a certain uh barometer nothing uh tangible but I you know I spend a lot of time trying what I call take the temperature of the market and get a sense for whether other people are operating out of extreme optimism or extreme pessimism

how do you do it what do a bar look like

uh I just look at what opinions are being expressed how uniformly are they held how strongly are they held how self-satisfied are the people who are holding them uh you know and you get into for example a bubble like the the uh internet bubble uh of 2000 and uh you know the people who are holding those opinions and making the most money are doing it for the silliest of reasons their justifications just don't hold and so hopefully you can see through that and and get off the train uh before they ride it off the off the cliff

and the how it marks uh barometer just now

well moderate um I mean in fact uh I I wrote in one of my memos recently that um people say that they this is they're the most uncertain they've ever been in my book that's healthy you should be uncertain when you're certain that's dangerous uh and

uh um well it goes back to Twain's quote about what you don't know but uh but you you know it for certain and it's not true um I wrote a book a memo in the October of uh 22 uh called the illusion of knowledge there's a great historian called Daniel boron he says the enemy of knowledge is not ignorance it's the illusion of knowledge it's the fallacious belief that you know which stops you from inquiring

um so I think that acknowledging that you don't know something is extremely healthy

what is your source of information what do you what do you read what are your um what's the information flow

mostly the newspapers I try to uh consume two or three newspapers a day plus The Economist um uh I say magazine they call it a newspaper um to me the most important thing is not to have the data everybody has the data everybody knows what's happening in the world today and what happened yesterday to me the most important thing is to sit and say what does it mean figure out the import of the things that are happening uh the implications

um and uh I am not highly data driven compared to other people but rather um driven by this idea of figuring out where we stand in the cycle taking the temperature of the market uh I put out a a memo in the roughly July of 23 called taking the temperature and I say that there were as as as I mentioned with my conversation with Andrew there were five times in my career that I took U contrarian stands on the Market

so who do you speak to who do you advice

I try to um glean knowledge broadly um there are really no particular individuals of course I always like to uh I used to know uh try very hard to know what Charlie Munger was thinking and uh I try to keep up with Warren Buffett but he doesn't say much um um

Stan druck and Miller uh he you can get you can get Stan at talk but he's a traitor so his his opinion changes in the short term yeah um

there Seth claran is a very uh intelligent money manager in Boston um and uh I I just try to um I would call myself an observer uh and uh I just try to U critically observe what's going on around me

now Howard you are um let's say now you are 2025 you are um studying business and you want to plan a life in in finance how do you go about this what is your advice to young people who are interested in this field

my most important advice is this due to the prevalence of Randomness in the financial world you can't be an investor satisfactorily if you have to be right all the time

uh there's a book called Fooled by Randomness by Nasim Nicholas TB and he contrasts investing against Dentistry he says if you if you go to dental school and you learn to fill a cavity and you fill it that way every time you'll be successful every time there's nothing you can do in investing that will make you successful every time if you if you're right 60% or 70% of the time you you'll be the smartest man in the world

so I if you're the kind of person who has to be right all the time don't become an investor no but investing is a great puzzle with many many considerations that have to be peeled like an onion and if you like responding to an intellectual puzzle and you can stand the ups and downs and the vagaries of being wrong I think it's a great area but you have to equip yourself philosophically to do it and then you have to have an apprenticeship in which you learn from somebody else who knows how to do it

you have solved his puzzle better than most people the whole world big thanks for being with us and all the best going forward

thank you for your interesting questions thank you