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- [00:01]
Host (Prof. G)
Support for the show comes from Odoo. Running a business takes everything you've got, and a lot of the tools out there that are supposed to make your life easier just aren't great at talking to each other. And that means you end up having to toggle between a dozen different apps and services just to keep the lights on. Enough of that. Now there is Odoo, the all in one fully integrated platform that might actually help you get it all done. Thousands of businesses have made the switch, so why not you try Odoo for free@odoo.com that's O-.
- [00:39]
Howard Marks
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- [01:08]
Co-host / Interviewer
You have one new message translating Disney and Pixar's Hoppers is now available on Disney.
- [01:18]
Host (Prof. G)
You could say that again. Critics are calling it Pixar's funniest movie
- [01:21]
Co-host / Interviewer
Ever and a wildly entertaining ride.
- [01:24]
Host (Prof. G)
Blizzard Potato.
- [01:25]
Co-host / Interviewer
It's certified fresh and verified hot.
- [01:28]
Howard Marks
Now we party. This is incredible. Wow. I am clearing the rest of the day.
- [01:34]
Co-host / Interviewer
Disney and Pixar's Hoppers now available on Disney.
- [01:37]
Howard Marks
Rated pg.
- [01:50]
Host (Prof. G)
Welcome to Prof. G Markets. This could be one of the most consequential weeks for the markets in years. Today, SpaceX is expected to complete the largest IPO in history, and it may be just the beginning. Anthropic and OpenAI have both filed to go public, setting the stage for a wave of blockbuster offerings. Meanwhile, some of the richest companies on the planet are competing for investor capital before the IPO pipeline fully opens. As we've discussed, last week Google announced the biggest stock sale in history and Meta signaled that it too is exploring a major equity raise. So how should investors think about this moment? What happens when an unprecedented amount of equity hits the market? What are the opportunities and what are the risks? To help us make sense of it all, we are joined by someone who spent more than 35 years writing some of Wall Street's most influential memos and has earned a reputation as the king of common sense. His memos inform investors across finance, even Warren Buffett himself. This is our conversation with Howard Marks, the co founder and co chairman of Oaktree Capital Management. Howard thank you so much for joining us. I want to start with a quot that you said in one of your earliest memos. You said, quote, in the late stages of the great bull markets, people become willing to pay prices for stocks that assume the good times will go on ad infinitum. We're about to see this space X ipo. This company is about to be priced at more than 100 times sales. We have a feeling that this is a little bit of investor spirits, animal spirits, people thinking it's the good times. What do you make of this IPO and the other IPOs that we're seeing? Is this a frothy market?
- [03:30]
Howard Marks
There's no question about the fact, to use Alan Greenspan's saying from about 30 years ago, that we have exuberance. That's the only thing we know for sure. He pioneered the phrase irrational exuberance. The question is, is today's exuberance irrational? Number one, I don't think anybody can definitively say so. And the reason I say that is that I don't think I've never heard anybody tell me exactly what AI will be able to do or when or for whom or how much profit it will produce and for whom. There's an arms race going on between what you described as some of the greatest companies on the planet. Planet. I would describe what we call the hyperscalers as mostly the greatest companies I've ever seen. And they're engaged in an arms race. Can only one win? Is it winner take all? Can several win? Nobody can tell me these things. So I don't think there's an analytical or what we call a value based way to decide whether or not to participate in these IPOs and if so, at what price. AI, as far as I think virtually all of us are concerned, is a concept. We can't define its parameters and it's a great concept. It's likely to be the most powerful force any of us have ever seen. But I think that's all we know. And a decision to participate or not participate and what price to participate at is, it's really. Well, it's what my South African friends call a thumb sock. You can't put numbers on a pad and figure out what these things are worth, which is what value investors like me historically have done.
- [05:48]
Host (Prof. G)
I guess the question then is, because I agree with you, that you ask these questions and investors say, don't worry about it. It's not really about the fundamentals right now. It's about the future. It's about the technology. It's about what's going to happen at some point in the timeline. That sounds a lot like the irrational exuberance that we have seen in previous cycles. And you've been around to see many of them and you've invested and made a lot of money trading and figuring out an investment strategy to profit off of those cycles and to time it correctly. Or you could correct me on what your strategy was. But does it not seem like those previous cycles does not feel to you like I don't know.com era it does feel like that.
- [06:37]
Howard Marks
We have a technological innovation. I've seen several, I've read about many more over the last, let's say 150 years. This may be the greatest, this may be the most powerful. It's also in many ways the least specifiable. So the technological innovations I'm talking about, let's just for a starting point, let's say the railroads back in the 1860s and then radio in the 1920s, the automobile computers in the 1950s and 60s, Internet in 2000. It may be revisionist history, but I think we had a much better view of what all of those could do. They didn't have this unimaginable, unlimitable upside that AI has or the, in my opinion, degree of uncertainty. We knew that the railroad would carry goods and people from coast to coast. We knew that radio would carry messages. We may not have known exactly how they would produce profits or how they would become television. But anyway, all the things I mentioned were accompanied by what we call bubbles. People got excited about developments which were unprecedented. They threw vast amounts of money about building the infrastructure for it. There was a winner take all race. There was excitement, there was exuberance. The capital flowed in like water. In every case, too much capital flowed in. I think it's fair to say too much infrastructure was built and prices were paid that were too high. And a lot of the people who provided the capital for these bubbles lost their money. I think it's fair to say that those comments have been true in every case that I enumerated. So I wrote in a memo recently, this year, and I think it's true that if this technological innovation with its exuberance doesn't produce a money losing bubble, it'll be the first. And now it could happen. You can't rule these things out. And maybe this is a good time for me to introduce the rejoinder of the, of the optimist. What do they say? This time it's different. Okay, that was true about the railroads. It was true about radio, it was true about computers and the Internet. But this time it's different. And this time we have a development of incalculable, unlimitable value. So this time it's really true that there's no price too high. That's what they say. But the problem with that, Ed, is they always say that this time it's different, is never different. And they've said it in each of those bubbles that I mentioned, I think. So nobody, including me, should say definitively that this is a bubble, that the people who invest in these early stages of AI will lose their money, that the people who invest in the companies you named will pay prices that they'll never see again. But you must be alert to the possibility. The way people get into trouble is by not being alert to the possibility.
- [10:52]
Host (Prof. G)
And this all seems incredibly relevant today, on the day when SpaceX is set to go public at close to a $2 trillion valuation. We'll see how it trades. But if you're looking for signals of everything you just described, it seems like that's it.
- [11:08]
Howard Marks
My favorite Fortune cookie says that the cautious seldom err or write great poetry. So investing in these companies today could be a huge error, but it could be great poetry. And the people who resist because it could be an error could miss out on the greatest thing in history. And that's what makes these decisions so hard. The people who invest today in traditional industries, in transportation, in distribution, in retailing, in real estate, they don't have, for the most part, the risk of creating, of committing grievous error. But they also don't have access to the possibly best thing in history. So you just have. When you sit here with something that's so young and where the future is so unestimable, you just have to deal with it as a concept or not deal.
- [12:22]
Co-host / Interviewer
How does an investor deal with it, so to speak? I like the fact that you said sort of like what could go right. The upside is sort of unimaginable. The downside. I mean, it sounds like you recognize that both scenarios are feasible here. The bulls could be right, the bears could be right. But in terms of how do you actually invest around it? Because I look at these companies, and at a $4 trillion valuation, if it is in fact the upside scenario, I don't see how any other company survives. We end up with five companies. If these companies actually become worth 50 or $100 trillion, if they have the same type of returns we're used to getting from Amazon or Apple or Google, and they went public. That means there's going to be three or four companies controlling all of the market cap globally, which my mind blows, trying to think about what that would mean for society. What if you're a 25 or 35 year old trying to, you know, thinking about building wealth and you got your 401k, how do you invest around the kind of the unknowable here in dealing
- [13:29]
Howard Marks
with the future, the way most people deal with the future is by coming up with a forecast. I argue strenuously that if you want to deal with the future, you need two things, not one. You need a forecast and you need a judgment regarding the probability that your forecast is right. So you can make a forecast about the future of AI, you can make a forecast which is optimistic. But I just think if you say this is my judgment about the future of AI, and by the way, I'm highly confident that I'm right, I think you're probably making a big mistake. I've never met anybody who thinks they can tell me what this world is going to look like five or ten years from now. So why should any. The young person you described who's laying the foundation for his investment portfolio, why should he conclude that he's probably right when all these other people are, we know it could be great. I bet it's probably going to be great. I said in my last memo that in terms of its basic capabilities, my guess is that it's more likely to be underestimated today than overestimated today. But what we're talking about is how much capital should it receive and what is a piece of a company that engages in this activity worth? And the value investor, the old fashioned investor like me and my fellow travelers. What we do is we figure out what a company's like. We look at what it makes today and what potential earning power it's building. We try to figure out what its earnings will be in five or 10 years. We put what we think is a reasonable valuation on those earnings, largely related to the earnings potential in the subsequent decades. And then we look at the price today and we try to figure out whether today's price is fair relative to that earnings power. And you know, I don't think I've ever seen an industry or companies where that is less feasible. You know, if, if somebody will, will tell me what they think anthropic net earnings will be in 2036, I'll bet them that they're not within 50% of the truth. Of course we have to wait 10 years to find out. But if I'm right and you make an investment in anthropic stock in the ipo, you have to accept the likelihood that what you're doing is closer to speculating, and I don't say that word pejoratively, than analytical investing. And there's a spectrum which goes from what I'll call analytical investing in prosaic, understandable companies to speculative investing in futuristic companies that can't be described at all. And you should calibrate your activities based on where you are on that spectrum. That's the whole thing. And it's very hard to do. Especially this is the hardest thing I think I've ever seen in the investment world because of this enormous degree of uncertainty.
- [17:17]
Co-host / Interviewer
Are there other sectors where you feel more confident, other asset classes or other business sectors where you think you're more comfortable looking, making a forecast and saying, this appears to be overvalued or undervalued?
- [17:32]
Howard Marks
Well, that's what we do for a living. And historically we have made those judgments and pretty well. But then since the Internet came along roughly 30 years ago, we have a new concept which is extremely important today, and that's disruption. You take what I call a prosaic company in a prosaic industry and you say, well, it's not so futuristic. We can probably anticipate what it's going to look like in five or ten years from now. And it doesn't have these technological things that, that are going to make it or break it. But then you think a little further and you say, well, let me think whether that's right. You know, 30 years ago we have this word in the value investing business or the investment business called a moat. Things that surround a company that are protective that, that make it less attackable. And historically, the value investor, the cautious analytical investor, has preferred to invest in companies with moats. So if you go back 30 years ago, what was an example of a company with a great moat? And a great example is a newspaper. And if you owned a newspaper in a given city, it would be hard for a competitor to start up from scratch. The newspaper from another city couldn't compete against you because the used car ads and the help wanted ads and the movie times would all be irrelevant in your city. And it cost a quarter, let's say, so anybody could afford it. And if people bought one today, they'd still have to buy it tomorrow because yesterday's newspaper is already obsolete. So it's a small amount of money that people are going to spend regularly and they're never done buying it. And it can't be. There are reasons why radio couldn't compete and why the newspaper from the next town could compete. That was a strong set of moats and a lot of smart people invested in the newspapers and made a lot of money. Now, it's true of the movie industry and other, in particular, communications industries, but now the newspapers are, a lot of them are out of business and they're under profit pressure. So what happened to the moat? And the answer is that the Internet and digital communications came along and put a lot of them out of business and gave them competition that nobody thought was possible 30 years ago. And I'm sorry for the length of this discussion, but what can't be disrupted now by AI who can't lose their job to AI? I used to say, well, how about everybody says plumbers, well, maybe, maybe a robot can come into your house with a camera and assess your situation and make the needed repairs. Then I said, a masseur. Why can't somebody build a robot that can give you a good massage? And so the world has become a much more uncertain place. The probabilities that can be assigned to the future are much broader today than ever. I think that's an important change. When I was a kid, the world didn't change. A comic book was always a dime. New technologies didn't come along that often. The world, we were pretty confident that the world would look the same 10 years later, and for the most part it did. But today I think you have to accept that much more change is possible. So the investor has to recognize that he or she is living in and dealing in a much less predictable world.
- [21:57]
Host (Prof. G)
We'll be right back after the break, and if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts.
- [22:14]
Co-host / Interviewer
Support for the show comes from Indeed. When the pressure's on and you need to hire the right person for the job, Indeed Sponsored Jobs has got your back. It matches you with quality candidates fast, so you don't need to spend tons of time searching for that elusive new talent. According to their data, Sponsored Job posts directly on indeed are 95% more likely to report a higher than non sponsored jobs. Join the 3.3 million employers worldwide that use Indeed to connect with quality talent that fits their needs. Spend less time searching and more time actually interviewing candidates who check all your boxes. Less stress, less time, more results. When you need the right person to cut through the chaos. This is a job for Indeed. Sponsored Jobs and listeners of this show will get a $75 sponsored job credit to help help get your job the premium status it deserves@ Indeed.com podcast just go to Indeed.com podcast right now and support our show by saying you heard about Indeed on this podcast. That's indeed.com podcast. Terms and conditions apply. Need the right hire fast? Then this is a job for Indeed. Sponsored Jobs.
- [23:21]
Host (Prof. G)
Support for the show comes from Odoo. Running a business is hard enough, so why make it harder? With a dozen different apps that don't talk to each other, one for sales, another for inventory, a separate one for accounting. Before you know it, you are drowning in software instead of growing your business. This is where Odoo comes in. Odoo is the only business software you'll ever need. It's an all in one fully integrated platform that handles everything CRM, accounting, inventory, E commerce, HR and more. No more app overload, no more juggling load logins, just one seamless system that makes work easier. And the best part? Odoo replaces multiple expensive platforms for a fraction of the cost. It's built to grow with your business whether you are just starting out or already scaling up. Plus it is easy to use, customizable and designed to streamline every process so you can focus on what really matters running your business. Thousands of businesses have made the switch, so why not you try Odoo for free@odoo.com that's o d o o.com.
- [24:32]
Co-host / Interviewer
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- [25:56]
Host (Prof. G)
We're back with Prof. G. Markets.
- [25:58]
Co-host / Interviewer
Given that you do you are a fiduciary for other people's capital. You do have to make forecasts and develop theses and invest people's capital. So at some point I can't imagine. So let's acknowledge that there's more known unknowables or unknown unknowables than ever before. Given that you are charged with deploying capital and developing forecasts and theses, what are some of those forecasts? Where do you find value right now?
- [26:28]
Howard Marks
I still think there is a more predictable part of the economy. It'll probably be a while before the energy business gets disrupted to the point where we use something in lieu of oil and gas. That's probably largely true of the food industry, probably the timber industry and the home building industry. Transportation. It's probably going to be a while before we walk into a station, become dematerialized and show up in another city. Retail, you know, has been disrupted. But it looks, we're maybe we're at a baseline level of, of, of in person shopping. That's not going to go further, I don't know. But so you can identify areas, you know, metals and mining, paper, chemicals. I guess I would say for the most part that things that have less intellectual content are less likely to be disrupted by AI, which is basically an intellectual problem solver and productivity tool. So, you know, I think, I think that's, you can, we can make a list of things that we think are less likely to be disrupted by AI. We just shouldn't be too cocksure about it. But that's what we do for a living. Scott. We're still investing. We're investing according to the same investment philosophy and in many of the same industries, but we have to constantly renew our thinking. It seems that the most laughable thing to do today would be to say I found some companies in industries that'll never change.
- [28:24]
Host (Prof. G)
I'm just looking at the Shiller PE ratio, which is currently close to 42, very close to the bubble era where it hit a peak of 44 times earnings. That right there is an example of an indicator that we could draw whatever meaning we want from it. And I could say, okay, here we are, we're at the top. This is the bubble. But I'm not sure how much I should believe that. I guess my question to you what kinds of indicators do you find to be most informative or most valuable when you're assessing the exuberance and the value of stocks and bonds and everything in the markets today?
- [29:10]
Howard Marks
We start with the traditional indicators of valuation like the PE ratio, whether it's the Shiller Cape ratio or the traditional S and P E ratio. And those things show the market to be. I used the expression a year ago, lofty but not muddy. The non Shiller PE ratio is about 23 or so today. The 80 year average is 16, so we're roughly 50% higher today. But in 2000 I think it was 32. When I started in this business as a young man, 1969, in the research department at Citibank, the bank and most of the banks invested in what were called the nifty 50, which were considered to be the best and fastest growing companies in America. Xerox, IBM, Kodak, Polaroid, Merck, Lilly, Texas Instruments, Hewlett Packard, Coca Cola, Avon, et cetera. And most of those stocks were selling at PE ratios between 60 and 90. So to look at the max 7 takeout, Tesla, they're selling at P ratios in the 30s. Doesn't sound so expensive to me. And that's just pen. But you can't just depend on pe. That's too simplistic. The companies are different. Their capital intensiveness is lower, their marginal profitability is higher. Since the product is an intellectual product rather than a piece of metal, it doesn't cost much to make the next one. So their incremental profitability is much higher. And then another thing is we've never ever seen companies growing at the rates of today. And I don't know the Pacific, so I don't want to go there. But you hear about companies that are growing 50% a month or 100% a year or whatever it might be. Never seen that before. And you look at AI and the progress that it has made in the last four years. Three years ago you talk about moats, you talk about impregnability. Three years ago, most people thought software was a great industry to invest in because everybody who used computers, which was everybody, needed software. And if you had a software system that served your company and industry, It would be expensive to change. And for the most part it was hard to figure out a reason to change. So that's a pretty good moat. More recently, people are wondering whether the whole software industry is going to go out of business because nobody writes software anymore. AI writes its own software for itself. People have to tell it what to write but it can write it without any help. So now people have, in that world there's something called SAS software as a service. And around February 1st we had something called the Sasspocalypse, where the great AI companies announced some coding models and everybody said that's it. The whole software industry has gone out of business. Now that's probably an exaggeration, but it's very hard to figure out these things. By the way, I want to come back to something that you asked me a long time ago and I didn't answer. And I don't want to leave it unanswered. How do you invest in this, given all these uncertainties that I'm talking about? And you know, what history has shown is that one of the greatest mistakes you can make is being not optimistic enough. And another mistake you can make is to say the future is unclear, so I can't invest. Those two things don't necessarily go together. The future is always unclear. Maybe it's more unclear than ever, but that's not a reason not to invest. You just have to invest carefully, knowingly. You have to be aware of the risks you're taking. So how to invest in AI? Like anything else, there's a spectrum. And at one end of the spectrum we have ultra high possible returns with great uncertainty. And at the other end of the spectrum, maybe we have somewhat lower possible returns with less uncertainty. Now all of this is more uncertain than ever, but that spectrum still exists. And so you can choose a point on that spectrum. Let me give you a couple of examples. You can invest in what we call the hyperscalers, Amazon, Google, Meta, Microsoft, for example. They have established businesses with moats, enormous operating cash flow, they want to get into AI. They maybe feel that they have to compete vigorously in this winner take all battle, but still with established businesses and cash flow and some diversity of business. These are, as I said before, without naming names, some of the greatest companies I've ever seen. You would think that investing in them would be maybe the low risk way to invest in AI. But if AI booms and takes off and octuples in the next three years, since they have other businesses holding back their growth rate, they're not going to be the maximum profit winners. Then you have established companies, as you said before, we don't know their profitability, their finances, and maybe and they're one product companies in the sense that they're all AI, so maybe it's harder to specify their future. But Anthropic and OpenAI, for example Nvidia have a Very high probability, I think, not being an expert, high probability of still being successful five or 10 years from now. They may not be the number one they are today, but they're unlikely, I think, to be obsoleted. So they're depending on the price you pay and its fairness. They may be riskier than the hyperscalers, but they're not make it or break it. They're not, you know, they're already up and running. And then you have startups, you have startups where you don't know where. They may not have revenues. They may have revenues, but no profits. You may not even know what the product will be. But if you can get in at something called ground level and one of them turns into be a big winner, you can make an incalculable amount of money. I described this in a recent memo as a lottery ticket. At the riskiest end of the spectrum, you have lottery behavior. And if you think about the lottery, most people who buy lottery tickets lose all their money. A few people become incredibly rich. So that's probably the profile of performance. At the riskiest end of the spectrum, you can pick where to play on the spectrum, you can mix positions on the spectrum, and then you can decide how much should all of these companies on the spectrum be of your total portfolio.
- [37:44]
Host (Prof. G)
I guess the problem just on that point is that it seems that we are muddying what the spectrum actually is. And we're almost rebranding lottery tickets as certain safe investments. And I think the best example would probably be SpaceX, whose losses grew 700% year over year. It's an incredibly unprofitable business, especially the AI business. Anthropic is also unprofitable, though maybe we're starting to see, although we haven't seen the financials, if that's starting to change. OpenAI is certainly very unprofitable. But a lot of times when you say this, people will say, but the revenue is growing spectacularly. It grew, as you say, like 50% month over month. Crazy revenue growth. And that's sort of the justification as to why it isn't a lottery ticket. Don't worry about the profitability. The top line's growing really fast. And I'm actually not sure what to make of that argument. Part of me wants to say, no, it's still losing a ton of money, still a lottery ticket. But as someone who's looked at so many companies over the years, I mean, what do you make of that argument? What do you make of subsidizing these losses to the tune of literally Hundreds of billions of dollars. This seems like we're entering a new era. It seems as though profitability isn't really a thing anymore. At least I guess it's not a problem. And they can command these valuations. And so I guess I ask that to you, knowing that you're not a vc, but you're someone who's seen so many cycles, you've experienced investments work and not work conceptually, what do you make of it?
- [39:28]
Howard Marks
In the heat of the moment, in the exuberance, people say things like profits don't matter. What matters is in the future. We used to value stocks on earnings. Then when we started investing in companies with no earnings, we talked about investing on the basis of sales, ratio of sales. Then when we talked about companies that had no sales people back in 1999, 2,000 people said, well, how much per. Per eyeball, how much per click? And people put values on Internet stocks based on how many people were going to their site, even though they were going there free. But I believe ultimately it always comes down to value. Ultimately, at some time in the future, profitability will matter. And if you find a company that's a great tech leader today and it looks like it has an unlimited technological franchise and great expertise, and if you tell me that 20 years from now it still won't be making money, my guess is that the price paid today by an exuberant investor will turn out, will produce disappointment. When exuberance is replaced by sobriety, people say, well, of course profits matter. We invest in companies which we think will make money and their profits will make money for us. So it's silly to disregard completely the possibility of profits. By the way, Warren Buffett said in connection with the Internet, In I think, 2000, he said, there's no doubt about the fact that the Internet will add to efficiency, but that's not the same as adding to profitability. And that's relevant today. Also. AI is going to change the world. I have no doubt about that. Who will it make money for? You know, I mean, if it's a. If, if, if all the hyperscalers, plus the anthropics and, and OpenAI's of the world and Tesla and some of the startups, if they all engage in battle and compete against each other at enormous costs, how profitable will they be? Who will make the money? And if AI is primarily a labor saving device, which I think might be an accurate description, who gets the benefit of the labor savings? Maybe the customer. The shipping company or the retail company or the warehouse company benefits from a price war among AI providers such that the user adds to his or her profits. But the purveyor of AI services doesn't do that. Great. You know these things can't be specified now.
- [42:51]
Host (Prof. G)
We'll be right back. And for even more markets content. Sign up for our newsletter@profgumarkets.com.
- [43:08]
Co-host / Interviewer
Support for the show comes from Deleteme. Have you ever thought I should really be doing something to protect myself from stalkers, scammers and hackers, but you're not sure what? Here's what you do. Go to joindeleteme.com Prof. G and enter code Prof. G and you'll get 20% off. DeleteMe. Delete Me removes your personal information that's being sold on hundreds of data broker sites. I could tell you more or I could let our producer Jen Sanchez tell you about her experience using Delete Me.
- [43:34]
Howard Marks
Jen Working in media, I've become a lot more aware of how much information about all of us exists online. One day I searched for myself and I found details like my phone number, old addresses, you name it. So I'm really glad that I started to take my online privacy a lot more seriously.
- [43:55]
Co-host / Interviewer
Take control of your data and keep your private life private by signing up for Delete Me now at a special discount for our listeners. Get 20% off your DeleteMe plan when you go to JoinDeleteMe.com profg and use promo code Prof. G at checkout. The only way to get 20% off is to go to JoinDeleteMe.com profg and enter code Prof. G at checkout. That's JoinDeleteMe.com Prof. G code Prop. G
- [44:24]
Host (Prof. G)
support for the show comes from Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value in fixed income is not easy. Bond markets are massive, murky and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. Vanguard bonds are institutional quality. Institutional quality isn't a tagline. It's a commitment to your clients. It means top grade products across the board. The Lineup includes over 80 bond funds. They are actively managed by a 200 person global squad of sector specialists, analysts and traders. Lots of firms love to highlight their star portfolio managers like it's all about that one brilliant mind making the magic happen. That Vanguard's philosophy is a little different. They believe the best active strategies shouldn't be locked away with one person. They should be shared across the team. That way, every client benefits from the collective brain power not just one individual's take. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself@vanguard.com audio that's vanguard.com audio all investors investing is subject to risk. Vanguard Marketing Corporation Distributor
- [45:39]
Co-host / Interviewer
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- [46:49]
Howard Marks
Foreign
- [46:52]
Host (Prof. G)
we're back with Prof. G Markets.
- [46:54]
Co-host / Interviewer
I want to ask a question about your business. Obviously, I've been in your business nearly as long as you, but I've been around it. And I remember when I first moved to New York, I was in San Francisco in the 90s and then New York from 2000 on. I just knew a ton of people making a great living in your business. Now I know a small number of people making an astronomical living and the rest are gone. The rest. It feels like there's been just an, just an incredible consolidation in your business where you're either. You're either a leviathan or you're a no man's land. I would just love to get your take on your business as a business and how you've seen it change and where you think it's headed.
- [47:33]
Howard Marks
How long do you have? I mean, that's a pretty. That's a pretty broad question.
- [47:39]
Co-host / Interviewer
Sure.
- [47:40]
Howard Marks
First of all, you know, I'm pretty sure I predate you. When I attended the University of Chicago in 1968, the professor pointed out that the average mutual fund did worse than the S and P before fees and then charged a high fee. And so he says, why don't you just buy one share of each stock? In the S and P, there were no index funds or no concept of indexation, but it came along. And today the majority of mutual fund equity capital is managed by indexation or passive investment. That's one reason why a lot of people have disappeared. The consumer was not well informed and paid a high fee for a defective product, which is not a great business model. On the other hand, in the last, let's say, 40 years, which is maybe it's a little more, less, there have been all these innovations. We lived 40 plus years in a period of declining interest rates, which made a lot of things very successful. And a lot of people cashed in and built very, very profitable businesses investing in what are called alternative investments, private equity, private credit, and things like that. And they found an environment which was perfect for them. And especially Since March of 09, which was the low point of the global financial crisis, things have been rosy for over 17 years. And so a lot of people have made a lot of money. This tends to get sorted out in the bad times. In the good times, the great investors do great, the bad investors do good. In the bad times, it gets sorted out. There may be rougher times ahead for some of these new, new things in the investment business, and some of it may get sorted out. By the way, let me just. Closest to home for Oaktree, in the last 15 years, they developed a business called private credit, which is really, it's a broader term for what we call direct lending, which is private loans for midsize buyouts. And I'm informed on good authority that so this, this didn't exist in 2010, and it's $1.7 trillion today. And I'm told that there are roughly 700 direct lending managers. And so the availability of that $1.7 trillion put a lot of people into business and made a lot of people extremely successful, along with a very favorable economy and with low or generally low or generally declining interest rates, which are salutary. So this has been an ideal environment, and we have 700 managers making money in this industry today. What will it look like five or ten years from now? We'll find out. But I'm told that of the 700, roughly 3% were in business before the global financial crisis. So we don't know how many of them have what it takes to deal with a harsh environment. Making money in a salutary environment proves almost nothing to make money in a salutary investment environment. You can do it on the basis of good judgment and hard work and skill, or you can do it on aggressiveness and getting lucky. It doesn't get sorted in the good times. As Buffett says, it's only when the tide goes out that we find out who's been swimming naked. So this period that you describe, and particularly the period 09 to date, this has been salad days, halcyon days. And nobody should look at those 17 years and say, oh, that one's, that's a long period. So that's probably normalcy. This was the greatest period imaginable for the investment industry and especially for the alternative investment industry. And one day I think the tide will go out and one day some of this will be sorted.
- [52:25]
Co-host / Interviewer
Just a quick question to wrap up here. We didn't touch on private credit. There's a lot of fear and a lot of a concern around private credit right now. Do you think those fears are overblown? Underblown? What is your view on the private credit market right now? And I realize that's an awfully big market, but it's getting a lot of attention right now.
- [52:45]
Howard Marks
I think it's overblown. These were managers who collected money from clients and gave loans for midsize buyouts. And some of them will be unsuccessful, but probably not a large percentage. I mean, this activity has been around under different guises in 78 or 77. I was lucky to be asked to start Citibank's high yield bond activity in 78. And we've been making loans to companies of moderate creditworthiness and doing well for 48 years. People who don't do it as well will not have great results, but most of the loans will pay. And the people who are throwing up their hands are probably exaggerating the difficulty and extrapolating the fears in software, which are probably overblown. Having said that, retail investors or individual investors bought these products and these are private loans. There's no market for them. You can't get out of them at the drop of a hat. And so I think most of the unease concerning what you call private credit, what I call direct lending, is around the fact that people have said, okay, you know what, I'm not that happy, I'd like to get my money back. And if you went into a non traded bdc, which is what we call these things you're talking about, people said we can only let out 5% of the investors per quarter. And other people said, what do you mean I put money in, I can't get it out. Well, that was always the terms. This, if you read the prospectus, which admittedly, very few people do, it was there. None of this is a surprise. But people do things in the good times when they're feeling no pain, sometimes without adequate care or research or prudence, and they tend to regret them in the bad times. Some of that is going on, but I don't think there was a misrepresentation. People should not be surprised that they can't get all their money out every quarter. But one of the most powerful forces in the investment business is disillusionment. And people went from being unworried to now thinking that this ship is sinking. And that's very painful. The unworried feeling was mistaken. And now the feeling that the ship is hopelessly sinking is also probably mistaken.
- [55:42]
Host (Prof. G)
Howard, you've been incredibly successful on Wall Street. You started one of the most successful asset management firms in the world. A lot of young people listen to this podcast, starting their careers who want to build economic security, who want to be successful. What advice would you give to those people who are just starting out in their careers right now?
- [56:04]
Howard Marks
I've enjoyed a great career, and I don't consider it over. Investing is a fascinating field. I mean, just think about this podcast and think about the number of times I said, I don't know, or something's unpredictable or inestimable or incalculable. So what we do every day is we peel an onion and we deal with uncertainty and we make judgments. We make the best judgments we can in an uncertain world. In his book Fooled by Randomness, Nassim Taleb talked about made comparison between investing in dentistry, and he said, if you go to dental school and you learn how to fill a cavity, and you fill the cavity that way, every time, you'll be successful every time. That's not true of investing. So if you're the kind of person who wants to be successful every time, don't become an investor. Become a dentist or an engineer or something where you have physical rules in play that are reliable. There are no physical rules in investing that will make you successful all the time. Warren Buffett, the most successful investor of all times, attributes his success to 12 investments over the last 60, 70 years. Now, he didn't have that many abject failures, but many, many, many investments that he made were only moderately successful. He did 12 great ones. So do you like dealing with uncertainty and ambiguity? Can you live with a batting average which is far from 1000? The only thing I would emphasize is that investing has been enormously profitable industry for those of us participating in it in the last 50 years. You shouldn't become an investor just because it's a high paid industry. But if you meet the description that I just laid out, I think it's a great thing to do. It's exciting, it's intellectually challenging. You never reach a point where you say, well, I got this figured out and I find that to be a wonderful attribute.
- [58:28]
Host (Prof. G)
I wish we could keep going for hours, but alas we cannot. Howard Marks is the co founder and co Chairman of Oaktree Capital Management. Prior to co founding Oaktree Marks led the groups at the TCW Group that were responsible for investments in distressed debt, high yield bonds and convertible securities. He was also Chief Investment Officer for Domestic fixed income at TCW. Previously, Marx was with Citicorp Investment Management for 16 years. Howard has published three books on investing including the Most Important Thing, Uncommon Sense for the Thoughtful Investor and Mastering the Market Cycle. Getting the Odds on your side. Howard, we really appreciate your time. Thank you so much.
- [59:06]
Co-host / Interviewer
Thank you Howard.
- [59:07]
Howard Marks
Thank you fellows for your great questions. It's been a pleasure.
- [59:12]
Host (Prof. G)
This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Jorge Carty. Our research team is Dan Shalon, Isabella Kinsel, Kristen O' Donoghue and Mia Silverio. Jake McPherson is our social Producer, Drew Burrows is our Technical Director and Catherine Dillon is our Executive Producer. Thank you for listening to Profg Markets from Prof. G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.
- [59:56]
Howard Marks
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- [61:23]
Co-host / Interviewer
crypto's trillion dollar swings, there's a money
- [61:26]
Howard Marks
side to every story. Get the money side of the story. Subscribe now@bloomberg.com.