Howard Marks & Andrew Marks: Something of Value

1. 0:00 – 0:29

   Cold open banter and show setup

   1. DRDavid Rosenthal0:00

      All right, I think we figured it out.

   2. BGBen Gilbert0:02

      Andrew, I think you have a bright future in technology.

   3. DRDavid Rosenthal0:04

      I appreciate it. [laughing]

   4. BGBen Gilbert0:06

      Especially Windows technology.

   5. DRDavid Rosenthal0:08

      Yeah, you should invest in some tech startups.

   6. DRDavid Rosenthal0:10

      [laughing]

   7. BGBen Gilbert0:12

      [laughing]

   8. SPSpeaker0:12

      Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth?

2. 0:29 – 3:28

   Meet Howard Marks and Andrew Marks: value vs. venture head-to-head

   1. BGBen Gilbert0:29

      Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I am the co-founder and managing director of Seattle-based Pioneer Square Labs, and our venture fund, PSL Ventures.

   2. DRDavid Rosenthal0:42

      And I'm David Rosenthal, and I am an angel investor based in San Francisco.

   3. BGBen Gilbert0:47

      And we are your hosts. Today, we have two guests with very different investment styles: a value investor and a growth-oriented tech investor, head-to-head! But not just any investors. We are joined today by the legendary value investor, Howard Marks, the co-founder of Oaktree Capital Management, and his son, Andrew Marks, the co-founder of TQ Ventures. Oaktree, for those who don't know, is one of the leading investment management firms in the world, specializing in alternative investments, with a hundred and fifty-nine billion dollars in assets under management as of the end of June 2022.

   4. DRDavid Rosenthal1:28

      Probably far fewer of you know Andrew and his firm, TQ Ventures, but what they've accomplished so far is pretty equally impressive in a very different field. So as we'll talk about, TQ is an early-stage venture firm that Andrew and his partners started about five years ago. They have a billion dollars under management now, including, I think, a five hundred million dollar third fund that they just closed just a couple months ago. I can say I do know that their returns so far have been top decile across all venture funds raised during that time period in all of those vintages. We got to know Andrew over the years as a Acquired community member and listener, and then I've gotten to know him in the context of Kindergarten Ventures, my angel list fund that I manage with Nat Manning. And a little over a year ago, Andrew and Howard co-authored one of Howard's famous memos together in a departure for Howard, where they were debating over COVID together as a family, as father and son, value investing versus growth investing and tech investing, and what was going on in the markets, and they turned it into a memo, and it ended up becoming... we'll talk about it on the episode, Howard's most popular memo ever, which is incredible in a career spanning many, many decades as one of the most popular authors of investment memos.

   5. BGBen Gilbert2:58

      Oh, Howard's memos and books are among the most coveted in the entire investing landscape. Even Warren Buffett is quoted in saying, "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something." Well, if you wanna discuss these topics with us after you listen, you should come join the Acquired community at acquired.fm/slack. Our new merch store is available at acquired.fm/store. You can listen to The LP Show by searching Acquired LP Show in the podcast player of your choice, or get new episodes

3. 3:28 – 7:20

   Sponsor: Vanta — operating with discipline in a tougher 2022 environment

   1. BGBen Gilbert3:28

      two weeks early at acquired.fm/lp. Now, we are very excited to welcome back to Acquired our presenting sponsor, Vanta, the leader in automated security and compliance. We are enormous fans of Vanta, and now investors, and their approach to the whole compliance process, SOC 2, HIPAA, GDPR, and more. And we've got CEO and co-founder Christina Cacioppo back with us today.

   2. DRDavid Rosenthal3:52

      All right, Christina, we talked last time about the story of the tremendous round that Vanta raised in the end of April, even as the world was falling apart [chuckles] around you. But now that you've raised that round, how are you operating the company now in this environment [chuckles] that has changed quite a bit here in 2022? And what advice do you have for other founders who are in the same boat?

   3. SPSpeaker4:12

      Yeah, so I think at a high level, a lot of actually what's said on Twitter and the advice that's given out is really good. It's take the last round you've raised, presume it's your last, or at least you're not gonna raise for maybe two to three years, and operate the business accordingly. Also, kind of assume a bunch of your metrics are gonna degrade, so whether it's you're gonna spend more to acquire customers or the retention's gonna dip. I think that's all really good. A few things we've done just super tactically, I tend to find tactical advice actually helpful to take the platitudes down to what we're actually doing. So we have an operating plan for two and a half years that we are revisiting on a weekly basis, and then we'll make updates on a monthly basis, and it filters into hiring, it filters into marketing budget, and it's just designed so that we, again, have the runway we expect, despite whatever changes might happen. We can just look at the plan, look at the actual results, diff them, be like, "Okay, can we speed up hiring? Should we slow down hiring anywhere? What should we do based on what just happened?" And having those touch points and also just a set of people responsible for looking at the data and making the decision every month, super helpful. So another thing we do is we have napkin math for a bunch of different roles, and that's how we figure out whether or not we can get comfortable with the hire in this environment. It varies per role, but for account executives, it's very much a pipeline and an attainment number, so are our current salespeople attaining at a level such that we wanna bring on new folks? We also do a bunch of sales capacity modeling, sort of in the Salesforce school of thought, that our CRO, Stevie, brought in of, we have this many AEs with this quota and this attainment, what do we think revenue can be? From that, then we'll back out a customer number and then back out a number of CSMs and implementation managers. It's pretty much fourth-grade math, but much more helpful than the, like, "Oh, do people feel overloaded? Does anyone, like, feel like they wanna go recruit?"... 'cause I think in that world, you get, in some cases, too little recruiting, in some cases, too much.

   4. BGBen Gilbert6:12

      Fascinating. So it's doing a lot of focusing on head count related to revenue and trying to tie that as closely to predictable revenue as possible based on all the data you have on your existing head count.

   5. SPSpeaker6:27

      Exactly. The go-to-market side of Vanta, I think especially as an SMB-focused business today, we kind of operate in this predictable, almost machine-like way on the go-to-market side. I think for the engineering and product and design side, that's a little different, and there we're actually just hiring as much as we can, and it's great in this environment versus last year's, honestly, but very much predictable revenue on the go-to-market side.

   6. BGBen Gilbert6:50

      That is great. Our thanks to Vanta, the leader in automated security and compliance software. If you are looking to join Vanta's three thousand-plus customers and get certified for your compliance in weeks instead of months, you can click the link in the show notes or go to vanta.com/acquired for that sweet ten percent discount. Now, on to our interview with Howard and Andrew Marks. And remember, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

4. 7:20 – 13:00

   How a father–son debate became Howard’s most-read memo

   1. DRDavid Rosenthal7:20

      Well, it's such a treat to have you both here. So the memo you wrote together, Something of Value, Howard, I believe this is the most popular memo that you've written across your entire illustrious career. Is that correct?

   2. HMHoward Marks7:32

      That's right, David. Previously, that was held by a one I wrote, I think it was in January of '14 or '15, called Luck, in which I talked about how lucky I've been, and that I'm a big believer in luck, and it's great to be on the right side of it. And I listed about a dozen ways that I think I've been lucky, and people liked that because it showed the personal side, as did Something of Value.

   3. DRDavid Rosenthal7:56

      Well, you write in the memo about how this came to be, of the two of you collaborating over the pandemic, but maybe here to recap on the podcast, how did this amazing thing happen of a father-son writing this incredible piece of work together?

   4. HMHoward Marks8:09

      Well, Nancy and I came to California on March the 6th of twenty twenty. Oaktree was scheduled to have a conference for its clients on the 11th. Although we canceled the conference, we did record it at the conference venue for live streaming. And so we were in LA, which of course, is Oaktree's headquarters. Andrew and his family came out on the 13th and moved in with us, and we stayed that way for, I think, until June. So we were incarcerated together.

   5. DRDavid Rosenthal8:41

      [chuckles]

   6. HMHoward Marks8:41

      And, well, first of all, we have fun talking about what we do and kidding each other, and we have a lot of differences. We're not the same person. Andrew's business is different from mine, and his general mindset is different. What he learned forty years after I learned what I learned initially, hopefully still learning, both of us.

   7. DRDavid Rosenthal9:01

      [chuckles]

   8. HMHoward Marks9:01

      So there were a lot of instances of differences, and that made for a very spirited period, and I hope a spirited memo.

   9. BGBen Gilbert9:09

      And how many memos had you written before this first one that you co-wrote together?

   10. HMHoward Marks9:14

       I've never actually counted them, but I think it's about a hundred and sixty.

   11. BGBen Gilbert9:17

       Just trying to frame for listeners, Howard Marks' memo is a thing in the investment community, and it's crazy to see one come out with both your names on it. I mean, I remember first seeing that and thinking, "Oh, this is gonna be cool." And I'm curious if you had... even before we get into the content and the debate that you had in creating the tension with it, did you yourself have any reservation of, "Oh, my gosh, am I changing the nature of what the memo is by co-authoring it with Andrew?"

   12. HMHoward Marks9:43

       No, because first of all, he didn't get near the keyboard. [laughing]

   13. DRDavid Rosenthal9:48

       [laughing]

   14. HMHoward Marks9:48

       But we communicate really well. The ideas that he expressed, many of the ideas came from him as counterpoint to mine, and when he expressed them, it was clear that we'd have a really good talk.

   15. SPSpeaker10:00

       Yeah, and I think what's also interesting is that I have been an investing nerd since I was really little, but only evolved into investing more in what you would call growth companies or what would generally be called growth companies. I started off being a value investor, first parroting my dad, as all little kids do, and then I got fortunately into the Buffett letters really young, and so turned into a huge Buffett nerd and all the things that come with that. And so my sort of trajectory was across the value end of the spectrum to the sort of growth end of the spectrum, and I had to make that journey myself and understand how the two relate and why I thought spending time in one area was better than spending time in another area or whatever. And so I was sort of able to talk to my dad in his language, and so I wouldn't say it was a... It definitely wasn't a debate. It was just more of a discussion of how things have evolved and trying to examine it a little bit.

   16. BGBen Gilbert11:01

       And Andrew, do you recall in your journey over the course of your life, the first time where you saw what you felt was a really attractive investment opportunity in what people would consider growth investing or high growth investing or tech investing that felt counter to some principles that you had internalized from your dad, from reading the Buffett letters, from your style of investing earlier in life?

   17. SPSpeaker11:23

       You know, I can't remember a specific one, but I think the sort of evolution happened a little bit gradually. So a value investor, you would sort of look at what the current cash flows of the business are and kind of valuing it on that and not making much assumption for growth. And then there's a cohort of growth companies that weren't exactly tech companies in the way that tech companies look today, but, you know, you could look at things like where rolling out stores is a big thing, Starbucks or the auto parts companies or Walmart or Costco, all that type of stuff. And then also things where really attractive acquisitions and synergies were attractive or were a huge part of the story, you know?... John Malone's cable roll-ups and things like that. And what's interesting is you sort of learn that instead of looking at cash flows, there's this concept of sort of maintenance cash flow, and then you could think about where to reinvest that, and if you can reinvest that at really high rates, really attractive rates, that's a better thing to do than just sort of hoarding the cash or whatever. And by the way, and Buffett talks about this when he talks about the concept of owner earnings and things like that. And then it's not too far to then say, well, those same sorts of investments, you can make them out of the cash flow statement, but you can also make them out of the income statement. Things like high return sales or talented engineering teams and R&D and things like that. So I think I just got exposure incrementally to different sorts of things that traverse that spectrum, and that's sorta where I found what made sense to me.

5. 13:00 – 17:23

   Amazon as the bridge: optionality, management, and cash-flow misunderstandings

   1. DRDavid Rosenthal13:00

      I have to ask, both because it's fresh on our minds, given recent Acquired activity, but also you write about it in the memo. I can think of no better example company of that than Amazon. What is the two of your journey been with Amazon? Did you discuss that? Was that part of this thinking about value and growth perhaps not being two different things?

   2. SPSpeaker13:19

      I think it's also really interesting because a typical value investor, you sort of look just at the fundamentals of the business, and you look at the economics of the business, and Buffett is very famous for saying that you want a business that an idiot can run.

   3. BGBen Gilbert13:34

      'Cause eventually, someone will.

   4. SPSpeaker13:36

      Yeah, exactly. And so he sorta talks about the primacy of business model over management. But I think Amazon's a great example of the opposite, because you could have never dreamed that if you owned Amazon when the story was about growing as a retailer, you could have never dreamed of AWS. That shows what happens when you bet on an amazing founder who can leverage their business to create value in really compelling other ways. And so I think it's a great business case study, but it's also a case study of putting faith in a management team and recognizing the optionality that comes with that.

   5. DRDavid Rosenthal14:11

      Howard, did Amazon ever intersect with your investing career?

   6. HMHoward Marks14:15

      No, I'm a recovered equity investor. I was in the equity research department of Citibank from 'sixty-nine to 'seventy-eight, and then I left. And in the credit field, where I've spent the last forty-four years, we historically have not had contact with what you would call a, a tech company.

   7. DRDavid Rosenthal14:33

      Although they had some distressed debt at one point in time after the tech bubble.

   8. HMHoward Marks14:37

      Yeah, but again, remember, we put a very heavy emphasis on predictability, and I think that for the most part, Oaktree does what Warren and Charlie do. They put it on the too hard pile.

   9. SPSpeaker14:50

      I think, by the way, one other thing that I would add about Amazon that may be too wonky but also may be interesting, is I think it's also an example of one of the things we sort of talk about in the memo, which is it's hard to just take a sort of knee-jerk, thirty-thousand foot view, and you really have to sort of dive in and understand things. So what people said for the longest time was that Amazon was losing money and could never be profitable.

   10. DRDavid Rosenthal15:14

       A charity run for the benefit of the American consumer.

   11. SPSpeaker15:17

       Exactly. And that came from looking a lot at the income statement and recognizing that they were losing money, partially because they were continuing to lower price to achieve scale. But I think what's interesting is they actually had a very favorable cash conversion cycle, so the business was much more sound from a free cash flow perspective, much earlier than it was from an income state perspective.

   12. DRDavid Rosenthal15:38

       Michael Mauboussin wrote the research note that was not as popular as amazon.bomb and amazon.toast, but he called it cashflow.com, and that's what it was.

   13. SPSpeaker15:47

       Yeah. And so I think it's just another sign of the fact that you probably shouldn't come to a conclusion about something without really trying to understand it for yourself.

   14. HMHoward Marks15:57

       Well, this captures two of our earliest points of discussion. Number one, that the companies we're talking about are more complex than the simple profit earners of the, let's say, deep value era. And so you can't, as Andrew says, have a knee-jerk reaction to some superficial knowledge. You have to really get deep. And then the other concept was this idea of optional profitability. The value investor wants to maximize cash flow and profits, EPS, but the growth investor sees losses sometimes as the right thing in the interest of the future. So that's an very, very important divergence.

   15. SPSpeaker16:40

       But also very often not. And so you can't just be in one camp and you can't say, "Well, I shouldn't care ever about losses," or, "I should just take for granted that all reinvestments in growth are good." But you also can't take the point of view that none of them are good.

   16. HMHoward Marks16:54

       Right. Wasn't it Mark Twain who said, "All generalizations are flawed, including this one?" [laughing]

   17. DRDavid Rosenthal17:00

       [laughing]

   18. HMHoward Marks17:01

       And by the way, when I say the value investor does this and the growth investor does that, probably the biggest single theme of the memo was that that dichotomy should not be so hardwired.

   19. DRDavid Rosenthal17:13

       Yeah, which is so great. You make the point in the memo, which we talked about a lot in our Berkshire series, Ben Graham made the lion's share of his money on Geico, which was not a value investment.

6. 17:23 – 21:44

   Howard’s high-yield origin story: when “undesirable” becomes mispriced opportunity

   1. HMHoward Marks17:23

      Right. Well, I think one of the great enemies of profitability is rigidity, because I'm lucky when I switched to managing money by switching to the bond department at Citibank, and there couldn't be a bigger backwater at the time. They said: "Could you figure out what high yield bonds means and start a fund?" And I found this area where everybody said, "Oh, no, no, we don't do that." Everybody. Most investment organizations had a rule against buying bonds that are r- rated below A or below triple B, and I'm buying single B bonds, and everybody says, "No, we don't do that." Well, guess what? When you go to an auction and you sit down, take your seat, and you see there are no other bidders-

   2. DRDavid Rosenthal18:07

      [chuckles]

   3. HMHoward Marks18:08

      ... that's usually a good thing. So the point is, open-mindedness was really the most important single theme of the memo, I think.... along with continuing to evolve your thinking as you get older.

   4. BGBen Gilbert18:20

      Can you take us back a little bit to that moment when you were starting to do high yield investing, and nobody else was? I mean, I assume Milken wasn't active at this point in time.

   5. HMHoward Marks18:30

      No, Milken was. No, Mike had been interested in low-rated bonds, I think, all along. He got out of Wharton the same year I got out of Chicago, 'sixty-nine. And I think that he immediately found, among other things, he wasn't dedicated to one area, but I think he found low-rated debt. And there's a famous book called Hickman, which talks about bond experience from nineteen hundred to nineteen, I think, forty-three. And supposedly, Mike found that book, and he read in it that the lower a bond's rating was, the higher its actual rate of return was. Not its promised yield, but its realized total return. Because, yes, there had been some defaults and bankruptcies, and let's remember that that period included the Great Depression, but nevertheless, the excess yield you got as an inducement was more than sufficient to offset the credit losses. And that was like an aha moment for him, and at that point in time, it was impossible to issue a low-rated bond. They were called non-investment grade, speculative grade, and you just couldn't issue them.

   6. BGBen Gilbert19:33

      Oh, so the big banks weren't doing it?

   7. HMHoward Marks19:35

      Right, and the big investment banks, which is, in those days, were separate, the big underwriters. And let's remember that in Moody's manual, it defined a B-rated bond as follows: "Fails to possess the characteristics of a desirable investment." [laughing]

   8. BGBen Gilbert19:50

      [laughing]

   9. HMHoward Marks19:50

      And when I teach classes about this, I say to them, "Let's go down to the street. I have a car there I don't need anymore, and you have money, and you need a car. But hopefully, before you say whether you'll take it or not, hopefully, you're gonna ask me one question. What is that question?"

   10. BGBen Gilbert20:06

       I'm debating whether the question is, what's the value of the car or what's the price of the car? But I wanna know both.

   11. HMHoward Marks20:12

       But the value, you can't ask me 'cause I'm a seller.

   12. BGBen Gilbert20:15

       Right. Okay, I wanna know what the price is.

   13. HMHoward Marks20:17

       But you can ask me the price. Hopefully, before you say, "I'll take it," or, "I won't take it," you'll know the price. But, you know, in nineteen seventy-eight, Moody said, "These bonds are not proper for investment regardless of price."

   14. BGBen Gilbert20:27

       Oh.

   15. HMHoward Marks20:28

       How can that be?

   16. BGBen Gilbert20:29

       Well, the other thing that you say sometimes is, how can life insurance companies make money knowing that every single person is gonna die? [chuckles]

   17. HMHoward Marks20:36

       Well, that, that's right. That was one of my real epiphanies. Around 'eighty-one or two, one of the first financial cable shows interviewed me, and the reporter said to me, "How can you buy these bonds? You know some of them are gonna default." And this is one of those times when, you know, you just get the answer. It pops into your mind. I'd never thought of it before, and I said, "The most conservative companies in America are the life insurance companies. How can they insure people's lives when they know they're all gonna die?" [laughing]

   18. BGBen Gilbert21:02

       [laughing]

   19. HMHoward Marks21:03

       And the answer is, number one, it's risk they're aware of. Doesn't come as a shock when somebody dies. You know, nobody breaks into the board meeting and say, "Hey, one of the people died."

   20. BGBen Gilbert21:11

       [chuckles]

   21. HMHoward Marks21:11

       Number two, it's risk you can analyze, and so they sent a doctor to your house to see if you're in good enough shape to get a policy. Number three, it's risk you can diversify, so nobody insures just skydivers or just people who live on the San Andreas Fault or just smokers, but they diversify their book. Number four, it's risk they're well paid to take. So they look at me, they say, "This guy's gonna die at ninety," and they price the policy on the assumption I'm gonna die at seventy-five.

   22. BGBen Gilbert21:42

       There's your margin of safety.

7. 21:44 – 28:38

   The Nifty Fifty and disruption: great companies can be terrible investments at the wrong price

   1. HMHoward Marks21:44

      Exactly。 And I said, "This is exactly what we do in high yield bonds." So we started doing it, and we made money steadily and safely, investing in the worst public companies in America. Now, remember my background. I joined the investment business September of sixty-nine. I'd had a summer job in sixty-eight, so I got a look at it, but in sixty-nine, I went to work permanently at Citibank's investment research department, and the bank was what was called the Nifty Fifty investor. The Nifty Fifty were considered to be the best and fastest-growing companies in America, companies that were so good that, A, nothing bad could ever happen, and B, there was no price too high.

   2. BGBen Gilbert22:22

      This was the polar opposite of the not appropriate for investment.

   3. HMHoward Marks22:26

      Exactly. For the Nifty Fifty, there was no price too high, and for the high yield bonds, there was no price low enough. And of course, both stances are wrong, and if you bought the Nifty Fifty the day I got to work, and if you held it tenaciously for five years, you lost almost all your money-

   4. BGBen Gilbert22:46

      Oof

   5. HMHoward Marks22:46

      ... in the best companies in America, for the main reason that they had been priced too high. The normal P/E ratio for the S&P is sixteen post-war. These things, a lot of them were selling between sixty and ninety.

   6. BGBen Gilbert22:58

      Gosh, I don't know any companies like that today.

   7. HMHoward Marks23:00

      Yeah.

   8. BGBen Gilbert23:01

      Was it the case that they were not the best companies in America, or was it the case that they were the best companies in America, but they were just priced too high to make sense as investments?

   9. HMHoward Marks23:11

      Some of each. They were all priced too high, but some, in addition, it was illusory. Let's go down the list. The granddaddy was IBM. The saying was: You can't be fired for buying IBM. Did IBM go bankrupt? Maybe. I don't remember. Close. Xerox was number two. They completely lost their market to imports. They had to find a new business model.

   10. BGBen Gilbert23:35

       The consumer companies and the tobacco companies were part of that, too.

   11. HMHoward Marks23:38

       And for the most part, they did better, but I'll tell you one consumer company that didn't do well, and that's Simplicity Patterns. That was in the fifty. You see a lot of people sewing their own clothes today?

   12. BGBen Gilbert23:49

       [chuckles]

   13. HMHoward Marks23:50

       If so, you travel in different circles from me. But that was considered a company that could never be hurt. Maybe Sears was in there, I forget, but the concept of disruption was never considered. The moats were considered inviolate. The thinking was really simple. Nobody thought about the fact that if Xerox priced their copies at thirty cents apiece, somebody from abroad could produce it, and that presented a price umbrella that somebody else could get underneath.... So in those days, the Wall Street Journal used to run a box on the first page whenever something would crap out, showing the losses in a certain category. And we had lots of companies where you lost more than ninety percent from the high to the low.

   14. SPSpeaker24:35

       To go back to your question, I think if you're an investor, you have to have a couple of different skills. One is you have to think about the future potential of the company, and that's sort of what my dad was talking about, about moats and disruption and things like that. And the second thing is you have to think about, well, what's that worth versus what is that selling for? And if you come back to the fundamental ideas of the memo, one of them is that all investments in equities are worth the discounted value of their future cash flows from here to eternity. And for some companies, those cash flows are more in the here and now, and for some companies, those cash flows are very far away, but they all go into the formula. And by the way, if you think about the nature of a DCF formula, every company requires judgments about the future. It can be a seemingly stalwart company that has immense consistency and whatever, but those can be disrupted.

   15. HMHoward Marks25:35

       Well, I think the greatest example, one of the industries that all the value people thought were impregnable, great moats, was the newspapers. Because you had your newspaper, you didn't have to worry about competition from the newspaper in the town next door. You were entrenched. It only cost fifteen cents, so nobody would stop buying it in tough times.

   16. SPSpeaker25:54

       And if you wanted to advertise, you wanted to advertise in the paper with the most circulation.

   17. HMHoward Marks25:59

       And the local movies had to be in the local paper, the local want ads, the local car ads. And the great thing was that if the consumer bought it today, guess what? They had to buy it again tomorrow because it had a one-day shelf life. What could be a better business? And twenty years later, most of the companies in that industry are fighting for their lives.

   18. BGBen Gilbert26:17

       If I could just make an observation, you sound like a crazy person when you assert that en masse, very quickly, consumer behavior is going to change. If you would have told me when I was reading the paper, and this was the most important thing in America, "Well, newspaper values are mostly gonna go to zero because all of the consumer attention is gonna be shifting to consuming everything on their computers in an interconnected web of servers that doesn't really exist yet. So therefore, the newspapers won't have value," you'd be like, "What?" Or if you came to me ten years ago and said, "Facebook bought Instagram, and they're demonstrating their ability to constantly keep all the consumer attention, but eventually, actually, this Chinese company is gonna start, and it's gonna be short form vi- yeah, Facebook won't figure it out this time. And so all the consumer attention is gonna shift." And I'd just be like: You're wrong. I just don't believe you.

   19. SPSpeaker27:05

       Yeah, that's of course true, but I think the other thing that's really interesting to note, and there are these very widely circulated charts of the speeding up of technological adoption. And so it was very possible for companies to be much more durable back then than it is today, in my opinion. I mean, if you transport yourself back to 1950 and you think about, well, how many businesses are there where I think I can say with high conviction that they'll be the same in ten years as they are today? I think that number would probably be much, much higher than you could say today. Without understanding what management is doing to further entrench their moats or fend off competition or continuously evolve or whatever, it's very, very hard to say, well, with no minding of the ship, this business will just stay consistent. There are very few businesses that idiots can run these days.

   20. HMHoward Marks27:55

       But I'll tell you, to second what Andrew's saying, if you go back to my youth in the '50s, or when I was a young man in the '60s and '70s, you just didn't have the feeling that the world was changing. My thought model for the world at that time, looking back at it, is kind of a consistent backdrop, like on a stage, and the actors do their thing in front of the backdrop, but the backdrop doesn't change. And so there are cycles, ups and downs, excesses and corrections, and all these things, but the world didn't change much, and a comic book was a dime for my whole youth. But today, everything changes every minute.

8. 28:38 – 32:21

   Faster change, bigger TAMs: Darwinism turned up in modern tech markets

   1. BGBen Gilbert28:38

      So here's a question then: Should companies be worth less? Because if the future is more uncertain and it's more likely that things get disrupted and moats are less permanent than they've ever been, shouldn't we consider less future years of cash flows?

   2. SPSpeaker28:57

      Well, like everything, it's a double-edged sword. I mean, on the one hand, you just made the point that without minding the ship, companies are much more potentially disruptable. But on the other hand, that means if you have competitive advantages and you continue to mine those advantages, and you use them to enter adjacent markets or launch new products or going after other markets, geographically or whatever, there's much more value creation to be had. And I think the ability to leverage your advantages and build more for the companies that are really doing so, it's probably never been higher. And by the way, with the internet, you can address global markets. We just talked about newspapers where you couldn't address the town next door. One of my favorite writings on investing, it's not actually about investing, but it's this guy, Brian Arthur, and he wrote something called Increasing Returns in the New World of Business, and that was in the mid-'90s. And he made the observation that with the new world, with the new distribution models of things like the internet and whatever, the best companies could continue to get bigger and bigger, whereas you were sort of capped out more in the old world, and so you would have diminishing returns to scale over time. And by the way, that couldn't have been more right. You look at markets over the subsequent couple decades, and you have companies like Apple and Amazon and Google and Microsoft that just continue to get bigger and bigger. And I think a lot of that comes from the fact that they're just-... continue to dominate more and more of various markets.

   3. DRDavid Rosenthal30:26

      This is one of my favorite pieces of trivia of all time about that paper. Brian Arthur was friends with Cormac McCarthy, the author who wrote All the Pretty Horses and No Country for Old Men, and Cormac helped shape the prose in that piece.

   4. SPSpeaker30:40

      Oh, very interesting.

   5. DRDavid Rosenthal30:42

      One of the reasons why it's very successful.

   6. SPSpeaker30:43

      Well, yeah, I guess for an economist, it was extremely well-written.

   7. HMHoward Marks30:47

      Before I lose the opportunity, I just wanna add one thing to Andrew's list of criteria for success in this continued expansion mode, and that is companies that are able to avoid the negative effects of success. You have to stay lean and flexible and unbureaucratic and future-looking.

   8. BGBen Gilbert31:06

      Andrew, you're pointing out this really interesting thing where you have two opposing forces that have butting heads. One is, now we have globally addressable markets, so TAMs are bigger, therefore, market caps can be bigger. And at the same time, you have competition happens faster than ever because paradigms change faster than ever. And so therefore, the future is less certain than it's ever been, despite the fact that the opportunity for any given business is the largest it's ever been.

   9. SPSpeaker31:33

      Yeah, and by the way, I wouldn't just say global markets, I would say strategically adjacent markets as well. Again, look at the big companies and how they continue to step out and do more and more in things that are tangential to their existing businesses. I mean, Amazon's a great example of that. They started in books, then they went to media, and then continued on and on and on, and eventually they leveraged their scale into cloud computing and whatever.

   10. DRDavid Rosenthal31:57

       Then that into databases and all sorts of stuff. Yep.

   11. SPSpeaker32:00

       Yeah, exactly.

   12. HMHoward Marks32:01

       Ben, Andrew mentioned that he'd never heard your voice at real speed because he listens to podcasts accelerated. I think the way to think about it is take Darwinism and turn up the knob a few clicks.

   13. BGBen Gilbert32:14

       [laughing]

   14. HMHoward Marks32:14

       It's what it is. It's winners and losers, maybe more dramatic than ever, and happening faster than ever.

9. 32:21 – 36:54

   Markets evolve like games: why old value edges erode and future-judgment edges matter more

   1. SPSpeaker32:21

      And then this all, I think, dovetails into one other point that we made from the memo that I think is really important, which is that markets evolve and games evolve. I was an obsessive poker player. I've always been an obsessive games player generally, and my dad and I, we sit around and we'll play backgammon for forever and whatever. And I, I got obsessed with poker right when the poker boom happened, which was Chris Moneymaker won the World Series of Poker-

   2. BGBen Gilbert32:46

      Oh, yeah

   3. SPSpeaker32:46

      ... and they started online poker.

   4. BGBen Gilbert32:47

      Moneymaker and Farha.

   5. SPSpeaker32:48

      Yeah. Well done. That's very impressive poker trivia. So when online poker first launched and everyone got into the poker boom, because no one knew how to play and it was so new, if you just sat around and you played aces and kings and nothing else, you could win money, and it was very easy. And then over time, people figured that out, and they sorta figured out the next level of the game and whatever, and the winning strategy turned into the very exploitable strategy, and that evolution has happened a lot more times, to the point that I'm probably terrible at poker now. But anyway, I think the same thing has happened in markets. And so back in the times when Buffett was starting, information about companies and the ability to transact in companies, and actually even finding out about companies, was extremely hard. I mean, you had to go to the library, you had to take out the Moody's Manual.

   6. DRDavid Rosenthal33:38

      He was driving around buying stock certificates from farmers.

   7. SPSpeaker33:41

      Yeah, I don't know if you've ever looked at a Moody's Manual, but there's not that much there.

   8. DRDavid Rosenthal33:44

      [chuckles]

   9. SPSpeaker33:44

      And so if you were interested in something, you had to mail away for the annual report, and so on and so forth. And then you had to call your broker, and they had to figure out how to buy an illiquid stock. And because there was so much friction to getting information and transacting, it was much more possible for value to be hidden in plain sight. And I wasn't there, but I know this because Buffett says that this is exactly what he did. You could look at something and just plainly see that the company just continued to march ahead and just plainly understand that it was undervalued relative to those prospects if you had conservative assumptions about the future continuing. And nowadays, information is totally ubiquitous. Anyone can buy a stock. There's tons and tons and tons of smart people investing in the stock market, but there are also algorithms and machine learning and all this type of stuff. And so it's very hard to believe that you can just have some sort of knee-jerk, surface-level understanding of something and just look at financials and have some very elementary view on something and have it be some sort of insight that's profitable.

   10. HMHoward Marks34:48

       Well, the phrase I took away from that, and it's in the memo, is readily available quantitative information about the present. And Andrew pointed out the evolution of markets, and, you know, I was taught at Chicago in the mid-'60s, the efficient market hypothesis, that everything is priced right 'cause everybody's working so hard to find the bargains and the overpricings. And of course, that's a framework, and it was not true that everything was priced right, but certainly over time, things are priced more right.

   11. DRDavid Rosenthal35:20

       It's become more true.

   12. HMHoward Marks35:21

       Right. Inefficiencies, which I prefer to say mistakes, things the markets misprices, where do they come from? They come from ignorance and prejudice. So Moody's had a prejudice against the single B bond. It had a prejudice in favor of the Nifty Fifty, as did most investors, and I was lucky to find some things that either others didn't know about or didn't understand. But human knowledge is cumulative, and lately it's been rushing forward at an incredible pace. So it's hard to imagine that there's a piece of information that I can get off the internet that's gonna make me any money, for the simple reason that everybody else can get it off the internet. This is a zero-sum game for a fixed amount of profit, and it'll go to the people who do better at the expense of the people who do worse. So you have to have an advantage, a knowledge advantage, a skill advantage, if you're gonna be one of the people who ends up on the positive side of that equation.

   13. SPSpeaker36:20

       And so to bring this back to what we were talking about earlier, it's very dangerous to just make qualitative judgments about a company that seemingly everyone has. "Oh, this is a great company, whatever, and it'll just continue winning," without also saying, "Well, to what extent is this reflected in the price?" And so-... That's the whole point of investing, whether it's value investing or, quote, "growth investing," and that's sort of the point we make in the memo. I mean, you have to be able to make judgments about the future prospects of the company, and then you have to be able to say, well, to what extent is this already reflected in the price?

10. 36:54 – 48:12

    Why Andrew chose venture: probabilistic bets, founder obsession, and personal fit

    1. DRDavid Rosenthal36:54

       If you're talking about public equities or any public market, that dynamic is so strong that we were just talking about. There's so much information out there. Yes, maybe you can have some advantage, but it's very hard. If you're instead operating in a private market that is at least relatively to the public markets, much more illiquid, you can have more advantages. So you've shifted your career to doing mostly early-stage private market investing. Is that a big reason for that?

    2. SPSpeaker37:26

       Well, so what I'd say is, first of all, I think you'd be hard-pressed to say that venture is super inefficient. It's not a market where everyone can transact, and it's actually hard to get in the place where you can invest in seemingly great companies, but the competition to invest in those things is very fierce. So I wouldn't say that I came to the realization that venture was this super inefficient market. I wanted to capitalize on that insight or whatever. And by the way, and leaving aside the fact that I love hunting for founders, I love working with founders, I love so much that goes into the whole business of venture investing. But if you'd wanna just talk about the proposition, the reason why I went into it is, number one, it sort of suits my skill set more to make long-term qualitative judgments about the future. And I think venture, so much of what you're doing is you're finding huge gaps between what you're paying today and what this could be worth if it's right. So you have to really imagine in ten years, if this is successful, well, what could that business look like? And much more so than the sort of analysis that goes into being a public markets investor, that really suits my skill set much more. And then the other thing is, it's a much more probabilistic endeavor. I mean, what you're doing is you're trying to find extremely high expected value investments, where the average occurrence is that you're gonna lose your money, but make enough of those bets, and so it works out to be a great return. And then, by the way, try to help the companies in whatever way you can and follow them closely so you can add more capital to the ones that are doing well and whatever. And so that whole endeavor really suited my makeup much more.

    3. DRDavid Rosenthal39:18

       Oh, but we were chatting before we started recording. I went back through my notes from business school, from Howard, your book, The Most Important Thing Illuminated, and every other page on there is like, risk equals permanent capital loss. Do everything you can to avoid permanent capital loss, and venture is not that.

    4. SPSpeaker39:34

       It's not that, and I also don't think that I would be particularly great at that. I mean, if you told me I had to have a portfolio of ten companies where not only would the portfolio return be twenty percent, but they'd all be roughly twenty percent, or they'd go somewhere between ten and thirty or something like that. I mean, I just don't know if that would be as suited with my skill set.

    5. HMHoward Marks39:56

       And in nineteen seventy-eight, when I left the equity area, it was really because of the terrible performance of the Nifty Fifty, which I, as director of research, was associated with. So they said to me: "What do you want to do next?" And I said: "I'll do anything except spend the rest of my life choosing between Merck and Lilly." [chuckles] Because you can take the best drug analyst in the world and sit him down on the first day of every year and ask him, which is gonna perform better, Merck or Lilly? And my guess is he'll get it right half the time. But the good news is, my boss said, "I want you to go into the bond department." And it played to my quantitative skills and to my conservative personality. And if they would have said: "I want you to start a venture capital fund and be ready to invest in Amazon when it starts," I would have been a disaster because I'm not an optimist, I'm not a futurist, and financially, I'm something of a chicken. So the point is, so far, Andrew and I have gravitated things that are right for us, and that's a hell of a lot easier than doing something which is wrong for you and trying to put a square peg in a round hole.

    6. SPSpeaker41:01

       One of the things that really interests me is applying some of the more traditional investing lenses or Buffett investing lenses or whatever to venture is really interesting because I think you have to think about, well, what can this be worth if it works, and what's the potential probability that it works? And in order to do that, in my opinion, I think it's very helpful to be able to visualize what the business could look like. And if the company IPOs in ten years, what's that person gonna be looking at when they're thinking about investing in the company? So you have to sort of visualize, well, what could the financials of this business look like down the road, even though it's totally nascent? And what could the moats in that business look like, and how much capital might it take to get there? And what's the likelihood of competition, and what could they evolve into after they establish themselves in that market? And et cetera, et cetera. And I think it's really interesting, and to me, I, I find it to be, yeah, really, really thought-provoking.

    7. HMHoward Marks41:54

       Remember what I said, that Andrew said, readily available quantitative information about the present is not gonna give you the key to the castle. He said a couple of minutes ago, however, that he's good at making qualitative judgments about the future. And so if everybody has all the company data about today and the means to massage it, how do you get a knowledge advantage? And the answer is you have to either somehow do a better job of massaging the current data, which is challenging, or you have to be better at making qualitative judgments, or you have to be better at figuring out what the future holds. So he's had to evolve.... from the old value people who, you know, Buffett talks about buying dollars for fifty cents, which is not such a terrible idea, but to doing more like he does, dealing with these challenging aspects of qualitative and future.

    8. DRDavid Rosenthal42:53

       Yeah. I mean, I think you just have to find the type of thing that suits you, and I like being an optimist, and I like thinking about, well, what could this be if it works? And there are other people that like saying: "Well, this company clearly sucks, but it doesn't suck as much as everyone thinks," or, "People think this business is gonna die, but I think it's only gonna be maimed or something." [laughing]

    9. BGBen Gilbert43:11

       It will die slowly over more years.

    10. DRDavid Rosenthal43:13

        You know, that's an incredibly valuable skill to have, and you can make incredible returns doing that. It's just not in my nature.

    11. HMHoward Marks43:21

        Well, at Oaktree's, I think the thing we're known best for is investing in distressed debt. And when we started that in eighty-eight, my partner Bruce Karsh, and I had this idea, it was actually Bruce's idea, but he joined me, and I'd been in the high yield bond business for ten years at that point. People would say, "Well, that's crazy. You're gonna buy the debt of companies that are bankrupt? They're not gonna repay the debt." And the answer is, A, they're not gonna repay it in full, but they're gonna pay part. That may be enough. Or if the creditors are unpaid, they get the company. That may have value. But that was good for me. It was great for Bruce Karsh. It wasn't the right thing for Andrew, so fortunately, we gravitated in the right direction.

    12. BGBen Gilbert44:02

        For our next sponsor, it is a very appropriate one for this episode, our good friends at Tiny, who share a lot of the same investment philosophies as what we are talking about here with Andrew and Howard. Actually, with both of them.

    13. DRDavid Rosenthal44:15

        Yes.

    14. BGBen Gilbert44:16

        And they've got something new to share with us, and we talked about this a little bit on our special with Anthony Gonzalez. As longtime listeners know, Tiny is the Berkshire Hathaway of the internet and has built and acquired a collection of truly wonderful internet businesses, most of which they fully own. Their story, which many of you know, is incredible. Andrew Wilkinson started the design agency Metalab in Victoria, BC. They became one of the premier design firms in the world, building UIs for Slack, Coinbase, Tinder, Headspace, Patreon, you name it. With that Metalab success, Andrew and his partners, Chris and Jeremy, started to think about investing. They became completely obsessed with Warren, Charlie, and the Berkshire model, and of course, that led them to realize, wait a minute, we know there are a whole bunch of companies out there, just like Metalab, that are wonderful internet businesses doing five million or more in recurring revenue at thirty to forty percent operating margins. But it just doesn't make sense for venture capital, 'cause there aren't M&A buyers for them out there, or they can't get to the scale required for an IPO. What would Warren and Charlie do here? They'd just go and buy these businesses and own them forever. And that is exactly what Tiny has gone out and done for the past fifteen years with incredible success. You can think about companies like Dribbble, Pixel Union, Creative Market, eighty/twenty, Girlboss, AeroPress, which I use all the time.

    15. DRDavid Rosenthal45:32

        Yeah.

    16. BGBen Gilbert45:32

        All of these are now Tiny businesses run by their own independent managers, just like Brooks Running, for example, within Berkshire, and producing incredible cash flow for Tiny and their managers. So David, what is new?

    17. DRDavid Rosenthal45:46

        Well, so it turns out that over the long bull market run of the past decade, a lot of wonderful internet businesses like these that should have been Tiny-type companies mistakenly took venture capital instead, and now they can't get to an exit. So for anyone who's a founder or a VC in this situation, you know this sucks. I've been there personally many times. Ben, you've probably been there personally.

    18. BGBen Gilbert46:16

        Yep.

    19. DRDavid Rosenthal46:16

        The company no longer has the potential for an exit that would make it meaningful to a VC's portfolio, and yet you're on the board. It's taking all this time. There's a misalignment of incentives, and at the same time, it's not like this is a bad business. It's a legitimately good small business on the internet, and it doesn't deserve to be just shut down. So Tiny has realized that they can fix this situation for everybody. Sell the company to them, the venture firms get their money back, that they can then recycle and invest in the same fund into new portfolio companies, and founders get to take control of the company back. Tiny has done this with several businesses so far this year. These are venture-backed companies doing over five million in revenue at thirty to forty percent operating margins, or the potential for that to quickly be the case. And Tiny came in, acquired the business, the VCs got their money back, and more importantly, their time back, and management and Tiny got to run the business as it should be, wonderfully and profitably with totally aligned incentives. Honestly, this is a total win for everybody. This function needs to exist in the ecosystem, and I'm so glad Tiny is now doing it.

    20. BGBen Gilbert47:31

        And more so in the last six months than ever before. I mean, there's so many companies where now this makes sense. When there was just available capital everywhere, there was other options to kinda keep going and see. Now, this makes a lot of sense for a lot more companies. So if you're running a business like that or you're a VC board member, and I know there are a lot of you out there, you owe it to yourself and to your portfolio to shoot a note over to hi@tiny.com. Just tell them Ben and David sent you.

    21. DRDavid Rosenthal47:59

        Ah, I honestly really wish that this existed back when I was an actual "professional," quote, unquote, "VC," and I was taking board seats. Uh, this is a no-brainer. I'm so glad Tiny is doing it.

    22. BGBen Gilbert48:10

        Thanks, Tiny.

11. 48:12 – 1:00:19

    Building investment firms: culture, partner complementarity, and staying close to the work

    1. DRDavid Rosenthal48:12

       We wanted to ask both of you about the firm-building aspect of the investment business. One thing I've certainly learned in my career is that being a great investor is a very challenging proposition and an activity that can easily be one's life work. Building a great investment firm is a very different challenge. It's very rare that people can be great at both of those, and it's also not a second challenge to take on lightly. How did each of you think of this?

    2. HMHoward Marks48:42

       ... Well, having spent my first seventeen years at Citibank, which is a management-intensive bureaucracy, I was pretty good at those things. I was not a guy who started in a garage, you know? And so processes and deliberateness were right up my alley. But on the other hand, we started Oaktree at a time when the quest for alternative investments was extremely strong. The demand, I think, outstripped the supply. Most people kinda gave up on getting the returns they need from stocks and bonds. So we had a big tailwind, and what Bruce and I did, for the most part, is create a culture. We didn't ever have a micromanaging, micromanaging mentality. We were too busy. It was not our day job to run the company. We did that as a sideline, and it wasn't management intensive. So we weren't great on the profit margins, but they kinda took care of themselves, and we were haphazard about compensation. You know, we kinda respond to the last person to walk in the door, but the right culture at the right time with, I think, some exceptional people, was enough to make the company a success, even though it was largely an unguided missile in terms of management.

    3. BGBen Gilbert50:01

       How did you think about splitting up the responsibilities of the core competency of the business investing versus the necessary lifeblood of the business of finding capital to manage?

    4. DRDavid Rosenthal50:13

       And recruiting and everything.

    5. HMHoward Marks50:15

       Well, the great advantage we had is that the people who started Oaktree, there were five of us, three others, in addition to Bruce and me, had worked together on average for nine years at the time we did it. So we weren't dealing with strangers and trying to figure out an MO. All we had to do was what we had been doing at TCW before Oaktree, and for the most part, that meant I was out raising the money and visiting with the clients, and representing us to the greater community, and clients and prospects, and Bruce and the others were back managing money. And David, you mentioned my book, The Most Important Thing, that actually evolved from a memo of that title that I wrote around '02, and that had a section on how to run a company, which I spared the readers of the book because it had nothing to do with investing. But I said in there that the key among partners is to have shared values and complementary skills. And we absolutely shared values. We're all family men and conservative people, and somewhat risk-averse, and so forth. Andrew points out we probably could have used one founder in the mix who wasn't quite as risk-averse, but we did okay. But we had complementary skills, and I could do things in the outside community that Bruce maybe couldn't do, although he's better at it than he thinks, but had no interest in doing. And he could do things in terms of managing money that I couldn't do. But the great news is, we each accepted the truth of what I just said, and so that produces a lot of respect, mutual respect, and that's why we've had such a great partnership for thirty-five years.

    6. SPSpeaker52:05

       And then for us, I mean, while I'm incredibly proud of and impressed by what my dad and his partners have built, our approach is sort of totally opposite just because it suits us.

    7. DRDavid Rosenthal52:17

       That sounds like a theme between father and son. [laughing]

    8. SPSpeaker52:20

       [chuckles] Yeah, I mean, it's not for the sake of being opposite, but my partner, Schuster, and I, who we both, since we started, have run the investment program, and the sourcing, and investment decisions, and it helps that we've been long-time, extremely close friends, and we talk all the time. And we just feel like we have to really pinch ourselves that we get to do this every day, that we just love, love the investing. And to us, what motivates all of us is having absolutely world-class returns over a long period of time.

    9. BGBen Gilbert52:56

       You seem to share that competitive streak with your dad, even though you have different ideals in many other ways.

    10. HMHoward Marks53:00

        Yeah. You know what, Ben? If you're not competitive, you shouldn't be in the investment business.

    11. SPSpeaker53:05

        Yeah, but I would say it's not competitive with others, it's competition with ourselves. I mean, we just wanna be the best that we possibly can be. So everything we do at our firm is in service of that, and it's not because other approaches aren't also extremely valid or work for other people, it's just that this is what motivates us. And so we have no ambition to broaden our firm in terms of strategies or turn our firm into some big asset manager. And if our jobs turned from investing into management, we'd be extremely unhappy, and that trade-off isn't worth it. So everything we do is in service of trying to do what we love and maximize our time doing that, and have the best returns that we possibly can, and so do the things that we think enable that, which, in our opinion, in this business, is really all about your reputation with founders and having as broad of a network of as many incredibly talented potential founders as you can, and then being able to do whatever we can to build the best relationships we can with them. And I think that comes from helping them, but I think that also comes from being great partners and also friends. That's how we build the firm, and it's very different.

    12. DRDavid Rosenthal54:23

        You point out that the nature of Oaktree and TQ's investment business is, is very different, and thus the core competencies are, you know, very different too. Andrew, you don't write public-facing memos. [chuckles] You don't go on too many podcasts. Thank you for joining us here, but it's probably just not as important as it was at Oaktree.

    13. SPSpeaker54:41

        Look, there are other people in venture who do that stuff extremely well.

    14. BGBen Gilbert54:45

        Other people in venture go on podcasts? [laughing]

    15. SPSpeaker54:49

        ... I think those podcasts are great, and I think people who do it probably do it because they enjoy it, but also because it really helps them. I mean, builds great brands with founders and increases their network and adds a lot of credibility and all that type of stuff. I think at some point, you just sort of do what suits you, and we have certain things that suit us, and other people have things that suit them. And it's not really a strategic question about if going on podcasts help us or hurt us or being public-facing or whatever. It's just you sort of do what you think is right for you.

    16. BGBen Gilbert55:21

        Which is funny. That's the echo of Howard, something I've heard you say in the past, which is that you just have to make sure that your investment strategy suits your demeanor as an investor, which is almost saying the same thing. I mean, David and I talk about this a lot in the podcasting business. We say: Should we change the content to match what the demand seems to be, or should we just say, "You know what? Let's find a way to do what's natural to us, because that's what we're gonna have the most fun doing, that's where we're gonna have competitive advantage, and that's where we're gonna have durability?" And I think that same concept applies in all three of those things just discussed.

    17. HMHoward Marks55:57

        When I'm asked for career advice, when I speak to students nowadays, I say something very, very much in line with what you just said, Ben. I say, "Look for something that plays to your strengths and avoids your weaknesses and that you'll enjoy doing," and it sounds like that's what you've done. And turning it around, we are so lucky to have the ability to do something we enjoy. And take that out of the equation, what are you left with? We only have one life. We should make the most of it we can. I think anybody who has a choice and does something he doesn't enjoy just to make more money is making a world-class mistake.

    18. SPSpeaker56:40

        I think learning and evolution are really important. Learning at our firm is really important to us, and it's just important to who we are as people, and continuing to try and expand our competencies and rub our nose in the many mistakes we make and all that type of stuff. And so I think you have to find something that suits you, but you also can't get too hung up in your comfort zone and just say, "Well, this doesn't fit in my comfort zone, so I'm just gonna totally ignore that." And you guys talked about this on your Berkshire episode. I mean, one critique you could make of Buffett is he just totally ignored technology. And technology not only became much more pervasive, but I also think that, I mean, he's an incredibly smart guy, and he understands lots of different elements of business. And when he talked about technology, I think he was referring to science projects, you know, where your technical advantage is what will allow your business to succeed over time. But there are lots and lots of technology companies where what they do is not so incredibly cutting edge, and really, what powers their business is moats that are very similar to other sorts of things. You also had Hamilton Helmer on here, and a lot of those sort of moats traverse both technology and non-technology businesses. So I have no doubt that Buffett could have totally nailed it, but it was just not in his comfort zone.

    19. HMHoward Marks58:06

        You know, this points out a dichotomy in investing or maybe a conundrum, of which there are so many. Because what we just talked about was it's important to stick to your last and do what you're good at and fits with you, but it's also essential to be open-minded- [chuckles] ... and willing to change.

    20. BGBen Gilbert58:27

        I'm getting whiplash.

    21. HMHoward Marks58:28

        Yeah, but look, to be a good investor, you have to be confident because you have to back things that are iffy and stay with them if they go bad, and if you're in the public securities market, you have to maybe buy more of them when they decline, but not so confident that you're pig-headed and keep throwing bad money after good. You have to concentrate your holdings enough so that the few good ideas you get in your lifetime really make a big difference, but you have to diversify to protect against the unforeseen. So this is really the nub of it. It's such a fascinating field because, in my opinion, the things we're talking about can't be reduced to an algorithm. And this is where our humanity pays off, because Andrew talks about making better qualitative judgments about the future. I like to believe that computers will not be doing that well for some time, so that we'll still have some scope for success.

    22. SPSpeaker59:37

        Or if they do, then it will cease to become a competitive advantage.

    23. HMHoward Marks59:41

        Right. Well, but we need to have some competitive advantages left, you know? But I think it comes from qualitative and future. I always say that I don't think that a computer can sit down with five business plans and figure out which one is Amazon in advance or meet five CEOs and know which one is Steve Jobs, and not many people can do it either. That's the important thing. But the few who can, can really help their clients, and if the person who finds Amazon can also find Google and can find Facebook, and to the point where you can conclude, okay, it's skill, not luck, then you really have something.

12. 1:00:19 – 1:17:05

    Judgment, recruiting, and founders: second-level thinking and being “uncomfortably idiosyncratic”

    1. BGBen Gilbert1:00:19

       So here's a philosophical question: If there's a very credible trope to be made on either side of an argument, and you can always make both of them and then be stuck in the middle, ultimately, everything always comes down to judgment. So where does judgment come from?

    2. HMHoward Marks1:00:36

       Well, that's a great question. I was having lunch with Charlie Munger-... back in twenty eleven, when Most Important Thing was about to come out, 'cause he worked downtown right next to me in the building next door. And when I got up to go, he said, "Just remember, none of this is meant to be easy. Anybody who thinks it's easy is stupid." [laughing] And so I wrote a memo, I think it was September fifteen, if I'm not mistaken, and I talked about that. I called it It's Not Easy. A friend of mine wrote a book on investing in the UK, and the title is Simple But Not Easy. The things we're supposed to do are simple to describe. It's just not easy to do them, A, better than other people, and B, consistently, and C, over time. It all comes down to judgment. Now, that's not your question, Ben. Your question is, where does it come from? And you remember that the first chapter of The Most Important Thing talks about second-level thinking, thinking at a higher level than others, differently, but also better. That is to say, more correct. It's easy to diverge from the thinking of the consensus, not always easy to diverge correctly, but that's what a superior investor has to do. You might call it second-level thinking, variant perception, knowledge advantage, insight-

    3. SPSpeaker1:01:55

       Context.

    4. HMHoward Marks1:01:56

       Judgment, but it's an intangible. People say to me, "Can you teach somebody to be a second-level thinker?" And I said: I don't know. It's kinda like asking the basketball coach to coach height.

    5. SPSpeaker1:02:08

       [chuckles]

    6. HMHoward Marks1:02:08

       All his efforts won't make his players any taller. Some people get it, some don't.

    7. SPSpeaker1:02:12

       Yeah, I mean, I would say it comes from-- probably comes from a lot of different places, but some ideas would be some combination of sort of deep knowledge and understanding of what you're doing, and a real framework for what matters and what doesn't, and why. I would say rationality, which is the ability to think logically and not emotionally, which sort of dovetails with knowing yourself and being able to know where your biases will infect the decision-making process. And then I think there's intellectual humility that comes with it, knowing that there's a good chance that you can be wrong, even if all those things are true, and also knowing what you don't know. So knowing where you can't opine and where you have to learn, and where you should seek others, and things like that.

    8. DRDavid Rosenthal1:03:00

       Andrew, I imagine this is less so for you, but certainly at Oaktree, you recruited a lot of people.

    9. BGBen Gilbert1:03:06

       Over a thousand employees, right?

    10. DRDavid Rosenthal1:03:07

        So you had to make judgment about other people's judgment. How did you do that?

    11. HMHoward Marks1:03:11

        You know, back when I was an analyst in the early seventies, I followed Xerox, and one of the portfolio managers said to me, "Who's the best Wall Street analyst on Xerox, sell side?" And I said, "Well, the one who agrees with me most is so-and-so. Isn't that our definition of who's the smartest?" No, but the truth is, we look for smart people. We look for what Nancy, my wife, calls smart eyes. Exceptional people who get things maybe a little better than others, who understand what's important and what's not, who can go beyond the readily available quantitative information. And look, it's very simple. Like with oil, the cure for low oil prices is low oil prices. Some people get that intuitively, some people don't understand it. You have to get the people who get it intuitively. But I think also, very importantly, we look for team players. We look for people who can work and exchange ideas, and can do well with ideas from their peers, from their lessers, from their superiors, managers, subordinates, you know, and throw it all together. We don't want the lone wolf. We don't want the you-eat-what-you-kill kind of person, and we don't pay people on the basis of their one year's quantitative performance as an individual, and we don't want people to work that way.

    12. SPSpeaker1:04:32

        I definitely can't attest to having nearly as much experience in recruiting. We've added a whole three people to our team now, but I do think that the vast majority of the venture investment decision-making is about understanding founders and having a sense for founders. I mean, again, after talking about all this business analysis stuff, we firmly believe that the vast, vast majority of the investment consideration is backing the right people. And so what you're doing, I think, every day, every week, is evaluating people, and so you have to do that in the same way. And so I think, first of all, when you hear a venture pitch, so many of them that we all hear are like, you know, the person gets on, and it's like: Here's where I went to school, here's where I worked, and then I worked here, and now I'm doing this, and let me tell you what I'm doing. And I sort of say, "No, no, no, let's stop. I wanna spend a lot of time understanding you." And I think the real way to suss out judgment is by going through the person's story and background, and understanding why they made decisions, 'cause you can sort of fake your way through prospective things. And when I, and I'm sure you guys, were recruiting out of school, you know, there was the Vault Guide for finance interviews-

    13. DRDavid Rosenthal1:05:44

        Oh, yeah

    14. SPSpeaker1:05:44

        ... and you could memorize every single answer about how you would do this and how you would do that, and whatever.

    15. BGBen Gilbert1:05:49

        In CS, there was a book called Programming Interviews Exposed, written by three ex-Microsoft guys, and it was truly the way to whiz through any of these.

    16. SPSpeaker1:05:56

        Yeah, but you can't fake what you've done. And so if you really dive into what people have done and why, and if they've made decisions based on their own judgment, and if they've learned and evolved, and if they've made decisions based on first principles, and were willing to go against the herd, and were willing to do things because they're passionate, and if their idea comes from specific knowledge of a real problem and a real deep understanding, I think you can evaluate judgment very well based on that. And so I think that translates into hiring, too. You know, really understanding what people have done in the past and why, and then I think you can also test for specific skills in the hiring process. I mean, I think you wanna understand why you wanna hire someone, and then I think you can test against those things in real ways.

    17. BGBen Gilbert1:06:45

        ... It's funny, on the founders thing, I was having a conversation with my dad about a potential angel investment recently, and he was like: "I know people always say the founder's the most important, but what is your view of what that actually means?" And I sort of just barfed out this answer. Howard, sounds like your earlier story. It just came to you, and I was like: Are they a weirdo? And in particular, are they a weirdo at something where they're four standard deviations from the mean at that thing? And it could kinda be anything, but if this person can't be in the middle of the distribution at everything, or else the startup will never be successful.

    18. SPSpeaker1:07:20

        Yeah, well, I think what's interesting also is that there are so many ways to succeed by being amazingly good at the conventional thing, by being the best at going through the map or following the map or whatever, and sort of hacking whatever the process is that everyone's done before you. But with startups, there's not much of a map. I mean, there might be some general principles, but in any given area, you're doing what you're doing for the first time, or if someone else is doing it, you're trying to do it differently and better and whatever. So you have to be able to think for yourself, and you have to have real conviction in, in yourself. And so I think to your point, the people who are more unconventional are people who are willing to do things based on what they think is right for them and their own views, versus just being the best at what's conventional.

    19. HMHoward Marks1:08:07

        You know, my last memo came out a couple weeks ago, was called I Beg to Differ, and it was all about the need to be different. And it's exactly what you're saying. The path to exceptionality cannot come through doing what everybody else does. And the advantage of the things we do, especially Andrew does, that we've been discussing, is the fact that there is no clear roadmap. There's no simple algorithm which will produce a consistently correct outcome. But we're dealing with challenging concepts here, and the person who sees differently and better is the one who's gonna win. And David Swensen, who ran the endowment at Yale, used to talk about the need to do things that are uncomfortably idiosyncratic. You have to be idiosyncratic to split tacks and to win, and for many people, it'll be uncomfortable because they'll be out of step with so-called common sense, but you gotta do it anyway.

    20. SPSpeaker1:09:10

        One way that I sorta intuit for myself about this point, about why founders are everything, sort of the question I guess your dad asked, is think of the best startup idea you could possibly imagine. I don't know, someone gave you Google's PageRank algorithm.

    21. BGBen Gilbert1:09:25

        That's literally what I was thinking of, too. [chuckles]

    22. SPSpeaker1:09:27

        And then imagine someone from your life that's mediocre or maybe better than mediocre or an A- or a B+.

    23. BGBen Gilbert1:09:34

        Or even talented at conventional things.

    24. SPSpeaker1:09:36

        Yeah. What are the odds that that person would have built Google?

    25. BGBen Gilbert1:09:39

        Zero.

    26. SPSpeaker1:09:40

        Zero, right? And that's because, number one, it's hard to build a company, even if you have a great idea, and execute on all the things you have to execute. But number two, if you're doing something well, other smart people are gonna be like, "Hey, there's a lot of value to capture here. I'm gonna go compete." So not only are you gonna have to build your company, but you're gonna have to out-compete everyone else. And I just think it takes exceptional people who can exhibit exceptional judgment, who can attract and retain other exceptional people, and all the things that go into being a great founder to build those sorts of things.

    27. BGBen Gilbert1:10:15

        For our next sponsor, it's Brex, and last episode, we introduced you to the new Brex: corporate cards and spend management that have zero receipt chasing, but with one hundred percent compliance in over one hundred countries. Okay, so here's why I'm calling it the new Brex. As many of you know, Brex launched in 2017 as that super simple to use corporate card. They later added a cash management account that was interest-bearing, venture debt, and financial modeling tools. But here we are in 2022, and Brex has expanded into the next frontier of spend management software. So what is that? Well, if you've submitted an expense report in your life, you're familiar with the long and tedious process of submitting for approval, justifying it, categorizing each expense, et cetera.

    28. SPSpeaker1:11:00

        Oh, I gotta wait for Ben to approve my expenses all the time. [laughing] It's terrible.

    29. BGBen Gilbert1:11:04

        You're probably also very much aware that the legacy tools are not fantastic, and there could be something much, much better. Well, Brex realized it could fix a lot of this, since it's also your corporate card. There's really nice ways to improve the UX by sharing data across both of those systems. Since they're now tackling bigger companies and not just startups, they realized they could go a step further.

    30. SPSpeaker1:11:25

        So if you've spent time at startups and big companies, you know that as companies grow, they take on more people, processes, and systems, and unfortunately, with that comes more overhead and more bureaucracy. Plus, today, all of those employees are likely to be living and working all around the world, adding an even bigger challenge. So Brex has built spend management software that enables big companies to do everything necessary to support lots of people globally and drive one hundred percent compliance at scale. But even better, it also enables them to preserve the trust and ease of use of the systems that keep startups moving fast.
13. 1:17:05 – 1:34:51

    Selling vs. holding: opportunity cost, “unbuying,” and the compounding certificate

    1. DRDavid Rosenthal1:17:05

       Well, and other big topic I wanted to cover from the memo is just that. This is the perfect transition, selling. You each brought very different perspectives to the topic of selling.

    2. HMHoward Marks1:17:18

       That was our most lively interchange, I would say.

    3. DRDavid Rosenthal1:17:22

       I'd love to hear from each of you what your thoughts were on selling before coming together and then how they changed.

    4. HMHoward Marks1:17:30

       So as you probably know, I wrote a memo in January of this year, I think it was, called Selling Out, and I observed that a lot is written about when to buy securities. It's a little bit about market timing, but not much about when to sell securities, and of course, it's half the equation. And yes, my tendency, coming from the conservative background that I came from, was to, uh, what would you say? Take some money off the table, take some of the profits. I had this terribly misguided feeling that if you sell half, you can't be all wrong. But of course, I wasn't dealing with securities with the potential of what Andrew deals with. But anyway, for people whose parents were adults during the Depression, who were brought up with, "Don't put all your eggs in one basket, save for a rainy day," that kind of thing, you take some profits. You know? If you're of a more optimistic bent, the timing of your birth was more fortuitous, you never heard those things, and so maybe it's easier to hold for the long run. You know, I wrote a memo on liquidity about eight years ago, and Andrew gave me a great quote for that memo, the greatest quote, and he said, "If you see a chart of a stock that's been up for twenty-five years, and you say, 'Man, I wish I owned that stock,' think of all the days you would've had to talk yourself out of selling." So in Selling Out, I told the story of Amazon, that I think it was eighty-nine in ninety-nine, and then it fell to six in oh-one. And let's say you were fortunate enough to buy it at six. Would you start selling at twelve? Well, most people would start selling at twelve. It's just a double. Would you sell at sixty, ten X?

    5. DRDavid Rosenthal1:19:10

       Ten X.

    6. HMHoward Marks1:19:11

       What about six hundred, hundred X? You know, and then it went up to thirty-three hundred.... So this idea that as soon as there's a profit, you should take some of it off the table seems like a huge mistake. Charlie Munger says, "You only get four good ideas in your life, and you gotta get the most out of them." What I said in the memo, selling out half facetiously, but only half, is that there are two reasons people sell things: 'cause they're up and 'cause they're down.

    7. SPSpeaker1:19:40

       [chuckles]

    8. HMHoward Marks1:19:40

       If something goes up, they say, "I better sell some before the profit evaporates, and I'll feel like a jerk." If it goes down, they say, "I better sell some before it goes down more, and I'll feel like a jerk." In other words-

    9. SPSpeaker1:19:53

       And that has nothing to do with the business.

    10. HMHoward Marks1:19:55

        Right, or the thing you're selling. And a huge amount of people's preoccupation, in my opinion, is with avoiding regret, embarrassment in front of others, regret themselves.

    11. SPSpeaker1:20:08

        My view on selling is consistent with the general way that we talked about the value and sort of growth dichotomy, which is that what matters in investing is really deeply understanding what you own and why you are making the investment and what you're playing for. And when it comes down to making a decision about selling or not, what matters is understanding those sorts of things and then also understanding your opportunity cost. I mean, your money has to go somewhere, and so you have to think about decisions relative to each other. But the point of the memo was that, first of all, most people don't think about opportunity costs, and most conversations about selling are sort of academic, you know, thinking about, should you sell this investment in a vacuum or whatever? But outside of that, most people make selling decisions based on price action, if it's up or if it's down or whatever. And most people confuse price action with fundamentals. Oh, this company has been up and to the right for years, and so it must be a compounder or it must be compounding value intrinsically. So I think you should make your selling decision based on why you made the investment and how things have evolved and what you could be playing for. Take a simple example. Let's say you can buy a dollar for fifty cents. Well, that's obviously a good thing to do, but if it reprices to a dollar, you should probably sell it because there's no more in the investment. However, let's say there's a contract where you can get a dollar, but then every year, the value of what you can claim compounds by twenty percent, and you can buy that contract for fifty cents. Well, you can buy it for fifty cents. Let's say it goes to a dollar. You doubled your money, but you shouldn't sell it. Next year, it'll compound value to $1.20. So if it goes up to $1.20, you're up twenty percent. You still shouldn't sell it. The next year, it'll go to one forty-four. Let's say instead of one forty-four, it goes to one sixty. You probably still shouldn't sell it, even though it's, quote-unquote, overvalued, because the right to compound at almost twenty percent in perpetuity is extremely valuable, and so on and so forth. So you shouldn't just let price action alone determine what you should do. And then I think the other thing to note is, number one, things that can do that, these sort of compounding certificates, you know, in the form of companies, are extremely rare but extremely, extremely valuable. I mean, if you just look at a DCF, if you really have something that can compound cash flows for twenty-five years, you're up a hundred X. So if you can do that for fifty years, you're up ten thousand X. So it's really, really hard to price that in in the near term. And so number one, if you can really believe you found something like that, something crazy has to happen for you to sell it. I mean, the price can... Of course, as my dad said, anything can be priced too high. But I mean, really recognizing what you have is really important, and also recognizing that we have a huge tendency to wanna act, and so sitting idle on something for decades and decades is really hard. But then contrarily, those things are extremely rare, so most things are not that. And if something appears where the price appears to be compounding and you get comfortable that it is one of those things, you better be sure that it is, and you better know why you own it. I just think it's a nuanced conversation that comes back to, Well, why do you own what you own? What are you playing for? You know, what's your confidence in the future? And then if I sold this, where could I put the money?

    12. HMHoward Marks1:23:38

        You know, it all comes down to maybe we can think better about the selling decision if we rebrand it and we call it the decision to unbuy. The thought process should be the opposite of the buying decision and not some chicken stuff about being afraid to lose. But, you know, I think Andrew points out a, a very important thing, that in the olden days, you look at the classic value investments, and I did some of this, you get this chance to buy the dollars for fifty cents, and that's a great thing. But once it hits a dollar, you gotta sell it. You gotta find another dollar for fifty cents. The concept of you buy a dollar for fifty cents, and then it goes on to be worth two and four and eight and sixteen.

    13. SPSpeaker1:24:20

        Cigar butts don't go to eight bucks.

    14. HMHoward Marks1:24:21

        Yeah, right. And remember, I was a credit investor, and the bond investor generally does not think in terms of getting more than a hundred cents on the dollar.

    15. SPSpeaker1:24:29

        [chuckles]

    16. HMHoward Marks1:24:30

        So when the upside is capped or nonexistent, then obviously taking profits may be somewhat more responsible.

    17. SPSpeaker1:24:39

        And by the way, I mean, venture is an interesting lens to look at this. The truly generational companies, the truly monstrous companies, are extremely few and far between. But when you have them, selling them early is just a colossal mistake.

    18. HMHoward Marks1:24:53

        Oh, disastrous.

    19. SPSpeaker1:24:54

        There are incredibly prolific firms where their reputation is built on a handful of fantastic investments, and I think if you probably looked at the PAs of the most famous venture investors of all time, a huge majority of it is made up of continuing to hold a few things.

    20. HMHoward Marks1:25:12

        Oh, I have a great story on this. I won't out the firm. It could be one of several firms, but I know that one of the early-ish venture investors in Facebook, after the IPO, they distributed out the shares, and-

    21. BGBen Gilbert1:25:24

        ... among the partnership, most of the general partners relatively quickly liquidated their Facebook shares, but the partner who led the investment was like, "Nah, [laughing] I'm gonna let this ride." And that was a very good decision.

    22. BGBen Gilbert1:25:40

        Well, I wanna start moving us to a close here. I always find that people tend to mostly consume in whatever medium they're currently consuming in. And David and I have played around a lot with, like, should we write? Should we do blog posts? Should we do newsletters? People we know for one hundred percent sure are listening to this podcast, so when I'm pointing them to go check out your memo, I would like to do so in the podcast form. So where can listeners go read the memo that we have mentioned so many times or listen to it?

    23. HMHoward Marks1:26:09

        Well, the memo, and all my memos since nineteen ninety, are available at oaktreecapital.com/insights under the heading of Chairman's Memos. And you can read them all one at a time, in order, and the only thing I can promise you is the price is right, 'cause they're all free.

    24. BGBen Gilbert1:26:29

        When did you start writing the memos?

    25. HMHoward Marks1:26:31

        In nineteen ninety.

    26. BGBen Gilbert1:26:32

        That's a good story, by the way. You should tell that one.

    27. HMHoward Marks1:26:33

        Yeah, I'll tell that story, and it bears a little bit on what we're talking about here. But in nineteen ninety, I went to visit a client in the Midwest who told me that the pension fund he ran for fourteen years was between the twenty-seventh percentile and the forty-seventh percentile every year for fourteen years. So if you say to somebody, "Well, for fourteen years it ranged each year between twenty-seven and forty-seven, what do you think they did for the whole period?" You would say, "Well, probably about thirty-seven, right?" And the answer is fourth. That pension fund was in the fourth percentile of all pension funds for the fourteen years. Why? Because some of the other people shoot themselves in the foot. So that was a lesson in consistency. And then, right around the same time, there was a deep value firm in New York, and they invested very heavily in the banks that year, and the banks did horribly. So the president comes out and he says, "Well, obviously, if you want to be in the top five percent of money managers, you have to be willing to be in the bottom five percent." And the dichotomy between the implications of those two stories really caused me to write the first memo, the juxtaposition. My clients don't hire me to be in the top five percent. I don't care if I'm in the top five percent in any given year. I'm absolutely unwilling to be in the bottom five percent, and I think so are they. So that thing about being willing to be in the bottom five percent sounds to me like a post-justification. But anyway, that's not how I choose to operate, and so it was a great opportunity to write that up. And so I wrote that one in nineteen ninety. I think I wrote another one in ninety-one, then I wrote one in ninety-three. There was no regularity, and one of the things I like to mention, David, is that for the first ten years, I never had a response.

    28. BGBen Gilbert1:28:20

        [chuckles] Wow!

    29. HMHoward Marks1:28:22

        Not only did nobody say it was good, nobody ever said, "I got it."

    30. BGBen Gilbert1:28:26

        And these were mail? This was pre-fax.
14. 1:25:40 – 1:34:51

    Where to find the memo, TQ contact info, and closing thoughts on social media

    1. BGBen Gilbert1:25:40

       Well, I wanna start moving us to a close here. I always find that people tend to mostly consume in whatever medium they're currently consuming in. And David and I have played around a lot with, like, should we write? Should we do blog posts? Should we do newsletters? People we know for one hundred percent sure are listening to this podcast, so when I'm pointing them to go check out your memo, I would like to do so in the podcast form. So where can listeners go read the memo that we have mentioned so many times or listen to it?

    2. HMHoward Marks1:26:09

       Well, the memo, and all my memos since nineteen ninety, are available at oaktreecapital.com/insights under the heading of Chairman's Memos. And you can read them all one at a time, in order, and the only thing I can promise you is the price is right, 'cause they're all free.

    3. BGBen Gilbert1:26:29

       When did you start writing the memos?

    4. HMHoward Marks1:26:31

       In nineteen ninety.

    5. BGBen Gilbert1:26:32

       That's a good story, by the way. You should tell that one.

    6. HMHoward Marks1:26:33

       Yeah, I'll tell that story, and it bears a little bit on what we're talking about here. But in nineteen ninety, I went to visit a client in the Midwest who told me that the pension fund he ran for fourteen years was between the twenty-seventh percentile and the forty-seventh percentile every year for fourteen years. So if you say to somebody, "Well, for fourteen years it ranged each year between twenty-seven and forty-seven, what do you think they did for the whole period?" You would say, "Well, probably about thirty-seven, right?" And the answer is fourth. That pension fund was in the fourth percentile of all pension funds for the fourteen years. Why? Because some of the other people shoot themselves in the foot. So that was a lesson in consistency. And then, right around the same time, there was a deep value firm in New York, and they invested very heavily in the banks that year, and the banks did horribly. So the president comes out and he says, "Well, obviously, if you want to be in the top five percent of money managers, you have to be willing to be in the bottom five percent." And the dichotomy between the implications of those two stories really caused me to write the first memo, the juxtaposition. My clients don't hire me to be in the top five percent. I don't care if I'm in the top five percent in any given year. I'm absolutely unwilling to be in the bottom five percent, and I think so are they. So that thing about being willing to be in the bottom five percent sounds to me like a post-justification. But anyway, that's not how I choose to operate, and so it was a great opportunity to write that up. And so I wrote that one in nineteen ninety. I think I wrote another one in ninety-one, then I wrote one in ninety-three. There was no regularity, and one of the things I like to mention, David, is that for the first ten years, I never had a response.

    7. BGBen Gilbert1:28:20

       [chuckles] Wow!

    8. HMHoward Marks1:28:22

       Not only did nobody say it was good, nobody ever said, "I got it."

    9. BGBen Gilbert1:28:26

       And these were mail? This was pre-fax.

    10. HMHoward Marks1:28:29

        This was the old days of mail, but they only went to our clients, so probably a few hundred. Now it's a few hundred thousand by the subscriptions. And by the way, you mentioned podcasts. These things are also available in podcast form under something called The Memo, originally enough.

    11. BGBen Gilbert1:28:46

        [chuckles] In any podcast player, we'll link to it.

    12. HMHoward Marks1:28:49

        So if you like to listen, you can listen. I like to read.

    13. BGBen Gilbert1:28:53

        Ah, so it was a sporadic thing?

    14. HMHoward Marks1:28:55

        Oh, yeah. There was no plan.

    15. BGBen Gilbert1:28:58

        Well, the other thing that I think is great is, I mean, you wrote it with a lot of consistency or with some consistency, but you got no feedback whatsoever, but you kept writing it.

    16. HMHoward Marks1:29:07

        Well, I was doing it for myself.

    17. BGBen Gilbert1:29:09

        The dam broke one day, and it ultimately picked up steam.

    18. HMHoward Marks1:29:12

        Well, I wrote one on the first day of two thousand called bubble.com. [laughing]

    19. BGBen Gilbert1:29:17

        [laughing]

    20. BGBen Gilbert1:29:17

        [laughing]

    21. HMHoward Marks1:29:17

        And that one had two advantages: number one, it was correct, and number two, it was correct quickly. Because if you do something correct, but it turns out to be correct six years later, nobody remembers you. But this one, of course, the tech bubble crapped out in mid-2000, and so I like to say that after ten years, I became an overnight success.

    22. BGBen Gilbert1:29:38

        Were you posting them publicly always?

    23. HMHoward Marks1:29:41

        No. I think we probably started posting probably around 2000, maybe when we got on the internet, which was, of course, a little earlier. But when we started Oaktree, they gave me a computer. I said, "I only want Excel and Word,"-

    24. BGBen Gilbert1:29:55

        [chuckles]

    25. HMHoward Marks1:29:55

        -and that's all I had, but that was ninety-five. Then I think we moved in ninety-eight, and I said, "Okay, I'll take that other stuff." For the life of me, I couldn't figure out the difference between Explorer and email, but I got there eventually.

    26. BGBen Gilbert1:30:10

        This explains why Andrew is the tech investor.

    27. HMHoward Marks1:30:12

        Exactly, and why he had to fix my computer.

    28. BGBen Gilbert1:30:15

        [chuckles] If you were to graph the committed capital from clients by year, is there a correlation with the distribution of how widely your letters go out once you started posting them publicly and committed capital from clients? Did that meaningfully help the firm marketing?

    29. HMHoward Marks1:30:33

        Well, you never know.

    30. BGBen Gilbert1:30:34

        One thing that's interesting to that point, though, is that you've dramatically limited your fund sizes in certain periods and then raised them a lot in other periods.

Episode duration: 1:34:51