Howard Marks: AI, Debt vs Equity & The Next 40 Years Of Investing | Nikhil Kamath | WTF is Finance?

1. 0:00 – 2:05

   Introduction

   1. SPSpeaker0:00

      [upbeat music] [water drops] [pen writes] [dramatic music]

   2. NKNikhil Kamath0:52

      Could you also say that indexation and ETFs have taken over because the markets have been in an uptrend?

   3. HMHoward Marks1:01

      My answer is that indexation has taken over as it has, not because it's so good, but because active management was so bad.

   4. NKNikhil Kamath1:09

      'Cause a lot of the distressed bonds that you are in, is the chance of a downside zero? So I'll give you a little bit of a background. So most of these are, like, conversations. I-

   5. HMHoward Marks1:37

      Most of-

   6. NKNikhil Kamath1:38

      The interviews that we do are conversations. They're fairly free-flowing, and the audience we cater to are entrepreneurs of Indian origin-

   7. HMHoward Marks1:48

      Mm

   8. NKNikhil Kamath1:49

      ... who are around the age of 25 to 30.

   9. HMHoward Marks1:51

      Mm-hmm.

   10. NKNikhil Kamath1:52

       Everyone's looking to invest in the market, trade the market, start a business, building something from the bottom up.

   11. HMHoward Marks2:01

       Right.

   12. NKNikhil Kamath2:01

       So we are speaking to them. So most of today is around that.

2. 2:05 – 8:10

   From Queens to Wharton beginnings

   1. NKNikhil Kamath2:05

      Can we start with a little bit about you and, uh-

   2. HMHoward Marks2:09

      Yeah

   3. NKNikhil Kamath2:09

      ... how your own journey began from Queens to Wall Street? Maybe like a, how do you describe your story in your words? Your story, your origin story.

   4. HMHoward Marks2:22

      Well, um, you know, I was born in Queens, New York, as you know.

   5. NKNikhil Kamath2:29

      Mm-hmm.

   6. HMHoward Marks2:29

      One of the, w- one of what are called the outer boroughs. Uh, middle-class upbringing.

   7. NKNikhil Kamath2:35

      Mm-hmm.

   8. HMHoward Marks2:36

      Uh, neither parent, uh, went to college. Um, but my father was a very intelligent man and, and, and an accountant.

   9. NKNikhil Kamath2:48

      Mm-hmm.

   10. HMHoward Marks2:49

       And I think he did his job well, and so we lived a, uh, comfortable middle-class, uh, existence.

   11. NKNikhil Kamath2:58

       Mm-hmm.

   12. HMHoward Marks2:59

       Um, I went to the public schools of New York at a time when you could get a good education in the public schools of New York, uh, and I think I got one. Uh, and, uh, oddly enough, uh, uh, ended up taking courses in business law and then accounting-

   13. NKNikhil Kamath3:18

       Mm-hmm

   14. HMHoward Marks3:18

       ... in high school.

   15. NKNikhil Kamath3:20

       Mm-hmm.

   16. HMHoward Marks3:20

       And, uh, really connected with accounting-

   17. NKNikhil Kamath3:23

       Mm-hmm

   18. HMHoward Marks3:23

       ... with the orderliness and the symmetry. Uh, it, it, it just clicked for me. So I decided to go to, uh, a business school. I applied to Wharton as the best business school for undergraduates in America. Uh, I was told I wouldn't get in, but I did. Uh, went to Wharton as an accounting student, switched my major to finance.

   19. NKNikhil Kamath3:45

       Mm-hmm.

   20. HMHoward Marks3:47

       Uh, uh, then went on to get a, an MBA, uh, in, in accounting from the University of Chicago Business School. Uh, [clears throat] and, uh, between years of business school, I had a job in the investment research department of Citibank. Liked it, went back.

   21. NKNikhil Kamath4:05

       Hmm.

   22. HMHoward Marks4:05

       That, that's my, that's my background.

   23. NKNikhil Kamath4:08

       Is Wharton, would you s- say, still one of the better schools?

   24. HMHoward Marks4:12

       No, I think it... I, I, I, I have no reason to believe it's not still the best undergraduate business school. There are other good graduate schools-

   25. NKNikhil Kamath4:20

       Mm-hmm

   26. HMHoward Marks4:21

       ... uh, that are, uh, uh, very competitive with Wharton. Um, uh, I, I'm not, I'm no expert. I'm gonna say that 100 times on this tape.

   27. NKNikhil Kamath4:33

       Mm-hmm.

   28. HMHoward Marks4:33

       Uh, but, uh, I believe that Wharton is still the best undergraduate business school.

   29. NKNikhil Kamath4:38

       And you studied Japanese literature at Wharton?

   30. HMHoward Marks4:42

       Yes. Uh, when I went to Wharton, uh, there were two very enlightened requirements.
3. 8:10 – 15:17

   Mujo and independence of events

   1. NKNikhil Kamath8:10

      the sixth day.

   2. HMHoward Marks8:10

      Well, I mean-

   3. NKNikhil Kamath8:11

      Do you believe in game theory?

   4. HMHoward Marks8:12

      And whether that may not be precisely true, but, uh, uh, but I'm a big believer in, in the independence of events, and I think that that's what Mujo is about-

   5. NKNikhil Kamath8:22

      Mm-hmm

   6. HMHoward Marks8:22

      ... independence of events. So, you know, if you flip ten q-- uh, a coin ten times, better example coin than rain-

   7. NKNikhil Kamath8:30

      Mm-hmm, mm-hmm

   8. HMHoward Marks8:30

      ... 'cause rain there are some physical properties at work, but, uh, if you flip a coin ten times and you get ten heads, the probability of heads on the eleventh flip is still fifty-fifty, 'cause the, 'cause the trials are independent.

   9. NKNikhil Kamath8:45

      Do you believe in game theory?

   10. HMHoward Marks8:47

       In?

   11. NKNikhil Kamath8:47

       Game theory.

   12. HMHoward Marks8:49

       Uh, w- well, I believe that, uh, I believe that, uh, it, you can strategize-

   13. NKNikhil Kamath8:57

       Hmm

   14. HMHoward Marks8:57

       ... and you can, uh, figure out, uh, which action has the highest expected payoff-

   15. NKNikhil Kamath9:05

       Mm-hmm

   16. HMHoward Marks9:05

       ... or the highest maximum potential payoff-

   17. NKNikhil Kamath9:10

       Mm-hmm

   18. HMHoward Marks9:10

       ... or the least probability of a really bad payoff.

   19. NKNikhil Kamath9:15

       Mm-hmm.

   20. HMHoward Marks9:16

       And you can perhaps even strategize about what your, uh, opponent is gonna do.

   21. NKNikhil Kamath9:22

       Mm-hmm.

   22. HMHoward Marks9:23

       I, so I, I believe in strategy. I don't know if that's exactly the same as game theory-

   23. NKNikhil Kamath9:28

       Mm-hmm

   24. HMHoward Marks9:28

       ... but I, I think, um, I think that, you know, uh, I, a-as I've suggested in my comments so far, what I really don't believe in is predictions. And, uh, I believe that, uh, uh, given human nature and the, uh, dislike for ambiguity, uh, people pursue, uh, predictions so that they can understand what world they're gonna be operating in and, and deal with it accordingly. Uh, and if they do this to excess, then they theorize about a world, uh, they'll be operating in, uh, which is not as likely to obtain as they think, which means that their predictions can be misleading.

   25. NKNikhil Kamath10:32

       Mm-hmm.

   26. HMHoward Marks10:33

       And, um, about twenty-odd years ago, I wrote a memo called You Can Predict... You Can't Predict, You Can Prepare, and that's really the essence. And that, that, you can tell that that comes directly from the understanding of Mujo. Um, we can't predict the future. We can't control the future. But we can prepare for the future. Now, that raises an interesting contradiction in terms. If you can't predict what the future will be, how can you prepare for it? And the answer is you can prepare for a future which is unpredictable. So you can, uh, in investing, you can put together a portfolio rather than one that will produce maximum success if a certain future unfolds. You can put together a portfolio which will do fine if several, any of several futures unfold, and not too terribly if a bunch of other futures unfold. Now, you can't prepare simultaneously for the, uh, positive tail and the negative tail.

   27. NKNikhil Kamath11:47

       Mm-hmm.

   28. HMHoward Marks11:48

       If you, if you prepare for a, a total disaster, then you're unprepared for a great future. If you prepare for enormous success, and you're gonna maximize your, uh, outcome should this success unfold, then you're probably un, totally unprepared for a very negative But i- you can prepare if you, i- if you, uh, sub-optimize for a number of possible outcomes in the middle of the probability distribution.

   29. NKNikhil Kamath12:25

       Isn't that a bit contrarian to the coin example? You said if you toss a coin and it comes heads 10 times-

   30. HMHoward Marks12:34

       Yes
4. 15:17 – 22:09

   Why cycles exist in markets

   1. HMHoward Marks15:17

      In other words, I wrote a book about, uh, cycles-

   2. NKNikhil Kamath15:20

      Mm-hmm

   3. HMHoward Marks15:20

      ... and that's the one where I refer to my experience tr- traveling in India. And, uh, cycles are induced primarily by behavior, by, uh, you know, uh, uh, the upcycle is exaggerating, overgeneralizing. The upcycle, the... There's a trend line, let's say it's GDP growth.

   4. NKNikhil Kamath15:48

      Mm-hmm.

   5. HMHoward Marks15:49

      There's a trend line. But sometimes, uh, the economy grows more than that. Why? Largely, I think, because of optimism, because, uh, people are optimistic, so they spend a lot of money. Producers are optimistic about demand for their product, so they build new factories and hire labor and buy machinery, and the sum of these things produces a period of above-trend growth.

   6. NKNikhil Kamath16:21

      Mm-hmm.

   7. HMHoward Marks16:23

      But then, when producers have more than prepared for the coming growth and consumers have been sated by consumption, then the, then things will ease off, and maybe i- it results in a period of below-average growth. So, uh, you know, I, I wrote the book, uh, I was about two-thirds through writing the book, and I've been studying cycles for almost sixty years now, living through cycles. And, uh, I said to myself, "Just why do we have cycles? Why doesn't GDP, if, if the average growth in GDP is two, why isn't it always two? Why, why is it three or four or one or zero or minus one?" Uh, and the answer is excesses and corrections. And then you go to a negative, which is an excess, and then it corrects back to the trend line. So rather than thinking of cycles as, as ups and downs, which I think most people do, think of them as excesses and corrections, excesses and corrections, fluctuations around the trend line. I mean, y- this is most easily seen in, in, in the stock market, for example. You look at the S&P 500. The S&P 500 has returned about ten percent a year on average for the last hundred years.

   8. NKNikhil Kamath17:59

      But the constituents of the S&P have changed many times in that period.

   9. HMHoward Marks18:03

      Yes, but the, but the average rate of return doesn't change.

   10. NKNikhil Kamath18:06

       Average rate of return. I don't know about the S&P. I know in India the indices, I'm a stock investor.

   11. HMHoward Marks18:11

       Yes.

   12. NKNikhil Kamath18:11

       That's my full-time job.

   13. HMHoward Marks18:13

       Yes.

   14. NKNikhil Kamath18:14

       We have returned about eleven percent over the last couple of decades. But we have depreciation of currency, which is about 4, 5% a year. So I'm assuming the S&P would have returned 6%, if you were to ask me to wager a guess. But I don't think it's a fair benchmark because the companies in the S&P, like the indexes back home, change by virtue of market cap.

   15. HMHoward Marks18:39

       They do. But my point is that the S&P, however constituted, has returned an average of 10% a year for the last hundred years. But, um, not steadily.

   16. NKNikhil Kamath18:58

       Mm-hmm.

   17. HMHoward Marks18:59

       In the '90s, it returned 20% a year, and in the aughts it returned zero per year. So certainly not steady. And not only is that an interesting phenomenon to think about, but even more so the fact that the return on the S&P, which averages 10, is almost never between 8 and 12.

   18. NKNikhil Kamath19:27

       Hmm.

   19. HMHoward Marks19:28

       This is a very interesting datum.

   20. NKNikhil Kamath19:30

       Mm-hmm.

   21. HMHoward Marks19:30

       Uh, uh, why is it that the norm is not the average?

   22. NKNikhil Kamath19:42

       Greed and fear.

   23. HMHoward Marks19:44

       Excess and correction.

   24. NKNikhil Kamath19:46

       Do you think-

   25. HMHoward Marks19:47

       Excess of optimism, correction, excess of pex- pessimism.

   26. NKNikhil Kamath19:52

       Can I ask you a s- a small digression in a question?

   27. HMHoward Marks19:57

       Yes.

   28. NKNikhil Kamath19:57

       If humans were no longer in the picture-

   29. HMHoward Marks19:59

       Yes

   30. NKNikhil Kamath19:59

       ... and AI models are trading in the market-
5. 22:09 – 28:38

   Pandemic, recessions, and recovery age

   1. HMHoward Marks22:09

      uh, when you look at the economy, people think of the age of the recovery. So the rec- the economic recovery is two years older. The, the, the, the bull market in stocks went on another almost two years. So, um, I would, I would say that the, uh, y- you see, it, it, first of all, as to the economy, it's very, very hard to date or talk about the age of this cycle because we had the pandemic-

   2. NKNikhil Kamath22:38

      Mm-hmm

   3. HMHoward Marks22:39

      ... where we did something unique. We closed the world economy-

   4. NKNikhil Kamath22:44

      Mm-hmm

   5. HMHoward Marks22:44

      ... to produce the spread, to reduce the spread of the disease.

   6. NKNikhil Kamath22:48

      Mm-hmm.

   7. HMHoward Marks22:48

      And so that interfered with the normal workings.

   8. NKNikhil Kamath22:52

      Mm-hmm.

   9. HMHoward Marks22:53

      And it, uh, according to the people who make these decisions, it produced a recession. It was in a very unusual recession because it was only one quarter. I always thought an, a recession was two quarters of negative GDP growth. Uh, and of course it didn't occur for the normal reason of excess optimism leading to a correction. It was man-made.

   10. NKNikhil Kamath23:17

       Mm-hmm.

   11. HMHoward Marks23:19

       And was readily corrected.

   12. NKNikhil Kamath23:21

       Mm-hmm.

   13. HMHoward Marks23:21

       So the second quarter of 2020 was the worst quarter in the history of the world, uh, uh, for, for US, for GDP. Uh, and then the third quarter was the best.

   14. NKNikhil Kamath23:31

       Mm-hmm.

   15. HMHoward Marks23:32

       So was it really a recession in the, in the functional terms of determining cyclicality, uh, or, or just some noise? Uh, and-

   16. NKNikhil Kamath23:45

       Can I ask another question here? I would say GDP, if I were to consider it the total produce going into the economy-

   17. HMHoward Marks23:54

       Yeah

   18. NKNikhil Kamath23:54

       ... and consumers consume as much as we can, I could argue that a recession is truly when there is more production in an economy and the consumption is organically lesser. So do you think GDP is a good benchmark to figure out when there is a recession or not? Because the consumers went away then artificially.

   19. HMHoward Marks24:19

       Well, I think it's, I think, um- I think your definition of recession isn't, isn't right because what you said was, uh, there's more production. But that's not-

   20. NKNikhil Kamath24:31

       Less consumption

   21. HMHoward Marks24:32

       ... less consumption. That is, that's the main element-

   22. NKNikhil Kamath24:35

       Mm-hmm

   23. HMHoward Marks24:35

       ... of, of, uh, of a recession, in my opinion. Uh, uh, manufacturers are always happy to produce goods to meet demand. Uh, the recession, it means primarily a reduction of demand so that, uh, uh, uh, which, which, uh, discourages manufacturers from producing, and the reduced production is really what causes the recession. Fewer people are, are at work, uh, et cetera. Fewer goods are produced and consumed.

   24. NKNikhil Kamath25:12

       So in the pa- pandemic, production went down, but the demand for consumption did not actually go down, but just that the markets were shut for a period of time. 'Cause when they opened, people really consumed.

   25. HMHoward Marks25:22

       Well, I mean, yes, the, the underlying demand didn't go down, but people, I mean, uh, in the sense that people would have liked to have parties-

   26. NKNikhil Kamath25:34

       Mm-hmm

   27. HMHoward Marks25:35

       ... they just weren't allowed to have parties. So the demand, the, the psychological demand for a party was there, but the economic demand for rental halls and bands and food and, uh, party dresses and things like that, uh, didn't exist. Uh, so that's, that, so, but this is why I say that the GDP was kind of artificially depressed, uh, by a decision of government-

   28. NKNikhil Kamath26:08

       Mm-hmm

   29. HMHoward Marks26:08

       ... really. So, so when we say that, well, how old is this recovery? Was that a real recession? If that was a recession, then this recovery is now six years old. If that wasn't a recession-

   30. NKNikhil Kamath26:25

       Twenty-
6. 28:38 – 36:08

   Where we are today

   1. HMHoward Marks28:38

      I think it's, uh, it's gone on a good while, and, uh, it's, uh, it's not nascent. It's not adolescent. Uh, it's, but it's also not, uh, uh, uh, geriatric. I think it's in middle age, uh, and, and I think, I think the US economy, if that's what you're talking about, is healthy and, and doing quite well. Uh, if, if the thing that presages a, a downturn is excesses to the upside, you don't find too many of those, you know? Uh, when I go to a city, I, I look for construction cranes in the sky to tell me if there's a building boom. Most booms are followed at some point by busts. I don't see it in most of our cities. Uh, I don't see, uh, inventories growing. Uh, inventory growth is, uh, uh, in- inventories grow for two reasons. In times of, uh, s- weak consumption, because people don't buy the things that manufacturers produce, in times of, of, of, of strong consumption, uh, inventories grow b- because manufacturers amp up production to get ahead of some, uh, anticipated surge in demand, and those often prese- presage downturns when they turn out not to be warranted. I don't see that.

   2. NKNikhil Kamath30:12

      In some sectors, do you?

   3. HMHoward Marks30:15

      Well, I mean, maybe. I, I don't, I don't look at the data finely enough to tell you that.

   4. NKNikhil Kamath30:20

      In AI, maybe?

   5. HMHoward Marks30:21

      Pardon me?

   6. NKNikhil Kamath30:22

      In AI, maybe?

   7. HMHoward Marks30:24

      Uh, well of course we don't talk about inventory in AI, but there's certainly a boom in capital investment for AI.

   8. NKNikhil Kamath30:31

      One could say hardware, energy, compute is inventory.

   9. HMHoward Marks30:35

      Yeah. Well, I mean, look, there's massive construction of infrastructure for AI.

   10. NKNikhil Kamath30:41

       Much like buildings.

   11. HMHoward Marks30:43

       Yes, yes.

   12. NKNikhil Kamath30:43

       And Queens.

   13. HMHoward Marks30:44

       Yes. That's right. That, that, well, that is, that is the area that's booming in our economy, and, uh, I need, uh, people who know more about AI than me to tell me whether it's gonna bust. You know, the question is, is all of this con- or, or is some of this construction unwarranted? Um, uh, I don't think anybody can tell us that. We do know, we certainly know that it is an area of, of, uh, of boom.

   14. NKNikhil Kamath31:16

       How do you stay so sharp, Howard, at your age? Like, I have watched a whole bunch of your interviews and read a lot of what you have written over the years. As a stock market investor all my life, uh, I think there's so much I can learn from you. But how do you stay this sharp today?

   15. HMHoward Marks31:37

       Well, I don't think, I don't, I mean... I'm lucky. I have-

   16. NKNikhil Kamath31:42

       Genetically?

   17. HMHoward Marks31:43

       Well, I, I think I'm, I think I'm very lucky genetically.

   18. NKNikhil Kamath31:46

       Okay.

   19. HMHoward Marks31:47

       Yes, because, uh, my dad lived to 101, and he was quite sharp at the end.

   20. NKNikhil Kamath31:52

       Mm-hmm.

   21. HMHoward Marks31:53

       Uh, and, uh, you know, uh, we all face a, a, a decline at some point in time.

   22. NKNikhil Kamath32:02

       Mm-hmm.

   23. HMHoward Marks32:02

       And the only question is, when does this start, and, and, and at what rate does it progress? And, uh, you know, uh, uh, you look at, uh, Warren Buffett, Charlie Munger, some of my, uh, role models and, uh, friends, and, uh, uh, you know, uh, they were or, or are, uh, sharp in their mid-90s and late 90s. So it, it, it's just a... I mean, I didn't... When you say, "How do you stay sharp?" I don't go to the gym and work- Well, I do do a lot of puzzles, and I read, and I read in fields that are not my fields.

   24. NKNikhil Kamath32:43

       Mm.

   25. HMHoward Marks32:43

       I, you know, I th- I'm still trying to gain knowledge and broaden myself. And, uh, I, I guess I make some effort to, uh, to, uh, plow new ground, and the question is, when do you stop doing that? At what age? But, you know, I, my last two memos, uh... I hope your audience knows about the memos.

   26. NKNikhil Kamath33:04

       Yeah.

   27. HMHoward Marks33:04

       But the, I wrote one December 9th and one, I think February 25th, uh, um, about AI.

   28. NKNikhil Kamath33:13

       Mm-hmm.

   29. HMHoward Marks33:14

       And I had to do a lot of learning.

   30. NKNikhil Kamath33:16

       You changed your mind on AI as well.
7. 36:08 – 42:57

   Drifting versus seeing the river

   1. HMHoward Marks36:08

      I imagine there are people who do it intentionally, people who, uh, go to the mountain and m- meditate-

   2. NKNikhil Kamath36:15

      Mm-hmm

   3. HMHoward Marks36:15

      ... and think about it and conclude, "You know what? I really should change my focus at this point in my life."

   4. NKNikhil Kamath36:21

      Have you even to, have you been able to ever pull that off? Like I've been fascinated with the idea of going to a mountain and Arriving at some kind of evolutionary thought in my mind which makes me actively transition into something.

   5. HMHoward Marks36:38

      Mm.

   6. NKNikhil Kamath36:39

      Have you been able to touch that?

   7. HMHoward Marks36:41

      Well, I, I, I, I, I haven't physically gone to the mountain-

   8. NKNikhil Kamath36:45

      Mm-hmm

   9. HMHoward Marks36:45

      ... but I, I think the key, uh... I've do- I've written the first pages of a book.

   10. NKNikhil Kamath36:53

       Mm-hmm.

   11. HMHoward Marks36:53

       Uh, I think the... I think the, the, the key to all of this, to all of life, is to behave thoughtfully with your mind engaged. Not just, uh, let the river take you, but give thought to what's going on, why is it going on, what does it mean, why did it happen, what does it imply for me, what should I do about it? And, uh, it's the... That's, that, that is, I think, going through life with your eyes open, uh, and that's how you can intentionally get to a higher stage in life by doing that. And, and the, the, the, uh, the image that comes back to me is the image of whether you let the river take you or whether you, uh, try to figure out a, a better place to get to and then try to get there.

   12. NKNikhil Kamath38:22

       Maybe once or twice in my life I have felt like I could see the river.

   13. HMHoward Marks38:29

       See-

   14. NKNikhil Kamath38:29

       The river

   15. HMHoward Marks38:30

       ... the river. Yes.

   16. NKNikhil Kamath38:31

       Can you actively?

   17. HMHoward Marks38:33

       Um, I, I think at this stage I, I, I am able to think about this progression constructively. When I think about m- my early decades, not years, decades, and I think about, uh, you know, what I did from, let's say, I would say from the beginning of, let's say, high school-

   18. NKNikhil Kamath39:08

       Mm-hmm

   19. HMHoward Marks39:08

       ... 1960-

   20. NKNikhil Kamath39:09

       Mm-hmm

   21. HMHoward Marks39:09

       ... until starting Oaktree in, in '95.

   22. NKNikhil Kamath39:14

       Mm-hmm.

   23. HMHoward Marks39:16

       So that 35-year period, which took me up to age, uh, let's say 49. I was adrift. I did not make proactive decisions. I let the river take me. I'm very lucky that it took me to some good places-

   24. NKNikhil Kamath39:36

       Mm-hmm

   25. HMHoward Marks39:36

       ... in, in s- in several different aspects of life. But I don't consider... When I look at my behavior, I don't consider it thoughtful or intentional, and so, uh, I'm just lucky that I got to a good place despite my own inattention. Uh, I think that, uh, starting Oaktree was the biggest and maybe first, uh, thing I really did with intention, and, uh, I've, and I've tried to be more intentional since then. But when I look back and I describe, uh, how I selected my career, how I selected my first job, how I decided to go to graduate school, uh, uh, and, and, uh, h- h- and, and, and how I transitioned from, from, uh, uh, the, the equities department, uh, to the bond world, uh, in 1978, uh, in time to, uh, in time to have the benefit of the, uh, birth of high-yield bonds, it was all happenstance, serendipity, coincidence, uh, passivity. You know, I, I, I was not making intentional decisions in that period.

   26. NKNikhil Kamath40:57

       What changed? How did you become intentional from being unintentional when you began Oaktree? Because other peop- people can maybe learn from it. Maybe I can learn how-

   27. HMHoward Marks41:10

       Yeah

   28. NKNikhil Kamath41:10

       ... to catch it.

   29. HMHoward Marks41:11

       Well, the easy answer is that my wife pushed me, uh, uh, to, to, uh, think about it more and to, uh, independently start Oaktree. My partner Bruce Karsh, uh, uh, and I d- did it together. He, he... So his participation, uh, encouraged mine. Uh-

   30. NKNikhil Kamath41:38

       But-
8. 42:57 – 49:45

   Oak Tree and accidental entrepreneurship

   1. HMHoward Marks42:57

      So I think that, I think that, uh, thank God I, I rose to the occasion and, and left TCW with Bruce and, and my other partners to start Oaktree. And then I think that it was, uh... I don't, I don't think I ever said, "Well, now I'm gonna start taking control of my life. Now I'm gonna start acting intentionally. Now I'm gonna become a leader." I just think it was inescapable.

   2. NKNikhil Kamath43:29

      That's very interesting because it sounds like you're saying entrepreneurship and taking risk can trigger the riding the river to seeing the river.

   3. HMHoward Marks43:42

      Some people are driven entrepreneurially. I think that entrepreneurship is the epitome of intentionality. It's, it's taking the bull by the horns, as we say, proactively. So I think the entrepreneur naturally, innately does the opposite of drifting down the river. Um, and, um, my inclination was not entrepreneurial, you know. Uh, I, I, uh, I liked most of what I was doing at TCW, uh, but, uh, with, uh, with en-encouragement from Bruce Karsh and my wife, and with a little encouragement from TCW to leave in terms of how I thought I was treated, my inertia was overcome. That's what I would describe. You know, it wasn't a proactive decision, "Hey, let's, let's get going." It was the unlikely overcoming of my innate inertia. It's a very different story.

   4. NKNikhil Kamath45:07

      It could be like a chicken and egg thing.

   5. HMHoward Marks45:09

      Oh, it's very chicken and egg, yes. But, but, uh, I think the important thing is, for the purposes of your audience, that my departure from TCW did not start with an entrepreneurial spirit. And some people-- I know, I know people who, you know, who were entrepre-- I mean, uh, you know, always dreamed of making a lot of money, always dreamed of r-running their own business, chafed at being an employee, had to get out and start their own. Uh, that, that, that was never descriptive of me.

   6. NKNikhil Kamath45:52

      Mm.

   7. HMHoward Marks45:53

      So I kind of, I k-I kind of, uh, did something that you might call entrepreneurial, uh, despite myself is the way I would describe it, r-rather than because of my, uh, innate drive.

   8. NKNikhil Kamath46:14

      So Howard, my job for twenty years has been that of a stock investor.

   9. HMHoward Marks46:18

      Mm-hmm.

   10. NKNikhil Kamath46:20

       You've been a debt person almost all your life. Why would you be in a asset class which has finite upside, and the downside, I guess, is finite because in most cases it's zero, versus equity, where you could have exponential upside?

   11. HMHoward Marks46:40

       Well, that's a great question. And, uh, I, I haven't really been asked that question much in the past. My answer may take a while.

   12. NKNikhil Kamath46:48

       Yeah.

   13. HMHoward Marks46:48

       Settle in.

   14. NKNikhil Kamath46:49

       Yeah.

   15. HMHoward Marks46:50

       Uh... The, the question as you pose it is an interesting question if you assume rationality and objectivity. But that ignores personal, let's say, kinks. So I'll return to that. But first of all, my decision to move from-- I, I spent nine years in the equity department, so it wasn't really at the very beginning. It felt like a long time.

   16. NKNikhil Kamath47:33

       Mm-hmm.

   17. HMHoward Marks47:34

       But my decision to move from the equity department in '６９ to, to the bond department in '７８ was not my decision, and it, it, it, it, uh, it wasn't because I figured out it would be better for me. Uh, the, the, the, the Citibank I joined in September of '６９ was an investor in what was called the Nifty Fifty.

   18. NKNikhil Kamath47:56

       Mm-hmm.

   19. HMHoward Marks47:57

       The fifty supposedly best and fastest growing companies in America, companies where nothing bad could ever happen. There was no price too high for the stock. And if you bought those stocks the day I got to work in September '６９, if you held them tenaciously for, for five years, you lost about ninety-five percent of your money. Ninety-five percent. Because for many of them, something did go wrong, and for all of them, the price was too high. The P/E ratios, as I recall, were mostly between sixty and ninety So it was a, uh... And, and so that was a real disaster for the people who invested in the Nifty50, which was most of the money center banks. And I was, uh, director of research by the mid-'70s, so I was part of the process, and we hired a new CIO, uh, who wanted to have a new head of research, and, uh, I helped him hire my successor. And then he said, "What do you wanna do next?" I said, "I don't know. I could do this, I could do that." Typically, I didn't think it over very much or, or assess my strengths and weaknesses very well. And he said, "I'd like you to move to the bond department and start a convertible bond fund," 'cause he had come from a place that had a, had one, and it was very successful, and we didn't have one. And I said yes. So that was the extent of my intentionality, which is almost non-existent. It was, you know, uh... And, and I say now, and it may be an exaggeration, but I was lucky I didn't get fired. Uh, but American companies gave pretty much lifetime employment at that time. Anyway, so, so number one,

9. 49:45 – 57:14

   Why bonds over equities

   1. HMHoward Marks49:45

      my move to s- to the bond department was not voluntary, other than I could have said no. Uh, uh, but number two, you talk about the fact that bonds have, uh, capped upside and some downside from default, certainly true, but it fit me because I was brought up to be very conservative. My parents were adults during the Depression. Now, your parents probably weren't alive during the Depression, or, and most people I know, uh, who are old, their parents were children during the Depression. My parents were adults during the Depression, which meant when I grew up, what did I hear?

   2. NKNikhil Kamath50:31

      Mm-hmm.

   3. HMHoward Marks50:32

      Don't put all your eggs in one basket. Save for a rainy day. Uh, avoid risk, s- et cetera. So-

   4. NKNikhil Kamath50:38

      I think Indians p- Indian parents lived through pseudo socialism in the country.

   5. HMHoward Marks50:42

      Mm-hmm. Mm.

   6. NKNikhil Kamath50:43

      Similar.

   7. HMHoward Marks50:43

      Yeah.

   8. NKNikhil Kamath50:44

      Not as bad.

   9. HMHoward Marks50:44

      Yeah, yeah. But, but, um, y- see, you as, as a stock guy look at bonds and say, "No upside, some downside." I say, "Predictable outcome, which is achieved almost every time."

   10. NKNikhil Kamath51:12

       Is that true, though? 'Cause a lot of the distressed bonds that you are in, which have fairly high coupons, is the chance of a downside zero?

   11. HMHoward Marks51:25

       I said almost every time.

   12. NKNikhil Kamath51:26

       Mm.

   13. HMHoward Marks51:27

       And, you know, uh, uh, first of all, uh, so as I said, I moved to the bond department in '78, uh, May of '78. In Ei- August of '78, I got the phone call that changed my life from the head of the bond department, who said, "There's some guy in California named Milken or something-

   14. NKNikhil Kamath51:46

       Mm-hmm

   15. HMHoward Marks51:46

       ... who deals in something called high-yield bonds. Do you think you can figure out what that is?" 'Cause the client had asked for a portfolio.

   16. NKNikhil Kamath51:53

       Junk bonds.

   17. HMHoward Marks51:54

       Pardon me?

   18. NKNikhil Kamath51:54

       Junk bonds. Milken, Michael Milken junk bonds?

   19. HMHoward Marks51:58

       Yeah. Yeah, junk bonds.

   20. NKNikhil Kamath52:00

       Yeah.

   21. HMHoward Marks52:00

       So, so I said, "Yes."

   22. NKNikhil Kamath52:04

       Mm-hmm.

   23. HMHoward Marks52:04

       "I can do it." And that put me here today, 48 years later. Um, but, but, um... So I, I b- uh, if you've read Malcolm Gladwell, Outliers, you know the importance of right time, right place. I was in the right place at the right time. I was in... Uh, that put me in high-yield bonds at the beginning of the high-yield bond movement.

   24. NKNikhil Kamath52:34

       I've met Michael Milken, and because he got unlucky later in life, it couldn't have just been right place, right time, because it didn't go that way for him for a period of time.

   25. HMHoward Marks52:45

       Well, that's right, but, uh, things in his existence conspired to produce a bad result for a while. Uh, but not for me. I got there at the beginning. The, the... What Malcolm Gladwell's book is really about, Nikhil, is about it's great to be at the front of the line. That's really what it's about. He talks about demographic luck.

   26. NKNikhil Kamath53:09

       Mm-hmm.

   27. HMHoward Marks53:09

       Right? Right time, right place. And, and-

   28. NKNikhil Kamath53:12

       I think the question is how do you figure out where is the front of the line?

   29. HMHoward Marks53:15

       Well, you... Well, I didn't.

   30. NKNikhil Kamath53:17

       Mm.
10. 57:14 – 1:05:36

    Distressed bonds and excess returns

    1. NKNikhil Kamath57:14

       Can you contextualize distressed bonds? Let's say the US Treasury, US government borrows at 4%. Let's say I read somewhere that Google is borrowing 100-year paper at 6%, which sounds crazy, and we'll get to that.

    2. HMHoward Marks57:30

       Yeah.

    3. NKNikhil Kamath57:30

       What kind of companies are in this distressed bond ecosystem, and what rate of return are they paying, rate of interest?

    4. HMHoward Marks57:39

       Well, let's, we have to clarify.

    5. NKNikhil Kamath57:41

       Mm-hmm.

    6. HMHoward Marks57:42

       Oaktree and I ha- have two businesses.

    7. NKNikhil Kamath57:45

       Mm-hmm.

    8. HMHoward Marks57:46

       One we perform, we call performing credit-

    9. NKNikhil Kamath57:49

       Mm-hmm

    10. HMHoward Marks57:49

        ... and one we call opportunistic credit. That's the new euphemism for distressed.

    11. NKNikhil Kamath57:53

        Mm-hmm.

    12. HMHoward Marks57:55

        So I-

    13. NKNikhil Kamath57:56

        Wouldn't you benefit from calling it junk so you have a higher margin because more people would stay out of it?

    14. HMHoward Marks58:04

        Yes, if they listened to me.

    15. NKNikhil Kamath58:05

        [laughs]

    16. HMHoward Marks58:06

        If I was that influential. But, and, and that's the right kind of, kind of, uh, counterthinking. But, uh, on the other hand, a big part of our business now is making loans to companies that need what we call rescue loans.

    17. NKNikhil Kamath58:21

        Mm-hmm.

    18. HMHoward Marks58:22

        They don't like to be associated with the word distressed.

    19. NKNikhil Kamath58:25

        Fair.

    20. HMHoward Marks58:25

        So we're more likely to get their business-

    21. NKNikhil Kamath58:28

        Mm-hmm

    22. HMHoward Marks58:29

        ... if we call it opportunistic.

    23. NKNikhil Kamath58:31

        Fair.

    24. HMHoward Marks58:33

        Um, so, uh, you know, in the performing credit area-

    25. NKNikhil Kamath58:43

        Mm-hmm

    26. HMHoward Marks58:43

        ... we lend money to companies that the world thinks has a, let's say, three, four, five, 6% of not paying us.

    27. NKNikhil Kamath58:57

        Hmm.

    28. HMHoward Marks58:58

        Prob- three, four, five, 6% probability of not paying us.

    29. NKNikhil Kamath59:03

        Mm-hmm.

    30. HMHoward Marks59:07

        We lend them money if we think it's one or 2%. So if the world thinks they're 5% likely to not pay us, and we conclude that they're only 2% likely to not pay us, then the world requires them to pay an, a rate of interest which is commensurate with their 5% probability of non-payment, which means if we're right, and it's only two, we're getting something for nothing.
11. 1:05:36 – 1:12:42

    Beginning a new career today

    1. NKNikhil Kamath1:05:36

       If you had to begin a new career today, for the next forty years-

    2. HMHoward Marks1:05:41

       Yes

    3. NKNikhil Kamath1:05:41

       ... would you pick debt over equity again?

    4. HMHoward Marks1:05:43

       For me?

    5. NKNikhil Kamath1:05:44

       For you.

    6. HMHoward Marks1:05:44

       Or for, or for the average watcher?

    7. NKNikhil Kamath1:05:46

       Let's say for the average watcher.

    8. HMHoward Marks1:05:51

       Um, well, I think that, I think that we were very fortunate in getting into some debt markets before they were discovered and before people understood them, and we benefited from people's, uh, uh, antagonism-

    9. NKNikhil Kamath1:06:07

       Mm-hmm

    10. HMHoward Marks1:06:07

        ... toward those markets. Uh, those opportunities are in the past.

    11. NKNikhil Kamath1:06:12

        Mm-hmm.

    12. HMHoward Marks1:06:12

        Um, so-

    13. NKNikhil Kamath1:06:14

        Where's the front of the line today?

    14. HMHoward Marks1:06:16

        Well, I mean, who is the person in the investment business today who will find the most success in the next ten years? The answer is, in my opinion, the person who best understands AI-

    15. NKNikhil Kamath1:06:32

        Mm-hmm

    16. HMHoward Marks1:06:32

        ... and its capabilities and implications. So, but I-

    17. NKNikhil Kamath1:06:40

        Or is a contrarian and doesn't believe in AI.

    18. HMHoward Marks1:06:42

        Pardon me?

    19. NKNikhil Kamath1:06:43

        Or he could be a contrarian and bet against AI.

    20. HMHoward Marks1:06:46

        Well, that's what I said. I said, "Best understands." I didn't say, "Is most in favor of."

    21. NKNikhil Kamath1:06:50

        Mm-hmm.

    22. HMHoward Marks1:06:50

        So if, if AI is gonna disappoint, the expectations are very high And when you, as you know from being a stock picker, when you go into something [clears throat] where the expectations are very high, it's very easy to lose money-

    23. NKNikhil Kamath1:07:08

        Mm-hmm

    24. HMHoward Marks1:07:08

        ... if those, uh, uh, expectations aren't rewarded.

    25. NKNikhil Kamath1:07:14

        Mm-hmm.

    26. HMHoward Marks1:07:15

        So yes, maybe, maybe, uh, i- if you're the person who best understands AI today, maybe you'll make a lot of money by understanding that it's overdone and betting against it.

    27. NKNikhil Kamath1:07:26

        The current expectation with AI is almost dystopia or utopia.

    28. HMHoward Marks1:07:32

        Yes.

    29. NKNikhil Kamath1:07:33

        Which is crazy, I think.

    30. HMHoward Marks1:07:34

        Well, I don't know.
12. 1:12:42 – 1:20:08

    Active management versus indexation

    1. HMHoward Marks1:12:42

       And, um, uh, but I, I believe that people can do some things that AI can't.

    2. NKNikhil Kamath1:12:49

       Could you also say that indexation and ETFs have taken over because the markets have been in an uptrend, largely? In a more volatile time, active might make sense. In a depression, active might make sense.

    3. HMHoward Marks1:13:04

       You know what? The bad times create an opening-

    4. NKNikhil Kamath1:13:11

       Mm-hmm

    5. HMHoward Marks1:13:11

       ... for active management.

    6. NKNikhil Kamath1:13:13

       Mm-hmm.

    7. HMHoward Marks1:13:13

       But it's still hard.

    8. NKNikhil Kamath1:13:15

       Mm-hmm.

    9. HMHoward Marks1:13:15

       And not many people can do it well. Why do bad times create an opening? Because panic drives down, let's say, stock prices.

    10. NKNikhil Kamath1:13:27

        Mm-hmm.

    11. HMHoward Marks1:13:28

        But the same panic causes most people to panic, which means that most people can't stop, up, and buy in the panic. And there's a, there was a guy named Wally Deemer, who was an old-time trader, who had some great quotes, and he turned them into a little book. And h- but his greatest quote of all is, "When the time comes to buy, you won't want to." So this, this idea that upheaval creates opportunity is logically correct, but not realistic because most people's psychological impediments prevent them from taking advantage of the upheaval. You see?

    12. NKNikhil Kamath1:14:09

        Maybe you mix active plus AI together to try and take emotion out of it.

    13. HMHoward Marks1:14:13

        Well, that, that could work.

    14. NKNikhil Kamath1:14:16

        Mm.

    15. HMHoward Marks1:14:16

        That could work. If, if Claude could call you or send you a message which says, "This is one of those opportunities we talked about, don't be stupid, get your ass in gear-

    16. NKNikhil Kamath1:14:28

        Mm-hmm

    17. HMHoward Marks1:14:28

        ... and buy something. Don't hide in your, in your-

    18. NKNikhil Kamath1:14:31

        [laughs]

    19. HMHoward Marks1:14:32

        ... in your, uh, in your hole."

    20. NKNikhil Kamath1:14:34

        Mm-hmm.

    21. HMHoward Marks1:14:34

        That could, that could be a good thing, yes. But, but I still think that, I still think, Nikhil, that when you get into areas which are not connected, what I would call mechanically, where, where, where physical laws are not everything-

    22. NKNikhil Kamath1:14:54

        Mm-hmm

    23. HMHoward Marks1:14:54

        ... that means that human psychology plays a role in developments, and that tells me that people who are superior at dealing with human psychology can get an advantage. And I think that includes investing.

    24. NKNikhil Kamath1:15:16

        I agree.

    25. HMHoward Marks1:15:16

        But not everybody.

    26. NKNikhil Kamath1:15:17

        Mm-hmm.

    27. HMHoward Marks1:15:17

        It always comes back to not everybody. And, you know, there's a, there's a phrase in, in our world, a friend of mine in England used it as the title for a book, Simple But Not Easy.

    28. NKNikhil Kamath1:15:28

        Mm-hmm.

    29. HMHoward Marks1:15:28

        Our job is simple. We gotta find the best managers-

    30. NKNikhil Kamath1:15:32

        Mm-hmm
13. 1:20:08 – 1:27:25

    Learning from Andrew, second level thinking

    1. NKNikhil Kamath1:20:08

       I'm sure Andrew has learnt so much from you. Is there one thing that you learned from Andrew?

    2. HMHoward Marks1:20:14

       Oh, I've learned so much because y- and this is how we started the conversation. You said to me, "How do you stay sharp?"

    3. NKNikhil Kamath1:20:20

       Yeah.

    4. HMHoward Marks1:20:20

       And, and, uh, you know, uh, speaking with young people-

    5. NKNikhil Kamath1:20:25

       Mm-hmm

    6. HMHoward Marks1:20:25

       ... if you st- if, if you st- speak, if I speak to my contemporaries, how am I ever gonna learn anything?

    7. NKNikhil Kamath1:20:31

       Mm-hmm.

    8. HMHoward Marks1:20:32

       Speaking with young people is how you learn, and y- y- they, they know stuff you don't know because they are still learning, and they learned more recently, and hopefully you have something you can give them in exchange, which is experience that they don't have 'cause they haven't lived eighty years. Uh, but Andrew is essentially your age.

    9. NKNikhil Kamath1:20:51

       Mm-hmm.

    10. HMHoward Marks1:20:52

        Uh, and I wrote a memo-

    11. NKNikhil Kamath1:20:54

        Mm-hmm

    12. HMHoward Marks1:20:55

        ... after that experience, uh, three generations living under one roof-

    13. NKNikhil Kamath1:20:59

        Mm-hmm

    14. HMHoward Marks1:20:59

        ... was of great value, and I wrote a memo called Something of Value, and the other reason I chose that title is 'cause we mostly talked about something called value investing. Uh, but I get so much from him, and he pushes me to see things that I don't... wouldn't otherwise see, and he's also intolerant of, of my not, uh, staying sharp and moving ahead. You know, how, how do you s- how do you keep moving ahead at eighty? That's really the question. But I, I don't think it's impossible. But a, a, a great example, I mean, the, the example that immediately comes to mind, uh, and I think it's a, it's a great one, is that he observed, and I wrote in the memo, the memo was Something of Value, January of '21, as I recall. He pointed out, it was almost revelatory, readily available quantitative information about the present cannot hold the key to success because everybody has it. Success in investing is doing better than others. S- in- investing is a, is a funny field because it's really easy to be average, and it's really hard to be above average. But readily available quantitative information about the present is not gonna make you above average for the simple reason that everybody has it. And, and I talk in the memo about that one of the reasons Buffett was able to steal a march on everybody else and become Buffett is because nobody, uh, he, he, he sought it out and he worked it when nobody else did. And, you know, when I was starting off in this business, in the research world, think about your process. Let's say I said, "Um, you know, I went into a store today, I bought a product, I liked the product. I think maybe that company has a future. I'd like to learn about it." How would you get information? Think about what you would do if you had that experience this morning here in New York City. What did we do then? You know what we did then? We wrote a letter to the company and asked it for a copy of the annual report. It took a week for them to get that letter. They put it at the bottom of the pile, and they took the letter off the top of the pile, and they sent that person an annual report. It took a week or two to get down to my letter, and then they took an annual report, put it in an envelope, addressed it to me, put a stamp on, put it in the mailbox, and it took a week for it to get to me. Now, I exaggerate, but the point is, it took a month to get an annual report so that I could start studying the company. There was no online. There was no wiki or whatever source you might use. Uh, the only alternative was there were, there were books called Moody's Manuals.

    15. NKNikhil Kamath1:24:09

        Mm-hmm.

    16. HMHoward Marks1:24:09

        And they were, each book was this thick, no, this thick. Take it off the shelf. It had a paper called onion skin-

    17. NKNikhil Kamath1:24:17

        Mm-hmm

    18. HMHoward Marks1:24:17

        ... the thinnest of paper, and it had tiny print, tiny print. You needed glasses. And it, it, they had the financials, the current financials on every company. Not much, uh, narrative, nothing, no discussion of the future, but just the financials of every company. That's all you could get until your annual report came in the mail. Then maybe you could start figuring out the business and its potential. So, uh, you could, if you were Buffett, and if you sat in your office in Omaha and read the Moody's Manual when nobody else was willing 'cause it was stultifying, you could get an advantage.

    19. NKNikhil Kamath1:24:58

        Is that what he did?

    20. HMHoward Marks1:25:00

        I think, well, that's an ex-- that's my-

    21. NKNikhil Kamath1:25:02

        Mm-hmm

    22. HMHoward Marks1:25:02

        ... that's my illustration of what he did. Maybe he did more. I don't know. But-

    23. NKNikhil Kamath1:25:07

        I'm no one to pay you a compliment, Howard, but if I could-

    24. HMHoward Marks1:25:11

        Yes

    25. NKNikhil Kamath1:25:12

        ... I think-

    26. HMHoward Marks1:25:13

        Compliments are always good.

    27. NKNikhil Kamath1:25:14

        [laughs] I think the nimbleness and the willingness you have to change at eighty is by far the most impressive thing about you. And when I speak to really successful people, I think this trait over all others kind of makes them who they are.

    28. HMHoward Marks1:25:36

        Well, I, I appreciate that comment. I hope it's true. Uh, but it makes sense, doesn't it? Because the ability to change your mind and change your thinking and learn new things is an, is, is an example or a component of superior insight, which is what you have to be. This is a competitive game. Uh, it's like golf. You say, "Today, I shot seventy-four."

    29. NKNikhil Kamath1:26:04

        Mm-hmm.

    30. HMHoward Marks1:26:05

        I tell you I shot seventy-four.
14. 1:27:25 – 1:34:28

    How to become contrarian and better

    1. HMHoward Marks1:27:25

       Well, you know, it's a funny thing. This has been a theme for me for the last nine months. I say this every time I get a question like yours, Nikhil. The, the really hard questions are the ones that start with the word how.

    2. NKNikhil Kamath1:27:39

       Mm-hmm.

    3. HMHoward Marks1:27:40

       How can I learn the need to evolve and grow? How can I learn to see things better, more clearly than other people? How can I learn to be a credit analyst who better understands the default probability than anybody else? How can I become a s- what I call a second level thinker, uh, understanding things at a higher level and better than other people? And h- all the hows, I can't tell you. How, how can I remain sharp at eighty? I can't tell you. I can tell you what you have to do. You have to do all the things that I mentioned in order to be a superior investor. I just can't tell you how to do it. And in my first book, uh, it's, it's funny, when, when, when I sa- uh, when I had the idea for the first book, which is called The Most Important Thing, it has twenty-one chapters. Each chapter says, "The most important thing is..." And then it's a different thing, 'cause there are so many things that are important. And I told Columbia about the book, and they wanted to publish the book, Columbia University. And so they said, "Give us a sample chapter." And I wrote out a chapter ca- sa- sa- each chapter says, "The most important thing is..." And this one says, "Second level thinking." And I wrote the chapter about second level. I had never really thought about it before. It just kind of struck me, and I wrote it down. Um, uh, and, and it, what it says is it, it's pretty simple. If you think the same as everybody else, you'll act the same as everybody else. If e- if you act the same as everybody else, your investments will perform the same as everybody else. So to perform better, you have to deviate from the herd. Seems clear.

    4. NKNikhil Kamath1:29:33

       Do you think, uh-

    5. HMHoward Marks1:29:34

       How do you do it? How do you do it? And, uh, I said in the book, a- asking how to, how to become... I, I can tell you the importance of second level thinking, but a- asking me how to become a second level thinker is like in basketball we say, "You can't coach height." All the coaching in the world will not make your team taller. So can you-- I can tell you that you must become a second level thinker to be successful as an investor. I just can't tell you how.

    6. NKNikhil Kamath1:30:10

       If I were to draw a extrapolation that second level thinking is also contrarian thinking in a way-

    7. HMHoward Marks1:30:17

       Mm-hmm, mm-hmm

    8. NKNikhil Kamath1:30:19

       ... do you think AIs which are predictive in nature can be modeled to be contradictory tomorrow?

    9. HMHoward Marks1:30:27

       I... But that's the challenge, you see.

    10. NKNikhil Kamath1:30:30

        Mm-hmm.

    11. HMHoward Marks1:30:30

        Because second level thinking, or contrarian thinking, is not just different from the herd.

    12. NKNikhil Kamath1:30:36

        Mm-hmm.

    13. HMHoward Marks1:30:37

        That's not enough.

    14. NKNikhil Kamath1:30:38

        Mm-hmm.

    15. HMHoward Marks1:30:39

        It has to be different from the herd and better. So you can say, you could... I, I, I don't know how to, how to program AI, but I assume you can say to Claude-

    16. NKNikhil Kamath1:30:50

        Mm-hmm

    17. HMHoward Marks1:30:52

        ... every answer you give me on every company has to be different from the consensus.

    18. NKNikhil Kamath1:30:58

        Or the opposite of consensus.

    19. HMHoward Marks1:30:59

        Or, well, the opposite is, is pretty categorical.

    20. NKNikhil Kamath1:31:02

        Mm-hmm.

    21. HMHoward Marks1:31:02

        But let's say has to deviate from the consensus.

    22. NKNikhil Kamath1:31:05

        Mm-hmm.

    23. HMHoward Marks1:31:05

        I don't want it... And no consensus thinking is welcome here.

    24. NKNikhil Kamath1:31:08

        Mm-hmm.

    25. HMHoward Marks1:31:09

        You can say that. You can, you can make it be different. Can you make it be better?

    26. NKNikhil Kamath1:31:15

        Mm.

    27. HMHoward Marks1:31:16

        If, if it... 'Cause, you see, this is the catch. Because the people you compete against in the investment arena are also intelligent, educated, literate- Computer able, highly motivated, they're pretty good.

    28. NKNikhil Kamath1:31:41

        Mm-hmm.

    29. HMHoward Marks1:31:43

        Met- much of the time they're as close to right as you can get. So if you believe the consensus is as close to right as most people can get, then if you tell Claude, "I only want non-consensus thinking," then it has a high probability of being wrong. That's not a good thing.

    30. NKNikhil Kamath1:32:07

        In a way, AI in investing could work if everyone in investing uses AI.
15. 1:34:28 – 1:43:16

    Learning from history, final advice

    1. HMHoward Marks1:34:29

       I don't, I don't consider myself a futurist.

    2. NKNikhil Kamath1:34:32

       Mm-hmm.

    3. HMHoward Marks1:34:33

       I don't engage-

    4. NKNikhil Kamath1:34:34

       Yeah

    5. HMHoward Marks1:34:34

       ... in that kind of... That's, that kind of thinking is what we call blue sky.

    6. NKNikhil Kamath1:34:37

       Mm-hmm.

    7. HMHoward Marks1:34:38

       And, uh, I am partial to what Albert Einstein said on the subject.

    8. NKNikhil Kamath1:34:44

       Mm-hmm.

    9. HMHoward Marks1:34:44

       He said something like, "I don't think about the future, it'll come soon enough."

    10. NKNikhil Kamath1:34:50

        But do I think about the past?

    11. HMHoward Marks1:34:52

        I think about the past to learn from it, and I j- I try to, I try to, uh... I'm, I'm great on these quotes.

    12. NKNikhil Kamath1:35:00

        Mm-hmm.

    13. HMHoward Marks1:35:00

        And my favorite on this subject is from Mark Twain-

    14. NKNikhil Kamath1:35:03

        Mm-hmm

    15. HMHoward Marks1:35:03

        ... who supposedly, but I think didn't really say it, supposedly said, "History does not repeat, but it does rhyme."

    16. NKNikhil Kamath1:35:11

        Mm-hmm.

    17. HMHoward Marks1:35:11

        There are certain themes that re- that rhyme from instance to instance in history.

    18. NKNikhil Kamath1:35:17

        Mm-hmm.

    19. HMHoward Marks1:35:18

        And, um, they mostly have to do with human nature.

    20. NKNikhil Kamath1:35:27

        Mm-hmm.

    21. HMHoward Marks1:35:28

        And I think human nature doesn't change incredibly slowly. I mean, uh, ev- when, when we talk about fight or flight, people will start talking about the, the, the, the, uh, the Stone Age man-

    22. NKNikhil Kamath1:35:41

        Mm-hmm

    23. HMHoward Marks1:35:42

        ... and the, and the watering hole, right?

    24. NKNikhil Kamath1:35:43

        Mm-hmm.

    25. HMHoward Marks1:35:44

        Well, that was millions of years ago. These things are still relevant. So, so the point is that, that, uh, uh, I think, I think you can learn from history.

    26. NKNikhil Kamath1:35:55

        Mm-hmm.

    27. HMHoward Marks1:35:56

        And what you, what you mostly learn are the lessons of human nature.

    28. NKNikhil Kamath1:36:01

        Mark Twain said that, and Napoleon said, "History is written by the winners of tomorrow." So we don't even know how accurate the history we have access to really is.

    29. HMHoward Marks1:36:11

        Well, except, except for we have the numbers.

    30. NKNikhil Kamath1:36:15

        Financial history.

Episode duration: 1:43:16