Howard Marks — How to Invest with Clear Thinking | The Tim Ferriss Show (Podcast)

1. 0:00 – 3:57

   Intro

   1. HMHoward Marks0:00

      Optimal minimal

   2. TFTim Ferriss0:02

      At this altitude, I can run flat out for a half mile before my hands start to shake. Can I ask you a personal question? Now would seem an appropriate time.

   3. HMHoward Marks0:10

      What if I did the opposite?

   4. TFTim Ferriss0:12

      I'm a cybernetic organism, living tissue over metal endoskeleton.

   5. HMHoward Marks0:16

      The Tim Ferriss Show.

   6. TFTim Ferriss0:24

      This episode is brought to you by Intel, and I've used them personally. Ever since I wrote The 4-Hour Workweek, I've been asked over and over again how I choose to delegate tasks, how I do 80/20 analysis, and so on. At the root of many of those decisions is a simple question, actually two questions. Number one, how can I invest money to improve my quality of life? I use that in investing as well. The second, how can I spend a little money or moderate money to save significant time? Intel is one of those investments. They're a turnkey solution for all of your imaginable customer care needs. I used Intel during the launch of The 4-Hour Body, which was very, very involved, and they provided 24/7 customer service for my land rush campaign because it was critical for me to take care of every person who purchased my books and participated. This allowed me to focus on the things that I am better at, my strengths, like the marketing plan that we'd worked on for six months, implementing that. Intel trains their experienced customer service reps to know your business and your products inside and out and make your customers raving fans. They answer more than a million customer service requests every year, and they can do so across all platforms, including email, phone, social media, text, even chat. Leaving your customers with poor service or just mediocre service, which by the way, in a competitive pool is a huge liability. Long wait times or unanswered messages carries a massive cost and risk to your business. Intel removes the logistics and headaches of this type of communication, allowing you to focus on your strengths and grow your business. It can be a real competitive advantage, and I see many, many e-commerce companies and tech companies thinking of customer service as a good enough checkbox or an afterthought. And just like Airbnb used design in innovative ways to be a competitor and to win, you can do the same thing with customer service. So as a listener of this podcast, you can get up to $10,000 off, that's a big discount, $10,000 off your startup fees and costs by visiting intel.com/tim. So check it out. For more info, go to intel.com, I-N-K-T-E-L.com/tim. This episode is brought to you by Helix Sleep. Last year, I focused on dramatically improving a few things, surprise, surprise, most notably the quality of my sleep, which seems to affect just about everything. This led me to revisit, you name it, my daily routine, morning routine, exercise, diet, all the way to what I slept on, and I ended up getting all new beds here in Austin, Texas, including mattresses from Helix Sleep. Helix has built a sleep quiz that takes two minutes to complete, and they use the answers to match your body type and sleep preferences to the perfect mattress. Whether you're a side sleeper, hot sleeper, cold sleeper, or you like plush, you like firm, with Helix, there's no more guessing or confusion. Just go to helixsleep.com/tim, take their two-minute sleep quiz, and they'll match you to a mattress that will give you the best sleep of your life. That is their promise. For couples, Helix can even split the mattress down the middle, providing individual support needs and feel preferences for each side. They have a 10-year warranty, and you can test drive your mattress for 100 nights risk-free. Right now, Helix is offering up to $125 off of all mattress orders, so check it out. Get up to 125

2. 3:57 – 9:22

   Clear thinking beyond investing: poem, Japanese studies, and mujō (impermanence)

   1. TFTim Ferriss3:57

      off at helixsleep.com/tim. That's helixsleep.com/tim for $125 off your mattress order. Take a look, helixsleep.com/tim. Well, hello, boys and girls. This is Tim Ferriss, and welcome to another episode of The Tim Ferriss Show, where it is my job to interview world-class performers to tease out the habits, routines, thinking frameworks, life lessons, favorite books, et cetera, that you can apply and test for yourself. This episode features someone who is very, very well known in the world of investing, but studying what he says is really a study in clearer thinking, and it transcends investing and business in so many different ways. Howard S. Marks is co-chairman and co-founder of Oaktree Capital Management, a leading investment manager with more than $120 billion in assets. He is the author of the new book, Mastering the Market Cycle, subtitle, Getting the Odds on Your Side, and his previous book on investing, The Most Important Thing, subtitle, Uncommon Sense for the Thoughtful Investor, was a critically acclaimed bestseller. To give you an idea of who reads his memos and his writing, Warren Buffett has written of Howard, quote, "When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something." End quote. I'm gonna keep this short because it covers a lot of ground. We talk about the three stages of a bull market, newsletters he reads, thoughts on Bitcoin and crypto, his thoughts on understanding market cycles for making better decisions, how his firm was poised to capitalize on the bubble in 2008 and put massive amounts of capital to work, and more, and more, and more, and more. We really cover a lot of ground, and I had a lot of fun. So without further ado, maybe I've already said that, [laughs] here is Howard Marks. Howard, welcome to the show.

   2. HMHoward Marks5:50

      Thank you, Tim. I've been looking forward to being here.

   3. TFTim Ferriss5:53

      I am thrilled to be sitting here with you because I have so many fans of your work and thinking in my friend circles.

   4. HMHoward Marks5:58

      Well, that's great to hear.

   5. TFTim Ferriss5:59

      When I went out to a handful to ask for potential topics or questions, they were very, very forthcoming. But what I thought I would do in this particular episode I've never done in a podcast episode before, which is to start with a poem. This is always risky, risky business, but this was suggested by a friend And he said, "I would use an A.E. Housman poem." This captures effectively the, uh, I think the, what he views as, as, as the spirit of s- of much of your writing. And you can agree or disagree. Here we go. "I, to my perils of cheat and charmer, come clad in armor by stars benign. Hope lies to mortals and most believe her, but man's deceiver was never mine. The thoughts of others were light and fleeting, of lovers meeting or luck or fame. Mine were of trouble and mine were steady, so I was ready when trouble came." And that is "A Shropshire Lad," the name of the poem. And I thought that, uh, we could certainly talk about that specifically, but in the course of doing research for this conversation, I discovered that you had studied not only finance and what you might look at as vocational subjects when you were an undergrad, but also seems like Japanese, and that, that there was this concept of mujō that popped up when I was doing my reading. Would you mind describing that time and that concept?

   6. HMHoward Marks7:21

      Well, I went to Wharton, um, at a, uh, a- at a, at an enlightened time when you were required to have a non-business minor and then a semester of the literature of a foreign country in English. I, I never learned Japanese. But I started off for some reason, which I, it's interesting that I have no recollection of what motivated me, but I decided not French literature or English or... but Japanese literature. It, it must've been the e-exoticism. Uh, and I liked it so much that I turned Japanese studies into my minor and took 15 credits at the graduate level. And that's what turned me from a, from an indifferent teenager into a, into a student, really. Um, but the professor for most of those courses, a guy named A. Dale Saunders, was an inspirational speaker and a Oxford don, an aesthete. And, uh, so I took this course in, uh, Japanese philosophy, and we came across mujō. And mujō, uh, literally means the turning of the wheel of the law, in other words, uh, the operation of life. And, uh, the, the, the essence is impermanence, and, uh, because the wheel does turn, and, um, and also the, the unpredictability of the future. And these were really formative for me, and they have in, in, unconsciously informed everything I've done. Um, and, uh, I think that personally that in the investment business and, and also in life, you are better off if you realize, number one, that if, if life is always gonna change on you, and there will always b-be new things coming down the pike, and you can't control it. Um, and what we have to do is live with it.

3. 9:22 – 13:23

   “You can’t predict, you can prepare”: how Oaktree positioned for the 2008 crisis

   1. TFTim Ferriss9:22

      S- in the course of the reading I've, I've done in prep for this, which is not only the, uh, the new book but also many of your letters, which I'd already been a fan of but went back to revisit, uh, I came agra- across many people who had tried to select favorite quotes, and one that came up a lot, so you could certainly correct this if this is not accurate, is something along the lines of, "You can't, you can't predict, you can prepare." And that leads me to 2008. And we're gonna bounce around chronologically quite a lot, I suspect. But, uh, during the 2008 bubble, which of course was a time, uh, in which many investors were pulling out of the market, Oaktree did exactly the opposite, and you put more than a half a billion dollars a week to work over 15 weeks. Why did you do that? Were you predicting? Were you prepared? What led to that type of decision?

   2. HMHoward Marks10:25

      Sure. Well, you mentioned the, the memos. I've been writing the memos since 1990. Um, and, um, I wrote one about 20 years ago, late '90s, uh, called You Can't Predict, You Can Prepare. I stole the tagline from an, a- an ad from Northwestern Mutual Life Insurance. Uh, but I think that's true of life. Uh, now it sounds like an oxymoron 'cause how can you prepare if you can't predict? But the answer is, uh, we never know what's gonna happen, but we can consider the likely scenarios and prepare for some of them. Uh, you can't, by definition, prepare for every eventuality. But, um, I, I would say that we did have a sense, uh, my partner Bruce Karsh and I, uh, had a sense in '05 and '06 that the world wasn't running right. Um, and the main thing that made us conclude that was the crappy deals that were getting done. And he and I would spend the day walking into each other's office saying, "Look at this piece of crap that got issued yesterday. There's something wrong. A deal like this should not be doable." The fact that investors are buying this tells me that they're not being skeptical. They're not being, uh, demanding. They're not applying standards. And, um, you know, uh, Buffett, uh, has a, has a saying, "The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs," and it's absolutely true. Um, and so we knew that the m- market was dangerous because of the behavior of others. Now, you can't... So we were prepared. We, we sold a lot of assets. We liquidated large funds. We replaced them with small funds. We became very selective in our buying. We raised a, a, a very large fund for investment if a crisis bursting would come into being

   3. TFTim Ferriss12:34

      Was this for a distressed debt?

   4. HMHoward Marks12:35

      For distressed debt. Now, the interesting thing though, so you can't pr- prepare. You can't predict. The thing that caused the bubble to burst, uh, was the unsubstantiality of mortgage-backed securities, and especially subprime. If you read the memos, you won't find a word about it. We didn't predict that. We didn't even know about it. It was occurring in an, in an extr- odd corner of the securities market. Most of us didn't know about it. Um, but it is what, what brought the house down, and we had no idea. But we were prepared because we knew simply that we were on dangerous ground, and that required a cautious preparation.

4. 13:23 – 14:41

   Timing is hard: raising capital without naming a date

   1. TFTim Ferriss13:23

      Let me ask, and, and I, I may embarrass myself with questions that, uh, display my ignorance about many topics in this interview. But when you raised money for a distressed debt fund, did you emphasize to the LPs or whoever gave you those funds that, uh, you had a specific timeline in mind for deploying those funds, or did you emphasize the importance of patience with those people and that you'd be looking for indicators and that they needed to look at it as a long-term investment? How did you manage the question of, of when from those people?

   2. HMHoward Marks14:02

      The question of when is, is one of the hardest ones in our business, and I always say that we may have an idea of what's gonna happen, but we never know when it's gonna happen. You can't call these things. As one of my partners says, "If you name a price, don't name a date, and if you name a date, don't name a price."

   3. TFTim Ferriss14:16

      [laughs]

   4. HMHoward Marks14:17

      Uh, and then you can't be wrong. But, uh, we never did name a date. We probably, I can't even remember, we probably had a, a limit. In other words, if we hadn't deployed it within X years, then it got canceled, the commitments. Um, but I think th- th- there was an understanding that we thought it was coming within the next one, two, three years, something like that.

5. 14:41 – 18:13

   Why write Mastering the Market Cycle: knowing where you are, not forecasting

   1. TFTim Ferriss14:41

      Now, the, the subtitle of this new book, of course, the title, Mastering the Market Cycle. S- subtitle, Getting the Odds on Your Side. Why this book, and, and d- how does one, and this is of course something we could, we could discuss, uh, for many, many hours on end. But, uh, why this book, and, and how does someone in this context get the odds on their side?

   2. HMHoward Marks15:04

      Um, so I started writing the memos in 1990. I wrote them for 20 years. I always concluded that I would wr- write a book and pull them together into a philosophy when I retired. Uh, and then I got a letter from Warren Buffett in 2010 saying, "If you'll write a book, I'll give you a blurb for the jacket." So that was enough to g- get me off my ass and get me to do it in real time. Um, I wrote a book called The Most Important Thing because I found myself sitting in clients' offices saying, "The most important thing is buying cheap." And then 10 minutes later, I would say, "The most important thing is not losing money." And then 10 minutes later, I would say that, "The most important thing is contrarian behavior." So I wrote a book called The Most Important Thing, which has 21 chapters, and each one starts off, the title is, The Most Important Thing Is, and then it's a different thing. One of those most important things is knowing where we stand in the cycle. Um, and, uh, uh, as I say, I don't believe in forecasts. I always say, "We never know where we're going, but we sure as hell ought to know where we are." I mean, I can't tell you what's gonna happen tomorrow, but I should be able to assess the current environment, and, and that's the kind of thinking, uh, that helped us prepare for the, for the crisis. Um, I think that the two most important things are where we stand in the cycle and s- the broad subject of risk. And in fact, where we stand in the cycle is the primary determinant of risk. Um, so, uh, uh, uh, I think that this is really a, an important topic, and it can really help you do better. Getting the odds on your side, what that means is we don't know what's gonna happen. Nobody can tell you. But there are times when the future is, the outlook is better, and there are times when it's worse, and it's largely determined by where we stand in the cycle. When we are low in the cycle, that is to say we're coming off a bust, the economy is starting to warm up, investors are just barely starting to switch from pessimism to optimism, and, and, uh, prices are starting to rise, clearly the odds are in your favor. The outlook is better. It doesn't mean you're gonna make money, but the chances are good. On the other hand, when the cycle has gone on, the up cycle has gone on for a long time, when it, when, when valuations are high, when optimism is rampant, when everybody thinks everything's gonna get better forever, when the economy's been moving ahead for 10 years and it looks like it's never gonna stop, then usually the enthusiasm has carried the prices to such a high level that the odds are against you. And just knowing that is, is a huge advantage in investing. You should know that when the, when we're low in the up cycle, that's a time to be aggressive and put a lot of money to work and buy more aggressive things. And when we, when the cycle has gone on for a long time and we're elevated, that's the time to take some money off the table and behave more cautiously.

6. 18:13 – 23:07

   Deploying capital in a meltdown: “catching falling knives” and acting unemotional

   1. TFTim Ferriss18:13

      Question about 2008, uh, or you could pick another period, uh, a, a bust cycle that you're familiar with, uh, whether from firsthand experience or from research that you've done. You raise these funds, and I wanna revisit the question of when. Uh, from personal standpoint, uh- And I'll admit, admit it very freely, I think I've had a very fear-based mentality when it comes to public markets. I've done reasonably well in privately held technology startups because I lived in the middle of the switch box in San Francisco, and that's the only thing I paid attention to. And it protected me, in a way, from my lesser behaviors because I wasn't allowed to sell. Uh, but in the public markets, I've almost always held onto cash waiting for some cataclysmic event, but then lost my nerve in some fashion. Uh, I'd be... I'd love to hear, and maybe the catching falling knives is a way to segue into this. I don't know. I found that very, very interesting to read about. Uh, but how do you think about sitting on a position like that and timing? What, what, what determines the go command for deploying?

   2. HMHoward Marks19:25

      You have really touched on an extremely important topic. Most of us have an inherent bias. Most of us are essentially cautious or essentially aggressive. Probably more people are essentially cautious than aggressive. So one of the most important things is to assess ourselves, understand our biases, and try to overcome them. Now, uh, the, the, the Tim Ferriss that I heard you describe, I take that to mean that maybe you were lucky or smart enough to turn cautious leading up to the bubble. The markets fell apart. You're sitting on cash. You patted yourself on the back for being so smart as to not get caught, and you watched. What you didn't do is you didn't turn aggressive at the bottom.

   3. TFTim Ferriss20:21

      That's right.

   4. HMHoward Marks20:22

      And it's common, uh, not to do so. It's common to, as you say, for people to say, "I'm not gonna jump in while this thing's c- collapsing down. I'm gonna wait till the dust has settled and the future is clear. I'm not gonna try to catch a falling knife." But it is when the knives are falling that the people are most terrified that the best bargains are available. So if you wait until the dust settles, the bargains are gone, and that's what happened at the end of, of, uh, '08. You mentioned that we, in distressed debt, we put 500 million, uh, a week to work in the last 15 weeks following the bankruptcy of Lehman Brothers, and, and across the firm, uh, something like 650 million a week for 15 weeks. That's $10 billion. At a... And but the key is, it was at a time when essentially nobody else would. You get great bargains. By the time the end of '08 rolled around, the hedge funds that were getting withdrawals had either satisfied their withdrawals or gated, and-

   5. TFTim Ferriss21:28

      What does gated mean?

   6. HMHoward Marks21:29

      Uh, uh, told clients they couldn't have their money back for a while.

   7. TFTim Ferriss21:32

      Gotcha.

   8. HMHoward Marks21:33

      Um, and, um, so the, the selling abated. A few people saw that, that, uh, the great values, and with the s- with the selling and thus the fear having reduced, they were able to come forward. Prices started to move up. Then it's too late because if you're trying to buy in a falling market, you can buy all you want at successively lower prices, but if you're trying to buy large amounts in a rising market, your own buying puts the price up. You're your own worst enemy. You can't get much at low prices. So, you know, one of the keys to successful investing is to either be unemotional or, at minimum, act like you are. Uh, you know, the great investors I know are... behave in an unemotional fashion. You know, Warren Buffett couldn't care less. Uh, David Tepper couldn't care less, and, and, uh, and so forth. Um, uh, my, my own partner, Bruce Karsh, very, very, very stalwart. But p- part of it is that we support each other at the bottom. It's not easy. You know, and, and, uh, I say in the book that, uh, I recount some of the things we've done right with regard to cycled extremes, but I absolutely don't wanna give the impression that it's easy. It's terrifying. Others are terrified. That's why they're selling. That's why they're saying, "I don't care what the price is, just get me out." That's what... That's when you wanna buy. But the things that terrify them into selling will also terrify you. You have to overcome it.

7. 23:07 – 24:36

   Can contrarian calm be learned? limits of coaching emotion and second-level thinking

   1. TFTim Ferriss23:07

      How much of that stoic resilience or stoic composure is, uh, nature versus nurture, born versus trained in, in... from what you've observed and experienced? And, and if, if a portion of it is trained, how, how would you suggest to someone that they develop that ability?

   2. HMHoward Marks23:30

      I don't wanna answer categorically. I think it's a hell of a lot easier if you're born that way.

   3. TFTim Ferriss23:34

      [laughs]

   4. HMHoward Marks23:35

      You know, to, to-

   5. TFTim Ferriss23:36

      Right

   6. HMHoward Marks23:36

      ... to teach yourself to be unemotional is to, is to counter human nature, and by definition, it can't be easy. Um, this is... Other than as to, you know, uh, where are we in the cycle and what's gonna happen in the s- coming six months, this is probably the question I get the most often.

   7. TFTim Ferriss23:56

      Hmm.

   8. HMHoward Marks23:57

      How can you teach yourself to be unemotional, to be contrarian, to be a second-level thinker? Um, and there is no easy answer. Uh, in, in the first book on the subject of what I call second-level thinking, I say, uh, in basketball they say you can't coach height. All the coaching in the world will not y- make your team taller. So I don't know, frankly, whether you can... whether people can teach themselves to be unemotional, but clearly, if you are as emotional as others, you will probably succumb to the same errors

8. 24:36 – 33:03

   A 31-year partnership playbook: complementary skills, crisis debates, and respect

   1. TFTim Ferriss24:36

      So let's... I, I think we can, uh... I'd love to back into this type of, uh, not psychological profiling, but an examination of, of this type of resilience, maybe indirectly. Maybe it'll come up, maybe it won't. But, and I might get the, the total duration, uh, incorrect, but you mentioned a name, Bruce Karsh, that I'd love to, to bring up yet again, and he may, he may come up repeatedly. 23-year partnership, is that right? Or 20-plus year?

   2. HMHoward Marks25:02

      31 now.

   3. TFTim Ferriss25:02

      31. Okay.

   4. HMHoward Marks25:03

      'Cause Oaktree is 23 years old-

   5. TFTim Ferriss25:05

      I got it. Okay

   6. HMHoward Marks25:05

      ... but we worked together for eight years before that.

   7. TFTim Ferriss25:06

      Prior to that. All right. So if you were trying to hire a, say, 25-year-old version of Bruce, what would you be looking for?

   8. HMHoward Marks25:18

      Well, I'll tell you what he is.

   9. TFTim Ferriss25:19

      Let's, let's do that.

   10. HMHoward Marks25:21

       He's f- super smart. That goes without saying. He is highly competitive. Uh, you know, he, he's a chess player and, and, and most of the people that, again, that I know who are good investors are, are, are, uh, games players, either backgammon or, or, or chess or something like that. Um, we are in- inherently competitive. Um, uh, he's also, uh, uh, very analytical, and he's kind of a grinder. And I would describe myself as being intuitive and, and a quick decider. Thinking, slow and fast, Kahneman. Um, I'm a fast thinker. You tell me a problem, I tell you my answer in short order, and I'm done with it, for the most part. Bruce will think about it longer, come to his conclusion, and then he'll come back the next day and say, "You know, I was thinking about it last night. I don't think that's right, and here's why," or, "I don't think you are right, and here's why." And he'll, he'll grind on it for hours and days. I think this is part of the secret to our success. Uh, again, uh, something I once wrote, uh, on the subject of a good partnership, I said, I said, "Shared values and complementary skills." If you have a partner who has different values than you do, for example, uh, w- uh, Bob wants to make the most money possible and Ed wants to operate i- with integrity, those are largely contradictory. So I think it's very important to share values, but I also think it's, it's important to not be the same person, a, a copy of yourself. If, if you're... If it's a copy of yourself, you don't need it. It, it... The person should bring skills that you don't bring and maybe operate in ways you don't. And I think it's, it's probably helpful that I'm intuitive and he's analytical.

   11. TFTim Ferriss27:26

       I've heard, uh... Well, heard, [chuckles] that's not the right, not the right verb. I've read, uh... I, I believe it was Buffett who said that Charlie Munger has the, the something along the lines of the best 60-second mind he's ever encountered. It sounds like you also have a, a very highly developed fast thinking, uh, capacity. Is... How is it similar or different from Charlie Munger's 60-second?

   12. HMHoward Marks27:56

       Well, it... First of all, it's a daunting comparison. I, I would-

   13. TFTim Ferriss28:00

       [laughs]

   14. HMHoward Marks28:00

       ... I would never put myself in the category with Charlie. He's, he's, he's brilliant and, and, uh, o- one of the best thinkers there is. But, uh, you know, uh, I mean, the main thing is that he has read more broadly. He's had, he's had another 22 years to read further, and he was probably always, uh, a, a broader reader than I was. And i- it... So it's, it's his ability to call on these references, you know? Uh, it... In a way it's kinda silly to think we have to in- or that we can, uh, reinvent all the wisdom in the world. It's great to borrow from others, and, and, and Charlie does that broadly, and I try to do it. Uh, but he just knows more.

   15. TFTim Ferriss28:42

       I think we'll, we'll almost certainly come back to, uh, Warren and Charlie more in this conversation, but I, I want to return to, to Bruce because you mentioned the complementary skill sets, and you've, you've written about him, of course, quite a bit, mentioned him quite a bit, and I wanna pull up quickly just a few lines in the new book. "So Bruce and I have exchanged ideas and backed each other up almost daily over that period." This is, uh, preceding text. "And my give and take with him, especially in the most difficult of times, has played a particularly indispensable part in the development of the approaches to cycles on which this book is based." Could you share an example of a, of back and forth or disagreement during a difficult time or with a particular decision? Uh, is that possible just so that we c- we have a, a real world example of, of the interplay between the two of you?

   16. HMHoward Marks29:34

       We, we normally don't debate individual investments because he operates more at that level, and I operate more at the big picture level i- within Oaktree. But, I mean, I think a good example is in the period we desc- we've been talking about a couple of times now. We've mentioned the last 15 weeks of '08. Um, you know, it was really a very tough period because, uh, Lehman Brothers had gone bankrupt and, um, uh, and, uh, Bear Stearns had disappeared, and Merrill Lynch had been absorbed by Bank of America, and Washington Mutual and Wachovia Bank and, uh, you know. And it, it looked like falling dominoes, and it... You know, people were talking about the fact that Morgan Stanley was next, and Goldman was right behind that. And so you just had to conclude that the world, that the financial world was either gonna end or it wasn't. You couldn't analyze it. You couldn't prove anything about the future. It... And, and, and, and, and so it required a, a, an almost gamesman-like approach to whether you buy or not. And, uh, you know, we would talk about that in that sense, and we were both very comfortable talking about it in that sense. And what we concluded was that if the world ended, it didn't matter what we did. But if the world didn't end and we hadn't bought, we hadn't done our job. So buck up and do your job. Now, the great thing is that half the days Bruce would come to me, because he would be lying in bed at night thinking about this stuff, and he would come to me and he would say, "You know what? I think we're going too fast. I think we should slow down." And half the days he would say, "I think we're [laughs] going too slow." And, uh, you know, so I would play devil's advocate, um, and, uh, and s- support his decision but, but try to show him the other side, and, and he would do that with me, and that's why we got it done. But I, as, as I s- say in the, in the introductions of the book from which you read, I think that... I don't think either of us could have done as good a job alone. I think that the devil's advocacy and... but in a supportive way, uh, uh, really held the key. Um, I wr- I wrote a... In one of my memos I, uh, I wrote about a reporter, uh, and he, he, he, he called me up a few days after the bankruptcy of Lehman and he said, "What are you doing?" I said, "We're buying." He said, "You are?" Like it was the craziest thing he ever heard. And, you know, my reaction was, "If we're not buying now, when will we?" Uh, but, uh, uh, you know, it's been a great partnership, uh, uh, w- as you say, 31 years. Never an argument.

   17. TFTim Ferriss32:23

       Never an argument.

   18. HMHoward Marks32:23

       Never an argument. I mean a d- d- intellectual disagreements, but never an emotional argument, and never... And the key is respect. Even when we disagree, we respect. And the great thing about that is y- y- you sit down, you disagree, you... maybe you don't come to a conclusion, and then you go back to your corners and he, he says, "Well, you know what? Maybe Howard's right." And I say, "Maybe Bruce is right." And then you can have a productive discussion. If, if you, if your reaction is, "That moron," then you can't benefit from what he has to say.

9. 33:03 – 37:38

   Avoiding founder/partner blowups: hiring decisions, humility, and a “no assholes” rule

   1. TFTim Ferriss33:03

      For, for people who are hoping to exhibit that type of poise and respect for someone else, are there any tactical recommendations you might have? And the reason I ask that is, uh, I no longer live in Silicon Valley, but I was there for 17 years, and you see co-founder splits all the time. Some of them go the distance, but a lot of them, uh, end up fatalities, and you can almost see the writing on the wall when the respect goes out the window, and it's just a matter of time for a lot of these guys. Uh, for, for people who are in partnership, let's just for the time being assume it's in a, a business capacity or an investing capacity, w- what are some of the tools of the trades that it doesn't escalate? Do you walk out of the room if you're starting to get heated there? Uh, uh, or do you avoid, in some s- uh, systems way, given policies of the firm, any types of sort of mission critical single decisions from becoming an object of argument, if that makes any sense?

   2. HMHoward Marks34:02

      Sure.

   3. TFTim Ferriss34:03

      Uh, becau- When the stakes are high, what are some, some recommendations you would have when things... when perhaps emotions are starting to escalate?

   4. HMHoward Marks34:11

      Well, the only issue I would take, Tim, is you started with assume you're in partnership.

   5. TFTim Ferriss34:17

      Hmm.

   6. HMHoward Marks34:17

      I think you have to start sooner.

   7. TFTim Ferriss34:19

      Okay.

   8. HMHoward Marks34:19

      Who do you get in partnership with? And y- you know, you have to, uh, you have to share values, and you shouldn't be partners with somebody you're not gonna like, enjoy spending time with, and be able to work with constructively when the stuff hits the fan. That's really the key. So I, I mean, I believe that, that most... solving most personnel or managerial, uh, problems s- start at the beginning with the hiring decision or the combination decision. So, so, uh, you know, just don't get into business with somebody you're not gonna be able to live with. It's kinda like a marriage. Uh-

   9. TFTim Ferriss34:56

      Do you stress test their ability to handle potential high stress situations in some real or simulated fashion? Do you look back at, i- in say hiring decision, do you look back at their history and reference checks to assess that? How do you assess whether someone is going to keep their cool or not?

   10. HMHoward Marks35:16

       Well, well, we don't do simulations or war games or anything like that.

   11. TFTim Ferriss35:19

       Right.

   12. HMHoward Marks35:19

       But we do... You know, I mean, that's an important part of reference checking. Uh, uh, you have to, you have to look beyond whether it's the person is smart and whether the person's a money maker. You know, uh, uh, we have a no assholes rule at Oaktree, and I think that saves a, solves a lot of problems. And, uh, uh, you know, there are lots of people in the world who can make you a lot of money, but you pr- you may not wanna be in business with them, and it, you, it may not be viable long term. Now, it's, it's hard to absolutely, uh, follow that rule, uh, because really smart money makers are very tempting, but I think it's, I think it's really important. But, but then, you know, once, once you are, uh, in business together and you have the inevitable disagreement, I think one of the most important things is to, number one, acknowledge the limits on what you know. If you, if you go in with some humility, then you're unlikely to have a fight to the death, that is to the death of your partnership over an issue. And, and it's, it's gr- you know, it's great to say... I mean, people should wake up in the morning and start the day by practicing, "I don't know. I don't know." It's a great thing to say, and not enough people say it. And, and, uh, the, the, the, the flip side of I don't know is what I said, uh, before about our discussions. "Maybe he's right." You know? And so I think that's important, humility. Number two, again, uh, control of emotion. Don't get into fights just to show who's, who's more manly, uh, or, you know, or, or equate, um, winning the argument with success. Because if you're, if you're in a business situation and you're fighting for something that ultimately p- proves out to be a mistake, your success in winning the argument will lead to, uh, f- a failure. Um, so don't confuse winning the argument with coming to the best decision. Um, and, you know, again, try to limit the testosterone. Um, I think that really gets in the way.

10. 37:38 – 49:03

    Probability thinking: confidence levels, randomness, and alternative histories

    1. TFTim Ferriss37:38

       One, one of the many things that I really enjoy about your writing is that it serves, for me at least, as a reflection on clear thinking that transcends investing. I mean, it, it, it applies to so many, if not all areas of life, at least those governed by [chuckles] anything in the prefrontal cortex. And one that caught my eye when I was, when I was reading, which is, uh, page 15 in the new book, is the following, and, uh, I'd, I'd just like to read it. It's not very long. "In addition to an opinion regarding what's going to happen, people should have a view on the likelihood that their opinion will prove correct. Some events can be predicted with substantial confidence." Example given, "Will a given investment in grade bond pay the interest it promises? Some are uncertain." Example, "Will Amazon still be the leader in online retailing in 10 years? And some are entirely unpredictable." Example, "Will the stock market go up or down next month? It's my point here that not all predictions should be treated as equally likely to be correct, and thus they shouldn't be relied on equally. I don't think most people are as aware of this as they should be." Could you expand on this, uh, a bit if that's possible? Uh, maybe give some examples of how you or other people you respect use that type of, of heuristic when making decisions or just, I suppose, reflecting reality in their own minds or perceiving things.

    2. HMHoward Marks38:59

       Sure. You know, we all have opinions, and we hold our opinions because we believe in them. Nobody ever says, "You know, my opinion is X, a- and I think I'm wrong."

    3. TFTim Ferriss39:15

       [laughs]

    4. HMHoward Marks39:16

       We all think that our opinions are correct.

    5. TFTim Ferriss39:18

       [laughs]

    6. HMHoward Marks39:19

       Uh, but... And, and, and again, the world becomes a better place, an easier place to navigate if we admit that even though they're our opinions, th- they may be wrong. Uh, and, uh, you know, how, how does an investor like me deal with the fact that he doesn't believe in future predictions? And, and, uh, and the answer is, uh, I say... And I have opinions on all these subjects, but I say it's one thing to have an opinion, and there's a, it's another to believe and act as if it's right. And if you just s- say, "Maybe I'm wrong," uh, the world gets easier in my opinion, uh, easier to succeed, uh, less, less easy to, to, uh, to navigate day to day. You know, and, and a big theme of the book is that we have to view the future not as an event which is predetermined and predictable or, you know, determined already, but as a range of possibilities, as a probability distribution. And, you know, I went to the World's Fair, uh, in Flushing in 1964, I think it was, and I stood before an exhibit that IBM had, and it was, uh, you know, typical of technology 50-odd years ago. It was the most simplistic thing you could imagine. They had, they had a slot at the top and a bunch of balls, and the balls came through the slot, and then there were a bunch of pegs in a grid. And, uh, when the balls hit the pegs, they started to diffuse, and by the time they got to the bottom, they were in a bell-shaped distribution. And I think that was probably my first, uh, exposure to a distribution, but it's beautiful, and that's how life is. The future is a distribution of possibilities. And if we're really smart, we know what the distribution, what the possibilities are, and we may have an idea of which are more likely and less likely, but we sh- we still don't know what's gonna happen. And, and, and I think we have to behave that way. Now, some things we know more, some things we know less. We shouldn't get confused, but the, the, the most important single thing is to not have the same degree of conviction about all of our opinions because-

    7. TFTim Ferriss41:41

       Do, do you apply a, say, one to 10 numerical value? Is it more of a s- light, medium, strong? How, how do you think about that yourself?

    8. HMHoward Marks41:50

       Yeah. Well, I think it's, it's certainly not... Uh, you know, I'm not a, for the most part, a quantifier. If you read the book, uh, y- I would hope you would be struck by how few numbers there are in it. Um, and, uh, y- you know, one of the great, uh, quotes which, uh, is broadly attributed to Einstein, I don't think it was Einstein, is that, "Not everything that can be counted counts, and not everything that counts can be counted." So the, the, the most important insights to life are non-quantitative. Um, but I, I, I try to be conscious of when I have an opinion of how likely it is to be correct, and I try really hard not to always assume that I'm right. By the way, let me add one thing. Um, Henry Kaufman, who was the chief economist of Salomon Brothers in the '70s, uh, at a time when America was riven with hyperinflations, 15, 16, 17% a year. Nobody could figure out how to stop it. And, and, and the world was really a very difficult place to live. At Kaufman, there, there was two guys, Kaufman and Al Wolgenauer, first boss, and they were called Dr. Gloom and Dr. Doom.

    9. TFTim Ferriss43:04

       [laughs]

    10. HMHoward Marks43:04

        But, and, and but, but Kaufman said, "Two kinds of people lose a lot of money, the people who know nothing and the people who know everything." And, um, uh, it, it's very few of us know nothing, but it's really important to assume, to not assume we know everything.

    11. TFTim Ferriss43:24

        Uh, is there any reading you've done, or maybe it's just real-life experience in the trenches of doing this day in, day out, but, uh, i- for people who want to develop that, uh, I, I, I saw that you're seems like a, a reader or fan of some of what Nassim Taleb has put out, and he talks about epistemological arrogance quite a bit, so thinking that we or believing we know it all or more than we, we actually know. How, how would you suggest, are there any resources, letters, books, memos, talks that you might recommend to people who want to really cultivate that awareness of limited knowledge?

    12. HMHoward Marks44:02

        Well, when you started to ask that question, I, I did fast-forward to, uh, uh, Nassim Nicholas Taleb and his book, Fooled by Randomness. Uh, I think it's a really important book in terms of its ideas. And, uh, it, it's a, it's really about how much randomness there is in our world. Now, it's primarily about investing, not the general world, but the world of investing. And, you know, his example is that, uh, if you're a dentist... He picks on the dentists a lot in the book.

    13. TFTim Ferriss44:35

        [laughs]

    14. HMHoward Marks44:35

        But if, but if you're a dentist-

    15. TFTim Ferriss44:37

        Picks on economists, too. [laughs]

    16. HMHoward Marks44:38

        Yes. And you always fill a tooth the same way, you always get a successful filling. Whereas in the investment business, there's nothing that you can do that if you do it the same every time, you're gonna get a successful outcome because of the changeability and randomness in the world. Um, and, and, uh, uh, this is, uh, extremely important. And, uh, you know, we have to think about the world as a probability distribution. When we... You know, one of the things that interests me most is when you look at history, you say, "Well, I don't know so much about the future," but the history, that's, that's done. That's settled. We know what happened. We know what the truth was. But Taleb, uh, uses a concept called alternative histories, the other things that reasonably probably could have happened but didn't. And so when you look at a historical event, you have to say, was it, was that outcome inevitable, in which case it demonstrates a, a truth, or was it subject to randomness, and could other things ju- have happened just as well? You know, I wrote a memo, uh, in, in a memo around '06, I talked about the Rose Bowl game between USC and University of Texas, and USC was highly touted as the best team in the history of foot- college football. And in, and in, it... I won't go through all of it. I hope readers will take a look at it. But in the end, they lost on one play, and so, uh, nobody talked about them as being the best football team in history. My point was, and I, I, I wrote, I entitled this section What's Real. Maybe they were the best team in history, and maybe the fact that they didn't, weren't successful on that one play that the whole game, uh, maybe it was because the wind was blowing left to right rather than right to left at that moment. And so we should not be too firm in our conclusions. It's, I guess the, the recurrent theme is that, is, is, uh, lack of certainty. But I, I really would push people to Fooled by Randomness. Uh, there's a little book by John Kenneth Galbraith called The Short History of Financial Euphoria, and a great quote. He said, "We have two kinds of forecasters, the ones who don't know and the ones who don't know they don't know." And, and that has been very, uh, inspirational for me.

    17. TFTim Ferriss47:09

        I was, uh... And I, I don't think this was attributed to you, but, uh, I came across it in l- looking at some highlights of your memos, uh, in prep for this conversation, and I don't think it's attributed to you, but someone said s- "Dumb money can become smart money if it accepts its limitations." I don't know if you would agree with that, but it, it, it's, it stuck with me as maybe, uh, not necessarily forecasters but at least people who cultivate becoming aware of what they don't know.

    18. HMHoward Marks47:40

        Sure. Well, that, I think n- first of all, knowing what you don't know is w- w- one of the keys to success in anything. You know, Dirty Harry said, "A man should know his limitations."

    19. TFTim Ferriss47:50

        [laughs]

    20. HMHoward Marks47:51

        Uh, I wouldn't say... Yeah, it, it, it's not my quote. I wouldn't necessarily say that dumb money can be smart money. Uh, but, but I, I would say that one of the ways to avoid being dumb money is to not act as if you know things you don't know. Um, maybe by the time I get done giving the quote, I'll be able, able to remember who said it, but somebody very wise said... Mark Twain, that's it. "It's not what you don't know that gets you into trouble. It's what you know for certain that just ain't true." That is so important. There's nothing more dangerous in life than being sure you know something that you don't know. If you are, if you have excess certitude, you will do things boldly in dangerous ways and to dangerous extents that have the ability to get you into trouble, get you killed. But a sentence that starts off with, "I'm not sure, but," is unlikely to lead to fatal action. The distinction to me is so clear and, and so unarguable that I, I think this is one of the most important things for life. Know your limitations.

11. 49:03 – 56:32

    Staying calm, balancing humility with action, and why investing can’t be reduced to rules

    1. TFTim Ferriss49:03

       You mentioned a little bit earlier how you could potentially say to yourself in the morning, "I don't know. I don't know. Maybe he or she is right. Maybe he or she is right." Uh, it makes me think of some of these memento mori type quotes that, uh, may be, may be apocryphal from ancient Rome where they'd have someone behind the emperor when he's being paraded through the streets saying, "You're just a man. You're just a man," something like that. But I know this is, is seemingly maybe not on the same topic, but nonetheless, I, I, I wanna ask about it. Do you have any particular routines or habits in the first, say, hour or two of your day, whether it's now or whether you were kind of... If you c- if there were a particularly productive period in your professional life where you feel like those routines or habits in the morning were important. Does anything come to mind?

    2. HMHoward Marks49:58

       I don't have stylized routines. I, I, I, I mean, I would just say that my life is, is pretty calm, and I try to keep it that way. Um, and, um-

    3. TFTim Ferriss50:08

       What would be a symptom of it not being calm, and how would you respond to that?

    4. HMHoward Marks50:12

       Well, watching too much political TV and getting exercised about what you see on TV would be a good example. I mean, uh, that's, that's negative energy. That's not gonna contribute to your, your effectiveness in the day. Now, my... The fact that I don't get exercised about what I see on the news shows, um, is not in, um, purposeful.

    5. TFTim Ferriss50:35

       So up to this point, we've talked a fair amount about the importance of avoiding hubris, of understanding your limitations, the incompleteness of your knowledge. How do you balance that with perhaps knowing your strengths well enough or having conviction in evidence to the extent that you can then take action?

    6. HMHoward Marks50:54

       Sure. Well, that's a great question, Tim, and clearly it's essential to balance. Uh, you don't wanna be the person who thinks he knows everything, but you can't be very successful in life, and especially not in investing, if you think you're the person who knows nothing. Um, there is no magic in it. Uh, there is no rule, no method. Uh, it, it's just a, a, an awareness. Um, but we, we have to feel we know enough to take action. Now, most successful people, most smart people, uh, have, uh, uh, don't have a problem in that area. They have a history of having their ideas validated for the most part. Um, but I think it's, it's, it's... I mean, it is one of the great, uh, conundrums which is unanswerable, uh, methodologically. You know, you buy a stock at 80, it falls to 60. You say, "Well, I think it's cheaper now. I like it more. I'm gonna buy more." You buy more. Now it falls to 40. Is there a point at which you say, "Well, maybe I'm wrong, and maybe the market's right"? Uh, you know, if you, if you throw in the towel and sell every stock you buy when it goes down a little, you can't, you can never be successful, but if you ignore the possibility that you're, uh, wrong, uh, you can never be successful. Um, and you ha- you have to strike a balance. So, uh, when you buy a stock and it goes down a little, you take another look at your analysis. Uh, is there anything you missed? Uh, did, did your analysis hold water, and, and so forth. Maybe you talk to some people that you respect, uh, to get their opinions. Um, but, uh, you know, again, if you're, if you're too sure, you're in trouble, and if you're too unsure, you're in trouble. Uh, you have to strike a balance.

    7. TFTim Ferriss52:50

       If we come back to the, the hypothetical example you gave, someone buying at 60, drops to 40, drops to 30, drops to 20. To avoid being in that position where you are offering yourself the option of buying or selling at each of those check-in points, what are you deciding in advance so that you don't make those interim mistakes or you don't even make those decisions or, or look at them to begin with?

    8. HMHoward Marks53:18

       That's not my approach or Oaktree's approach. We don't have preset rules. Everybody says, "Well, why don't you just set a rule?" There, there, there are things called stop-loss orders.

    9. TFTim Ferriss53:27

       Right.

    10. HMHoward Marks53:27

        You buy something, it goes down 20%, you sell it every time. There is no rule that will ever work, uh, in every case. Um, y- y- you have a s- you have a rule that goes down 20, you're out. So it goes down 21, you sell, then it goes up 100. You know? Or it goes down 10, you don't sell, and it never goes up again. Um, there, there can't be a rule that always works. One day, just before the publication of my other book, uh, I had lunch with Charlie Munger, and, and at the end of the lunch, when I got up to go, he said, "Now, just remember, none of this is meant to be easy. Anybody who thinks it's easy is stupid." These things cannot be reduced to a rule. The market operates so as to confound rule makers. Uh, you know, it, it... And I wrote a memo five years ago called It's Not Easy. It all comes down to judgment. We have to have... If we're gonna have superior investment performance, we have to have superior judgment. And, uh, y- you, you... I mean, you can work on your processes, both intellectual and emotionally, but you can't... I mean, superior judgment is, isn't something you can order up, and not everybody can necessarily attain it. Um, but, uh, I, I mean, I think that one of the most important things is, is to dismiss the concept of a process or a rule that always works in the absence of superior judgment.

    11. TFTim Ferriss55:05

        Is the judgment the the decision to take a certain path versus another. In other words, and I know I'm gonna be bastardizing this, but if, if, if an advantage could take the form of access to better information, better analysis of that information, uh, making a better decision with this, with that information that is available, having the courage to act on it, and then the emotional fortitude to either act on it or also sit with that decision

    12. HMHoward Marks55:35

        Yes

    13. TFTim Ferriss55:35

        ... and there, there may be other behavioral psychological advantages or disadvantages, I'm sure there are. When you talk about judgment, is that a particular link in that, in that chain? Is it, uh-

    14. HMHoward Marks55:48

        I think judgment is everything. Uh, uh, f- for example, just to follow your taxonomy, judgment is knowing when you have information that others don't, and if you think you know something that others don't. It's knowing when yours is likely to be valid and n- knowing whether you're likely to be off beat. It's n- understanding how to analyze it. It's... Judgment is, is, is the reaching of conclusions based on your analysis. Um, and, uh, judgment is all we have to tell us when something goes against us, whether we should hang in or give up. So, um, a- as I say, I think it's, it's all judgment.

12. 56:32 – 1:02:27

    The key valuation question: “How much optimism is factored into the price?”

    1. TFTim Ferriss56:32

       I would imagine a lot of people read your memos and your writing to develop, in, in hopes of developing better judgment, and that while there, there is no one rule that will work for all circumstances, all cases, there may be certain questions or tools that prove helpful in a, in a greater percentage of cases than others. And to, to that, I would love to refer to a few things that I have in front of me. One is, is a letter that you sent to me along with the book, and, uh, towards the end of the letter, it's, it, uh, it says, "I, I draw on my 50 years of investing experience to provide an orientation to the usual cycles in the economy, corporate profits, the availability of credit in the securities markets, as well as some of the less ordinary ones. For example, in distressed debt, investor psychology, and even in success. But I think potent- the, I think potentially the most useful chapter, uh, the most useful is the chapter on the cycle and attitudes towards risk. How investors are thinking about risk and behaving toward it at a point in time might be the single most influential determinant of market's position in the cycle, uh, and thus the best indicator of how we should behave with, uh, regard to." And I, I read that chapter. I believe I had the right chapter, and there's a, there's a point in this chapter that is, uh, that has a few lines bolded, which I really appreciate, by the way, and it is, "If I could, if I could ask only one question regarding each investment I had under consideration, it would be simple. How much optimism is factored into the price?" Uh, could you talk about this question and perhaps give some examples of using it or how people might use it?

    2. HMHoward Marks58:16

       Sure. Y- you know, I started in the business in a summer job at Citibank, summer of '68, 50 years ago, and the bank was an investor in the fift- what was called the Nifty50, the 50 best and fastest growing companies in America. And if you bought the stocks the year I showed up and held them five years, you lost almost all your money, in the best companies in America. Then 10 years later, I switched to the, uh, so-called junk bond business, high yield bonds. Now I'm lending money to the worst companies in America, and I'm making money steadily and consistently. So, uh, clearly buying good things can't be the secret to success in investing and avoiding bad things. It has to be the price you pay. It's not what you buy, it's what you pay. And there are... There's no asset which is so good that it can't become overpriced. This is, of course, something that people have to bear in mind when they look at the FANG stocks. And on the other hand-

    3. TFTim Ferriss59:15

       For those who don't know, could you... FANG?

    4. HMHoward Marks59:16

       FANG, Facebook, uh, Amazon, Netflix, Google, and, and they throw in Alphabet too. Um, and, um, so there is n- no asset which is so good that it can't be overpriced. There are very few assets which are so bad that, that they can't be underpriced, and thus a bargain. So what we have to look for if we're gonna be successful investors, uh, now my school, which is called value investing, it puts more emphasis than perhaps, uh, v- venture capital or, or growth investing, which, you know, largely looks for brilliant futures. But it, it, the key is paying a low price relative some, to something called intrinsic value. If you pay a high price relative to the value, you're unlikely to do well, and you probably have to get lucky, uh, to have a good return. But if you pay a low price relative to the intrinsic value, then the odds, again, like my book says, are, are on your side. So we want low price to value. How do you get low price to value? And the answer is low optimism. Uh, there are other ways to describe it.

    5. TFTim Ferriss1:00:26

       You mean looking for low overall optimism?

    6. HMHoward Marks1:00:28

       Right. If, if, i- if... In short, the things that everybody feels good about are likely to be the things that are high priced, and the things that everybody feels bad about are likely to be low price. So, uh, if you could find out that here's, here's a stock, nobody thinks this company can ever have a good day, maybe there's a chance that it'll produce some favorable surprises and make you a lot of money. If there's a, if there's a s- a company like the Nifty50 back in '68, everybody assumed literally, Tim, nothing bad could ever happen to these stocks, then clearly there has to be so much optimism in the price that it's, that there'll never, there can never be a favorable surprise. We make money from favorable surprises, and if, if the conviction of, uh, positive conviction is so high, then c- by definition there can never be a favorable surprise. So, uh, I, I think that this is a, a number one concept.

    7. TFTim Ferriss1:01:31

       Uh, you, you d- you, you mentioned, uh, it, this... I think, I think you said the word never, uh, in this sort of hypothetical, uh, exuberant enthusiasm-

    8. HMHoward Marks1:01:43

       Yeah

    9. TFTim Ferriss1:01:43

       ... what someone might say. And, uh, what, what I believe you... There's certain words you dislike using-

    10. HMHoward Marks1:01:48

        Well, look

    11. TFTim Ferriss1:01:48

        ... or pay, pay, pay attention to when they come up.

    12. HMHoward Marks1:01:50

        It's all part of the, uh, of this, uh, lack of, uh, intellectual hubris.

    13. TFTim Ferriss1:01:56

        Right.

    14. HMHoward Marks1:01:57

        We should never say never, always, has to, can't. You know, these, these, these expressions are far too absolute to be winners in a world beset by uncertainty and randomness. Um, and, uh, when you, when you use those words, uh, you, you tend to get into big trouble.

13. 1:02:27 – 1:12:21

    Taking the market’s temperature: checklists, bull-market stages, and where things stood in Aug 2018

    1. TFTim Ferriss1:02:27

       When assessing, uh, public sentiment, uh, it could be really wide, let's say anyone participating in the S&P 500, it could be narrower, but w- let's, let's assume we're looking at the, the, the broad, uh, the broadest collection of market participants, w- at least let's just, let's just say S&P 500. I was texting with a friend of mine who's a successful investor, very different stylistically than yourself, and I asked him, I said, "What, what would people use or, or what do investing pros use or what's, what do some of them use to measure how feel- fearful or greedy," uh, and then in quotation marks, "the market is? Are there go-to indices or polls?" And he said, "People use the VIX as a measure of fear," VIX. Uh, and then, um, he said some people might use something like yield on junk bonds as a measure, uh, in other words, yo- low yield equals complacent market. What are, let's say, it seems so difficult to keep track of the media as a whole, although certainly it becomes obvious at some point if it's all negative or all positive. Are there, uh, particular indicators that you like to pay attention to or, or your firm likes to, to at least, uh, keep an eye on?

    2. HMHoward Marks1:03:44

       In the old book, there's a chapter that talks about the importance of taking the temperature of the market, knowing where we stand, and it has a... It, it concludes with a, a checklist, uh, largely tongue in cheek, uh, called the, uh, Poor Man's Guide to Market Assessment, and basically asks some simple questions. What's going on? Are, are... If a new fund comes out, does it sell out immediately or does it struggle? Um, if, um, if, uh, if an investor goes to a cocktail party, yeah, there you are.

    3. TFTim Ferriss1:04:19

       It's also in the new book.

    4. HMHoward Marks1:04:20

       Oh, it's also in the new book.

    5. TFTim Ferriss1:04:21

       No, it's good. Yeah.

    6. HMHoward Marks1:04:22

       Uh-

    7. TFTim Ferriss1:04:22

       It's worth-

    8. HMHoward Marks1:04:22

       You know, if, if you, if, if an, if an investor like me goes to a cocktail party, is he, is he the center of attention that everybody wants to talk to? Well, that's probably a, a sign that-

    9. TFTim Ferriss1:04:31

       [laughs]

    10. HMHoward Marks1:04:31

        ... that interest in the market is too high, or is he s- pushed into a corner and everybody wants to talk to, to the, uh, athletes and the, and the venture capital guys, and that's probably an indication that interest in my f- part of the market is too low and that bargains may be available. Uh, you know, and when you turn on TV, uh, is it all they wanna talk about is the good news or the bad news? And, um, uh, I have some cartoons in, in, in the new book, uh, old cartoons dredged up from my files, uh, but you know, um, it, it just, they demonstrate that virtually everything in the world and in the markets is subject to either a positive or a negative interpretation. And if, if, if everybody is interpreting everything positively, that tells me that the, that the spirits are too high and, and perhaps ready to be dashed and, and vice versa. You know, the greatest thing I was ever taught was back around '73, '74. Somebody said, "I'm gonna tell you about the three stages of the bull market." And in the first stage, just a few incredibly insightful people understand that there could be improvement. And in the second stage, most people recognize that improvement is actually taking place, and in the third stage, everybody and his brother believes that things will only get better forever. Now, I think this is, number one, this is a very accurate description of the world. Number two, clearly, if you buy in the first stage when only a few people understand the potential for improvement, you're gonna pay a low price because there isn't much optimism in the price. Then i- as you progress to the second and third stage, the unanticipated improvement takes place. That gives the market a favorable surprise. The stock prices or the asset prices rise in response to those favorable surprises. Um, and, uh, but you eventually reach a point where the good news convinces people that it's gonna go on forever. And when everybody believes that things will get better forever, clearly it's likely that so much optimism is in the stock price that it's dangerous and unlikely to yield a profit. So I think that the three stages of the bull market, uh, and conversely of the, of the bear market, are really important, not as a money-making rule but as something to bear in mind and watch out for.

    11. TFTim Ferriss1:07:18

        I'm gonna ask you a few questions that, that, uh, you may not like but that my fans will [chuckles] Kill me for if I don't ask. So where, uh... I guess number one is where do you think we are at the moment? And of, of course, this has to be timestamped, uh, and, and we're, we're talking in August 2018. Uh, and w- what has you worried? What has you optimistic, if you're optimistic about anything?

    12. HMHoward Marks1:07:45

        Sure. Well, where are we? For the last 10 years, ever since the crisis, th- people have been asking that question in the form of what inning are we in? Uh, when they asked it in late '08, w- uh, what they really meant was, uh, how much longer will the pain go on? Uh, now what they're asking is how much longer will the pleasure go on, and the bull market, and the economic, uh, recovery? I think we're in the eighth inning. Now, you don't have to timestamp it because I've been saying this for a while, um, and, and I'm likely to continue to do so. But about a year ago, I came to realization that that observation, even if accurate, is of limited use because unlike baseball, we don't know how many innings there are in a game. This is a big distinction. In a normal baseball game, we know there are nine innings. If I say we're in the eighth, and if I say it accurately, that means the good times are about to end. But in economies and markets, there is no fixed duration. So the bull market, this is the 10th year. That's a long time. In the economic recovery this month, we have begun the 10th year. The longest economic recovery in recent history is 10 years. So these observations start to tell you not that it's gonna end, but that the likelihood of its continuing is declining. The odds are not on your side. Uh, when you're in the 10th year, the odds of having 10 more years of recovery seemingly are not good. We don't know if there's some reason why there has never been a recovery of more than 10 years, uh, but we have to wonder if there is. Um, but on the other hand, we can't be too sure. Uh, now, I believe that this economic recovery for many years was the slowest on record. That is probably helpful because that kept excesses from coming into existence that have to be corrected, uh, with a, with a downturn. Um, so you asked about the good news. The good news is that the economy is functioning at a high level. We just had a quarter of unusually rapid growth. Um, unemployment is, uh, declining. Our economy is the envy of the world. Um, stock prices, which w- were very high when measured by price earnings ratio last year, are not so expensive this year because the earnings have been supercharged by the tax bill. The, the projected earnings of the S&P 500, uh, are, are way up this year, 23%, I think, which is unusual. And higher earnings m- everything else being equal, means a lower price earnings ratio. So on mo- by most measures, uh, stocks are only slightly expensive at this point in time. So that's the good news. The bad news is, number one, interest rates are likely to increase, and interest rates increase the burden of debt on companies. And when bonds yield more, they offer more competition for stocks. Uh, clearly there are a lot of uncertainties in the macro world, in the geopolitical world, and in the political world. Um, the, the, the greatest of which is the possibility of a trade war, which, uh, almost everybody thinks would be extremely negative, uh, not only for, uh, the US and for the people who engage in the trade war, but for everyone. And, uh, I think that i- interestingly, what we've been talking about is assessing the level of investor psychology. I don't believe that investor psychology is terribly frothy. The way I've put it in the past is that people are not thinking bullish, but they're acting bullish. A lot of people have moved into higher risk investments in order to get the returns they want because right now, safe investments, treasuries and, and high grade bonds and cash and money markets offer so little. So people have been forced, uh, to move out the risk curve and take more risk, and that makes the world a riskier place for you and me. Uh, I, I borrowed a phrase from my late father-in-law who said that those people could be described as handcuffed volunteers. They're doing things not 'cause they want to, but because they have to. But the effect on the market is the same. When people move to riskier actions, that makes the market riskier for everyone.

14. 1:12:21 – 1:18:05

    Practical allocation mindset: comfort levels, twin risks, and “move forward but with caution”

    1. TFTim Ferriss1:12:21

       So if we were to consider all of that, uh, if you had, say, three people come to you, and you had to, you had to give them some response because it's like a mother-in-law, people in the family. So you, you have to give them some kind of response. [sniffs] And I, I might be... Feel free to ask some clarifying questions. But let's say someone has 100K to invest, 1 million, 10 million to invest. So 100K, 1 million, and 10 million. They make $100,000 a year. That is going to remain stable and predictable. Let's just assume that on the income side. Uh, they are very cautious. I think like a lot of people, the loss aversion and pain of losing $100 hurts much more than the joy they derive from making $100. Uh, and they have their investable funds, in this case, 100K, 1 million, 10 million in cash or cash-like equivalents or some of these safe vehicles currently. And they say, "Howard, I don't know what to do." What are your thoughts?

    2. HMHoward Marks1:13:25

       One of the most important things of, in investing is to make people comfortable. It, it's a mistake to sit there and say, "You should do this. You should do that," regardless of people's comfort level. Because if you violate their comfort level, if you force them into things that are too risky for them and then things go bad, they're unlikely to do the right thing. They're more likely to panic and sell on the way, uh, uh, on the lows, which is the cardinal sin of investing. Uh, so it's very important to assess people's, uh, needs and ability to withstand tough times. Um, clearly, uh, the person who makes 100 and, and, and has 100 doesn't have a big margin of, uh, of safety for tough times. And, and, and they should invest, uh, more conservatively. The person with 10 million, um, uh, depending on his psychology, uh, or her psychology, um, probably would be willing to stomach some losses in the pursuit of big gains. Um, now, people always overestimate in advance their, the equanimity with which they would greet losses. You know, back in 1997, '8, '9, when the s- when the stock market and the tech stocks were rocketing along, what a, what a lot of people I think said is, "Well, I, I, you know, my 401k's been doing so great, I wouldn't mind if I lost a third of my money. It's okay." Believe me, when, when it, when they lost a third of their money, they weren't okay. Uh, but, you know, our mantra, my mantra for the last few years, uh, has been move forward but with caution. And, and, uh, so in varying degrees to those three people, uh, what I would say, we are investing every day. We are endeavoring to be fully invested today other than in funds that are strictly designated as standby funds for the, for the crisis. We are definitely taking risk, but with caution. We're a cautious firm. We invest in risky asset classes, high-yield bonds, distressed debt, uh, real estate, emerging market stocks and bonds, et cetera. These are, these are risky assets, and Oaktree has always taken a low-risk approach, a controlled risk approach to those asset classes. So when I say with caution, I mean with more caution than usual. I think this is a time for more caution than usual. Uh, a- and that's what I would tell those people. But I don't... So I think that the, the, uh, the, uh, outlook is not so bad and the prices are not so high that you have to practice maximum defensiveness and go to cash, uh, and, and, and suffer a 1% return on cash. But I think the outlook is not so good and prices are not so low that this is time for aggressiveness, and I wouldn't be aggressive. The, the... I think one way to, that I help myself make these decisions, and it might he- be helpful to your listeners, is I re- constantly remind myself and others that a- as an investor, there are really two key risks that we face every day. Now, the first one is obvious, and everybody knows about it. It's the risk of losing money. What's the second? Not so obvious, a little more subtle. It's the risk of missing opportunity. And most people, if, if reminded of the twin risks, they would say, "Well, I think that's right, and the truth is that I, I don't wanna lose a lot of money, but on the other hand, I don't wanna miss all the opportunities. So I'm gonna compromise. I'm gonna balance the two. I'm gonna do something kind of in the middle." Um, and that makes sense. Everybody, you know, other than daredevils and scaredy-cats, everybody should do something in the middle. Exactly where in the middle is, is, is debatable, and should be, uh, tailored to their own psyche and financial position. So the interesting question is, okay, what about today? Today, should you be at, in y- in your normal balance between the twin risks, or should it be different? Should you be in a higher risk position because, uh, so many things yield so little, or should you be in a lower risk position because there are so many uncertainties? And I actually think the latter. So fully invested, and being cautious does not mean being in cash. But everything you wanna do in the investment business, there are higher and lower risk ways to do it, and I think today is a time for the lower risk ways.

15. 1:18:05 – 1:51:26

    Risk tolerance through games, cycle misconceptions, patience, and closing recommendations

    1. TFTim Ferriss1:18:05

       Uh, so I, uh, you know, this is the, this is not the first time I've asked a question like this, but the last time I asked the first part of that, which was making 100 grand a year, I've, uh, someone has 100 gra- grand to spend, was actually at the Berkshire Hathaway shareholder meeting a long, long time ago. And it was my f- my f- my first and only time there, and I was so excited to be there. I mean, it's Woodstock for, you know, investor nerds. And, uh, it was, it was... There was so much excitement. People were camped out out front to be in line. I was part of that, and I asked someone working there where the microphone was that was hardest to get to. And then I sprinted over there, and I was able to ask, uh, Warren and Charlie this question. [chuckles] And the, and of course, you know them, and the responses can be very short. And, uh, I said, "If someone hypothetically were making $100,000 a year, they had $100,000 to deploy in some way, how would you suggest they invest that capital?" And it was along the lines of invest in the S&P 500 or a low-cost index fund in the S&P 500 and get back to work. And I found that very dissatisfying, but in retrospect, uh, certainly not the worst advice that you could give, give someone. Uh, how, how, how do you, uh, what do you disagree with, with Warren most on? What do you guys not see eye to eye on?

    2. HMHoward Marks1:19:29

       You know, Tim, there's a book out called The Warren Buffett Way, and I was asked to write the forward for the latest edition. And I wrote something called What Makes Warren Buffett Warren Buffett, and I listed the things that characterize him. Extremely high IQ, unemotional, great analyst, understand what's important, looks at the things that are important and figures out their import, ignores the things that are unimportant, and on and on like that. And the last one was the most, one of the most important. He's not afraid of getting fired. He doesn't have to worry about the, the interim consequences of error. Most people do. And, um, so, you know, uh, okay, so you say y- your, uh, y- your advice is, uh, or his advice is invest in an index fund. Fine as far as it goes, but how much? Should the person who has 100,000 put the whole 100,000 in the stock market?

    3. TFTim Ferriss1:20:25

       Right.

    4. HMHoward Marks1:20:26

       And especially should they do it today? And if they do it all today, we're confident that 20 years from now they're gonna have a lot more money and they're gonna be really happy. What about a year from now? And, and, uh, not everybody is financially able to live through a decline, uh, a- and emotionally able. And so as I said, the first purpose of investing, especially for people who have more money than they need to eat, should be to make you comfortable. Th- when I started at the bank, Citibank 50 years ago, they had a cartoon on the wall. It said, "Scared money never wins."

    5. TFTim Ferriss1:21:09

       [laughs]

    6. HMHoward Marks1:21:10

       And it's true. And so everybody should invest only up to their comfort level. And, uh, so I, I, I think I would... I, I certainly agree with Warren that for most people they can improve on an index fund. But th- uh, uh, but that's... And I'm not saying that Warren says that everybody should put 100% of their net worth in the, in the index fund, but clearly they shouldn't. And, and I was once at a, uh, at a talk, and I was preceded by, uh, by a college professor. I won't identify him. Uh, Warren always says, uh, uh, "Praise by name, criticize by category."

    7. TFTim Ferriss1:21:47

       [laughs]

    8. HMHoward Marks1:21:47

       So I'll only say, uh, so I'll say I was-

    9. TFTim Ferriss1:21:50

       That's genius

    10. HMHoward Marks1:21:50

        ... I was preceded by a college professor, and here's what he said. And this guy is, uh, known for pro-stocks attitudes. And he said, "If you are of average risk tolerance, you should have 85% of your money in the stock..." No. If you're below a- average risk tolerance, 85. Average risk tolerance, 105. If you're r- aggressive, 125% of your net worth should be in the stock market. And I just think that most people can't live in the long run, uh, in the short run with the consequences of, of being that much invested. Uh, and, and, and, uh, y- being human, we are our own worst enemy. Everything that goes on in the world and the market conspires to make people buy when things are going well and prices are high, and sell when things are going badly and prices are low. And, and fighting that is the number one theme of the book, and it's the number one theme of, of success.

    11. TFTim Ferriss1:22:57

        Uh, just from personal experience, and I mentioned this earlier, but looking at my response in, say, 2008-

    12. HMHoward Marks1:23:03

        Mm

    13. TFTim Ferriss1:23:03

        ... I'd bought a house in 2007 with some very unfortunate, uh, mortgage terms, and, uh, made some very bad decisions also with money that I had in the stock market at that time. And I think in part it was because I h- I, I couldn't have known how I would respond under those circumstances. And when I filled out this very templated form, of course, for whoever it was at the time, I won't mention any, anyone by name, but it was, "To what extent would you be comfortable with a drop in your portfolio over one quarter or one year?" Whatever the, the form of the question was, and it had 10%, 20%, 30%. And I thought, "About 30%, maybe." I mean, pulling an answer out of thin air. I had to answer it to get through the online form. But I'd never experienced anything similar to that. And this just came to mind because I'm looking at a, on a book, at a book on your shelf, uh, Bringing Down the House, about games. We were talking about games earlier. As I understand it, Bill Gates, I think also Buffett played a fair amount of bridge. Uh, certainly many, uh, people in the investing world, uh, including some people who are really, really, really fantastic, uh, some of the guys from Renaissance and so on, poker. Uh, then you have backgammon. What do you play, and what do you think the game that they select says about the person, if anything? And could playing those games help someone to assess their risk tolerance for larger types of investing, or are there other ways to, in any way, accurately determine that?

    14. HMHoward Marks1:24:32

        I think accurately determine, yes. Quantify, no.

    15. TFTim Ferriss1:24:37

        Mm-hmm.

    16. HMHoward Marks1:24:38

        Uh, but I think that we can get a handle on our degree of risk tolerance, risk aversion, and we should. And, um, you know, uh, I was with, uh, my son and, uh, one of his friends this week, and his friend is a great, uh, chess player. The interesting thing about people who play chess is that in chess there's no randomness. Uh, you know, there's no dice to roll. There's no wind to blow, uh, no card to pick from the deck. And, and every... all the information is on the board, and everybody has all the information. So it tells you something about an intellectual process. Um, and, uh, you know, all the way out to craps, which e- where everything's, uh, you know, i- in play all the time based on randomness. Um- So maybe which game we like, uh, tells us something about ourselves, but how we play also tells us about ourselves. Backgammon, which is one of my main games, uh, which is highly probability intensive, um, 'cause it's all the dice, it's the dice and the skill, but the dice mean a lot. Um, you know, in, i- in any situation with any throw of the dice, there are aggressive and defensive ways to play. So, you know, probably, uh, the interesting thing was that if you played and I watched you for a couple hours, I would know if you're aggressive or defensive or risk-averse or risk-tolerant, and, and, and you should be able to do the same for yourself. One of the... As I said before, one of the great things is to understand ourselves, and, and without that, we're really in trouble.

    17. TFTim Ferriss1:26:21

        What are some of the things that otherwise smart people miss about cycles or misconceptions that they believe to be true, like you said with Mark Twain, that just ain't so?

    18. HMHoward Marks1:26:33

        Hmm. I think the... Well, the, the, the biggest mistake you can make is ignore the repetitive nature of the cyclical pattern. Uh, Ray Dalio in his, in his book "Principles," uh, s- s- talks about how much analysis he and his partners did, uh, the, uh, conclusion of which is the ability to look at what's going on in the world or in the market and say, "Oh, that's another one of those." Life becomes very easy when you have studied the past to the extent that you've seen the recurring patterns, and you can recognize them when they come up again. So, so, uh, I, I think that's, I think that's extremely important. Um, but the other thing is, and I think the guiding quote of the book is, uh, is another one from Mark Twain, "History does not repeat, but it does rhyme." History does not repeat. The cycles are never the same in terms of amplitude, speed, duration, cause, or ramifications. But they do... There are themes that repeat that can help us to identify a- and properly respond to cyclical occurrences. So I say in the book that i- i- you know, I've been in the high yield bond business now for 40 years, and there was a time when i- there arose a body of thought that most defaults occur on bond's second anniversary since issuance. And I don't, I don't think there was anything magical about the second anniversary. And, you know, if people believed that, then they would sell all the bonds they had that were 23 years, uh, 23 months old, and buy them back when they were 25 months old if they had survived. But I don't think they would accomplish anything by that because they were... I think they were, they were, uh, assigning an import to a number that was not, uh, valid. So I think it, it's really important to recognize cycles and understand them. Uh, I think it's unimportant to assign importance to these numbers or rules, uh, but it's very im- important to understand what's going on around us. And when, when, when the recovery is old, the bull market is old, the psychology is elevated, the, the, uh, uh, valuations are high, then you should know that the odds are not on your side, a- and you should take some money off the table and behave in a more cautious way, and vice versa.

    19. TFTim Ferriss1:29:20

        Which I suppose also on some level necessitates cultivating a fair degree of patience. Uh, I mean, it would seem to me.

    20. HMHoward Marks1:29:28

        Patience is, patience is essential. There was a investment sage named Peter Bernstein, and he said, "The market is not an accommodating machine. It will not give you high returns because you need or want them." And, you know, i- i- if... I believe that right now we're living in a low return world. And if you say, "Howard, I need high returns in a low return world," the only way to try to get them is by taking a lot of risk, and by definition, taking a lot of risk is, is, is not sure to work and could have negative consequences. So I believe that when you're in a low return world, you have to, uh, accept it and, uh, deal accordingly. Now, this comes from mujō, which we started the interview with. Uh, I talked about mujō in a memo about 20 years ago entitled "It Is What It Is." I think one of the most important things that we can do as adults, be it, be it in the investment world or the real world, is to say it is what it is. In other words, accept things for what they are, deal with them as they are, don't spend a lot of time wishing they were different, uh, you know, uh, uh, certainly don't act as if they were different. Uh, we have to accept the realities.

    21. TFTim Ferriss1:30:47

        I've, uh... F- not that... In my, in my little tiny corner of investing, uh, which is, I mean, d- not even worth mentioning really in this conversation, but I, I, I, I only bring it up to tie it to how helpful actually reading certain, uh... I'm not gonna... It's not quite scripture, but Buddhist thinking related to concepts like mujō and stoic philosophy, Epictetus and so on, uh, how helpful that has been to tempering emotional reactivity. Uh, you mentioned someone I want to, to come back to for a second, uh, Peter. Is it Bernstein or Stein?

    22. HMHoward Marks1:31:28

        Bernstein.

    23. TFTim Ferriss1:31:28

        Bernstein. Financial historian, uh, sadly passed away, I think it was in 2009. I, uh, I've read that you consider him one of the smartest people you've, you've ever met. Why, why is that? Are there any other things that you learned from him?

    24. HMHoward Marks1:31:42

        48 years ago when I was a junior analyst following Xerox for Citibank, and I would give the portfolio managers at the bank my opinions, one of them came up to me and said, "Who is the best analyst on Wall Street on Xerox?" And I said, "Well, the one who agrees with me the most is so-and-so." We always think that the people who agree with us are really smart. And, uh, Peter saw the world the way I did, but in many cases put it into words better. Uh, and, um, um, I wrote a memo, uh, called Risk in '06, wrote Risk Revisited in '14, and then bizarrely, one day I found a memo from him. You pa- you mentioned he passed away in '09. In, in '16, I found a memo from him on my desk. My desk is a little messy, and there's a lot of stuff floating around. And it was a great memo, uh, entitled, uh, Can Risk Be Reduced To A Number? And I took a bunch of stuff, uh, from that in a redo of my memo entitled Risk Revisited Again. Uh, but I just, I just think that Bernstein is great. And, and, and in... On the subject of risk, he said, "Every day we walk into the unknown." Um, and, and as I said, the w- you know, the future is a distribution of possibilities, and some days we don't even know what the possibilities are. And, and I conclude, if I can borrow your copy of the book-

    25. TFTim Ferriss1:33:16

        Yeah, of course

    26. HMHoward Marks1:33:16

        ... I conclude, uh, with, with a quote from him, uh, because I think it's so good. And, uh, if I can find it quickly, he said, "The future is not ours to know, but it helps to know that being wrong is inevitable and normal. Not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future." And I think that that's a great way to, to think about the world we have to work in. And if you accept and inhale the unpredictability, variability, and randomness of the world, I think you're likely to do a lot better in it. Now, that doesn't mean you can't invest. You can't invest even boldly. What it means is you have to assume that things are not gonna always work out right away. Well, of course they're not always gonna work out, but they're certainly not always gonna work out right away, which means what? You have to have patience. You have to have staying power. You have to have fortitude. You have to, uh, uh, uh, not invest so much that if it goes against you, you're gonna panic and get out. Uh, preparing for an unknown world, unpredictable, maybe even hostile world in the short run, is probably a lot smarter than assuming everything's gonna go right and it's gonna go the way you expected, and it's gonna go that way right away, and you're not gonna be tested. Uh, a- and, uh, so I, I think that the, th- this is the kind of thinking that, that, that, uh, you know, when I read Bernstein or s- or some of the other people I've mentioned, you know, I just go, "Oh yeah, right. Sure." That, that gets it for me, you know? And that's why I love his stuff so much.

    27. TFTim Ferriss1:35:19

        Uh, Warren Buffett has mentioned how fond he is of your writing, and that, and I'm paraphrasing here, but if, if he sees it in his inbox or he sees one of your letters, it's one of the first things or the first thing that he'll pick up to read. I'd love to ask you about your reading. Are there any, say, three to five specific newsletters or columnists or economists or writers who you find yourself excited to read these days? Anyone who comes to mind?

    28. HMHoward Marks1:35:47

        I th- I think the best, uh, you know, I work mo- mainly in the credit area, not the stock market. So, you know, most people invest mainly in the stock market and, and we've talked a lot about the stock market. Uh, but that's not what I do professionally. And, uh, our Oaktree's investing is largely in, in something called credit, which means, uh, fixed income securities, bonds and notes, and loans, uh, not issued by governments. That's the definition of credit. Um, and i- in our world, I think that there's a great newsletter called Grant's Interest Rate Observer. It's, uh, a little ironic because it, Grant's has nothing to do with interest rates or almost nothing, but it's about credit. And it, and, and in particular, it exposes, uh, stupidity, and it exposes companies which seem to be... where, where people are not bringing enough, uh, skepticism and, and deals that seem unwise and that kind of thing. And, and I think they do a great job. Now, it, I, I, I think it's fair to say that it has a negative cast. In other words, they're mainly talking about things that are, that are, which are rated higher than they should be, which you should ob- uh, avoid or bet against. I don't think they as often talk about the things that are rated lower than they should be and, uh, and, and present profit opportunities. But for credit guys like us, uh, avoiding the losers is extremely important. And, and I think that's a great, uh, a great newsletter, not only for the content, but for the attitude-

    29. TFTim Ferriss1:37:29

        Hmm

    30. HMHoward Marks1:37:29

        ... uh, and the importance of identifying misperceptions. You know, uh, misperception is the key to operating in the, in the markets, and the, uh, variant perception. You understand things differently from the way everybody else understands them is the key to success, assuming you're right Uh, if you understand everything just the way everybody else does, clearly you can't outperform. That's the death knell for a would-be, uh, professional investor. So you have to have... You have to see things different, uh, from others. That's a necessary condition for outperformance, but you also have to see it better than others. That's necessary, too. Uh, that... Th- the two... The combination of those two is what I call second-level thinking, which, which I mentioned a couple times.
16. 1:51:26 – 1:58:24

    Final wrap-up and Tim’s 5-Bullet Friday mention

    1. TFTim Ferriss1:51:26

       Well, Howard, I really appreciate the time today.

    2. HMHoward Marks1:51:29

       Good.

    3. TFTim Ferriss1:51:30

       This is, uh-

    4. HMHoward Marks1:51:30

       Me too

    5. TFTim Ferriss1:51:31

       ... this is, this is very fun for me, and, uh, hopefully, and I believe will be valuable for people listening. Just to mention a few things, of course, people can find Mastering the Market Cycle, subtitle Getting the Odds on Your Side, everywhere books are sold. Uh, you can also learn more at masteringthemarketcycle.com. People can learn more about Oaktree at oaktreecapital.com. And on social media, you have Twitter, Facebook, and LinkedIn, all the same, howardmarksbook. Is there anything else that you would like to say to the people listening? Any f- recommendation, question they should ponder, action you might ask them to take? Anything at all, uh, besides, uh, besides the book itself, which I encourage people to check out.

    6. HMHoward Marks1:52:14

       Well, first of all, we've made repeated reference to my memos. They're all available online at oaktreecapital.com, uh, uh, under the heading of Insights, Chairman's Memos. You can get the last 29 years' worth. You can also s- sign up for a service that'll notify you wh- when one is published. The price is right, uh, because they're free. Uh, and, and I hope people will, will read them. And, and then I just wanna say that I like to hear from people. So, uh, I, I don't always have time to answer everybody, but m- my writing of the memos and the books has been e- enormously rewarding because I get lovely memos from people which say, uh, that I made, uh, complex things seem clear. Um, that's the one that gets me going the most. So, uh, if people wanna comment, or if they wanna take issue or, or ask a question, I'll, I'll try to get back to them.

    7. TFTim Ferriss1:53:06

       And is the, is the best way to reach out to send you a note on social media? Or, uh, I would p- advise against giving out any type of email address that will get deluged. But, um... Or maybe the answer is they should figure it out. [laughs]

    8. HMHoward Marks1:53:20

       Well, we're on social media.

    9. TFTim Ferriss1:53:21

       Okay.

    10. HMHoward Marks1:53:21

        And, and we'd be glad to hear from them there.

    11. TFTim Ferriss1:53:23

        Perfect. Uh, well, Howard, thank you again so much for the time. And for everybody listening, links to everything we discussed, uh, will be in the show notes, as usual, at tim.blog/podcast. And until next time, thank you for listening. [upbeat music] Hey, guys, this is Tim again. Just a few more things before you take off. Number one, this is 5-Bullet Friday. Do you want to get a short email from me? Would you enjoy getting a short email from me every Friday that provides a little morsel of fun for the weekend? And 5-Bullet Friday is a very short email where I share the coolest things I've found or that I've been pondering over the week. That could include favorite new albums that I've discovered. It could include gizmos and gadgets and all sorts of weird shit that I've somehow dug up [laughs] in the, uh, the world of the esoteric as I do. It could include favorite articles that I have read and that I've shared with my close friends, for instance. And it's very short. It's just a little tiny bite of goodness before you head off for the weekend. So if you want to receive that, check it out. Just go to 4hourworkweek.com. That's 4hourworkweek.com all spelled out, and just drop in your email, and you will get the very next one. And if you sign up, I hope you enjoy it. This episode is brought to you by Helix Sleep. Last year, I focused on dramatically improving a few things, surprise, surprise, most notably the quality of my sleep, which seems to affect just about everything. This led me to revisit, you name it, my daily routine, morning routine, exercise, diet, all the way to what I slept on. And I ended up getting all new beds here in Austin, Texas, including mattresses from Helix Sleep. Helix has built a sleep quiz that takes two minutes to complete, and they use the answers to match your body type and sleep preferences to the perfect mattress. Whether you're a side sleeper, hot sleeper, cold sleeper, or you like plush, you like firm, with Helix, there's no more guessing or confusion. Just go to helixsleep.com/tim, take their two-minute sleep quiz, and they'll match you to a mattress that will give you the best sleep of your life. That is their promise. For couples, Helix can even split the mattress down the middle, providing individual support needs and feel preferences for each side. They have a 10-year warranty, and you can test drive your mattress for 100 nights risk-free. Right now, Helix is offering up to $125 off of all mattress orders, so check it out. Get up to 125 off at helixsleep.com/tim. That's helixsleep.com/tim for $125 off your mattress order. Take a look, helixsleep.com/tim. This episode is brought to you by Inktel, and I've used them personally. Ever since I wrote The 4-Hour Workweek, I've been asked over and over again how I choose to delegate tasks, how I do 80/20 analysis, and so on. At the root of many of those decisions is a simple question, actually two questions. Number one, how can I invest money to improve my quality of life? I use that in investing as well. The second, how can I spend a little money or moderate money to save significant time? Inktel is one of those investments. They're a turnkey solution for all of your imaginable customer care needs. I used Inktel during the launch of The 4-Hour Body, which was very, very involved, and they provided 24/7 customer service for my land rush campaign because it was critical for me to take care of every person who purchased my books and participated. This allowed me to focus on the things that I am better at, my strengths, like the marketing plan that we'd worked on for six months, implementing that. Inktel trains their experienced customer service reps to know your business and your products inside and out and make your customers raving fans. They answer more than a million customer service requests every year, and they can do so across all platforms, including email, phone, social media, text, even chat. Leaving your customers with poor service or just mediocre service, which by the way, in a competitive pool is a huge liability. Long wait times or unanswered messages carries a massive cost and risk to your business. Inktel removes the logistics headaches of this type of communication, allowing you to focus on your strengths and grow your business. It can be a real competitive advantage, and I see many, many e-commerce companies and tech companies thinking of customer service as a good enough checkbox or an afterthought. And just like Airbnb used design in innovative ways to be a competitor and to win, you can do the same thing with customer service. So as a listener of this podcast, you can get up to $10,000 off, that's a big discount, $10,000 off your startup fees and costs by visiting Inktel.com/tim. So check it out. For more info, go to Inktel.com, I-N-K-T-E-L.com/tim.

Episode duration: 1:58:43