Name: Investing In Overpriced Markets (w/ Howard Marks) | Interview | Real Vision
Uploaded: 2019-05-25T14:54:07.000Z
Duration: 9 min 52 s
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Gerund

Howard, thank you for taking the time to join me today.

To-infinitive

Past simple

I know you have a busy schedule and as I said, I've read everything you've written over the

And I wanted to thank you personally for sharing all those thoughts because they've been hugely

instrumental in me being able to built my own framework.

And that's a lot of what I want to talk to you about today is how you think as well as

And to start I just want to take you back to 2005, 2006 which was a time when you were

making some pretty aggressive moves at the time with Oaktree's portfolio and talking

A lot of people kind of thinking, is he nuts?

This is some pretty dramatic statements to make.

Can you just take us back to that point in time and talk about what it was you were seeing

and what you felt you had to try and prepare for?

What we want to know is when psychology is too high and optimism is too high, and as

a consequence, behavior becomes imprudent.

When behavior is imprudent, then asset prices go too high based favorable expectations and

We actually made the best purchases we ever made in the summer of '02 in the world of

distressed debt-- because we had the meltdown of the telecoms, who had overborrowed to build

Actually it wasn't an event in the world, it was an event in a little corner of the

But it came back and everything was hunky dory by '03 and well into '04.

And to me, the most important thing was that in '05, '06 my partner Bruce Karsh and I spent

the whole day complaining about the deals that were getting done.

And when investors are practicing the willing suspension of disbelief, it's dangerous.

And in a prudent market where people are appropriately skeptical and risk averse, there are deals

And so we just took that as a great sign of danger and so we sold a lot of assets and

we liquidated some large funds we were managing and only replaced them with small funds--

and raised the standards for the investments we would make.

And most importantly, at the beginning of '07, our distressed debt funds had always

And at the beginning of '07, we set out to raise a reserve fund that would invest if

And that fund eventually reached 11 billion by March of '08.

Now this was about the time when you wrote race to the bottom, which is probably one

Yeah, I'm fascinated in what it takes to go from talking about how crazy the market is

and how badly all these crazy deals get done to actually doing something about it.

Because it's so easy to sit there and say, woah, this is crazy.

And it's still crazy three months from now.

How do you galvanize yourself to take action and say you know what, we're going to go out

on a limb here and actually do something about this?

My experience, for some reason, has enabled me to not be afraid of being wrong.

I'm always conscious of the opportunity to be wrong, but if I hold an opinion and Bruce

agrees, then I think the greater risk is not taking action.

And the other thing is by that time, I had been in this business almost 40 years, and

And cycles do tend to rhyme and we thought we were seeing the heated part of an up cycle,

which is a good time to take defensive action.

So the race to the bottom talked about the fact that the securities markets and the lending

And the opportunity to buy a security or lend money goes to the highest bidder.

And if you think about an auction for a painting or something like that, the winner-- who pays

the highest bidder-- is actually, if you turned it around, he's the person who's willing to

And so if you are making a loan, and there's a competition to make that loan, the opportunity

to make a loan will go to the person who receives the least for his money-- the least return

and the least safety and the least structure.

And when too many people have too much money and they're too eager to put it out, then

the bidding goes too far and the winner of the auction is actually a loser.

This is fascinating because when I read that memo, it was so simple.

It hits you like a ton of bricks when you look at it in just a slightly different way.

But again, this was first quarter of '07.

So you were still quote unquote \"wrong\" for a year and a half.

So a lot of people have you been expecting markets to stumble for a while now and they

And we'll talk about the Fed and all kinds of stuff I'm sure in a little while.

But how do you manage that expectation and then something you're so sure about, not happening?

Henry Kaufman said, there are two kinds of people who lose a lot of money-- the ones

who know nothing and the ones who know everything.

I use a lot of quotes and adages in my memos as you've seen in the book and when I speak.

And the first of the great investment adages that I ever learned in the early 70s was that

being too far ahead of your time is indistinguishable from being wrong.

But you have to live with that because in our business if you're wise, you have a sense

And the people who think they know when, tend to get into big trouble.

If you accept all of that, what it says is you have to think of what you think will happen.

You have to take action, but you have to be willing to wait that long period until it

You also said, what a wise man does in beginning, the fool does in the end-- which is, again,

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Investing In Overpriced Markets (w/ Howard Marks) | Interview | Real Vision

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