Howard Marks: 50 Years of Investing Wisdom in 50 Minutes (Priceless Lecture)

Well, Cain said it best of anybody. He said, "Markets can remain irrational longer than you can remain solvent." MH and some... so somebody who bets that a market which is irrational is going to... a market is too high, we say that's irrational. Somebody who bets heavily that that means it's going down tomorrow could lose his shirt. Good morning, everybody. I am Katie Cotch. I'm the CIO of our public equities business in Goldman Sachs Asset Management, and I'm here with our guest of honor, Howard Marks, who's the co-chairman of Oaktree Capital.

Howard, thank you for being with us.

It's a pleasure to be here, Katie.

We're going to start the conversation by talking about market cycles. And just for some stage setting for everybody, and we have a lot of super fans in here of your memos, many of us who have read a lot of these memos know that there are a couple of things that you always dismiss and a few things that you really believe in. So, let me briefly recap that, which is that you don't believe in economic forecasts, unless, of course, they come from Goldman Sachs Research; then you love them.

And you have a quote that you refer to a lot from John Kenneth Galbraith: "There are two kinds of forecasters: those who don't know, and those who don't know they don't know." And we're going to talk about not knowing stuff later. But while you don't believe in forecasting, you do believe in cycles.

The cycle I wanted to start talking about with you, if it would be okay, is 2008. And the reason I would like to do that is I think it was a very defining moment for Oaktree and you and your partner Bruce, the CIO, Bruce Ksh, stepped into the market in a really dramatic way when everybody was running in the opposite direction.

And I'll end just by giving people a sense of the magnitude, Howard and Bruce in, call it the fall, and you'll correct me, of '08, effectively putting $500 million to work a week in distressed debt, and then a total of $650 million a week over 15 weeks across the whole firm. So, you were a buyer of $1 billion of assets when everyone was stampeding for the exit.

So, given that you say you—that predictions don't work—people might look at that and say you predicted the global financial crisis. So, if you weren't predicting it, what were you doing?

You know, we turned very cautious in the end of '04–'05–'06, and the main reason I—what I—I do not believe in forecasts. I believe it's much—it's hard to predict the future. It's not that hard to predict the present. In other words, it's not that hard to understand what's going on today.

So, I do something I call taking the temperature of the market, trying to figure out whether the market is heated or frigid. And because you want to buy when other people are pessimistic and when the climate is cold, you don't want to buy when the market is overheated and everybody's optimistic.

So, the main indicator in '05–'06 was—and I always say I wore out the carpet between my office and Bruce's because I would walk in there a few times a day and I would say—I would hold up an article from the news and say, "Look at this piece of crap that got issued yesterday. If a company can raise money on this basis, there's something wrong in the market." It's as simple as that, you know?

And the market is—you've heard—maybe some of you have heard the term bond vigilantes—but the market is supposed to be like a vigilante. It's supposed to be a disciplinarian. It's supposed to enable good, prudent deals to get done, but not stupid deals. But when anybody can raise money for any purpose or no purpose on any terms, that's a danger signal. And that's what was going on, and it was just getting worse and worse and worse.

And then we got this massive dislocation; everybody's headed for the exits.

Yeah, and you stand up and say buy.

Yes, well, how'd that happen? You know, it really culminated in the bankruptcy of Lehman Brothers on September 15th of '08. We had lost Merrill Lynch and Bear Stearns and Wachovia Bank and Washington Mutual. And now? Lehman Brothers and AIG.

And there was a belief that the whole financial system was going to melt down. By the way, it did feel that way. It really felt like cascading dominoes: either the financial system is going to melt down or it's not. MH. If it melts down, it doesn't matter whether we bought or not, MH, because it's game over for everything. But if it doesn't melt down and we didn't buy, then we didn't do our job right, so let's buy.

That was the analysis. I mean, you couldn't say anything more profound than that.

First of all, there's really no such thing as analyzing the future because the future is unknown. But we look to the past for analogies. And this was—you know, there was no analogy to the Lehman bankruptcy. But the past says we have crises, and they end.

We don't always know how they're going to end in advance, but... so we bought, and it was one of the great buying opportunities of all time. And not only could you get good bargains, but you could invest huge quantities. And we were fortunate that Bruce and I had cooked up this idea of developing a reserve fund.

So, at the beginning of '07, we raised $3.5 billion, which was our fund for that period of time. But we also raised $11 billion, which we put on the shelf because we thought that something was coming. The first closing was March '07. We didn't start investing it until June '08. We actually had $10 billion to spend, so we were able to spend it.

I want to pivot to talk about another cycle. And you had talked about history can be a guide, and you have a quote I've heard you repeat a lot, which is that "History doesn't repeat, but it often rhymes" from Mark Twain.

So, I want to talk about the tech bubble. So, in January 2000, you wrote a memo called "Bubble.com". And actually, for everybody in this audience, I think it's a really powerful thing to go back and read at this moment in time because there are a lot of parallels.

Technology can change the world and not generate a profit. Eventually, these companies need to make money. Valuation matters, all that good stuff. You have said that, that memo, when you wrote, got very wide receptance. And you became an overnight success on that.

Why that?

Oh, well, I never had any response in the prior 10 years—none, zero. Nobody even told me they got it. But, of course, this was—I mean, this was the days before the internet, so I mailed them out to a few hundred clients, and they weren't passed around virally like they became.

And you've previously said in—when we get to those moments of euphoria, particularly in tech for example, there's something... people make a narrative that there's something new happening here that history can't discount.

So how would you describe that?

For this one, you have to have something new because, if you only have old stuff—steel, paper, and chemicals—you know, the history is too well defined, and the limitations are too well understood. But if you have something new, that gives flight to the imagination.

Yeah, and you know, you can say, "Well, this is something that's going to make everybody rich." And you alluded before to the fact that, so what they said in '98 and '99 was, "The internet will change the world," and so by definition, any web grocer is worth infinity.

Well, guess what? The internet certainly changed the world, but most of those companies didn't survive because they didn't make money, and they had bad business models, and so forth. And what that memo really pointed out more than anything else was how bad the business models were.

And they sold on, you know, multiple of eyeballs, you know, because there were no earnings, and in many cases, there were no revenues. But, you know, so if you have 50,000 eyeballs a day, it's worth such and such.

But anyway, you have to have something new. So it could be a SPAC, could be SaaS, could be, pardon the expression, Bitcoin, you know? But you know, there's no history to look at, so it's easy to weave a narrative that... you know, and there are no historic valuations to limit you and so forth.

You went on to do a career where you lent money to bad companies people thought were bad and you made a lot of money doing that.

Yes, so tell us what that experience was like.

Well, I was asked to start a high-yield bond fund in 1978, which was really the beginning of that world. Mike Milken had this idea that even a crappy company should be able to raise money. You see, prior to '77–'78, it was impossible to do a bond financing for a company rated below investment grade.

Mike's idea was that—and it wasn't unique to Mike—that even a crap company should be able to raise money in the bond market if it's willing to pay enough interest to compensate for the risk, and that's happened.

So now, as you say, now I'm investing in the worst public companies in America according to the ratings, and making money steadily and safely. So, I reached two important conclusions: It's not what you buy; it's what you pay.

And success in investing doesn't come from buying good things but from buying things well. And if you don't know the difference, you're in the wrong business—literally.

So, everything you buy should offer some combination of excellence of quality and/or attractive price. You don't want to buy a great company at a terrible price. You don't want to buy—you probably don't want to buy something which is horrible fundamentals at a really low-seeming price. It's the trade-off that you're looking for.

Last question on the market cycle: so in your first book, you include the poor man's almanac for investing, and it's a very—it's a checklist.

Well, it's—it's faux, of course. Yeah, semi-faux.

So there are some things to look for to see whether your negative sentiment is negative or positive. And basically, if the sentiment's too positive, you want to hold on to your wallet. It's like a quick summary of it. So do GPs have all the power? Do LPs have all the power? Are the lenders negotiating terms of funds?

And then another one was, lenders are eager, or they're reticent. Capital's abundant; capital's scarce. Somewhere in the verbiage, you put in there that if you're popular at a cocktail party, that's a warning signal that things are too euphoric.

But if you go through that—I'm not going to ask you to make predictions—but you think about that framework we've just laid out here, where are we in this cycle? Because you said we can know where we are now.

Well, I think—I think we're in— I think we're in moderate territory today, you know? And have not some people started calling, you know, bubble two years ago, June of '20? I haven't called bubble at all; I think things are high but not crazy.

And I think that valuations have always been reasonable relative to interest rates. It happens that real interest rates couldn't stay as low as they were, so valuations have proved to be vulnerable. But I just don't think it's crazy. And now, I think that the events of the last six months have taken the, you know, the bloom off the rose, that most of the excesses have been driven out.

So, you know, again, I think we're reasonable. I was, you know, thinking about coming here this morning, and you mentioned that I had more correct forecasts than I admit. But the truth is they weren't forecasts; they were just observations of current conditions.

But nevertheless, when I was working on the book about market cycles with my son Andrew, who is a very good professional investor, I said to him, "Andrew, you know, I think when I look back, I do admit, I said, 'I think most of my market calls have been correct.'" He says, "Yeah, Dad, that's because you did it five times in 50 years."

But it was a very profound thing he said because five, six, seven—whatever it is—times in my career, prices were either here or here. And when prices are at absurd extremes, the case, the logic for a market call is very strong, and the probability of being right is very high, mhm. But not when it's here or here or here or here or here or here—you know, and that's really the difference.

And we're here.

Well, I think we're here, but I mean, the point is the point is here. I mean, prices here have always collapsed, whatever here is defined as. But if I say to you what's the probability of a decline in six months, MH here, you might say it's 95. You would never say 100 to anything in my opinion, but here it may be 75, and here it may be 55.

And then when you pass intrinsic value and you're selling below—well, what's the probability that the next six months are up?

55? 75? 95? So, you know, one of the biggest mistakes you can make is to think that overpriced and going down tomorrow are synonymous. Markets that are overpriced often keep going, and, you know, well, Cain said it best of anybody. He said markets can remain irrational longer than you can remain solvent.

And some... so somebody who bets that a market which is irrational is going to— a market is too high, we say that's irrational. Somebody who bets heavily that that means it's going down tomorrow could lose his shirt or her shirt because markets often are overpriced and become more overpriced and more overpriced and more overpriced and more.

That's why we have words like rising market, bull market, bubble. And if it were true that every overpriced market reverts and becomes fairly priced, then we would never get a because they would stop going up here. But sometimes they go to here, and sometimes they go to here. When they get here, the call is pretty safe, especially if you add the word "eventually."

So what that means is, as long as you realize that nothing is sure to happen in this business, every irrationality can be exceeded. That means that you should try to bulletproof your affairs so that it may be likely to happen, but you want to be able to last long enough so that you're around when it happens.

I want to talk a little bit about emotion for a second. You've said that you need to either be unemotional or act like you are. And I wanted to go actually back to a story you talked about before, which is that you—this 2008, which a lot of people in this audience weren't here—and I think if you weren't there, you might not appreciate how scary that actually was.

I mean, you went through the dominoes of all the banks falling. Yeah, but were you scared when you and Bruce were putting the capital to work? How did you—or if not, how did you keep yourself from being emotional?

Well, let me say, if you think about the norm, what happens? Things are going well; the economy is performing well. Companies are reporting good earnings; stock prices are rising; everybody's optimistic. And the longer this goes on, people become more and more and more positive until they buy here.

And when they run out of money, then things turn around; then eventually the economy weakens; then the corporate profits aren't so good, and stock prices start going down. And people start losing hope, and as this continues, they get more and more depressed, more panicky, and they stop, start fearing further losses until they sell out down here.

In other words, they tend to buy more here and sell more here, which is what the opposite of what we all should do. My mother said, "How, we buy low, sell high."

And, uh, so emotion is our enemy. Emotion tends to get us to do the wrong thing at the wrong time, and we have to resist that. And one thing I point out is that the influences that affect the crowd and make it do what I just described, those influences are universal. I feel them too, you feel them too, and everyone in here.

We read the same newspapers; the news is the same for all of us. In order to outperform, by definition, you have to depart from the crowd. You have to hold a different position, and you have to have resolve to do it. And it's, you know, it can't be easy.

And, you know, I had one of my colleagues come to me in '98 talking about ancient history. Long-term capital had just melted down, and we had the ruble default and the Southeast Asian crisis, and there were a lot of things going wrong.

And one of the guys who considers himself to be very thoughtful is at Oaktree, though, right? Yes, Oaktree comes to me and he says, "This is it. I think it's all over. I think the financial system's going to melt down."

He explains to me all these things, and I said, "Great, thank you for sharing that with me. Now go back to your desk and do your job!" I said, "Battlefield hero is not somebody who's unafraid; it's somebody who's afraid, but he does it anyway."

I mean, if you're in scary circumstances, to be unafraid, you kind of have to be a nut. But the key is can you be afraid and do your job anyway?

I was just going to ask you if you thought it helped that you had each other.

Well, I think— I think it's very important that we have each other and we buck each other up, and you need that because... what I wanted to say is Dave Swenson, who for 35 years ran the endowment at Yale and did a bang-up job, and he wrote a book called "Pioneering Portfolio Management"—I think it was in '98 or '99—and he said that successful investing requires the adoption of uncomfortably idiosyncratic positions.

Everybody has the same influences; everybody thinks pretty much the same. Everybody anoints the same winners and the same and criticizes the same losers. And obviously the tomorrow's winners are usually found on the pile of today's losers, not on today's pile of today's winners.

But to prospect in today's pile of losers, the things that everybody else are junk, you have to be idiosyncratic. You have to take on idiosyncratic positions. And it's a rare person who can do that and not feel some discomfort.

So I think that those two words—uncomfortably idiosyncratic—tell a huge part of the story, mhm. But you have to do it. And you have to—when you know when Lehman goes under, you have to buy. You can't sell.

You actually once you originally introduced a philosophy or term like you need to dare to be great, and then you evolved that over time, which was more nuanced. Can you walk us through that?

Well, I wrote this memo back in '04 called “Dare to be Great.” And there was this guy who was really a con man who used to fly around America in a Lear Jet, and he had these—he dropped the stairs and these two vertically challenged people would get off and unroll a red carpet and a big banner that said “Dare to be Great.”

And he would come into some small town and siphon up everybody's money. I forget what exactly the scam was, but anyway, the point is, in order to be a great investor, you have to dare to be great.

But then, around 2015, I said to myself, "You know, but everybody dares to be great. Everybody's willing to be great." And it had come into another focus for me, so I wrote “Dare to be Great Too,” which I would recommend you read, not one.

And I said, "In order to be a great investor, you have to dare to be different," as I just explained. You have to be willing to do some things that are unpopular, and by definition will look crazy to others.

You have to dare to be wrong because there's nothing you can do in the goal. I think the goal in investing for professionals is to be above average. Investing is a funny business. It's really easy to be average. Just buy an index fund; it's really hard to be above average.

But if you want to be above average, everything you do in the interest of being above average exposes you to the risk of being below average. You overweight certain stocks—that's potential error. You avoid certain stocks—that's potential error. You diversify abroad versus the US—that's potential error. You buy high-beta stocks, low-beta stocks, etc. You hold some cash.

There's nothing you can do in the interest of being above average that does not expose you to the risk of being below average. So if you dare to be different, you have to be willing to be wrong.

I want to ask you one follow-up question on that around risk. And I actually want to go back to the very first memo you wrote, October 12, 1990, and I'm going to just quick recap—I might not get it perfectly right—but there was—you had an observation that there was a Midwest pension fund manager who was in the top couple of percentiles.

He was—in every year for 14 years in a row, he was between the 27th and 47th percentile measuring from the top. So he was solidly in the second quartile every year for 14 years in a row. Where did he come out for all 14? Fourth percentile.

It's crazy math because in most walks of life, if you stick between 27 and 47, your average is probably 37. His average was fourth. So what was the lesson that you—and there's actually like really—not really any other industry I can think of where you get around median over a long enough time and you're top, right?

So what lesson do you take from that?

Well, and the ju—the reason I wrote the memo—what made me write that first memo was the ju... position to some guy in New York who was running an investment management firm that had a horrible year because they were a value firm, and they bet heavily on the banks which did terribly.

And so he comes out and he says, "If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5." And my reaction was, "I like the first guy better. I like consistently a little above average."

The root to performance, which was the title of the memo, "The Root to Performance," I don't like this idea of shooting for the top and being willing to hit the bottom. I'm not interested in being in the top 5% in any one year. I'm absolutely unwilling to be in the bottom 5%. And my clients feel exactly the same.

So why should I do that? We don't swing for the fences. Oaktree does not swing for the fences—consistent batting average. And what I say is, if you look at the normal distribution from your direction, most people say, "I'm going to get here. I'm going to be in the upper tail. I'm going to shoot for the upper tail. I'm going to swing for the fences, and I'm going to have these huge winners."

Our approach is very simple: cut off the bottom tail. That's what this guy in the Midwest did. Dave Van Buskooten was his name. Cut off the bottom tail. So that if you cut off the bottom tail and your total experience consists of fabulous, excellent, very good, good, not so good, so-so—but never terrible—you'll be one of the best not after— not after one year.

Somebody else will swing for the fences and hit it exactly right and will be lionized for her performance that one year. Who can do it for 30 years?

A follow-up question on risk is that you think that there is a subjective judgment is a useful tool in managing risk. I just want to ask you the opposite of that, which is that do you think that there's value in using quantitative tools to measure and manage risk?

No, I really don't. We don't do it at all. First of all, what is risk? It's the probability of a negative event in the future. What do we know about that? What does the past tell us about that? The past has relevance, but it's not absolute.

I think that—and by the way, I was talking about epiphanies before, to digress, if I may?

Yes, you can.

So, I was writing a memo in '06 called "Risk," and I sat down at the word processor and I wrote what I always believed is that risk cannot be quantified. And that's one of the reasons why I don't believe in models because risk, being the probability of a bad event, can't be quantified in advance.

You can have an opinion; you can state it as a number, but that's not quantification. Quantification is measurement, and the probability of a negative event in the past—in the future—cannot be measured. And then I wrote something—you know, you hit the carriage return for the next section. I wrote something that I never thought of before: "Risk cannot be quantified even after the fact."

You buy something for a dollar; a year later you sell it for two. Was it risky?

Any answers?

No, you can't tell. Was it a crazy thing where you got lucky and doubled your money? Or was it a really clever thing that nobody else had figured out where you were sure to double your money? And the answer is, you can't tell.

No, I don't think risk can be measured. I don't think the past is absolutely applicable. In fact, the big money is lost at the juncture when the past stops being applicable, which happens eventually. I don't think it can be—I don't think that the possibilities in the future can be synthesized into inputs sufficient to let a computer decide what's risky or not.

I want to just segue to talk about mistakes. So obviously, you've gotten a lot right, and we've highlighted all of that. You're also a one-liner, which you're clearly a fan of. I just wanted to share a quote: "Experience is what you get when you don't get what you want."

Right.

When have you ever gotten what you didn't want, and what did that look like for you?

Well, when I was starting in my career, I'll never forget I met this guy, and he says, "We're bringing out two new stocks tomorrow." They were both little tech stocks, and he said, "They're both going to double in the first day." I said, "Good. I'll take 100 shares of each."

And I called him up the next day—$10 stock, so I put—I bet $2,000. So I called him the next day, I said, "What happened?" He said, "Yeah, they both doubled." I said, "Good. Sell one." He said, "What do you mean? They're going to the moon!"

I said, "Sell one, and I'll take my money out, and we'll let the other ride." So, I sold one. The other one, 40, 60, 80, $100 stopped trading, and there was something crooked, and when it reopened at 25 or something, you know? So, I learned that there are no short things.

And if something... you know, it's one of the important parts of being an investor is to be a skeptic. And, you know, if somebody comes to you and says, "I've been managing money for 25 years. I've made 11% a year; I've never had a down month," your job is to say that's too good to be true, Mr. Madoff, right?

But very few people did. And so I learned the importance of skepticism. And the great thing in life is to learn your lessons inexpensively, as I did.

One thing that might help someone with that is humility, which is something you're a big fan of, and that's a key cornerstone of our investment culture here.

Good. You're also a fan of Peter Bernstein, I believe, and I just wanted to read a quote from him: "Yes, humility is an enormously important quality. You can't win without it. Survival, in the end, is where the winners are by definition, and survival begins with humility."

Can you reflect on that a little for us?

Oh, well, that's a great quote from Peter. I have a lot of respect for Peter Bernstein.

First of all, it kind of goes without saying, but I'll say it anyway: You can't succeed if you don't survive, MH. And one of my favorite adages is, "Don't forget the man who was six feet tall who drowned crossing the stream that was five feet deep on average."

The concept of surviving on average is irrelevant. You have to survive every day, which means really that you have to survive on the bad days. So that's why I say you have to arrange your affairs— which means your financing, or your capital from your investors, whatever it is—or your portfolio, so that you can survive on the bad days.

So that's one thing. But humility—it's all about humility. You have to—you know, Dirty Harry said, "A man has to know his limitations." Mark Twain said that when you know something for certain, you can get into big trouble. It's absolutely the truth.

And, you know, nothing in our business is certain, and anybody who's certain is really missing the point. So—and we say something similar to how you say it, which is that we always have to know what we don't know.

Yeah, and when you and I had that prep call, we competed with each other about how much we knew that we didn't know.

You won.

Because you've been knowing what you didn't know for longer than I'm not knowing what I don't know. But, you know, it's—I wrote two memos in the middle of... in the middle of the pandemic, probably June of '20, called "Uncertainty" and "Uncertainty 2," talking about the importance of how uncertain things are—the importance of acknowledging that, especially to yourself.

We have to be honest with ourselves. And there's something called intellectual humility, which I think is extremely important. You know what that means?

Intellectual humility: very simple. The other person could be right. And if you go into a discussion and say with the belief that the other person could be right, you're going to have a much more productive discussion.

Do you think—like, just one last question for you on humility—something we've talked about is sometimes it's harder to be humble when you're losing. Actually, when you're winning, it looks very gracious; but when things are working against you, sometimes it can be more difficult.

No, I think—what do you think?

I think it's hard for most people to be humble at any time because they're—they have these defenses that require them to overlook their flaws, MH, and their limitations, and so, you know.

Look, I think that thing about experience is what you got when you didn't get what you wanted. Turn that around: What did you get when you got what you wanted? If you look at human endeavor, I believe strongly that success carries within itself the seeds of failure, and failure carries the seeds of success.

What do you learn from success? "I can do it; I can do it again. It's easy." "I can do it in other fields; I can do it with more money; I can do it alone." "It was me; it wasn't the team." And these are horrible lessons.

So, I think that success teaches terrible lessons because it plays to our ego. And, you know, I think you learn more from your failures, and hopefully you learn humility.

One last question on this is: How do you balance the importance of knowing there's incompleteness of knowledge with the fact that ultimately you have to make some decisions? Because you're managing people's money.

All these things are about balance. If you assume you know nothing, you can't function. If you think you know everything, you're going to get in trouble. You have to strike a balance, and hopefully it's an appropriate balance.

Think about confidence. Mhm. If you're an investor, if you don't have confidence, then every time you buy something, if it goes down, you're going to sell it because you're afraid it's going to go down more and you're going to be an abject failure. You have to have confidence.

If you buy something and it goes down, you have to reassess your thesis, and if it's intact, you have to buy more, or you can't be great.

But on the other hand, if you have hubris and you feel you can't possibly be wrong and every time something goes down, you blindly double down, then you're probably going to get into trouble and maybe be asked to leave the industry.

So, you have to have this balance: confidence but not overconfidence; humility but not over-humility.

And then one question for you just on pushing on this concept of knowing what you don't know. So we have a lot more data now by definition than ever in the history of the world.

On one argument, you could say then that's going to help us know more things because we can prosecute this data and come to conclusions that we couldn't have otherwise done. We can apply AI, machine learning, get new insights.

On the other side, something we say on our team sometimes is a T.S. Eliot quote: "Where is the wisdom that's lost in knowledge? Where is the knowledge lost in information?" Right?

Where do you fall out on that? Are we harder?

Look, we have more data and we have more tools for analyzing the data. But, my son and his wife and family came to live with us for the first three months of the pandemic, March, April, May of '20, and then I wrote—he and I actually—he contributed—but I wrote a memo in '21 called "Something of Value" about that experience because it was a great value for us to live together that time.

But he pointed out something very valuable, which was that, you know, Buffett talks about having bought dollars for 50, and he really did because nobody else knew which end was up. You know, I would say I bought some dollars for 60 cents.

I can't find those anymore. And Andrew made the point that readily available quantitative information about the present can't help you be superior as an investor, or it's not sufficient to be superior. You have to work with that stuff; you have to understand it and process it.

But it's not enough because everybody else has it readily available, and it's quantitative, so everybody can process it, and it's about the present. So there's no conjecture, no uncertainty, no vagueness.

So readily available quantitative information about the present cannot hold the secret to being a superior investor. It has to be something else.

And what could those things be? You have to do a better job of understanding the import of those data. You have to do a better job of evaluating the quality— the quality of the CEO, the quality of the product, the likelihood that the company will be able to follow a successful product with another successful product—the quality of the accounting, whatever it might be.

Or you have to be better at understanding the future. So in—I wrote a memo called "Investing Without People" in which I talked about what'll happen with AI and so forth and machine learning.

And it'll profoundly change our business and it'll put the hacks out of business. But I don't think that it will replace the best investors because the best investors are the people. I said in the memo I don't think that a computer can meet five executives and figure out which one's the next Steve Jobs.

I don't think it can look at five business plans and figure out which is the next Amazon. These are subjective judgments about the future, not based on past data. How's the computer going to get the information to make these decisions?

Now, what computers do is they handle a lot of data; they handle it fast. They don't make mistakes; they don't make computational mistakes and they don't make emotional mistakes.

So that's a pretty good list. That'll put a lot of people out of business in the investment business, but it will not, in my opinion, enable a computer to be the Warren Buffett of its day, shall we say?

Just picking up on Warren Buffett for a second—he's called, I think, and I might not quote him perfectly, but the discipline you're involved with is the negative art because you're just trying to identify the ideally the few companies that won't pay you back.

So do you ever wish that you lived like in my world of equities where it was more about possibilities and upside? Is it ever more fun to you?

You know, I'm an escape from your world!

Okay.

Because I spent my first nine years in equity research. I was the director of research at Citibank. And I think that this is—I think this is better for me because I'm by nature conservative.

And, you know, when Buffett says that fixed income investing is a negative art, what he's saying is that bonds don't have upside. They come out at par; they're going to be redeemed at par, so that's the best you can do. It's all downhill from there.

If you don't weed out the losers, Oaktree's motto is, if we avoid the losers, the winners take care of themselves. And I—when I was asked to start the high-yield bond fund in '78 at Citibank, I didn't know it, but it was perfect for me because it turned my innate conservatism into an advantage.

I think that to be in equities, you have to be a dreamer, optimist, and that's not really me.

Okay, great. I'm going to end with one kind of, I guess, personal question, which is that you've said that there's two—just to summarize—two important things: you've got to know what you don't know, but then you need to know something that other people don't know to make money.

And yet you've been so generous with your time today—all these books you've written, these memos going back to 1990. Why are you telling us all these things? You know, if we need to not know them for you to make money?

Well, just knowing them is not enough; you also have to implement them. And, you know, I think—we do a superior job of implementing them. But, you know, as I said, this is fun for me, and I've gotten such a great reward from sharing these things with people.

You know, the people that I share these things with are not my competitors; they're people. And I get these letters saying, "You know, you made something complicated clear," or I get letters to say, "You changed my life because I—I had a—there was a prominent economist from the '70s who called me up a few years ago. He said, 'You changed my life.'"

I said, "How?" He says, "I don't make forecasts anymore. I tell people what I think is going on, and I tell them what I think the implications are."

Gloom and doom—one of those economists. I'm not going to tell you.

Okay, but I mean, that's so gratifying.

You put him out of business.

No, I improved his business! I made it more valuable to his clients by not forecasting. By not forecasting, and if forecasting is not valuable, then you do a great service to your clients by telling them that.

Okay, I want to pick up on that answer to say that we really are so appreciative of you sharing all of this investing wisdom with us, and grateful to you for making the time today.

Well, we've—we and I have had a great relationship with Goldman Sachs. They've been a great help to Oaktree. They took us public; they put us on their true network, and as I told you, they even offered me a job in '77.

Yeah.

So I have a soft spot for Goldman, and I'm glad to come back.

Thank you, Howard. Appreciate it.

[Applause]