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Howard Marks: 78 Years of Investing Wisdom in 60 Minutes (MUST WATCH) — Transcript

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0:00how do you make money as an
0:02investor the people who don't know think
0:05the way you do it is by buying good
0:08assets a good building stock in a good
0:11company or something like that that is
0:14not the secret for
0:16Success the secret for success in
0:19investing is buying things for less than
0:20they're
0:21worth as you know I wrote a book in uh
0:252011 called the most important
0:28thing and the reason it's has that title
0:31is because I would find myself in my
0:33client's office and I would say you know
0:36the most important thing in investing is
0:37controlling risk and then five minutes
0:40later I would say the most important
0:42thing is to buy at a low price and five
0:45minutes later I would say the most
0:46important thing is to act as a
0:47contrarian and so back in
0:51203 I believe I wrote a memo called the
0:54most important thing I listed 19 things
0:56Each of which was the most important
0:58thing and then I used that I couldn't
1:00think of a better format for my book so
1:02I used the same format in uh 2011
1:05interestingly some of the things are
1:07different and that you supposed to show
1:08you that that one's thinking should
1:11still be alive and should still evolve
1:13and I know that s Rob and some of the
1:15other fellow went to see Charlie Munger
1:18speak in Los Angeles this week at age 91
1:21and uh I'm sure he's still evolving and
1:24uh and getting younger so I'm going to
1:26try to do the same now I should tell you
1:28and I don't know if you know this but uh
1:31I ow I write memos to the clients and
1:33I'll refer to a lot of memos in in this
1:35session probably and they're all
1:37available on oakry capital.com website
1:40and the price is right they're all free
1:42and so uh you know I've been sending
1:44them out now 25 years I started in 1990
1:47and I got a letter from a a guy in named
1:50Warren Buffett in
1:522009 or 10 and he said if you'll write a
1:56book I'll give you quote for the jacket
1:58and so I had been planning on writing a
2:00book when I retired from work but
2:02Buffett's promise uh caused me to
2:05accelerate uh my time frame and what the
2:08book is is who who here has read it okay
2:13about half so what what the book is it's
2:16a recitation of my investment philosophy
2:19and as it says in the forward to the
2:21philosophy which I took the forward you
2:23know I never I don't know about you I
2:24never read the forwards of books but I
2:26took the forwards of Mind very seriously
2:28and what it says in there it's not the
2:30designed to to tell you how to make
2:32money and it's not designed to tell you
2:35how easy investment is or to try to make
2:37it easy and in fact my highest goal is
2:41probably to make it clear how hard it is
2:43investing is very difficult because it's
2:46it it's kind of
2:48counterintuitive and it it kind of turns
2:51back on itself all the time and there
2:55are no formulas that work so what I
2:58tried to do in the book book is teach
3:00people how to think and uh now the
3:03thoughts they should hold change from
3:05time to time but how to think I think is
3:08uh valid in the long term um so and I
3:14it's my investment philosophy and I
3:16wasn't born with an investment
3:17philosophy I was you you'll hear from a
3:20lot of people if you're interested in
3:21investing who'll say well I started
3:23reading perspectives at age eight and I
3:25didn't uh or I you know at 13 I invested
3:28my bar mitzvah money which I didn't do
3:31but and in fact when I was getting out
3:33of graduate school age
3:3523 in
3:371969 so I know you can all do the math I
3:39didn't know what I wanted to do I had
3:41studied uh Finance at Wharton and
3:43accounting at uh Chicago and I knew I
3:46wanted to do something in finance but I
3:48had I wasn't very specific so I
3:50interviewed in five or six different
3:52fields uh large consulting firm small
3:55consulting firm accounting firm
3:56corporate treasury Investment Management
3:58Investment Banking six
4:00so uh you know I ended up in the
4:02investment business why because I had
4:04had a summer job in ' 68 at city in the
4:06investment research Department I liked
4:07it had fun right that's a good reason so
4:11I went there and by the way
4:13interestingly there was nothing magical
4:16about working in the investment business
4:17at that time it paid the same as all the
4:19rest all six jobs that I was offered had
4:22the same pay between 125 and 14 a year
4:26not a month and and uh
4:30and uh you know and there were no famous
4:32investors at the time investing was not
4:35a household word there were no
4:36investment TV shows uh and uh so I just
4:40did it because I liked it I liked the
4:42people and I thought that the that the
4:44investing was intellectually interesting
4:47um so I wasn't I didn't have a
4:49philosophy then when I started and that
4:51I had some things I had learned in
4:53school but I think that your philosophy
4:56your philosophy as opposed to somebody
4:58you know if you if studi decart or lock
5:01or somebody like that you learn his
5:02philosophy if you might learn a
5:04philosophy by studying a religion but
5:06that's not your philosophy your
5:07philosophy will come from the
5:09combination of what you have been taught
5:11by your teachers and parents and your
5:13experiences and what your experiences
5:16tell you about the things you were
5:18taught and how they have to be modified
5:20so I developed uh My Philosophy over you
5:23know I it might seem like I started
5:25writing the mamals a long time ago 25
5:28years but I had been working already
5:30over two decades at that time so I think
5:34that the integration of real life into
5:36philosophy is essential now my I
5:39prepared a few slides for today and
5:41basically the slides are here to
5:45illustrate where the philosophy came
5:47from talk to you about some of the
5:49foundations and Roots so I call it
5:51Origins and Inspirations and I hope
5:54you'll find it interesting
5:57so first of all uh uh not in order
6:01chronologically but hopefully in order
6:03to try to make something
6:05intelligible uh Fooled by Randomness by
6:08Nasim Nicholas TB now I who here has
6:11read that all right more people than
6:13have read my book uh and uh I think it's
6:17very important I think it's a excellent
6:20book uh with very very important ideas
6:23now don't tell nasm I tell I I said this
6:25but I tell all the people I speak to
6:27that it is easy it is either the most
6:30important badly written book or the
6:33worst written very important book that
6:34you'll ever read uh I I think it's not
6:37very clear and I think it's uh
6:41not uh well maybe there's no attempt to
6:44make it clear uh but I think a lot of
6:46the ideas are very important and uh even
6:49profound in my opinion so among other
6:52thing and and the basic theme is that in
6:57investing there's a lot of Random
7:01and if you look at
7:03investing as a field without Randomness
7:07where everything where everything is
7:10determinative you'll get confused
7:12because you will not draw the proper uh
7:16inferences from what you see for example
7:21just a brief example you see somebody
7:23and they report a great return for the
7:26year the science the the scientist
7:30who thinks that the world that that the
7:32investment world runs like the world of
7:34physics might think well great return
7:36that means the guy's a great investor
7:38but in truth it it might be somebody who
7:41took a crazy shot and got lucky why
7:44because there's a lot of Randomness in
7:46the world when I went to Warden
7:491963 the first book I remember learning
7:52was called decision making under
7:54uncertainty by C Jackson Grayson who
7:56became as I recall America's First
7:58Energy are and uh I learned a couple of
8:03important things from that book number
8:05one
8:08that you can't tell from an outcome
8:12whether a decision was good or bad it's
8:14very important most people don't
8:16understand this totally totally
8:18counterintuitive but the truth is in the
8:21real world where there's Randomness at
8:22work I mean if you build a bridge and it
8:25falls down then you must assume that the
8:28engineer made a
8:30mistake that it was a bad decision to
8:32build the bridge that way but in the in
8:35the real world of where where every
8:37where there's Randomness good decisions
8:40fail to work all the time bad decisions
8:43work all the time the investment
8:46business is full of people who are quote
8:49right for the wrong reason made this a
8:52bad decision it didn't work out the way
8:54they thought but they got lucky and they
8:56were bailed out by events so this is
8:58very important and this is the the basic
8:59theme of uh of Fooled by Randomness tb's
9:03first book since then he has written uh
9:06the Black Swan which became more famous
9:08but I don't think it's as good a book
9:10and he's written a book called
9:11antifragile and uh uh that one didn't
9:14get famous um but I think that this book
9:17is something everybody should read it if
9:20you have an interest in numbers
9:22investing and how the world works so
9:25it's as I say the book is all about the
9:28role played by luck and uh basically uh
9:33even if you know what's most likely many
9:36other things can happen instead this is
9:38very very important we talked uh earlier
9:41at lunch about what's the most important
9:44lesson you can draw well of course I
9:47can't I'll never say most important to
9:48anything but one very important lesson
9:51for for you to
9:53learn is that you should not act as if
9:58the things that should happen are the
10:00things that will happen hey everyone I
10:02just wanted to jump in here real quick
10:04and say that if you're enjoying this
10:05video you should download this
10:07completely free pdf at the link in the
10:09description because it contains 525
10:12pages of Howard Mark's legendary
10:14investment memos I compiled these memos
10:16just for you as my thank you for
10:18supporting the channel thank you for all
10:20that you do and now back to the video
10:24again in the world of the physical
10:25sciences you can probably bet that
10:27that's true and the electrical engineer
10:30knows that if he turns on a light switch
10:32over here the light will go on there
10:34every
10:35time because it's subject to physics not
10:38in the world of investing and so uh for
10:44every possible
10:48phenomenon there is there is a a range
10:52of things that can happen there may be
10:55one where it's possible to discern which
10:58one is the most like
10:59and if we draw a probability
11:01distribution that may be the highest
11:03point on the distribution the most
11:06likely single outcome but that doesn't
11:08mean it's going to happen and the reason
11:10we the reason we don't have many
11:11probability distributions that look like
11:13this but rather that look like this is
11:15because a range of things can happen and
11:18it's very very important to notice that
11:21number one there are lots of things that
11:22can happen so you have to allow for them
11:25and number two the thing that is most
11:27likely to happen is is far from sure to
11:30happen and we and so uh that's that's
11:34very that's very key there's a professor
11:37at the London Business School who put it
11:39succinctly he said risk means more
11:41things can happen than will
11:43happen and uh this is again this is
11:47profound in my opinion
11:50um in the economic world people
11:55generally make their decisions based on
11:57something called expected value which is
11:59to say that you multiply every possible
12:02outcome first of all of course you don't
12:04think in terms of a single
12:06outcome you think in terms of a range of
12:08outcomes so you take every if you could
12:11if you could iterate over so many you
12:14take every possible outcome you multiply
12:16it by the likelihood that it will happen
12:18you sum the results and then you get
12:19something called the expected value from
12:22that course of action and you choose
12:25your course of action based on the
12:26highest expected value and that sounds
12:28like tot totally rational thing but what
12:32if the course of action that you're
12:34considering has some outcomes that you
12:36absolutely can't
12:38withstand then you may not do it you may
12:41not do the highest expected value course
12:44of action because it has some you can't
12:47live with you know who here is willing
12:49to be uh you know uh the the sky diver
12:53who was right 98% of the time you know
12:56for example so you may elect to do bike
12:58riding on the SCH campus rather than
13:00skydiving even though skydiving is more
13:03exhilarating uh 98% of the time anyway
13:06so the point is uh it as I lived my life
13:11from Talking learning about Dimson
13:14learning about TB from learning from my
13:16own experience I realized that should is
13:22does not equal will lots of things that
13:24should happen fail to happen and even if
13:26they don't fail to happen they fail to
13:28happen on schedule ual so the thing that
13:31the that the economist or the finer
13:33thinks should happen this year may
13:35happen in 3 years you got to live three
13:38years to see it happen one of my
13:40favorite sayings is never forget the
13:43six- foot tall man who drowned crossing
13:45the stream that was 5 feet deep on
13:47average we can't live by the averages we
13:51can't say well I'm I'm happy to survive
13:54on average we got to survive on the bad
13:57days you got to survive
13:59and and if you're a decision maker you
14:01have to survive long enough for the
14:04correctness of your decision to be
14:06become evidence and you can't count on
14:08it happening right away I always remind
14:11people overpriced is not the same as
14:14going down
14:16tomorrow and if you bear that simple
14:18truth in mind I think it helps so so to
14:22Leb and the role of luck very important
14:25then John Kenneth GTH John Kenneth GB
14:28for those of you who are not familiar
14:30with ancient history was an economist
14:32American Economist uh died uh around 05
14:37I think maybe a little after and uh at
14:40the age of about 98 and he was my one of
14:43my favorites he was he was uh a little
14:46on on the left side uh he was you know
14:49somewhere between free enterprise and
14:51socialism but um he was what you what we
14:54call the liberal in the days when when
14:56that word when it was okay to say that
14:58word um but he was he was very very
15:02smart and he was not a he was not famous
15:03as an economist but he was a he played a
15:06lot of roles in government and he was a
15:08diplomat but he wrote some very good
15:10books and one of them is called uh a
15:13short history of financial
15:14Euphoria and uh I like thin books so and
15:18his is his is thin especially the ones
15:21he wrote in the last decade or two of
15:22his life were very thin so I enjoyed
15:24those but but the short history is very
15:26good and I recommend that to you um and
15:28one of the things he says is we have two
15:30classes of forecasters the ones who
15:32don't know and the ones who don't know
15:33they don't
15:34know now I don't believe in forecasts uh
15:38macro forecasts people who forecast
15:40interest rates performance of economies
15:43performance of stock markets and I don't
15:45think that my efforts to be a superior
15:50investor and most other people's are
15:53aided by macro forecasts so am I saying
15:58that that the F forecaster is never
16:00right no I'm not saying that the
16:03forecasters are often right last year
16:06GDP grew
16:072% many forecasters forecast that GDP
16:11will grow this year at
16:122% that's called
16:15extrapolation and usually in economics
16:19extrapolation Works usually the future
16:22looks like the recent past so usually
16:25the people who forecast a continuation
16:28of of the current are right the only
16:31problem is they don't make any money
16:34because let's take let's take the
16:37economy most people forecast two
16:39something for this year a growth rate of
16:41two something is cooked into the prices
16:44of Securities
16:46today if the growth rate turns out to be
16:48to something everybody who forecasted
16:51that will be right but the secur but
16:53security prices will not change much
16:56because that to something grow both was
16:59anticipated and discounted a year or two
17:03ago so uh all those people who are
17:08right won't make any
17:10money our forecast so that's a that's a
17:14that's a correct so most forecasts most
17:18extrapolation works all the time
17:19forecasts that are extrapolations work
17:21all the time but they don't make any
17:22money logically am I saying that
17:25forecasting that forecasts never make
17:27any money no the forecasts that make
17:30money are the forecasts of radical
17:33change if if I predict if everybody's
17:36predicting
17:372.4% growth for this year and if it
17:41turns out if I predict minus two and it
17:43turns out to be minus two or I predict
17:46six and it turns out to be six I'll make
17:48a lot of money so forecasts which are
17:51not extrapolations forecasts which are
17:54radically different from the recent past
17:56are potentially very valuable if they
17:59correct of course they're not of any
18:01value if they're incorrect if they're
18:03incorrect they'll they'll cost you a lot
18:05of money if if everybody else thinks
18:07it's going to be 2 four and you predict
18:08six and it turns out at 2 four you're
18:10probably going to have taken the wrong
18:11Investments and lost a lot of money so
18:14deviant forecasts which turn out to be
18:17right are po potentially very valueable
18:20but it's very hard to make
18:22them it's very hard to make them
18:23correctly it's very hard to make them
18:25correctly consistently
18:28and uh uh somebody at lunch mentioned an
18:31early memo I wrote called the value of
18:33forecasts and uh in one of there was the
18:36value of forecast and then there was
18:37value of forecasts two I think right and
18:41in one of those I reviewed the history
18:43recent history of the Wall Street
18:45Journal poll every six months the Wall
18:47Street Journal uh publishes the results
18:49of a poll of economists and uh on you
18:53know GDP growth CPI value of a dollar
18:57price of oil whatever it might be
18:59a bunch of phenomena they do it
19:00consistently and they they ask like 30
19:02people consistently over time and uh so
19:07it shows basically that most of the time
19:10when people get it right it's because
19:12they predicted extrapolation and nothing
19:14changed once in a while something
19:16changes
19:17radically and invariably somebody
19:20predicted
19:21it but the problem is if you look at
19:24that person's other forecasts over the
19:27years you see that that person always
19:29made radical forecasts and never was
19:32right any other time so of course if you
19:35if you're getting your information from
19:37a
19:37forecaster the fact that he was right
19:39once doesn't tell you anything you you
19:42wouldn't the the views of that
19:44forecaster would not be of any value to
19:46you unless he was right consistently and
19:48nobody's right consistently in making DV
19:51in forecasts so uh so the bottom line
19:55for me is that forecasting is not
19:57valuable uh
19:59and uh that's something that my
20:01experience has told me so we we don't
20:05know what's going to happen and
20:07Randomness will play a big role in what
20:10happens and Randomness is by definition
20:13unpredictable number
20:15three the losers game by Charlie
20:19Ellis this is very
20:21interesting uh anybody here know the
20:24name of the company
20:26TRW few people TR W used to be a big
20:30conglomerate uh and now it's known
20:32primarily for credit scores and uh there
20:36was a guy named Sao he was the r it was
20:39it was Thompson Ramo Woolridge and he
20:41was the r in
20:43TRW and very smart and Sao wrote a book
20:47and uh it was about uh winning at tennis
20:52who here plays tennis okay this is good
20:54because as I go around the world now
20:56very few people play tennis anymore
20:59but what Deo said is that there are two
21:01kinds of winning tennis players if you
21:04look at Pete Sampras or Nadal or jokovic
21:10how do they win the winning Champion
21:13tennis player wins by hitting winning
21:16shots he hits shots that the opponent
21:19can't return they're either so well
21:22placed or so strategic or so fast and
21:26hard that the opponent can't return
21:29and if Nadal hits a shot which is not a
21:35potential winner then his opponent can
21:38probably put it away because it doesn't
21:40have enough difficulty on the ball so
21:44the the championship tennis player wins
21:46by hitting
21:47winners you play tennis right how do you
21:51win do you win sometimes how do you win
21:55if I win it's by not hitting it out it's
21:58that's right the amateur tennis player
22:00like him and me we win not by hitting
22:03winners but by avoiding hitting losers
22:06and we believe that if we can just push
22:08it back 20
22:10times and just get it over the net 20
22:12times our opponent can only do it
22:1419 we believe that that we'll out steady
22:18him Outlast him and eventually he'll hit
22:21it into the net or off the court we'll
22:23win the point but we'll win the point
22:25without having hit a
22:27winner so they're obviously two styles
22:29of tennis and so same is true for
22:34investing and uh so Charlie Ellis wrote
22:38an article called The Losers game and he
22:40said he thought that in investing so
22:43championship tennis is a Winner's game
22:45it's won by winners he thought amateur
22:48tennis is a losers game it's won by the
22:51people who avoid being losers he thought
22:53that Charlie thinks or thought that
22:57investing is a loser game and so the
23:00best way to win at tennis is by at
23:02investing is by not hitting losers now I
23:05believe also that it's a losers game not
23:09as much as Charlie believes and not for
23:11the same reason Charlie believes that
23:12that investing is a losers game uh
23:15because the market is efficient and
23:17securities are priced right I believe
23:19there are inefficiencies I just think
23:21it's hard to consistently take advantage
23:23of them and you have to be an
23:24exceptional person to take advantage of
23:26them on a consistent basis and uh uh you
23:29know the reason that the pro can go for
23:32winners is because he is so well
23:33schooled and practiced and steady and
23:35talented that he knows that if he does
23:37this with his foot and this with his hip
23:39and this with his elbow and this with
23:40his wrist that the bull will go where he
23:43wants he doesn't worry about
23:46miscues uh wind sun in his eyes uh
23:51distraction he's so well schooled um and
23:55in fact you know in in in scoring tennis
23:58match match is they keep track of
23:59something called unforced errors and the
24:02reason they keep track of them is
24:03because there are so few the pro doesn't
24:06make a lot of unforced Errors we make
24:07unforced errors all the time and so we
24:10have in order to survive we have to
24:11avoid them so the point is if you're
24:14going to be an investor you have to
24:15decide am I good enough to go for
24:18winners or should
24:21I emphasize the avoidance of losers in
24:25my Approach and then the fourth input
24:29uh oh so I I I say here that the
24:31difficulty of getting it right is what
24:33makes defensive investing so important
24:35because it's just for us in investing
24:39especially because there's Randomness if
24:41we do the right thing with our foot and
24:43hip and arm and elbow we're not going to
24:45get a winner every time and then the
24:48fourth uh uh origin that I wanted to
24:51talk to you about today was my meeting
24:53with Mike milin in November 1978 so uh
24:56in 78 I got a call from my boss at City
25:00Bank and he said there's some guy in
25:02California named Mike milin and he deals
25:05with something called high yield bonds
25:06can you figure out what that means
25:08because one of our clients had asked for
25:09a high yield Bond portfolio and in that
25:11day nobody knew about it it was it was
25:14unknown and uh so I I I uh I met with
25:18Mike in November of 1978 he came to see
25:21me a city in New York he was looking for
25:23clients he was just starting off the in
25:25the high yield Bond industry and it was
25:27a great meeting and he explained to me
25:30that uh if you buy AAA bonds there's
25:34only one way to go tripa bonds are bonds
25:37that everybody thinks are great their
25:40companies are making a lot of money they
25:44have prudent balance sheets the Outlook
25:47is good everything's
25:50perfect so if everything's perfect that
25:52means it can't get
25:54better and if it can't get better that
25:56means it can only get worse it doesn't
25:57have to get worse
25:58but if there is a change it's going to
26:00be for the worse and if you've bought a
26:03bond on the assumption that it's
26:05perfect and it gets worse then you lose
26:08money so uh that's important on the
26:11other hand he said if you buy single B
26:13bonds and they
26:15survive there's only one way for them to
26:17go which is upgrade now that's not
26:19exactly true because they can default
26:21and go bankrupt but the ones that
26:24survive will go up will be upgraded
26:29and the surprises are likely to be on
26:31the upside so this was very
26:33important again this is about trying to
26:37hit winners avoid losers and if you're
26:40buying bonds that most people don't
26:42think much of it's hard to have a big
26:45loser because such low expectations are
26:48Incorporated now let me digress for a
26:50minute because this is really important
26:51how do you make money as an
26:54investor the people who don't know think
26:57the way you do it is by buying good
26:59assets a good building stock in a good
27:02company or something like that that is
27:05not the secret for
27:08Success the secret for success in
27:10investing is buying things for less than
27:12they're
27:13worth so if you buy a high quality asset
27:17you know there's a I and I say in the
27:18book there's a guy in on the radio I I
27:21used to when I lived in La I listened to
27:23NPR on the way to work and there was a
27:25guy who's and I heard him say it he said
27:27well if go into a store and you like the
27:29product buy the
27:31stock couldn't be more wrong because
27:34what determines the success of an
27:35investor is not what he buys but what he
27:37pays for it and if you buy a high
27:40quality asset but you overpay for it
27:42you're in big trouble you can buy a very
27:44low quality asset but if you pay less
27:47than it's worth chances are you're going
27:49to make money so the so the book says
27:53chapter three says the most important
27:54thing is value figuring out what the
27:56value of an asset is but number chapter
27:59four says the most important thing is
28:00the relationship between price and value
28:03so let's assume that you're able to
28:05figure out the value if you pay more
28:07than that you're in trouble if you get
28:08it for Less the wind is at your back so
28:12um it was very very important then uh to
28:17be in an area where the surprises were
28:20likely to be on the upside and if you
28:22buy the bonds of b-rated companies about
28:25which there are such low expectations
28:28maybe it's easy for there to be a
28:30favorable surprise now how can I how can
28:33I prove to you that the expectations
28:35were low the answer is that uh if you
28:39look in the Moody's guide to Bonds in
28:43those
28:44years it what was the definition of a
28:47b-rated bond quote fails to possess the
28:50characteristics of a desirable
28:51investment in other words it's a bad
28:54investment now I drove here from the
28:57airport in my car and if I take you
29:00outside to look at my car and I offer to
29:03you for sale because I I don't need that
29:05car anymore when I'm done here uh uh I'm
29:07not coming
29:09back if I say to you would you like to
29:11buy my car what is the one question you
29:15must ask me before saying yes or no
29:18price you get an A you get an A
29:23so in other words it's a good buy at a
29:26certain price it's a bad buy at another
29:27price Moody is now saying that b-rated
29:29bonds are a bad buy without any
29:32reference to
29:33price so in other words there's no price
29:35at which a company that has some credit
29:37risk uh is is worth investing in and by
29:40the way before I turned to high yield
29:42bonds in 78 I was part of the bank's me
29:45Machinery to buy the bonds of uh the
29:48stocks of America's best companies and I
29:50explained to lunch how if you bought the
29:51bonds of H packet Perkin Elma Texas
29:54Instruments Merc Lily Xerox IBM Kodak
29:56Polaroid AIG Coca-Cola and Proctor and
29:59gam and if you bought them all in ' 68
30:01and you held them until 73 you lost 90%
30:03of your money why because they were
30:06overpriced the average stock since the
30:08postwar has traded at 16 times its next
30:10year's earnings these were trading at 80
30:12and 90 times why because they were so
30:14good everybody it's great companies
30:16nothing can go wrong so it doesn't
30:17matter what price you pay and if you pay
30:1980 or 90 times that's fine and uh so
30:24here we are in my experience again
30:26experience as a teacher
30:28you invest in the best companies in
30:29America you lose a lot of
30:31money then you go to the high yield Bond
30:33business you buy you invest in the worst
30:35companies in America you make the most
30:37money so it's an instructive lesson if
30:39you have your eyes open and and and you
30:41learn from experience uh which which I
30:44did um but the key words were and they
30:48survive right there's a little trap
30:51there because you have to you have to
30:52catch those three words if you buy
30:54single B bonds that don't survive then
30:57you're in trouble so it but it's
31:00obviously it's torically true that if if
31:03a company about which the expectations
31:05are low uh survives it'll probably at
31:09minimum it'll pay off at maturity and
31:11maybe in the meantime it'll be upgraded
31:12or taken
31:13over if they survive so what that
31:16convinced me when I was starting the
31:17higho bond business and this
31:18conversation came at a great point in
31:20time is that my analyst should spend all
31:23their time trying to weed out the ones
31:25that don't survive not finding the ones
31:28that will have favorable events but just
31:31excluding the ones that have unfavorable
31:33events and that's what we did so now uh
31:37I'll tell you an interesting story
31:39around 05 or 06 the the Bible of
31:44investing is a book called security
31:47analysis written by Graham and do and uh
31:51they they wrote the first edition in
31:521934 Ben Ben Graham was Warren Buffett's
31:55teacher at Columbia and uh in many ways
31:58the father of value investing um and uh
32:01he and David Dodd wrote this book in 34
32:03and they updated it in 40 and then
32:06several times after and uh the 40
32:08Edition is is is considered to be a
32:10great Edition and so in ' 05 mcroy Hill
32:14which owned the book said they want to
32:15update the book and uh they uh turned it
32:19over to uh Seth claran who's a great
32:22dead investor at in Boston at bow poost
32:25and a professor uh can't remember his
32:28name right now
32:30H that's right Bruce Greenwald at
32:33Columbia so you should be up here I'll
32:35sit down uh and uh they they turned it
32:39over to Seth and and Bruce uh to to
32:42bring out this this revision and they in
32:44turn asked people to revise the sections
32:46and they asked me to revise the section
32:48on debt um and so that meant I had to go
32:52and read the 1940 Edition in order to
32:54update it and I came across something
32:56fascinating and it was and it verified
33:00what I had always thought it said that
33:03Bond investing is a negative
33:07art what does that
33:09mean what it means is I don't know how
33:12many of you know how bonds work but a
33:14bond is a promise to pay you give me
33:15$100 and I promise to give you 5%
33:17interest every year and then pay give
33:19you bonding back in 20 years fixed
33:21income it's called because all the
33:23events are fixed the contract is fixed
33:25the return is fixed assuming the promise
33:28is
33:29kept so all 5% bonds that pay will pay
33:355% no will pay six none will pay four
33:38all the ones that pay will pay
33:405% what does that mean it means it
33:43doesn't of the ones that pay it doesn't
33:45matter which ones you buy I'm going to
33:47like this one I like that one a lot that
33:49pays five I like that one that pays five
33:51it doesn't make any difference you're
33:52not GNA be a hero by choosing among the
33:54bonds that pay the only thing that
33:57matters is to exclude the ones that
33:59don't pay so if there are 100 bonds 90
34:01will pay they'll all pay the same thing
34:03it doesn't matter which of the 90 you
34:05choose the only thing that matters is
34:07excluding the 10 that don't pay negative
34:10art the the the greatness of your
34:14performance comes not from what you buy
34:16but from what you
34:17exclude so I thought that was very
34:19useful I should have that up here too
34:21but anyway so that that milin was my
34:24fourth uh input so to lab says that the
34:28future consists of a range of
34:30possibilities with the outcome
34:31significantly influenced by
34:33Randomness and galra says that
34:36forecasting is
34:37feudal and Ellis says that if the game
34:40isn't controllable it's better to work
34:41to avoid losers than to try for winners
34:44and milin says that holding survivors
34:46and avoiding defaults is the key in bond
34:49investing so if you put them all
34:51together that's how you get the
34:53philosophy that's in the book these were
34:55my
34:56Origins so when we started oak tree
34:58April the 10th of 1995 almost exactly 20
35:01years ago we wrote down our investment
35:04philosophy and here it is we published
35:06it we were a bunch of guys who had been
35:09working together for most of the
35:11previous 10 years at a at a different uh
35:14employer and we left there as a group
35:16and we started oak tree and so for a
35:18philosophy so I believe in writing
35:20things down and like like learning at
35:23the L says today write them down right
35:25so uh we wrote down our philosophy we
35:28published it we' never changed a word
35:29since and the clients like knowing what
35:32our road map is so these were the six
35:35tenants of the investment philosophy so
35:37the first one says that the the most
35:39important thing is risk control and we
35:41tell the clients we think that for a for
35:44excellence in investing the most
35:46important thing is not be making a lot
35:48of money it's not beating the market
35:49it's not being in the top cortile the
35:51most important thing is controlling risk
35:53that's our job that's what we'll do for
35:55you and the clients come to us who want
35:58to invest in our asset classes with the
36:00risks under control there are other
36:01people who who who put less emphasis on
36:05controlling risk and they have better
36:07results in the good times and worse
36:09results in the bad times our clients
36:10want what we give them number two we
36:13have an emphasis on consistency so we
36:16say we don't try for the moon at the
36:18danger of crashing you know uh the first
36:22memo that I wrote in 1990 I'm sure you
36:24remembered that J uh talked about uh a
36:27guy who was head of an an asset manager
36:31that had a terrible year and he said
36:33well it's very simple if you want to be
36:34in the top 5% of money managers you have
36:36to be willing to be in the
36:38bottom I have no interest in being in
36:40the bottom 5% I don't care about being
36:42in the top 5% I want to be above the
36:44middle on a consistent basis over the
36:46long term and there's a funny bit of
36:48math this will confound the uh what do
36:51you call yourself data scientists this
36:53will confound the data scientists in the
36:55room but the the so in that first memo I
36:59contrasted the comments from
37:02that uh that uh
37:05uh uh money manager with uh a comment
37:08from one of my clients who told me right
37:11about the same time it was the ju Theos
37:14that caused me to write that first memo
37:16he told me that for the previous 14
37:18years his pension fund had never been
37:21above the 27th percentile or below the
37:2447th percentile so it was solidly in the
37:28second
37:29quartile every year for 14 years so
37:32let's see 27 47 the average of that is
37:3537 right what percentile do you think
37:38that fund was in for the whole 14
37:40years four
37:43four and it it if you think about it
37:45it's really almost mysterious why why
37:48the fourth not the 37th and the answer
37:51is that when people blow up they really
37:53blow up and so uh uh we said we want
37:58consistency we want to be a little bit
38:00above the middle all the time maybe
38:03we'll pop up to the top in the years
38:05when the markets are terrible and our
38:07risk control is rewarded but we think
38:09that over a long period of time we'll be
38:12uh very respectable that way and our
38:15clients will have an absence of bad
38:17experiences which I think for them is
38:19very important so then macro forecasting
38:23is not critical to investing we do not
38:25make our decisions based on macro
38:27forecast as I explained to you we all
38:29have opinions we all we our official
38:31dictum is that it's okay to have an
38:33opinion you just shouldn't act as if
38:34it's right and and and I think this is
38:37this is very important you know Mark
38:39Twain said it's not what you don't know
38:41that gets you into trouble it's what you
38:42know for certain that just ain't true
38:44and and so uh we try to avoid holding
38:48strongly to those macro opinions and
38:51finally we don't do a lot of Market
38:53timing which is very very hard to do we
38:56do long term investing in assets that we
38:59think are
39:00underpriced so that's the oak tree
39:02philosophy you can see how the uh
39:06Origins and Inspirations that I went
39:08through uh fed into that and in fact
39:12it's all distilled in our motto which
39:14says that if we avoid the losers the
39:15winners to take care of themselves and
39:18if we avoid if we can make a large
39:20number of investors and just weed out
39:22the
39:23problems then we'll have just think of
39:25the bell-shaped curve we'll have a lot
39:27that do okay and an occasional one which
39:30is exceptional if we can read these out
39:35so a lot of money managers go into the
39:37clients and say we will get you in the
39:40top cortile into the great rightand tail
39:44I think it's hard to do on a consistent
39:46basis and if you aim for the right hand
39:48tail and you miss you end up in the left
39:50hand tail what we say is we'll just Lop
39:52off the left hand
39:53tail and if we can do that successfully
39:55and we pretty much have then what will
39:57you have okay good very good great
40:02terrific but no terrible the average
40:05will be very good and that's basically
40:07what we've
40:08had so lastly I'll just leave you with
40:11what I consider my three greatest adages
40:14not mine but the ones I've encountered
40:16over my career and that have been the
40:18most helpful um and they're all used in
40:20the book first of all what the wise man
40:23does in the beginning the fool does in
40:24the end in every Trend in invest testing
40:28it eventually becomes overdone if you
40:31find an asset which is cheap and buy it
40:34that's great if everybody else figures
40:36that out that it's cheap then it'll go
40:38up every then people see that it's
40:40rising and more people jump on the bandw
40:42and goes up up up and the last person to
40:44buy it is a is a fool and the first
40:47person to do do it buy it is a wise man
40:49it's the same asset just at different
40:51prices and and as as people
40:55say first the the
40:58innovator then the imitator then the
41:01idiot so that's another way to look at
41:04this adage number two never forget the
41:07six foot tall man who drowned crossing
41:09the stream that was 5T deep on average
41:11kind of like that sky diver who's right
41:1398% of the
41:15time it's not
41:17sufficient depending on how you want to
41:19live your life to survive on average we
41:22have to survive on the bad days so we
41:24have to be able to survive the low spots
41:27in the stream your portfolio has to be
41:29set up to survive on the bad days so you
41:33won't be shaken out uh of of your
41:35Investments and then finally being too
41:38far ahead of your time is
41:39indistinguishable from being wrong and
41:42yet that's a great challenge because as
41:43I said before the things that are
41:45supposed to happen will not necessarily
41:47happen and they absolutely will not
41:49happen on time so you have to be able to
41:52live until the wisdom of your decisions
41:56is proved if at all
41:58so all of these things I think say
42:00something about modesty and humility of
42:03belief rather than shess which I
42:05think is the greatest risk so with that
42:08s Rob I'll stop talking and we have a
42:11little time left and I'd love to take
42:12your questions that's what I'm here for
42:15thank you Howard this was fascinating so
42:17we are open for questions please raise
42:18your hand and I'll bring the mic to you
42:20um the thing you said about uh what the
42:22wise man does in the beginning the fool
42:23does in the end can can come you can
42:25come up from a single stock and you can
42:27think about your whole philosophy that
42:29way so you've been focusing here on
42:31avoiding losers and maybe humans are
42:34kind of generally focus on trying to
42:37find Winners maybe that's why we'll
42:38always do wrong but if everybody in the
42:40world was trying to avoid losers maybe
42:42the wise investor now Shoots for the
42:44winners do you know what I mean it's
42:45sort of self balancing sure well number
42:47one I don't think I don't think that we
42:49have to worry about everybody becoming
42:51too prudent or too wise because we're
42:53talk because we're talking about human
42:54nature Charlie Monger the boys went to
42:56see Charlie merer this week one of the
42:58one of the great quotes that Charlie
42:59gave me was from the philosopher deines
43:02who said for that which a man wishes
43:04that he will
43:05believe what do most people want more
43:07than anything else they want to get rich
43:10very few people think that the future
43:11that that the that the that the uh the
43:14secret to their happiness comes from
43:16prudence and caution most people think
43:19it comes from that stroke of Genius
43:21which will put him on Easy Street uh so
43:23but you're you're absolutely right and
43:26there are times
43:27when most people are behave in a prudent
43:30and cautious manner when is it it's in a
43:33crash when security prices are down here
43:36right that's the time to turn aggressive
43:38and buy so Buffett says the less
43:40Prudence with which others conduct their
43:42Affairs the greater the Prudence with
43:43which we must conduct our own Affairs
43:45and there are times when we should turn
43:48aggressive and that's when everything's
43:50being given away um so you said that you
43:53do not predict you do not make any Micro
43:56Focus right but actually the macros can
43:59affect companies in a lot of ways like I
44:02mean if you have interest rate like
44:0430% I mean 99% of the companies will be
44:07gone or something like that right so how
44:09do you even make an investment okay so
44:12now now I know I'm not coming back to
44:14Google anymore because the people are
44:15too intelligent because this is one of
44:17the great traps I say that we don't
44:21invest on the basis of macro forecast
44:23but you have to have a an economic
44:28framework in mind when you predict the
44:31fortunes of individual
44:33companies um and uh what I would say is
44:38what we try to do is we you know it's
44:41one thing to say that oil is at 50 and
44:45we're going to invest in this company
44:47because it will do fine if oil's at 50
44:50survive if it goes to 30 and Thrive if
44:52it goes to 70 but it's another thing to
44:54say oil is 50 I think it's going 110 10
44:57I'm going to invest in this company
44:58which is going to be great if if it goes
45:01to 110 but bankrupt if it stays at 50 so
45:05the question is how radical are your
45:07forecasts and we try to anticipate a
45:12future that
45:14looks pretty much like the
45:18norm and make allowance for the thing
45:21that that things other than the norm can
45:23happen and I can't really uh
45:27be much more concrete than that it's all
45:30you know all this by the way all this
45:32stuff is Judgment you know there are no
45:34rules there are no algorithms there are
45:36no there are no formulas that always
45:38work none of this is any good unless the
45:42person making the decision has Superior
45:44judgment and you know the first chapter
45:47of the book says the most important
45:48thing is second level thinking most
45:50people think on the first level to be a
45:52superior investor you must think on the
45:54second level you have to think different
45:55from everybody else but in being
45:58different you have to be better you know
46:00so the the first the first level thinker
46:03is naive he says this is a great company
46:05let's buy the stock the second level
46:07thinker says it's a great company but
46:08it's not as great as everybody thinks it
46:09is we better sell the stock that's the
46:12difference between being an average
46:13person and a person with Superior
46:15Insight by the by the way uh most people
46:19are not above
46:22average yes sir do you think Diversified
46:26index funds adequately protect the
46:28amateur investor from losers well this
46:31is a great this is a great question the
46:33role of the index fund
46:37um a lot of people say I'm going to take
46:39a lowrisk approach I'm going to invest
46:41in an index
46:43fund and they are
46:45confused what an index fund does is it
46:48guarantees you performance in line with
46:50the
46:51index
46:53so the point is
46:56because of the operation of What's
46:58called the efficient market not many
47:01people can beat the market it's true
47:03most mutual funds do not beat the market
47:05most mutual fund investors would would
47:07be better off just to be in an index
47:09fund and in in and in fact most active
47:13investment schemes impose fees that they
47:16don't earn and that is one of the major
47:19reasons that most active investment
47:21schemes perform below
47:24average so the index fund which is
47:28called passive investing yes it does
47:31reduce the eliminates the likelihood
47:34that you fail to keep up with the index
47:37it also of course eliminates the
47:38possibility that you outperform the
47:40index so you trade away the two sides of
47:43the probability distribution for shity
47:46that you get index
47:48results so but it doesn't eliminate the
47:51risk of the investment it eliminates the
47:53risk of deviating from the index what
47:56you have to to keep in mind is that the
47:58index fund investor loses money every
48:01time the index goes
48:03down why because there's no value added
48:06to to keep it above so uh and it by the
48:10way index investing is a fine thing for
48:13the average amateur investor because the
48:16average amateur investor number one
48:18can't beat the market number two can't
48:21find anybody or hire anybody who can
48:24beat the market but
48:27the only thing is he shouldn't think
48:29that it's a riskless
48:31trade it's you you you uh eliminate what
48:35we call Benchmark risk but you retain
48:38the risk of the underlying
48:42assets sorry um so you've been through
48:46one or two of these business Cycles I
48:48guess and uh with the availability of
48:51information and uh with the number of
48:54books being written about this subject
48:56about value and proper investing and how
48:59many managers don't beat the market do
49:01you think the average investor is doing
49:03anything different than they were 20
49:05years
49:06ago well look I think I think there's a
49:11minor movement toward
49:12indexation it's not a a a ground swell
49:16there's still lots of money in actively
49:18managed uh mutual funds where the where
49:21there's 2% a year of fees and costs or
49:25one and a half uh uh but but I think
49:27there's more in indexation every year
49:30and that's probably appropriate but
49:32here's an I'll just turn it around I'll
49:33leave you with a
49:35question why can't people beat the
49:37market because the Market's pretty
49:39efficient and market prices most things
49:42right and most people can't find and
49:45identify and act on the times when the
49:47market prices things wrong that's why
49:49most people can't beat the market that's
49:51what I learned at University of Chicago
49:52and I think it's pretty
49:54true so the reason for
49:57the inability to beat the market is the
49:59Market's efficiency the Market's
50:01efficiency comes from the concerted
50:03efforts of thousands of investors who
50:04are trying to find the bargains what
50:06happens when they stop
50:08trying so when when when the interest in
50:13P in active investment declines because
50:15people give up on it and turn to passive
50:17investing and all the analysts quit
50:19studying the companies then prices
50:22resume their deviation from intrinsic
50:25value then it becomes
50:27uh uh possible to beat the market again
50:29so it's really paradoxical and I would
50:32say counterintuitive but I don't think
50:34we we're close to that day but in theory
50:37there comes a day when so little
50:39attention is being paid to active
50:41investing that active investing starts
50:43working again yes sir thanks our for
50:46coming for the talk uh so you talk about
50:48the difference in value and the price uh
50:51the other dimension is time so how do
50:53you estimate the time taken to that
50:56preach to close you never do you never
50:59know see what he's saying I mean again
51:02it's a very good question and and what
51:05we want to do is we want to find things
51:08where the intrinsic value is here and
51:10the price is here and so his question is
51:12how do we estimate the time that it's
51:15going to take for The Gap to close and
51:18the answer is there's no way to say uh
51:20on occasion there are what we call
51:23catalysts and um
51:27one Catalyst would be uh the maturity
51:29the pending maturity of a bond if a bond
51:32is going to mature in 2012 and it's
51:34selling at 60 because most people think
51:36it's going to go bankrupt but it's but
51:38we think it's going to pay off and and
51:40uh at maturity then the date of that the
51:44existence of a maturity date is going to
51:46force the convergence of price to Value
51:49uh another uh Catalyst today is all
51:52these um um activist investors they find
51:56the company it's selling they think the
51:57intrinsic value is here it's selling
51:59here because the management is subpar
52:01and they're not doing the right strategy
52:02so they go in they F in trouble they try
52:04to get a board seat they try to force
52:06the management to do the right thing to
52:09course to to cause the price to converge
52:13with the value so there are a few
52:14catalysts in the world but generally
52:16speaking you buy a stock you hope you
52:18think it's worth here the price is here
52:20you hope it'll converge but there's no
52:21way to estimate the time and that's the
52:25reason why
52:27being too far ahead of your time is
52:28industrial from being wrong because it
52:30can take a long time so would you always
52:32look for presence of catalyst when you
52:34find a gap there aren't enough I mean it
52:37happens you know most of what we do is
52:39in the fixed income world and there are
52:41more catalysts in the fixed income world
52:44than in the equity world you find a
52:47stock you know the how many how many
52:49stocks you think the the the activist
52:51investors go after a year 10 20 5050 100
52:55no more there are thousands of stocks so
52:58most stocks are never going to get
53:00catalyzed curious if you could tell us
53:03what uh it was like when you were out
53:05raising money for oak tree in the early
53:07days I I I would imagine that I would
53:09imagine that today some clients are are
53:12skeptical uh but I would imagine that it
53:14was was it a lot different for you back
53:16then and well by the time we started oak
53:19tree it wasn't that hard because we had
53:21a reputation but when we but but but you
53:26know when I started raising money for
53:27our strategies 1978 junk bonds 90% of
53:31investment organizations like Google had
53:34a rule a concrete rule against any bond
53:39investing below triple below a or below
53:41investment grade which is Triple B and
53:44of course Moody said it's an improving
53:46investment so that was very very hard to
53:50overcome but you have what you have to
53:51do is you have to find a few people you
53:53see you have to find a few people you
53:56have to go say him to him you should do
53:58this because nobody else is because
54:00nobody else is doing it it's languishing
54:02cheap you make no money doing the things
54:05that everybody wants to do you make
54:06money by doing the things that nobody
54:08wants to do who then turn out to have
54:10value and if you say that message to a
54:13100 investors in the beginning maybe 10
54:15jump on
54:16board after it works for a while then
54:19the rest come on like the screen says
54:22but but uh hopefully not too extreme but
54:26the point is it was very hard in the
54:27beginning and uh you know in certain
54:31foreign countries it was even harder
54:34because in certain foreign countries
54:35where the thinking is a little more
54:38narrow than American
54:39thinking I always thought that if I go
54:41into somebody's office I say you should
54:43do this because nobody else is they'd
54:44call the man in a white coat to take me
54:47away they don't they don't understand
54:49that you know I think that Americans
54:51semi intuitively understand the value of
54:55contrarianism and of being a Maverick
54:57but in many countries they they they
54:59just don't get it so that's an example
55:01high yield now in but then we started
55:03Oak Tree in oh no no that was a city in
55:0785 I switched from City to trust compy
55:10the West TCW and in 88 we we brought out
55:13the first distress debt fund now now
55:16we're not investing in companies that
55:17have a risk of default we're investing
55:19in bonds that are either in the fault or
55:23sure to
55:24be and people would say well how can can
55:26you possibly make moneyy investing in
55:28the bonds of bankrupt
55:30companies and we had to explain to them
55:33that that if a if a if a creditor of a
55:37company doesn't get paid the interest in
55:40Principle as promised they have a claim
55:42against the value of the company and
55:44they exert that claim in a process
55:47called bankruptcy and in bankruptcy to
55:50oversimplify and overgeneralize the old
55:52owners are wiped out and the old
55:54creditors become the new owners and if
55:56you bought an ownership stake through
55:58the debt for what for less than it's
56:01worth then you make money and the you
56:04know we've made about 23% a year for 28
56:08years uh investing in distress debt
56:11before fees uh without any
56:14leverage so that's pretty astronomical
56:18uh why because from time to time in
56:20distress debt you get to buy things for
56:22less than they're worth and in fact
56:24because other people are fleeing from
56:26the
56:27bankruptcy maybe you get them to buy get
56:30them to buy them for a lot less than
56:31they're worth so you know it was very
56:33challenging but uh you know if you can
56:37like and you can't convince everybody
56:40but if you can explain the merits and
56:44and and tell the story clearly and
56:47concisely and persuasively then you get
56:49some clients and then if you get good
56:51results then you get more
56:54clients thank you a for for your talk uh
56:57one question uh Buffett uh in 99 said
57:00that if he was running very small
57:01amounts of money he would be able to
57:03find lots of Bargains and beat the
57:05market by 50% and he would use the word
57:08guaranteed uh I presume he meant that
57:10there are a lot of inefficiencies in the
57:12small um capitalization stocks one thing
57:15that kind of surprises me is if uh
57:18someone an analyst willing to work hard
57:20on his own not in an institution the
57:23world of distress debt investing is kind
57:25of shut out even for the value investor
57:28filled with lot of technicalities and
57:30seems like the big institution has a lot
57:33of Advantage there are there such
57:36inefficiencies that are kind of shut out
57:39to the institutions but the small
57:40investor willing to work hard can find
57:43inefficiencies in the debt World well I
57:45think that uh I I think that I think
57:48that this the small guy can even be
57:49active in distress debt uh he he can't
57:53get enough bonds to get a seat at the
57:54creditors committee table or have a
57:56voice but he can still uh find Superior
57:59values um you know so what I was saying
58:03in answer to your question is that if
58:04you have good if you get some accounts
58:06and you have good performance you'll get
58:08more accounts so that that goes a little
58:11further because what I really say is
58:12that if you have good performance you'll
58:14get more money and eventually if you let
58:17that process become unchecked if you get
58:19more money you'll have bad
58:21performance and this is one of the
58:22conundrums in our in our business and so
58:26you have to hold that but the truth of
58:28the matter is that the little
58:30guy has an
58:32advantage as long as he's willing to
58:34stay
58:35small many people are not because the in
58:39the short run the more money you manage
58:42when you get fees the you know there's a
58:45it's a great lure to take on more money
58:47but you have to stop it at a point where
58:49it's before it starts ruining your
58:51performance now uh for the data
58:54scientists Among Us I always like to
58:57point out that if if if I worked at uh
59:00uh you know Firestone Tires and I
59:03developed a new tire and I wanted to
59:04know how far it would go I would put it
59:06on a car and run it until it blew up
59:09right that's called destructive
59:11testing but as an investor with clients
59:13and a fiduciary responsibility I don't
59:15have the luxury of doing destructive
59:17testing so I can't add more people
59:21always say to me well what's the limit
59:22on how much money you can invest well
59:24and I can't
59:26find out by running into the wall I have
59:28to stop this side of the wall one of the
59:30interesting lessons is that if you stop
59:33this side of the wall then you never
59:34find out where the wall really
59:36is but that's what we have to do and uh
59:40uh so but uh so you have to stop and I
59:43believe that the person who has uh a big
59:48brain and a little money and a lot of
59:51time and uh exceptional Insight can find
59:55great bar
59:56bargain uh but you know that's that's a
1:00:00pretty daunting list and I don't think
1:00:03that Buffett's guarantee uh necessarily
1:00:06extends to everybody in this
1:00:08[Laughter]
1:00:17room do you see any unhealthy Trends in
1:00:21valuation in the market today the same
1:00:23way Tech or housing was valued in the
1:00:25past yes I do um because uh to the the
1:00:31market extends the the
1:00:35menu extends the what we call the
1:00:38Capital Market line extends from What's
1:00:40called the risk-free rate the risk-free
1:00:42rate is the rate generally speaking on
1:00:44the 30-day treasury bill and of course
1:00:48if you can get 3% on the risk-free rate
1:00:51then you in order to tie up your money
1:00:52for five years in a 5-year treasury you
1:00:54want four and to get it years you want
1:00:56five and if you can get 10 years on a
1:00:58government security uh 5% then in order
1:01:02to go into a corporate security which
1:01:04has some credit risk you would demand
1:01:05six and to go into a high yield Bond you
1:01:07demand 12 and so forth so there's a
1:01:09there's a kind of a process called
1:01:11equilibration uh which makes things line
1:01:14up in terms of relative risk and return
1:01:16but always tied pegged from the
1:01:18risk-free rate today the risk free rate
1:01:20is zero so everything that I just
1:01:24named this Capital Market Market line
1:01:26has had a parallel downward shift and so
1:01:29it's
1:01:31it before the crisis I had you know uh
1:01:34sirab mentioned about the fact that I
1:01:36turned bearish all my money was in was
1:01:39in treasuries uh all the money that I
1:01:42had outside of oak tree was in
1:01:43treasuries and I was getting six and a
1:01:45half% for 1 two 3 four 5 six year
1:01:48maturities I was getting income and
1:01:51safety today you have a choice income or
1:01:54safety because the things today that are
1:01:57highly safe pay no income you know and
1:02:00if you go to Fidelity conduct an
1:02:02experiment go to Fidelity or Vanguard or
1:02:05big mutual fund firm and go online and
1:02:08look at their menu of offerings and what
1:02:10is the current yield on current net
1:02:12yield after fees and expenses and for
1:02:15you'll see that for money market and
1:02:18short-term treasuries and maybe
1:02:20intermediate treasury the yield is
1:02:22zero so just think the guy is watching
1:02:26the Super Bowl in his undershirt he gets
1:02:29a statement from Fidelity he opens it up
1:02:31and it says the yield on your fund is
1:02:34now
1:02:34zero he grabs the phone he calls the 800
1:02:37number he says get me out of that fund
1:02:39that yields zero and put me in the one
1:02:40that yields
1:02:42six and he becomes a high yield Bond
1:02:44investor he has no idea why he doesn't
1:02:47know what a high yield bond is he
1:02:49doesn't understand what the dangers are
1:02:51he doesn't understand how to pick a high
1:02:53Bond manager but he seduced by that 6%
1:02:57versus zero and all around the
1:03:01investment world today people are
1:03:03chasing return they don't like the low
1:03:06returns that are available on safe
1:03:07instruments they're going for the for
1:03:09the Gusto they're going for riskier
1:03:11instruments and they're doing it
1:03:15mindlessly and uh I promise you I'd
1:03:18mentioned some memos I thought forgot to
1:03:20do that but if you go back that I wrote
1:03:22One in March of ' 07 called the race to
1:03:24the bottom
1:03:26and I talked about the fact that when
1:03:28people are number one eager to invest
1:03:30and number two not sufficiently risk
1:03:32conscious they do risky things and when
1:03:35people do risky things the market
1:03:36becomes a risky place and that's why
1:03:38Buffett says the less Prudence with
1:03:40which others conduct their Affairs the
1:03:42greater the Prudence with which we must
1:03:43conduct our own Affairs and that is
1:03:45going on now to some extent because
1:03:48people can't get a good return from safe
1:03:50instruments they're going into the risky
1:03:52ones and they're bidding you know so
1:03:57there's a there's a race to the bottom
1:03:58it's like an auction now if you want to
1:04:01buy a painting at sbe's there's an
1:04:04auction and the painting goes to the
1:04:05person who pays the highest price but in
1:04:09the investment world it's a reverse
1:04:11auction well sometimes you pay highest
1:04:13price but sometimes you you bid in
1:04:15lowest return so there's a there's a uh
1:04:18there's a bond that's going to be issued
1:04:20by a company I say I demand 7% interest
1:04:24and this fell says no I'll take take six
1:04:26and that guy says I'll take
1:04:28five I say I want protective Covenant to
1:04:31make sure that the company can't do
1:04:33things that that ruins its own
1:04:35creditworthiness he says I'll do it with
1:04:37less covenants and that guy says I'll
1:04:39take I'll do it with no covenants what
1:04:42happens the bond is issued at 5% with no
1:04:45covenants and that's the race to the
1:04:47bottom and anybody who participates in
1:04:49that Bond probably you know could be
1:04:51making a mistake and that's going on now
1:04:54not to the same terrible extent that it
1:05:00was in ' 06 and 07
1:05:03but you got to be be careful today Oak
1:05:06tre's motto for the last three and a
1:05:07half years has been moved forward but
1:05:09with caution caution has to be a very
1:05:12important component of everybody's
1:05:14actions
1:05:15today well thank you very much for being
1:05:18with me and I hope you enjoyed it and uh
1:05:20uh when I think of more stuff I'll come
1:05:22back thank you so much

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