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


Howard, thank you for taking the time to join
me today. It’s a pleasure to be here. I know you have a busy schedule and as I said,
I’ve read everything you’ve written over the years. And I wanted to thank you personally for sharing
all those thoughts because they’ve been hugely instrumental in me being able to built my
own framework. And that’s a lot of what I want to talk to
you about today is how you think as well as what you think. And to start I just want to take you back
to 2005, 2006 which was a time when you were making some pretty aggressive moves at the
time with Oaktree’s portfolio and talking about them. A lot of people kind of thinking, is he nuts? This is some pretty dramatic statements to
make. Can you just take us back to that point in
time and talk about what it was you were seeing and what you felt you had to try and prepare
for? What we want to know is when psychology is
too high and optimism is too high, and as a consequence, behavior becomes imprudent. When behavior is imprudent, then asset prices
go too high based favorable expectations and the world becomes a risky place. We actually made the best purchases we ever
made in the summer of ’02 in the world of distressed debt– because we had the meltdown
of the telecoms, who had overborrowed to build fiber, and we had the scandal companies. And that was incredible. But the world bounced back from that. Actually it wasn’t an event in the world,
it was an event in a little corner of the credit market. But it came back and everything was hunky
dory by ’03 and well into ’04. And it just seemed to go on from there. And to me, the most important thing was that
in ’05, ’06 my partner Bruce Karsh and I spent the whole day complaining about the deals
that were getting done. Any crazy deal could get done, you know? And when investors are practicing the willing
suspension of disbelief, it’s dangerous. And in a prudent market where people are appropriately
skeptical and risk averse, there are deals that can’t get done. But in that environment, they were. And so we just took that as a great sign of
danger and so we sold a lot of assets and we liquidated some large funds we were managing
and only replaced them with small funds– and raised the standards for the investments
we would make. And most importantly, at the beginning of
’07, our distressed debt funds had always been a billion or two. And at the beginning of ’07, we set out to
raise a reserve fund that would invest if a crisis came along. And that fund eventually reached 11 billion
by March of ’08. Now this was about the time when you wrote
race to the bottom, which is probably one of your most widely circulated memos. That was in the first quarter of ’07. Yeah, I’m fascinated in what it takes to go
from talking about how crazy the market is and how badly all these crazy deals get done
to actually doing something about it. Because it’s so easy to sit there and say,
woah, this is crazy. And it’s still crazy three months from now. How do you galvanize yourself to take action
and say you know what, we’re going to go out on a limb here and actually do something about
this? My experience, for some reason, has enabled
me to not be afraid of being wrong. I’m always conscious of the opportunity to
be wrong, but if I hold an opinion and Bruce agrees, then I think the greater risk is not
taking action. And the other thing is by that time, I had
been in this business almost 40 years, and I’ve seen a lot of cycles. And cycles do tend to rhyme and we thought
we were seeing the heated part of an up cycle, which is a good time to take defensive action. So the race to the bottom talked about the
fact that the securities markets and the lending markets are auctions. And the opportunity to buy a security or lend
money goes to the highest bidder. And if you think about an auction for a painting
or something like that, the winner– who pays the highest bidder– is actually, if you turned
it around, he’s the person who’s willing to receive the least for his money. And so if you are making a loan, and there’s
a competition to make that loan, the opportunity to make a loan will go to the person who receives
the least for his money– the least return and the least safety and the least structure. And when too many people have too much money
and they’re too eager to put it out, then the bidding goes too far and the winner of
the auction is actually a loser. Right. Because he does something imprudent. This is fascinating because when I read that
memo, it was so simple. It hits you like a ton of bricks when you
look at it in just a slightly different way. But again, this was first quarter of ’07. Yeah. So you were still quote unquote “wrong” for
a year and a half. Right. So a lot of people have you been expecting
markets to stumble for a while now and they haven’t. And we’ll talk about the Fed and all kinds
of stuff I’m sure in a little while. But how do you manage that expectation and
then something you’re so sure about, not happening? First of all, I’m never sure. I don’t use that word with me. Everything I do is with trepidation. Henry Kaufman said, there are two kinds of
people who lose a lot of money– the ones who know nothing and the ones who know everything. I hope never to be either. I use a lot of quotes and adages in my memos
as you’ve seen in the book and when I speak. And the first of the great investment adages
that I ever learned in the early 70s was that being too far ahead of your time is indistinguishable
from being wrong. But you have to live with that because in
our business if you’re wise, you have a sense for what’s going to happen. You never know when. And the people who think they know when, tend
to get into big trouble. If you accept all of that, what it says is
you have to think of what you think will happen. You have to take action, but you have to be
willing to wait that long period until it turns out to be correct action. You also said, what a wise man does in beginning,
the fool does in the end– which is, again, another way of saying the same thing. Well, the wise man is early. And he has to wait. But waiting and convincing your investors
to wait is another level altogether. Obviously with your tenure in the industry,
your track record, you are given more leeway than the other managers perhaps, which is
perhaps the greatest advantage you could have. But still, you have to manage those conversations
with people, and on a portfolio level, you have to manage your risk and manage your bleed
while what you’re trying to wait for this scenario to unfold. But how do you manage those conversations
with investors who are saying, hey Howard, you said we should be worried about this–
look, everything’s great. Because everything is great, optically. Well, we don’t have that conversation too
often but if I had it I would say, I didn’t say it’s going to happen right away. That’s the key. Overpriced and going down tomorrow are not
synonymous. And you know, Grant that in our business many
things are overpriced and become more overpriced, and more overpriced, and more overpriced. And that’s how you go from a bull market to
a bubble. And so
first of all, we have the confidence of our investors. Secondly, the money we’re talking about is
in closed end funds, where we don’t have to worry about people withdrawing. So you talked about having the confidence
of your investors, the greatest advantage in this business is having 10-year money. Because given the errors of the herd, the
pressure to sell is always greatest at the bottom. And if you have 10-year money, you don’t have
to succumb to it. Yeah sure. Well you mentioned cycles, I know you’re a
great student of cycles. And they used to be so important in markets–
everywhere you look. Whether it was the human cycle, whether it
was a market cycle, credit cycles– everything seemed to have a rhythm. And it made investing a lot easier because
you could at least have some sense of how these cycles would turn. That seems to have changed significantly in
the last 15, 20 years. You’re shaking your head there. I don’t agree with that. If you talk about 20 years, if you came in
this business 20 years ago, you have seen two profound cycles. You had the TMT bubble and crash and then
you had the mortgage bubble and crash. And I think that maybe they weren’t predictable,
but I’m not sure they ever were.

21 thoughts on “Investing In Overpriced Markets (w/ Howard Marks) | Interview | Real Vision™”

  1. Wisdom and experience goes a long way in this market. I do, however disagree on the subprime bust. It was very visible.

    This next one is much trickier…as he said…it will
    require patience. It will happen, but how and when?

  2. You can't predict what will happen with the stock market, currencies, crypto, gold, real estate. All you can do is stay nimble and learn how to be self sufficient. But I like bold predictions

  3. This is absolutely fantastic. I had the great privilege and honor of watching Howard Marks chat with Seth Klarman live at the University of Pennsylvania's very own Annenberg Center. It was a lovely hour-long chat, and Klarman and Marks both expressed their extreme cautiousness apropos international equity markets.

  4. The markets are overprived, because of the central banks, not because of investors. Central banks could push it to infinity, the only question is: when does hyperinflation kick in? This might be a future experiment for central banks on their "future-to-do-experiment" list

  5. "If you're wise, you have a sense for what's going to happen. You just don't know when." 😊

  6. The markets maybe a little overpriced right now even with the down market of 2018. But I think with the influx of retail investors the markets will be volatile but pretty flat for a couple of years year over year until valuations catch up to prices. There will also be opportunities to pass the overall market in that time.

  7. Of all the value investors, I respect Howard Marks the most—even though I don’t invest in bonds. His words are pure wisdom.

  8. Howard Marks has very compelling and illuminating interviews on YouTube, unfortunately I would not categorize this as one of them given the jargon filled line of questioning.

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