Howard Marks & Michael Mauboussin: The Art of Clear Thinking

Transcript

00:00:00  Sean DeLaney:  Howard, if you were writing a book, the most important thing outside of investing. Yeah. What would you have as number one?

00:00:06  Howard Marks:  Living life your way is the most important thing. Number one, there’s no right answer for everybody. No one size fits all. The worst thing you can do is do what other people tell you to do or emulate what other people are doing or what’s popular or what society says you should do. And certainly, you shouldn’t choose a career because you can make the most money. I mean, for most people, that’s not going to end up successful. You have to live your life your way. And of course, the challenge, as I say, is to figure out what your way is. The hard part is figuring out what it is that’ll make you happy. What a terrible idea it is to choose your career because it’s the one everybody else is choosing. Number one, it’ll be crowded and competitive. And number two, it may not be satisfactory to you. So I always say to kids: the career you choose should play to your strengths and avoid your weaknesses. And it should be the thing that will make you the happiest. We only get one life, as far as I know. And what a mistake it is to squander it on something that doesn’t play to your strength and make you happy, and something which is chosen just because it will make you the most money. Unless that’s the thing that’ll make you happy. But I mean, that’s my most important piece of advice. There’s only one success: to be able to live your life your way.

00:01:39  Sean DeLaney:  Welcome to What Got You There. I’m Sean DeLaney. Now, I’ve been lucky to speak with some remarkable people over the almost ten year history of this podcast. But when I look back, two people have influenced the way I think probably more than anyone else. They’re Howard Marks and Michael Mauboussin. The value of what I’ve learned from them over the years is honestly difficult to calculate. There are few people I have ever come across who have articulated the important principles of their craft as clearly as these two have. Now Howard Marks is the co-founder and co-chairman of Oaktree Capital Management. Michael Mauboussin is the head of Consilient Research at Counterpoint Global and has spent more than three decades writing and teaching about investing and decision making. Now they both approach their work from different directions. Howard is someone who has developed an unusual ability to recognize where we are in the cycle and understand what the market is implying, and remain emotionally separate from the crowd? And Michael has spent much of his career studying how we make decisions when luck, uncertainty and incomplete information make the outcome difficult to interpret. Now they may approach their work differently and from different directions, but underneath it I would say they’re wrestling with the same thing. How do we think clearly to make better decisions and live a better life? Now for this episode specifically, I went back through my conversations with Howard and Michael, and I brought together the sections that I continue to learn from. These were recorded separately, but the ideas speak to each other in a way I think becomes especially powerful when you hear them together. This is Howard Marks and Michael Mauboussin. Please enjoy.

00:03:14  Sean DeLaney:  Howard, after all these years in investing, is there something that you’ve done pretty much every single day that you think just had the most benefit for you over your life?

00:03:24  Howard Marks:  Well, I think, being aware of one’s environment, not actually trying to apply something algorithmically or formalistically, but the necessary condition for outperformance of others is to do something different. Not every day because there’s not something intelligent to do differently every day, but to be aware of excesses in the environment, be they extremes of the economic cycle or extremes of the market or of investor behavior. And at that time, to stand away from the herd.

00:04:02  Sean DeLaney:  Is there anything you do to control your environment to make sure you don’t get caught up in that herd mentality?

00:04:07  Howard Marks:  I think the only thing you can really do, intentionally is be aware, and try to, as I say, not conform. Emotional control, a lack of emotionality, is essential because if you are subject to the same emotions as the herd, then you’ll probably do the same things as the herd. Not stand away. So by definition, then you have to not be emotional like the herd. People always ask me, well, how do you be unemotional? And it helps to be born non-emotional. And most of the great investors I know are unemotional or have their emotions under control. But that seems harder to me. It seems harder to recognize the importance of emotional control and practice it. Given that we’re all subject to the same inputs and we all see everybody else doing whatever it is they do, it seems to me to be harder to practice emotional control rather than be unemotional by nature.

00:05:18  Sean DeLaney:  I’m wondering if you were writing a book, the most important thing outside of investing. What would you have as number one?

00:05:24  Howard Marks:  Well, Andrew and I talk about that being my next book and in working on it together, because we have such a successful dialogue. And you know, when I get the time, I think we’ll do it. But I mean, look, I think that living life your way is the most important thing. And this is how I conclude most of my talks with students on campus because they always ask, well, what should I do? And I said, well, number one, there’s no right answer for everybody. No one size fits all. The worst thing you can do is do what other people tell you to do or emulate what other people are doing or what’s popular or what society says you should do. And certainly, you shouldn’t choose a career because you can make the most money. I mean, for most people, that’s not going to end up successful. You have to live your life your way. And of course, the challenge, as I say, is to figure out what your way is. And when I’m talking to people at Wharton or Harvard Business School or Columbia or these great schools, most of them have enormous ability. They’re very intelligent. They wouldn’t be there if they weren’t special kids. And most of them can accomplish what they set out to do, especially if they invest within their skill set. But the hard part is figuring out what it is that’ll make you happy And so obviously what a terrible idea it is to choose your career because it’s the one everybody else is choosing. Number one, it’ll be crowded and competitive. And number two, it may not be satisfactory to you. So I always say to kids. The career you choose should play to your strengths and avoid your weaknesses. And it should be the thing that will make you the happiest. We only get one life, as far as I know. And what a mistake it is to squander it on something that doesn’t play to your strength and make you happy, and something which is chosen just because it will make you the most money. Unless that’s the thing that’ll make you happy. But I mean, that’s my most important piece of advice. But you know, I have lots of observations on the world. You even mentioned when we were chatting before the, what you called the two by two matrix about you know, the fact that the things that work the best are the things that are unconventional and correct. It’s a little hard to be unconventional. Most people don’t do it naturally. And the things that are conventional are often the right thing because they’re the thing that so many people have thought about and chosen to do. So it’s hard to be unconventional and it’s hard to be right when you’re unconventional, but when you do both, it’s the most successful. That’s one of the challenges in life, one of the illogicalities of life.

00:08:35  Sean DeLaney:  Howard. This is the point I really want to hit on. Know thyself. They could be the most important words in investing. I’m wondering how you were able to go against the grain at times and really, truly understand who you were. Yeah.

00:08:49  Howard Marks:  Well, I think that first of all, I certainly didn’t know who I was in the sixties or the seventies. And you figure it out after a while you know? And if in the eighties, you would have said to me, what are you good at? I would have said, I’m good at being analytical and quantitative analysis and I learned in the nineties and certainly this century that what I was really good at was more qualitative and conceptual and seeing the patterns in the market. Understanding concepts and theories and especially new products as they evolved, as the market evolved, and communicating those things, writing, speaking with clients and then leadership and leading the organization. Millions of people are analytically and quantitatively capable, numerate. And I was fine at that, but I think that these latter things, which are more qualitative and conceptual, were really my strength. And you know, my favorite quote of all is from an English writer called Christopher Morley. And I’ve never used this in a memo because it’s never been appropriate. But he said there’s only one success to be able to live your life your way. It’s a great concept, but you know, the key for most people is to figure out what their way is, and you have to see what your strengths and weaknesses really are and what it is that will make you happy and what will make you unhappy.

00:10:30  Sean DeLaney:  Figure out your way. I love it. How difficult this late in your career when you’ve had so much success, is it uncovering that bias and then not only facing it with your son, but then writing about it publicly?

00:10:42  Howard Marks:  Well, it’s very hard to do it yourself. I talked about how successful my work with Bruce Karsh has been. It’s another example of the desirability of help. Many of us only understand ourselves when we go to a shrink, or when we’ve had lengthy talks with a priest or a rabbi, or with our wives or with our best friend. You know, it’s hard to do it on your own. You want to understand your biases, but your biases keep you from understanding your biases, you know, and this is very important. Living with Andrew and his family for much of the pandemic helped me. And he’s very different from me and he’s extremely insightful. And he has a very high emotional IQ and he helped me to see these things. And you know, we spend a lot of time. And so I learned the easy way, which is with help from him and pointing out these things about me, myself and my biases, my history and about value investing and keeping an open mind and trying to be modern and so forth. And some of it I learned the hard way. And I recount in the appendix to the memo a kind of a synthetic dialogue between the two of us, and he said, well, I’ve got this and it’s up this percentage. And I said, well, are you going to sell some? He said, well, it’s a great investment. Why would I sell some? I would say, because it’s up. He says, well, why should I sell it? Because it’s up, he said. I said, well, it could go down. He says, well, I hold it because I think it’s going up. And so I’m going to continue to hold it because I think it still has a lot of potential. And about five or six years ago, I wrote a memo maybe six or seven, about liquidity in the market so the point is that liquidity isn’t always a good thing because most people trade too much. And in our distressed debt accounts, there are what are called closed-end accounts, the client permits a certain amount of money to be invested. And the funds have a ten year life, which is subject to extension if needed, and they can’t withdraw their money. They can’t trade too much, which means they can’t sell at the lows and buy at the highs. The way most people do. And so I talked about the fact that liquidity isn’t always a great thing, and selling and buying too much and trading too much is not a good thing. And Andrew says, and I quoted him in the memo, he said, if you look at the chart of a stock that’s been up for twenty five years, and you say, man, I wish I had that stock. He said, think of all the days you would have had to talk yourself out of selling. And it’s true. I mean, the hardest thing in the world is to hold a stock for twenty five years and see it go from one to ten to one hundred to one thousand and not sell it and then watch it go to ten thousand and one hundred thousand. And that’s how you make the big money. But you have to hold for a long time. And instead, most people sell. And I said, well, why don’t you just sell some? And I had this, I’ve always had this rule that if you sell half, you can’t be all wrong. But you also can’t be all right. And it’s kind of like my favorite fortune cookie, which says that the cautious seldom err or write great poetry. The cautious rarely have disasters or huge successes. And that was my experience. So the point is that to hit the big successes, you have to hold for the long term. And you know, Andrew and I had that conversation all the time. I would say, well, why don’t you just sell a little. It’s called taking profits. And he said, no, I’m going to let this run. And of course, so far, of course, he’s right.

00:14:48  Sean DeLaney:  Howard just said how difficult it is to understand yourself by yourself. And I’ve seen that to be true as well. Now, as an investor, you can dedicate countless hours to researching companies. Talking to the management teams, modeling out the business and the industry. But the hardest variable in all of that to model is actually yourself. And as Howard discussed, it’s so hard to see how your own patterns, your own temperament, your own incentives, and even your fears are actually shaping what appears to be an objective judgment about a position. And the interesting dynamic is the more successful you become in your career, the more challenging this becomes because you have fewer people in your life who are willing and able to question your thinking without being impacted by your decision. So your life becomes increasingly more complex, with fewer people who can hold the context to help you navigate that life. And helping people navigate it is actually what I do outside the podcast. For more than a decade, I’ve worked privately with a small number of founders, CEOs, and investors. I serve as long term counsel to people whose lives and work have become too complex for simple answers. Now with investors, my conversations are not about what to buy or sell. It’s about you. It’s about the person making the decisions and the decisions that you cannot discuss or bring to anyone else. Decisions like is it the right time to leave and start my own fund? Where are my emotions and my fears distorting my investment decisions? Which opportunities make sense financially to me, but are actually wrong for the life I’m trying to build with my family. Now over time I come to understand your whole picture. I come to understand how you think, where your instincts tend to be unusually good, which situations cloud your judgment, what things and people you grip too tightly and what you truly want to make out of your life. Now, if this sounds like a conversation you’ve been missing, you can learn more at What Got You There dot com forward slash advisory. Every inquiry comes directly to me.

00:16:51  Sean DeLaney:  Michael. You are one of the clearest business thinkers I’ve ever come across, if not the clearest. And this makes me wonder just about your ability to think about business and your thinking process in general. Do you have an actual process that you allocate towards thinking?

00:17:07  Michael Mauboussin:  Not really, but I do think I think you’re making a couple of points that are really important. And I’ve had in my career, I’ve been very fortunate to be able to do two things that I think help in that regard a lot, or maybe three things, right. One is I’ve been able to allocate a lot of time to it. So whereas a lot of people are really doing things, I mean, I had to do things when I was an analyst and a strategist, but I had for a long time, quite a bit of time to allocate to study as a professional. And that’s a tremendous benefit. The second thing is writing. And so I’ve had the opportunity to write a lot as part of my job and even working on writing some books and I’ll mention one of my books I you know, I had an editor work with me, a guy named Lawrence Gonzalez, who was amazing. And when I sent Lawrence, I first just sent it to him very casually. And he said, well, I’d like to line edit this for you. And so I was like, all right, great. So he sent it back. And not only did he line it at my book, he actually wrote basically in the margins. Here’s this mistake you keep making. Here’s why you’re always muddled in these particular situations. Here’s you’re using this expression the wrong way. He was actually teaching me about writing as we were going through this. And I just recall going through his edits was one of the most difficult weeks I’ve ever had professionally, but incredibly valuable in terms of understanding how to communicate more clearly. And you know, cut out a lot of fluff and so forth. And then the last thing I’ll say is teaching. And as you know, just teaching and coaching, same thing. It’s one thing to think, you know, what something means or how to do something. It’s a very different thing to communicate it to get that into the mind of another. And I think teaching instills incredible discipline. You really can’t teach something until you understand it. And so you can’t fake it right? And if you do fake it especially with graduate students, it’s going to be clear pretty quickly. And I always like to say great teachers are great students. And I think great coaches, by the way, are great students. So it’s a sort of circular process never ends. So those things really having time to allocate writing in the discipline of writing and then teaching all sort of work together, I think, to move toward that objective is, like you said, to get clearer and more correct about ideas whenever possible.

00:19:26  Sean DeLaney:  Howard, can you talk to me about how the deep thinking you’ve done to write your memos has influenced you over the years?

00:19:34  Howard Marks:  First of all, the greatest thing about the memos. Well, people like them. I’ve been writing for just over thirty years. In the first ten years, I never had a response. I never heard. Not only did nobody say, that was great. Nobody ever said I got it. Literally, they only went to the clients and there were only a few hundred. And these were the days of mail. And to respond, somebody would have had to actually pick up the phone and call or look up my number or put pen to paper and then write it and put a stamp on it and put it in the mailbox. And nobody ever did that for ten years. And I kept going because it was good for me. First of all, it’s my creative outlet. I love to write. And number two, I have learned so much from writing and a lot of the things I think are there because I thought of them during the writing process. Many times I write a memo, I go into the writing process, not having thought the thoughts and the thoughts emerge in the writing process. The greatest example is that I was writing a memo on risk in zero six. And you know, everybody talks about quantifying risk and so forth. And I wrote down that risk cannot be quantified in advance. Risk is the probability of a bad outcome. You can’t measure probabilities of uncertain events. You can’t, there’s no place you can look, you know, let’s say that at the time I said that risk is the probability of a permanent loss. There’s no place you can look to measure the probability of a bad outcome, you know? And so that was very important. And I wrote it down. And I had always thought that. Then I kept typing and I wrote, and you can’t even figure out the probability of a loss after the fact. You can’t tell whether something was risky after the fact. If you invest one hundred dollars and a year later you sell it for two hundred dollars. Was it risky? You can’t tell why, because the outcome that happened was only one of the outcomes that could have happened. We’re back to Taleb and alternative histories. And so if many things could have happened but didn’t, then you can’t say what the real range of possibilities was. You can’t say what the probability distribution governing that investment was. That is to say, you can’t tell whether it was risky, So I’d love to write. There are two kinds of memos. There are the ones written in the moment an event happens, when I think it’s my job to explain it to my clients. And so I write, as I said, Lehman brothers went under on September fifteenth, Friday. I walked into the office on the eighteenth, sat down and wrote a memo, and we published it on the nineteenth, I think it was called, now what? Or something like brilliant like that. And so it doesn’t take long. And I do it quickly. Then there are memos which are important in their substance, which are kind of like projects. And these, you know, I accumulate information clippings, pile them up when I’m ready to go, I start writing and these can take one to three months because I feel no hurry and I want to do a thorough job. So I write them over, sometimes quickly, sometimes over time. I don’t feel time pressure on the latter ones. So I write a section and then I’ll stop for a week or something like that. And when I next have a thought, I’ll write some more. Just like with the books, they’re not written under time pressure. Take a long time. And then, you know, I love to edit them because I feel I’m shaping and polishing them, and then when ready, there are a few people I share them with at Oaktree and they give me comments and then they go out.

00:23:44  Sean DeLaney:  I love it. Two of my all-time favorites were Risk Revisited and Dare to Be Great II.

00:23:49  Howard Marks:  Well, I think. I think I actually think that certainly until recently I’ve written a couple of good ones. One called You Bet, about the comparison with gambling, one called Getting Lucky, about the importance of luck and how lucky I’d been. And now this one about value. Most people write and say that something of value is the best. And the response has been extremely strong. But other than that, I think that risk revisited. Again, not risk revisited, but risk revisited again. And dare to be great too, I think are the two best.

00:24:19  Sean DeLaney:  Michael.

00:24:20  Sean DeLaney:  I’d love to jump into your writing process, You mentioned reading, and that’s where you pull a lot of ideas from. I take it your idea generation process just far outweighs the capabilities of your output. So I’d love to know, how do you balance the exploration versus exploitation problem?

00:24:35  Michael Mauboussin:  I always worry that I’m going to run out of things to write about. So I kind of keep like a little running list of things. And I’m like, you know, so you cross off the top one as you write about it and then you add something to the bottom. And it does seem like an endless journey. That’s one of the virtues of being involved with business and being involved with markets is that you never lick the game, right? You always have something to learn. There’s always something new, some development and so on and so forth. But you know, I have to say, I wish I had a more systematic answer to this. I basically just sort of follow my nose and what seems interesting to me at a particular time. If I’m curious about a particular topic, it’s because I don’t understand something or haven’t read anything that allows me to understand it. Those tend to be the areas where I gravitate. A lot of the work we do, I would really call synthesis. We do some original stuff, but a lot of it is synthesis, which is to say really trying to garner the best ideas or thoughts on a particular topic and bring them together in a way that hopefully allows us and other people some insight as to how it works. So yeah, I just sort of follow my nose around is the best answer to that question.

00:25:47  Sean DeLaney:  Sometimes synthesis is just an indication of better understanding. So yeah, the deeper you can go on that, it always seems to be incredibly beneficial. You mentioned a second ago about you love when you don’t understand something. What does it look like in the first couple days when you come across something new you’re unfamiliar with? What does that look like for you?

00:26:06  Michael Mauboussin:  Yeah, I mean, it’s a great question that really does speak to my just my writing process in general. So what I tend to do is phase one is to just read as much as I can about the particular topic. And for us, if it’s an investing related topic, it usually means identifying often academic papers, but also things from the business press, but usually academic papers and literally trying to identify and you know, cast as wide a net as possible as to what papers would be relevant. And then I basically just try to read them all. And as I’m reading them, I’m trying to take notes. So I have some mental references, you know. So that’s writing on the margins and so on and so forth. And almost always have a legal pad near me. So I’ll jot down notes. And so that I’ll just sort of bomb through that. And that takes time, right? And by the way, that there could be a lot of other things going on. So I’ll just allocate time to that over time, over some period. And then the second phase is really trying to sit down with that legal pad and just organize some sort of an outline for that. So I know some people write without outlines. I don’t know how those people do it but I write everything. I try to outline everything before I write it just so I know that I know where I’m going, I know where I can refer back to material and so on and so forth. I think it just helps me. And by the way, I struggle. I mean, sometimes these things look like they come out okay, but often it’s a real struggle to come up with an outline that seems to flow at least the way I would think about the topic. And Sean, I suspect this is true for you as well, but a lot of the time we’re, I’m sort of working through those kinds of concepts is usually like when I’m, you know, working out or something like that, right? Like I’m doing something different. I’m walking the dogs or I’m working out or it’s, you know, before I go to sleep or right when I wake up, you know, sort of these quiet or in the shower, right? Literally these quiet moments where I’ve posed the problem to my mind and let the mind work through it and eventually sort of like churn it out. And then once I have the material, I’ve read it and outlined it. And by the way, as I go through the outlines, I’ll refer back, you know, paper X, this page go back to that. And then I try to put pen to paper. And the other thing that, you know, we are relentless about is editing. So not the first drafts. I try to make them pretty decent, but we spend enormous amounts of time going back and editing and improving and refining and that process, I think that most of us don’t want to do that. Right. You just want to hand your paper to the teacher and get an A but you realize in the real world that editing and that iteration process is really vital.

00:28:30  Sean DeLaney:  I’m wondering, is there a skill or mindset of yours that you just find the most difficult to transfer to even the most talented people on your team?

00:28:39  Michael Mauboussin:  No. I mean, look, I’m one of those guys. There’s nothing special about me and what I do. I think that everybody’s got to be true to themselves to some degree. You know, so for example, I tend to spend a fair bit of time reading and people are sometimes impressed by how much I read. But there are trade-offs, right? Because I’m not doing something else if I’m reading. Right. And the kind of work I do is not everybody’s cup of tea, nor should it be everybody’s cup of tea. And there are a lot of other people that do things that I can’t do very effectively at all. Right. And you know, trading is an example. I think I would be horrible at that. And I mean, I know actually my first job as a financial advisor, I did that for about a year and was an abject failure at it. So I experienced, you know, failure and understanding. So yeah, I don’t know, not really. I do think that it’s great to be part of a team or an organization where there is a lot of intellectual curiosity and open-mindedness. And so those qualities, I think that, A you can sort of pre-sort for them to some degree, but you can also cultivate those as an organization. The other thing that’s interesting, not just in the investment business but everywhere, including sports, is that sometimes success can lead people to think that what they’re doing is the only thing they need to know, right? And so success sometimes breeds a little bit of I don’t know whether it’s inertia or complacency. And you know, as you know, the greatest athletes, the greatest coaches, the greatest organizations are ones that are constantly striving to improve and to learn. And so I think that’s also important, but I’m not trying to confer anything that I do to anybody else. I’m trying to learn from other people more than I’m trying to impart anything to them.

00:30:22  Sean DeLaney:  And you’re just even talking just about just those people who are constantly learning and improving. And you obviously know, one of the most important pieces of that is feedback. What other ways are you incorporating feedback loops into your life?

00:30:35  Michael Mauboussin:  Yeah, I think it’s really important. Especially, the quality of the feedback is very different in different types of activities. So when your activity is largely skill based and you know, you think about playing the piano or you know. Well, music is just a great example where. Or a tennis player or something. So a teacher can really observe you and give you very pointed feedback that can be helpful. But when you get more on the luck side of things, when there’s more randomness and I think markets are a really good example. Investing is generally a very good example. It’s very difficult to get high quality feedback. So I think the answer is to focus as much on process as possible. Now, you know, the clearest example of where I get feedback is actually in the classroom because as I present ideas, I can see people, whether they understand what I’m talking about or not. So I get visual cues, I obviously get questions, but also visual cues. And so the key is to tune the presentations and the message to make sure that you’re getting maximum impact. Over the years. Also, I’ve done a, you know, I do a fair bit of presenting, whether they’re, you know, client meetings or whatever. And I’ll tell you something else that’s funny for me is that, you know, for example, I would show I would have a concept or even have a joke in my presentation or something I thought was lighthearted. And people look at me like I’m an idiot. So I was like, I can now understand what these comedians are like. Like they go to these clubs and they’re trying out their material and you know, something you think is really clever may not go over well. And something you may think is not very clever tends to go over well. And you just have to sort of go with what works, right. So there’s some of that as well. So I try to be attuned to that. By the same token over the years, I’ve from time to time have gotten people saying to me like you know, you should do this, that or the other. And if it didn’t feel right to me if I felt that what I was doing was more was better or more authentic, I would actually not pay attention to some feedback. So part of it is gathering proper feedback, especially from sources that you respect. And I think like an audience of a student body, for example, is great, but also to make sure that a successful organization should have people along the way saying like, what you’re doing is not right. Or why would you be doing this way or whatever? And you have to have a little bit of fortitude of the vision and the backbone of what you’re doing to also understand when you shouldn’t pay attention to feedback.

00:33:07  Sean DeLaney:  Yeah. You’ve been teaching since ninety three Columbia School of Business and earlier, you just kind of mentioning some of the parallels, even to coaching that there is in teaching. What else in teaching do you think is very important for the teacher to help his students or their students?

00:33:21  Michael Mauboussin:  Yeah, I think that and I don’t know what your experience is like, but if you reflect back on like the great teachers or coaches you’ve had in your life and by the way, they tend to be quite memorable. But I think that one of the qualities I was, what I always find is so as I mentioned, they’re great. I mean, they’re usually a few things. One is they’re good communicators, right? So they have the capability of taking what can be complex ideas and making them understandable so that you walk out and you say, man, that’s cool. I now understand something I didn’t understand before. I think great teachers are great learners, right? So it’s not like they have a set of a body of information they’re trying to convey and just do it in a classroom and then that’s it. They’re constantly learning themselves. And that, you know, speaks to the intellectual curiosity as well. So those would be some to me, some of the very big qualities of great teachers. Yeah, those would be two big ones.

00:34:15  Sean DeLaney:  Your communication skills are second to none. You’re so clear, so concise. Your work is so buttoned up. I would love to know how much work goes into, let’s call it an hour long talk for you.

00:34:26  Michael Mauboussin:  Yeah, that’s a good question. And you know, the other thing is that I’m a fairly strong introvert. So these kinds of things are not you know, I can now do presentations, but it’s not necessarily a comfort zone for me. I’ll mention in the mid nineteen nineties, I went to a school, a place called the Buckley School of Public Speaking. So it’s down in Camden, South Carolina, and it’s a couple day, two and a half day training session on public speaking. And they teach you a lot of techniques to improve the quality of your speaking. I’m not sure I do all the things I’m supposed to do all the time, but it was very helpful for me, but I think you’ve hit on the key point and again, this also relates to business and athletics and so forth, which is the importance of preparation. And I think that many people feel that they can maybe wing it a little bit of a strong term, but they underprepared and my tendency is probably to over prepare. So I prepare a lot for those things. So you know, when you say a one hour presentation, and often I’m doing those things the first time, you know, you’re probably what you’ve probably seen is after a bunch of practice and having done it and refined it and so forth. But no, I spend a lot of time on it and I’ll give you one sort of more concrete thing. When I was an analyst back in the day, we would go in the morning meeting and you’d talk about a particular idea, you know, upgrading the stock or downgrading the stock or whatever it is. And you would get three minutes to do that, three minutes. So you have to be able to communicate your idea as effectively and compellingly as possible in three minutes. And I would spend, you know, I usually say like an hour or sixty to ninety minutes crafting that three minute presentation to really make sure I was picking the right words that I was introducing the right statistical, the numbers right to animate the ideas and so forth. And I think that ends up paying off. Right. And again, that’s a case where you’re getting feedback. So if you do it well, you realize what worked. If you do it poorly, you realize what didn’t work. And the other thing I’ll say for that is I also like to listen also. You know, it’s like reading. I like to listen to other people and see what works. You know, again, maybe it’s idiosyncratic, like what works for me, but who is a good speaker, who is clear, who is compelling? And yeah, so just observing other people and trying to again, take their greatest hits and say, look, that’s a quality I want to emulate.

00:36:53  Michael Mauboussin:  The other component of teaching, which I probably neglected to mention, was just passion. And as you know, people who are passionate about their topic, I think it tends to come through and animate the whole concept. And one of the things I’ll say that I do in my teaching, which I didn’t see all the teachers do for me or for my classes was to learn the history of ideas. And I’ve always found that to be fascinating. By the way, again, you look at great coaches, for instance, almost all of them understand the history of their sport and the history of the ideas and how they’ve come along and you know, and they spend time to understand the evolution of their game. And I’ve always found that to be fascinating. So in the world of business and investing and finance, there are obviously very long, deep and rich traditions. And you know, there are paths that the intellectual paths that these different disciplines take. And just understanding that and understanding where these ideas come from and how they arose in the first place. I find that stuff to be fascinating. And I think it’s a very valuable component of pedagogy. So a very valuable component of teaching is to say, here’s this idea that we have, here’s where it came from here’s why it’s valuable, here’s how to think about it. Right? And I will say that my course that there, we don’t have official mottos, but we have two mottos that I share with them the very first day. One is, a Latin phrase that’s the motto of the Royal Society. It’s called it’s nullius in verba. But the translation of nullius in verba is really don’t take anybody’s word for it. Think for yourself. So I say to the students, I’m going to guide this. I’m going to sort of lead this discussion over the next semester. And I’m going to impart some frameworks and tools. I’m hopeful that you’re that you’ll find useful as you go through life. But it’s nice in Verba, right? Don’t take my word for it. Think for yourself always. And if something doesn’t make sense to you should always ask or challenge, right? And the second is there’s a quote from the mathematician Carl Gauss. And he said it’s also in Latin, but basically he said not notations but notions. Right. So in other words, don’t worry about math before you understand concepts. So concepts first and then bringing on the tools and all that to sort of specify that. But concepts first. And by the way, I think that’s also very important even in, you know, analytics and sports and so forth. It’s certainly in the world of finance and business is to understand concepts first and then having those notations. The numbers animate that rather than the other way around. So people sometimes go right to these equations or numbers and don’t really have the full context. So those are those would be some other things I would just throw out there that I think that’s behind the scenes. I’m not sure the students are so aware that I’m thinking about this stuff, but I think that’s the stuff that I think might be helpful in the bigger equation.

00:39:50  Sean DeLaney:  I’d love to dive into pattern recognition. Anyone who’s familiar with your work clearly understands you’ve got above average ability in terms of spotting patterns. Were there things you did throughout your career that just helped speed that pattern recognition process up?

00:40:04  Howard Marks:  No, I do think, Sean, that it’s mostly time and understanding. You know, Ray Dalio in his book, recent book, talks about pattern recognition. Now what they did is they studied history. And he says, you reach a point where something happens and you say, oh, that’s one of those, you know? But I think that’s the point. If you can get to the point where you say, oh, it’s one of those. And the reason markets go to extreme is that many people fail to say, oh, it’s one of those, instead, what they say is this time it’s different. And I first came across that phrase, on October eleventh, nineteen eighty seven there was an article in the New York Times written by a woman called Denise Wallace. And the title was something like, this time it’s not any different. And what she said is that. When the market goes to extremes, people always say, oh, this time it’s different. In other words, the old rules don’t apply. This is such a unique experience that the old rules don’t apply. And so the old valuation limitations, you know. Well, yes, the normal post-war p e is sixteen but it’s selling at thirty now. And that’s fine because this time it’s different, you know, whether it’s the internet or the nifty fifty or the housing miracle in two thousand and five, six. You know, this time it’s different. The old rules don’t apply. And then there’s a correction and people say, oh, yes, I guess the old rules do apply. So it’s very important when you hear people say, this time it’s different. You’re a red light should go on. I think the phrase came from Sir John Templeton. And he said, but sometimes it is different. Twenty percent of the time it really is different. And the world does change. And if that was true when he said it in the eighties, I think it’s much more true today. Maybe it’s forty percent or fifty percent. The world is, you know, when we when I was a kid or even a young man, the world felt like it was a static place. Nothing ever changed. I always say that when I was a kid, comic books were ten cents through my whole childhood. We didn’t have inflation, we didn’t have changing prices, and we didn’t have rapid technological change or communications that changed everything so rapidly. And we didn’t have the partisan communications that we have now because communications operated under something called the Fairness Doctrine. So the world didn’t change and events played out in front of an unchanging backdrop, shall we say, today. The world changes every day. So it’s much more likely today that things really are different. That was one of the themes of my memo. Something of value. And so I think it’s important to recognize that today and be more flexible in our approach. So you know, Mark Twain said history doesn’t repeat, but it rhymes. There are some things that are kind of eternal verities, but there is much more that’s different from the day to day.

00:43:09  Sean DeLaney:  Looking back at the start of your career, would you have been able to predict the success you’ve had?

00:43:14  Howard Marks:  Oh, I wouldn’t even have been able to predict what I did. You know, there are a lot of people in accounting who said, well, you know, I started to read prospectuses at ten and then at thirteen, I invested my bar mitzvah money and that kind of thing. But I didn’t have any of that certainty. And when I was getting out of grad school at University of Chicago in sixty nine, I didn’t know what I wanted to do. So I applied for six jobs in six different fields. And Citibank, the one that I applied for was the only one in investment management of the six. But I had a good summer working there in the year during the summer between years of graduate school. And so I went back there and stayed for fifteen or sixteen years.

00:44:01  Sean DeLaney:  So what changed at that time here, it seems you were interested in a lot of different things and very broad in terms of what you might be interested in. And then all of a sudden, I mean, you devoted your life to this. What happened there?

00:44:12  Howard Marks:  Yeah. Well, I mean, when I start something, I get attached to it and it was very enjoyable. Although not painless because when I got there for the summer job in sixty eight or for the full time job in sixty nine the bank was a practitioner of what was called nifty fifty investing. Now, most of the banks were the big investors of the day. You know, there were no KKR, there was no Blackstone, there was no Bear. Well, Vanguard didn’t exist. There were a few mutual fund companies, and there were no investment boutiques or hedge funds. Bank trust departments did most of the investing at the time. And that’s where I was working. Most of what we called the Money Center banks, the ones I’m talking about here, the ones in New York and so forth, mostly in New York and Boston. They did the investing, and most of them were devotees of what was called nifty fifty investing. They invested in the stocks of the fifty best and fastest growing companies in America. Now, this was a kind of company that really came into existence after the war. Thanks to advances in technology and marketing, you had companies like Xerox, Kodak, Polaroid, IBM, Hewlett Packard, Perkin, Elmer, Texas Instruments, Merck, Lilly, Coca-Cola, AIG, Procter and Gamble. That grew faster than the other companies. You know, you didn’t have these rapid growing companies in the thirties or before. And of course, not much was invented on the civil side during the war. So this was a post-war development and mostly sixties on. And so people went crazy over these stocks. They were considered to be such good companies that, A nothing bad could ever happen, and B, there was no price too high for these stocks because of their wonderfulness. And so if you bought them the day I got there from my first job, sixty nine and if you held them diligently for five years by the end of 1974, you lost almost all your money in the best companies in America. I was associated with that. By 1975, I was the director of research, you know, and you know, I was just a kid. I was in my twenties, but you know, for some reason I was able to do that before my thirtieth birthday. And so I was associated with the nifty fifty practice at Citibank. And the outcome was terrible. The clients lost almost all their money and we were rather undiversified. We mostly had only that. So you know, I always say I’m lucky I didn’t get fired, but I did lose my job as director of research because they brought in a new chief investment officer to pull us out of the slump, and he brought in his own director of research eventually. And so but he didn’t say that I was fired. He said, what do you want to do? And I said, well, I’ll do anything except spend the rest of my life choosing between Merck and Lilly because I believe in market efficiency. And I believe that you can’t differentiate. You know, if you offered me a million dollars at the end of the year for saying which Merck or Lilly is going to outperform in the next year, I couldn’t do it. Nobody can do it more than fifty percent of the time by flipping a coin. And so he said, well, I want you to start a portfolio in convertible bonds. They had a convertible bond portfolio at his old shop, which was called Morgan Guaranty at the time. And so I did, and I loved it. And I went from running a huge department with a big budget and I think seventy five people to working alone with no budget and no organizational importance. And I loved it. But then, in August of 1978, I got the phone call that changed my life. It was the head of the bond department saying, there’s some guy named Milken or something out in California, and he deals with these things called high yield bonds. Do you think you can figure out what that is? And so you know, I was smart enough to say yes and try to keep my job. And I got involved with high yield bonds at the beginning of high yield bonds. And as Malcolm Gladwell says in his book Outliers, it’s great to be first in line. That’s what he calls demographic luck: being at the right place at the right time. And almost everything important that has happened in the investment world in the last forty two years has either come through the high yield bond world or has applied the mentality that grew up in the high yield bond world. And I was lucky to be there at the beginning. Now, however. So here we are. We invested in the best companies in America at the end of the sixties, early 70s. And you lost almost all your money. Now I’m investing in the worst public companies in the world, and I’m making money safely and steadily. So I drew two conclusions. It’s not what you buy, it’s what you pay. Let me say this: There’s nothing so good that it can’t become overpriced and a bad idea. And there are a few things so bad that they can’t be underpriced. And a good idea. It’s not what you buy, it’s what you pay. And the corollary of that is that good investing is not a matter of buying good things. It’s a matter of buying things well. And if you don’t understand the difference between buying good things and buying things well, then you shouldn’t be doing this. It’s all a matter of buying things well. And these were my two revelations at the time. And they really shaped what I’ve done since seventy eight.

00:50:50  Sean DeLaney:  When you started at Columbia in ninety three, I have to assume you guys didn’t even have behavior finance courses. And if we’re going to fast forward thirty years into the future and look back, where do you think people are going to be dumbfounded that we didn’t concentrate more right now on.

00:51:04  Michael Mauboussin:  That’s a great question, by the way. There were no behavioral finance courses. What I suggested to my students even back then was that they take negotiations courses because negotiations was the closest thing they could get to understanding it. What’s powerful about negotiation, as you know, is, and I’m not a negotiations teacher, but I think that this idea is really valuable in life, which is understanding the other person’s point of view, right? So you have to understand what is acceptable to you and you have to understand where the other person is coming from. And then obviously what you’re trying to do is find a solution that’s mutually advantageous. So this idea of just literally understanding other people, and I think a lot of what comes down in behavioral finance is actually understanding the behaviors and thought processes of other people. I do think there are a bunch of areas that we just don’t understand. I tell my students the very first day, that there are more questions than there are answers in finance, right? So there are a lot of things we don’t really understand very well. Some core ideas that we I think, don’t fully understand are market things like market efficiency and market inefficiency. So what makes asset prices ‘correct,’ in quotation marks, and what makes them incorrect. And so we have ideas and I certainly have written a little bit about this, but I think I don’t think that’s buttoned down. What is the concept of risk? Do we really understand what risk is? Are there better ways to think about that? Might we be able to do that? Going back to this idea of market efficiency, one of the areas that I’ve always found fascinating is sort of this idea of the wisdom of crowds. And the key to the wisdom of crowds working is you have to have diversity of the underlying agents, in this case, investors. You have to have an aggregation mechanism. So a way to bring that information together and you need proper incentives. Well, we don’t really know how to measure diversity all that well. And that’s another area I think going, you know, if you said thirty years from now, looking back, I would really hope that we do a better job of really thinking about diversity. And we talk about diversity in organizations. We almost always talk about social category diversity, so age, gender, ethnicity, and so forth. But really what we’re after is cognitive diversity. So the ways we think and our mental models and our training and our experience. And you know, I think we’re making some strides, but how we understand that stuff is still, I think, still quite nascent. So that’s another area. And then the last area, there’s been a ton of ink spilled on this, obviously, but even things like competitive strategy. So you know, what makes for good business? What makes for a sustainably good business? That’s a big area. And maybe I’ll mention one more, which is that we’ve spent a lot of time and written a lot about this concept called base rates, which is essentially a repository of history of corporate performance in particular, for instance. So you know, how companies have grown, what’s happened to their profits, and all these kinds of things. And the premise is that some understanding of history can be helpful in understanding potential outcomes for the future. So that whole area in terms of building out databases, if you will, of past performance, I think that’s still vastly underutilized and vastly underdeveloped. And that might be something in twenty or thirty years that we’re much more robust at doing.

00:54:14  Sean DeLaney:  Yeah, it’s certainly an exciting time. The ability to then dive deeper and explore more of these. One of the things I love exploring, one of my passions is just around understanding behavior and psychology When did you start looking at heuristics and biases and just their overall impact on investors?

00:54:29  Michael Mauboussin:  Yeah, it’s a great question, Sean. You know, I think that as I started teaching my course, the thing that I really ended up the biggest change over the years has been precisely what you described and sort of the behavioral stuff. And you know, I sort of probably became aware of that in the mid nineties, late nineteen nineties, and started to read about it fairly actively at that time. As I mentioned, I’d sat in on some negotiation classes and learned a little bit of those techniques. That was very fascinating to me, but I was just stepping back and saying, you know, in investing for instance, you know, what distinguishes the good from the great? And it really isn’t that they have better information. It really isn’t that, you know, they have better spreadsheets or something like that. It’s almost always that they’re making better decisions, especially under stressful circumstances. And so that got me very interested in sort of learning more about all that stuff. And so yeah, probably the late nineteen nineties and that has been, you know, so that’s been probably a twenty five year journey and learning more about that stuff. And obviously, it’s been a field that’s really blossomed in the last quarter century as well. I mean, obviously controversy, if you actually read the original stuff in the nineteen seventies, it’s remarkably lucid and interesting, even from fifty years ago. But yeah, so probably the last twenty five years and I’ve, and obviously I’ve written some books about this and try to integrate it. I just think it’s an eternally fascinating thing. And as you said, like once you’ve learned some of these techniques and some of the ideas are very accessible ideas, once you’ve learned these techniques and integrated them and internalized them, I think it gives you a lot of help in sort of navigating through life and the decisions you make.

00:56:07  Sean DeLaney:  Yeah, absolutely. Two of your books Think Twice and more than, you know, are treasure troves and just underlined and highlighted multiple times. So I’m a huge fan of your work there. I’m thinking about looking for an edge. And this doesn’t only have to pertain to the investing world. This could just be life in general. But do you think behavioral mistakes are where the most opportunity to find an edge is right now?

00:56:28  Michael Mauboussin:  Yeah, it’s almost always, you know, we wrote a piece about this a little while ago about market inefficiencies. And I know you’re talking about something broader. And we talked about things that probably all apply in life to some degree. But we talk about behavioral, analytical, informational and technical. So analytical. I’ll come back to behavioral last. Analytical just says you and I have the same information, but we analyze it differently. Someone with better frameworks and mental models can have an edge in that regard. That can be an edge if you’re competing with people who don’t think about it as well. And you can think about, by the way, even like assessing athletes, for instance, that could be an example where, you know, we all have the same data on this particular athlete, but somehow you see something that others haven’t seen and that gives you an edge. Information means you know, something others don’t know. That happens. It’s difficult to do. Certainly in the context of markets, it’s challenging. Technical, I’ll leave aside, but technical shows up in everything, which is sometimes people make decisions for reasons that have nothing to do with what their actual preferences are. And so you know, I was talking actually to the GM of an NBA team, and the guy said, I was talking about a particular trade. And he goes, well, you know, these guys had a salary cap problem. And you know, he was just talking about all these moving pieces about things that had to do with the economics of the business rather than necessarily the values of the players. And he said, you know, we were able to fashion this trade that addressed these issues that had less to do with the actual player values. But if you go back and circle around, say, behavioral stuff, I mean, that’s the one that you know, it’s unlikely that human nature is going to change anytime soon. Even with all our understanding of these behavioral issues, people are people and you see it every day so that I think those will be persistent. You know, Ben Graham, who is obviously the father of security analysis, had this metaphor of Mr. Market to think about markets. And in a sense, what he was trying to do is anthropomorphize this concept of markets as people and having these different sort of moods. And I think that those sets of ideas will be around for a long time. So people will collectively become too optimistic or too pessimistic. And you know, collectively, and that’s always been true. And I think that, for the foreseeable future, will also be true. So I think the behavioral stuff is huge. And that was a little bit of the point of Think Twice, which is to say, hey, as you go through life, try to be better at it yourself, none of us will be perfect, but you know, try to be better at it yourself. So you make fewer mistakes. But second, recognize that these mistakes are going to be made by others. And you know, you may have an opportunity. I don’t like to use the phrase, but to take advantage of or to take advantage of other people’s mistakes, right? To some degree. So it’s a dual benefit to understanding these things, A being better yourself, and B, seeing where other people are making mistakes that may be advantageous for you.

00:59:22  Sean DeLaney:  What other behavioral biases do you just find the most joy exploring?

00:59:28  Michael Mauboussin:  Well, I think that there are a couple ones that are really big ones in investing in particular. But these are big deals in general. One is called confirmation bias, which is once you’ve made a decision about something, you tend to seek information that confirms your view and you dismiss discount or disavow information that doesn’t confirm your view. And by the way, if it’s information that’s a jump ball. The jump ball always goes to you right? The tie always goes to the base runner. And so that’s a big one. And you know, how do you counter that. It would be things like actively open mindedness, right? So this idea that really, not only are you willing to entertain different points of view, but you seek them out. And that’s cognitively challenging, by the way, it’s taxing to some degree, but just keeping an open mind about everything. And you know, so just consider and this goes back to even the things on negotiation. What is the other person’s point of view? The other big one in investing, but also probably in life is this concept of overconfidence that we tend to be, and there’s certain benefits to overconfidence and even optimism that sort of goes with it that are good and psychologically healthy. But you don’t want to be overconfident or underconfident. You want to be just well calibrated if possible. You know, you mentioned you brought up a really good point about feedback before. And you know, one of the questions is, are there ways to set up feedback mechanisms for yourself so that you get better calibrated in your decisions and in your overconfidence over time? And I think there are ways to do that. Part of it is to think about the world probabilistically. And the second thing is to document how you’re thinking about certain outcomes. And you know, when I met Danny Kahneman for the first time, which was just an absolute thrill, the first question I asked him was, what can I do to become a better decision maker? And his immediate response was, keep a journal of your important decisions. You know, write down what you expect to happen, why you expect it to happen, and assign probabilities to various outcomes. And then just keep that journal and refer back to it and score yourself on how things actually turn out. And sometimes you’ll be right for the wrong reasons. And you have to ding yourself right in those situations. And sometimes you’ll be wrong for the right reasons. In other words, the twenty percent outcome happened, which is going to happen twenty percent of the time, right? One in every five cases. But I thought those things were really there. And they’re not super time consuming. They’re not certainly not expensive, but they require a lot of discipline. And that could also be something that’s also like athletics, which is sometimes, you know, discipline is a really important component to make sure that you’re doing things properly every time. You know, if you’re the receiver, you run your route properly every time at the right speed, you break the right spot and so on and so forth. So those disciplines. Another important thing that probably carries over to almost everything.

01:02:18  Sean DeLaney:  Yeah. You were mentioning human nature is unlikely to change. I was laughing a minute ago when you brought up confirmation bias and the Greek statesman Demosthenes, he had a great quote. What a man wishes. So shall he believe. So? It holds true thousands of years later. So I’m pretty sure in a few thousand years they’ll be looking back the same thing you mentioned the decision Journal really intrigued about that. That’s one I’ve kept as well. How much of this is just intuitive sixth sense for you at this point? And how much do you have to look to decision journals or other systematic ways to understand these?

01:02:49  Michael Mauboussin:  There’s a great quote from Barb Mellers at University of Pennsylvania. She says something like, you know, we find prediction very hard, but rationalization of what happened very easy. Right. And so I think that there’s a lot of truth to that, which is that I think that most of us don’t like to keep track of our decisions or keep track of, for example, investment decisions. You’d rather just let the chips fall where they are and then come up with a story to explain what happened. And by the way, that story tends to make you look pretty flattered in the whole outcome. So I think it depends a lot on the kinds of things you’re doing. I’ll mention I was speaking with a senior executive for a Major League baseball team the other day. And he was saying like, he goes, this is actually something they struggle a lot with which is when they think about, for example, player assessment, how do they really know that they are thinking about things properly and they’re trying to work on documenting their decision making process as they go along. And again, contrasting, for example, what the analytics department may say versus the scouts and so forth, to see if they can glean information from how they think about these kinds of problems. But part of it is, you know, can you quantify for example, for an athlete, can you quantify measures of, quote, success? And those kinds of things can be a little bit challenging. But I think the degree to which people are willing, when they especially when you have things like discrete outcomes that we can agree upon in time periods that we can agree upon that kind of setup lends itself very much to giving quality feedback. And by the way, I think very few people do it. And that’s something I would imagine in the next five, ten, fifteen years that we’ll see more of that and that will be good. So that’s another area that’s fascinating. I’ll mention a third one. You used a really fascinating phrase explore versus exploit. So I don’t know if any listeners caught that, but that’s another area I’ve always been very interested in. And I think that as a business, you could think about, you know, sort of exploitation as doing more of what we do now, which is obviously completely fine. But exploration is trying to go out and find something new, find the next big thing. And it’s really interesting to ask from a resource allocation point of view, how much should I allocate to exploitation and how much should I allocate to exploration? And if you look at nature, by the way, what’s interesting is in environments that don’t change much, the skew towards exploitation. And there’s very little exploration. Why? Because exploration is not that valuable. Because stuff doesn’t change, right? By contrast, in rapidly changing environments, and you can think about ecosystems as an example, there’s a much greater premium put on exploration and less on exploitation, because what you’re exploiting is going to go away and you need to figure out what’s going to be next. So I’d love to think about a way to codify that to some degree, even in a corporate setting, are the ways that we can think about measuring rate of change in the environment. And as a consequence, ways of thinking about maybe not optimal, but at least directionally correct allocations of exploitation versus exploration. So to me, that’s another area that we’re playing around. There’s some new books out on this, but that’s another area that I’d like to do a deeper dive into.

01:06:11  Sean DeLaney:  Howard, We were talking about pattern recognition earlier. When you come across one of these revelations. I’m wondering what that looks like for you.

01:06:19  Howard Marks:  Well, as I said, I spend most of my time thinking about the market in this regard rather than selecting individual companies or securities. So I think the pattern is to find when things are overpriced, which is usually a function of there being too much optimism and excesses in the environment, in the physical environment, and then too much optimism about what’s going on or too much pessimism when there are craters in the environment and too much pessimism about that. You know, I use a lot of adages some of my own creation, but mostly other people because they said it so well. And in the early seventies I was a member of something called the Third Thursday Group, which met on Wall Street for lunch on the third Thursday of every month. And it was for directors of research and senior investors and that kind of thing. And you know, I met a lot of very able people much older than me, and they shared their wisdom. And somebody said to me, one of the first smart things I remember hearing is there are three stages to a bull market. The first stage, when very few people, only a gifted few, understand that there could be improvement. The second, when most people accept that improvement is actually taking place, and the third when everybody believes that things can only get better forever. And it is which stage we’re in and which feelings people are guided by that really determines the status of the market. So are people being too pessimistic in the first stage. That’s when you get bargains. Or two. Optimistic. In the third stage, which is when you know the excesses on the upside are taking place. And when you can really get killed if you participate. So it really comes down to a question of how much optimism is there. And you know, if I could only know one thing about every moment and every security, it’s how much optimism is in there. When you buy, when there’s no optimism, by definition, the price is low relative to the intrinsic value. And that’s when you get the bargains. When you do things, the real easy and big money in investing comes when you are willing to do something that nobody else will do. And when that’s by nobody else is willing to buy, you buy, you get a bargain. The real easy way to lose money is when you do that, everybody else is doing to excess. Because clearly now there’s too much optimism to be realistic. And you pay prices that vastly exceed the intrinsic value. And that’s an easy time to lose money. So you know, I work on that now. That’s qualitative. And there are quantitative things as well. Valuations p e ratios bond yields, yield spreads capitalization rates on real estate in enterprise values on private equity purchase. These are quantitative. But they can mislead and especially now in this period of great change the historic valuation ratios may not be that meaningful. And that was another important theme of the memo.

01:09:58  Sean DeLaney:  Yeah. You need to be non-consensus and right. You mentioned at the third Thursday lunches, I love this. You just mentioned a little bit of wisdom you happen to pick up there. Any other really meaningful lessons that you picked up from someone much senior to yourself early in your career that just stuck with you all this time?

01:10:13  Howard Marks:  The first of the great adages that I remember learning was that being too far ahead of your time is indistinguishable from being wrong. But you know, people turn up negative because they see things in the environment that are going on that spook them. And you may be right in principle. But if you do it too soon and it doesn’t work for a few years, everybody says, look at that guy. He used to understand this process, but look how wrong he is. You know, now you’re not wrong. You’re right. But early. But right. Being right early looks like being wrong. And the question is, can you survive in that interim between when you make the decision and when it’s proved out? And these can be very difficult times and you can show terrible performance and lose most of your money under management, even with a decision which is right in principle. The first thing I remember learning at Wharton in 1963 came from a book called Decision Making Under Uncertainty by Oil and Gas Operators, a guy named C Jackson Grayson, who later went on to be the first energy czar in the seventies after the Arab oil embargo. And what he pointed out was that the sign of a good decision is not that it turns out to be right. And this is counterintuitive. I believe that most of the things that are important in the investing world are counterintuitive, but the point is you can make a good decision and it doesn’t work because number one, nobody knows everything when they make the decision, nobody has all the facts. And number two, the world is dominated by uncertainty and by randomness. So you know, you can make a perfectly good decision with good data and a good decision process, but it turns out not to work because of some random event. And if you read Fooled by Randomness by Nassim Taleb, that was his first book, and a great book in my opinion. He said, to understand the quality of a decision, you have to understand not only the events that occurred, but the other events that could have occurred but didn’t, what he calls alternative histories. Only when you consider all the possible outcomes from a decision do you really understand the quality of that decision? Not by understanding the one event that did occur. So it’s really important to understand this and to understand that there are lots of good decisions that don’t work. And there are lots of bad decisions that work. We all know about people who are right for the wrong reason. So only when we look at the world that way do we understand who really made good decisions or not. And that’s a very important distinction also. So this is the kind of thing that is so vague, provocative and uncertain that this is why investing is interesting.

01:13:37  Sean DeLaney:  Throughout your whole career, do you have a decision that you’re just proudest of or just brings a smile to your face every time you think about it?

01:13:44  Howard Marks:  Yes, it’s a funny thing. My last book was called Mastering the Market Cycle, and that came out in late eighteen. And I do a lot of my musing with my son Andrew, who’s also a professional investor. And so I was talking to him about the book, while I was writing it and I said, you know, I think most of my cycle calls have been right now that I think about it. And he says, yeah, dad, that’s because you did it five times in fifty years. You can’t make a good decision every day. These calls at a peak or a trough, at the extreme of bubble and crash or high and low, bull and bear, are decisions where the logic is clear and I think compelling. And the probabilities are on your side. The probability of being right is high. But if you do it in between, you try to do it every day or every week or every month. You try to do it when the market is two percent overvalued or four percent undervalued or something. It’s very hard to be right. And so you know, I have done it maybe five times in my life. And they generally worked out very well. But probably the best was that, and it helps, by the way, not to do these things on your own, but to do them in partnership with somebody else who sees the world the way you do. Kind of like Buffett and Munger or something like that. And I’ve been lucky to have a partner named Bruce Karsh, who is my co-founder of Oaktree and worked with me at Trust Company. He joined me in 1986. Together we started, I think, the first distressed debt fund from a mainstream institution. I don’t know. He joined me in eighty seven, and we started the first distressed fund from a mainstream financial institution in eighty eight. We’re almost forty years together now. So I’ve been working with Bruce all that time and we support each other in what we do. It’s very, it’s kind of lonely to do these things, and it’s easy to second guess yourself. And it’s great to have somebody else, supporting your logic. But in oh, five, six, we turned very negative because of what we saw going on in the marketplace. And we really tightened our portfolios. We tightened our decision process and raised our selectivity and in oh seven to early zero eight, we raised a standby fund for investment in distress, which turned out to be the biggest in history. At that time, it was ten point nine billion. Our funds up to that point had been one or two, maybe three billion. And in 2007 and 2008 we raised eleven billion. And we had it standing by mostly uninvested. When Lehman went under on September 15, 2008. So we had made a good decision to be cautious and importantly, on September eighteenth and nineteenth, I made the decision supported by Bruce that we should invest aggressively and over the remainder of zero eight he invested an average of about four hundred and fifty million a week for fifteen weeks. That’s seven billion. And all you had to do to be successful was buy during the global financial crisis. And it kind of didn’t matter what you bought. Because everything was vastly underpriced and almost everything recovered fine. There were very few bankruptcies. And so the only thing that mattered was that you bought and we bought a lot. You know, we had much more money than anybody else. And we put most of it to work in those fifteen weeks, seven billion out of eleven. And so I think that was our best call. And you know, I write the memos to clients. And the great thing is that, you know, I don’t have to say to people, well, yeah, I know it. And they say, yeah, sure you did. You know, you can read the memos from that time. You can read the memos in oh seven, which were extremely cautionary, until the crisis hit around late July of oh seven. And then what we did after the bankruptcy of Lehman in late oh eight, early oh nine. And you can see that we I would say, called it right. Right. And you know, very few people did. I recount in one of the memos that I was talking to a friend of mine who was a reporter, and he said to me, so what are you doing? I said, we’re buying. He said, Are you crazy? And you know, it turned out to be the right thing. So it’s very satisfying and financially successful.

01:18:31  Sean DeLaney:  Yeah. Non-consensus. And right once again and prepared for those alternative futures. You mentioned your son Andrew, and believe me, we’re going to dive into your latest memo because I love how deep you went on your own thinking, but Andrew’s my age. I’m wondering the advice you’re giving to him. What do you wish you did more of earlier in your career?

01:18:49  Howard Marks:  Well, I’ve been too conservative, you know, and he explained to me and I put in the memo why he thinks I was too conservative, because I had parents who lived through the Depression and were scarred by it. They were adults during the Depression, not children. That’s not the important thing of being a child. If you were an adult, you knew what was going on. And so you know, all my life they would say things like, don’t put all your eggs in one basket and save for a rainy day. And you know, cautionary things like that, which influenced me. And then, you know, I was scarred because my first half decade or decade in the investment business were affected by the crash of the nifty fifty. And that had an influence, I’m sure. And then the fact that my greatest successes have come from spying excesses in the market, you know, excess of bull markets. So that became kind of a pattern recognition that resulted in knee jerk conservatism and skepticism. So as a fixed-income investor and a credit investor, I think that being conservative was okay.

01:19:54  Sean DeLaney:  I think you made out fine.

01:19:56  Howard Marks:  Yeah. And you know, in our fields, the premium is on conservatism because being an optimistic and aggressive fixed income investor is almost like an oxymoron. You have to have a bias towards conservatism when you do fixed income. I always say that if my boss, Peter Vermigli in nineteen seventy eight, rather than say, I’d like you to start a convertible bond fund, had said, I’d like you to start a venture capital fund and find Amazon when it comes into existence. I would have been a disaster because I’m not an optimist. I’m not a dreamer. And it wouldn’t have fit my personality. And one of the most important things is to invest in a way that is right for you and you know, for a chicken to try to be aggressive or for a cowboy to try to be conservative is challenging. So I was lucky because I fell into what was right for me.

01:20:53  Sean DeLaney:  This leads me to wonder about the start of Oaktree. And I’ve had a few people in the investing space that are wanting to soon or hopefully someday go off on their own. And you hit on self-belief earlier. I’m wondering how important was self-belief at the onset of Oaktree Capital?

01:21:09  Howard Marks:  Well, it wasn’t a great challenge for us, Sean. Number one, you talk about young people who want to go off on their own. We weren’t young people at the time. I was about to turn forty nine, and my partners were in their thirties and later the youngest guy, I think was thirty four at the time. There were five of us who started Oaktree together and we had worked at TCW together. My oldest partner is Sheldon Stone, who joined me at Citi in eighty three. And my newest partner was Richard Mason, who joined me at TCW in eighty eight. So by ninety five, when we started Oaktree, we had worked together seven to twelve years. We were not newcomers to each other or to the business, and we had been very successful. Number one, we made enough money so that we could live with the risk if it didn’t work. And number two, we had been successful together. So we had kind of proved out our methodology and developed reputations, which are important in the investment business. So deciding to go out and do it on our own was not enormously risky. And as I mentioned, Bruce Karsh had joined me in eighty seven and Larry Keel had joined me in eighty six. So the five of us went out and started Oaktree. We didn’t have to figure out what we would do because we’d already been doing it for almost a decade. I sat down and I codified what it is we had been doing, and that became our investment philosophy and our business principles, both of which are published on the web at Oaktree capital dot com and which we haven’t changed. We’ve added one thing to the business principles, and we haven’t changed the word of the investment philosophy in almost twenty six years. And so Oaktree is what I call a culturally driven organization. And there’s no uncertainty within Oaktree of what we do. It’s written out. It’s there. Everybody understands it. We don’t have religious arguments. As I put it we don’t have battles between the cowboys and the chickens. Everybody knows what the route to success is at Oaktree. And I think there was a memo around oh two called The Most Important Thing. Which really set the model for the book, which came out in eleven. And you know, the book has twenty-one chapters, twenty in the first edition and twenty one in the second because I added one. But each chapter says the most important thing is, and it’s a different thing because in investing, there is no one most important thing. There are many things which are essential and you have to get right. And that’s why I use that format. But in the memo, I talked about a good partnership which is the most important thing. And I said in there that the most important thing in a partnership is shared values and complementary skills. And I think that if you work with people who have different values than you do, it’s unlikely to be successful because it’s going to be riven by strife. And as I say, the battle between the cowboys and the chickens, because when you go through a bull market, the cowboys say the chickens are holding us back. And when it turns into a bear market, the chickens say the cowboys are getting us killed. And it’s unlikely to be successful. And then complementary skills. If your skills are duplicative and you have the same strengths, then you probably have the same weaknesses and the weaknesses can get you into trouble. And the strengths are duplicative. And what ends up happening is one person eventually says, well, I can do everything he does and more. I don’t need him. And so he says, I want you to go cut your share. I need more. And that jeopardizes the organization. So shared values and complementary skills. And that’s one of the things that I’m very proud that we have at Oaktree, and it’s worked very well. Bruce and I have now been partners for almost thirty five years, and we’ve never had an argument, and I’m very proud of that. We’ve had a lot of heated debates, but no arguments.

01:25:49  Sean DeLaney:  Is there a conversation with Bruce that, when I asked that question, just comes to mind? Very memorable one for you.

01:25:56  Howard Marks:  Well, I mean, the most memorable one. And as I said, we never had an argument. And the most memorable one is not a disagreement. It’s an agreement. But the reason why we were able to be so cautious heading into the global financial crisis is because we were in agreement on the state of the world. And I would read the newspaper and I would go into his office, I say, look at this. And they would report some new deal that was done. And I would say to him, look at this piece of crap that was issued yesterday. There’s something wrong. If a security so terrible and so punitive to the buyers can be issued today and can run into excessive demand, then there’s something wrong with the market because the market is supposed to be a policeman to issuance. And the presence of risk aversion on the part of buyers polices the market. It keeps the market safe and sane. And if nutty securities can be issued, which are terribly risky and unfounded, then there’s something wrong. And it was just that simple. That turned us cautious in the years leading up to the global financial crisis. And when you avoid the pain of the collapse, which we did, then you have your wits about you and you can swing into action and take advantage of the bargains that are created by the carnage. If you are being hurt every day and your portfolio is breaking down and the companies are turning into basket cases requiring remediation, you can’t become aggressive. Number one, you’re too busy. And number two, you’re too scarred to be able to turn aggressive. And when the world melts down, as it did in oh eight after the Lehman bankruptcy. And you see, everybody’s got all these problems that they’re working on and you kind of have few, if any, companies requiring remediation, then you say, oh, man, this is great. You know, this, I love it. This is a buying opportunity. You can’t do that if you’re getting beat up every day.

01:28:21  Sean DeLaney:  Survival is a hell of a thing. Howard, You mentioned Taleb. You mentioned a lot of great works throughout the years. Any other books that just have really stuck with you throughout all the years.

01:28:30  Howard Marks:  One of my heroes was John Kenneth Galbraith, and he wrote a book called The Short History of Financial Euphoria, which I thought was very good. And one of the first ones that got me formally thinking about cycles, because it was about some of the excesses of optimism that he had seen and some of the extreme bull markets. Peter Bernstein’s book, Against the Gods, which discusses the origin of the science of probabilities. And it’s only because of the creation of the science of probabilities that we can understand risk and transfer it. I mean, the insurance industry couldn’t exist if there was no sense for the probabilities of bad things happening, which is why we transfer that risk to the insurance company by taking out car insurance and so forth. So Against the Gods was very important. And Devil Take the Hindmost by Edward Chancellor, which talked about things like the South Sea bubble and tulip bubble. And that book was the inspiration for my memo, bubble dot com, on the first day of 2000, which talked about the excesses of the tech bubble and I wrote it around the tenth anniversary of the first memo. And that’s the first one that got a response. And that’s the one. So I said that after ten years, I became an overnight success because of bubble dot com. And that’s what put me on the map because it was right quickly. Remember I said, if you’re right, but it takes five years. It looks like you’re wrong. This one was right away because I wrote it in 2000. Yeah, that was terrific.

01:30:17  Sean DeLaney:  Howard, If you were going to do this with someone dead or alive, not a family member or a lost friend, anyone throughout history that you could spend an evening having a conversation with who would it be?

01:30:26  Howard Marks:  History. History is a long time, probably Ben Graham. You know, I’ve been lucky to spend a good amount of time with Warren Buffett and Charlie Munger, especially and Seth Klarman, who’s one of the people that I think thinks best, maybe because we think the same. But I think that I’d love to spend some time with Ben Graham.

01:30:49  Sean DeLaney:  Michael.

01:30:49  Sean DeLaney:  If you were going to sit down, you were going to be holding the microphone, get to spend an evening with anyone dead or alive, not a family member or friend. Who would you spend the evening interviewing?

01:31:00  Michael Mauboussin:  That’s a really interesting one. Especially as you say, dead or alive. There are some people, I mean, the guy who I probably admire the I don’t know if this is my would be my ultimate answer because you’d probably think about like very famous figures. But the guy who I admire deeply is Charles Darwin. I don’t know if he’d be an interesting guy to hang out with for an evening. He might be boring to hang out with an evening, but I’ve always been very taken with the idea of evolution. And I’ve always been amazed by his temperament and his work process and so forth. So maybe I would pick Charles Darwin. He’s my hero and intellectual hero. And so that I’ll go with that one.

01:31:38  Sean DeLaney:  That’s fantastic. Thank you so much for joining us on What Got You There.

01:31:42  Sean DeLaney:  I appreciate you listening all the way through and hearing me talk with Howard Marks and Michael Mauboussin for almost two hours, which tells me you’re interested in the ideas and the ways they approach their craft and their life. And so I’m wondering what it would be like for you if you had a thinking partner who worked consistently with you over time to help impact your decision making, your emotional control, your ability to think through the most complex dynamics you’re facing, what would that be like? Because Howard mentioned, on this. It’s hard to see your own patterns, your own temperament, your own incentives, and even how your fears are shaping your investment decisions and your life. And the more successful you become, it’s harder to get accurate feedback on these things. And so you’ve got this increasingly complex life with fewer people who can help you navigate it. And this is what I do every day. For well over a decade, I’ve worked privately with a small number of founders, CEOs and investors. I serve as a private advisor and counsel people whose lives and work have become too complex for simple answers. We don’t just focus on what you’re going to buy or sell. We face the complexities of your life, and what I do is over time, I come to understand the whole picture of your life and how everything influences one another. I come to understand how you think, where your instincts tend to be unusually good. Which situations cloud your judgment. Which relationships you’re wrestling with where your grip too tightly or too loosely, and what you truly want to make out of your life. So if you’re interested in hearing more and exploring this further, send me an email. [email protected] and we can set up a time to talk.

At the time of this recording, I was not a client of Oaktree Capital Management.