Howard Marks: 79 Years of Investing Wisdom in 55 Minutes

Alright, here's what I said. I said, "Describe Howard Marx in 280 characters. Here's what it gave you." Howard Marx is a legendary investor and co-founder of Oak Tree Capital. Known for his sharp memos, Contrary in Thinking and Risk-focused approach, he made billions zigging with other zag, especially in crisis when he writes Wall Street listens. Pretty flattering. Pretty good, yeah. (laughing) ♪ I feel like I could rule the world ♪ ♪ I know I could be what I want to ♪ ♪ Put my all in it like no days ♪ ♪ All on a road, let's travel never looking ♪ Okay, well, I think the best place to start is that kind of zig while other zag. So I want to ask about the S&P because you don't know much about us, but the short version of the guy you see across from me there, Sam is Sam's entrepreneur, Sam builds his company, he sold his company, and he took the money that he made and he said, "Look, I worked hard for this money. "Now I want this money to work hard for me, "but I need it to be safe." And so Sam went into a mostly, you know, best practice, low cost index funds in the S&P 500. And then he told me, "Sam, I'm about his strategy," or I tell him, "Dude, you got to buy Bitcoin." Ethereum, you got to buy this, you got to put some money over here. 'Cause I'm like, you know, if Sam is vanilla, I don't even know what I am, I'm some flavor off on the side. That's the strange. 2D Ferrudi. 3D Ferrudi. 2D Ferrudi over here. And I keep trying to pull him over here, but he says, "No, no, I like vanilla." And so he basically just says, the long-term average of DSP 500 is 10%. If I just hold this for 50 years, I'm gonna double, you know, this many times, I'm good. Very boring. - Very boring. - Yeah, he repeats that like on loop, like he's one of my kids toys. He pushed the button and just keeps saying the same line. But, you know, I do get a little wary when anything seems to say for two certain, I guess two taken for granted, that this 10% number over the long-term will be what it'll be. I guess what would your message be to Sam? As Sam, just, you know, is he right? Is he wrong? Would you give him a caution of warning if he was your nephew? He looks like he might be your nephew. People who's your nephew, what would you be telling him? - Well, on the one hand, Sam, you're right. Because if you have more money than you need to eat, the first purpose of your money should be to make you comfortable. It doesn't make any sense. Buffett says, "Don't risk what you have and need to get what you don't have and don't need." It makes no sense for somebody with a surplus of money to make their daily life less pleasant by going to investments that put them under pressure. - But there's gonna be a butt on your statement, it sounds like. - Butt. (laughing) On the other hand, the riskiest thing in the world is the belief that there's no risk. The risk in the markets does not come from the companies, the securities, or the institutions, like the exchanges. The risk in the markets comes from the behavior of people. And for that reason, that Buffett says, when others are imprudent, you should be prudent. When other people are carefree, you should be terrified because their behavior unduly raises prices and makes them precarious. When other people are terrified, you should be aggressive because their behavior suppresses prices to the point where everything's a giveaway. So I don't, I mean, look, in the long run, you're right about the S&P. And over the coming years, American companies on balance are going to produce prosperity. - What's that defined as long term in this? - Well, I would say, 20 or more is the real long term. And I'll tell you in a minute how I get there. But my favorite cartoon, I have a file of cartoons from over the years. My favorite one, there's a guy, he's got a, is a car pulled over to the side of the road. The guy's in a phone booth, so you know it's an old cartoon 'cause there are no more phone booths. And there's a factory going up in the background. And he's screaming into his telephone. I don't give a damn about prudent diversification, sell my Fenwick chemical. In other words, prudent diversification calls for certain investment positions and a variety of them in a certain composition. Reality says, I see Fenwick chemicals burning to the ground, get me out. And you can't ignore reality. Now, what's reality in this case for you? Reality is recognizing where things stand. And JP Morgan published a chart around the end of '24 and it was a scatter diagram showing over the years if you bought the relationship between the S&P 500 and the annualized return over the next 10 years. And it looked like this. On this axis, we had return and on this axis, we had PE ratio and it was a negative correlation which means the higher the PE ratio you pay the lower the return you should expect. Makes perfect sense. And it showed there was a number here, 23, on the PE ratio axis. And it showed, which is what the PE ratio on the S&P was at the time. And it showed that historically, if you bought the S&P when the PE ratio was 23 in every case, there were no exceptions. In every case, your annualized return of the next 10 years was between two and minus two. So all you have to know. - And what are we today? What is it today? - 24. - 24, 24, 24, 25, because why? Because the prices have risen. Now maybe the outlook has risen. So maybe it's still 23, but I think, let's say, I think 24. So you can say, the S&P has returned 10% a year on average for 100 years. I'm happy with 10, I'm in. Or you can say, it doesn't always return 10. By the way, one of the most interesting things about the S&P, if you do the research and I did it for a memo. On average, it has returned 10% a year for 100 years. But do you know that the annual return is almost never between eight and 12th? - Think about that. - It kills it or it dies. - This is a short, yeah. - Think about what that means. The norm is not the average. - But the issue for someone like me, so a lot of our listeners, one of them, you know, I was fortunate, I had a business. I made a relatively large amount of money at a very young age, but I'm not an investor. - Yeah. - Like I don't know anything about public markets. And so when I hear you say that, I think, well, I don't have an alternative. - Well, you do have an alternative. You could figure out an algorithm to rebalance your position based on relative price, and you could put it on autopilot. I don't recommend, you know, making judgments about the future and the appropriateness of today's price for the future you perceive. But you can do that. And there are ways to do these things, even if you just use common sense. - What would you be rebalancing into? - So let's say S&P PE is high. What would be the second best for the sort of non-full time active and basic? - Okay, so I've tried to suppress my tendency to talk my book until now. But I think an alternative is bonds, you know? And in 19, I joined Citibank in the Investment Research Department in 1969 as an equity analyst. And the bank did so horribly that in '78 I was banished to the bond department and the bond department was the equivalent of Siberia. The good news is that at that time, American corporations pretty much gave lifetime employment. So I didn't get sacked. But I'm in the bond department and I get a phone call from the head of the bond department saying that there's some guy in California named something like Milken, and he invests in something called "High-Yield Bonds." Can you figure out what that means? And I said yes, and I became a high-obond investor. And you know what, when you buy a bond, there's a contract that says the borrower will pay you interest every six months and give you your money back at the end. And you can figure out the return that is implied by that contract. And if the borrower doesn't keep that contract over generalizing, over simplifying, the creditors get the company through the bankruptcy process. So the borrower has a lot of incentive to pay you and they almost always pay. I've been involved in high-yield bonds for 47 years and I can tell you they've almost all paid. So today, you can buy high-yield bonds, whether it be the US or Europe or variations on that theme, what we call low-grade credit. And you can buy it to get yields of seven to eight. Now seven to eight is pretty close to 10. So that's a good thing. The bad thing is you have to pay tax every year on the. on the income, that's a bad thing. But for those of us who are cautious like you and me, we might say, I'll take, you know, eight, which in the long run will give me four after tax, as opposed to 10, which after capital gains taxation will give me seven. Or maybe I'll mix 'em, maybe I'll own a little S S and P and a little more debt because I'm worried. - That's what I do now. - Yeah, because I'm worried. It's not all or nothing. Then that's why I went on TV shows and they say, well, is this a sell or buy? Is this risk on or risk off? I resist that formulation because it's never one or the other, it's a mix. And the only question in this relevant is what mix? I think the way, when you manage your portfolio, the operative continuum to think about is the continuum that runs from aggressive to defensive. And I think about a spedometer in the car. So zero is no risk, 100 is max risk, 100% aggressive. You should have a sense for your appropriate normal posture and it sounds to me like Sam, you're a little conservative guy, you've made so much money, you can't believe it, but you don't wanna give it back. So I would say that you're a 65 and especially given your youth, you may be a 55 for your cohort. So I think you should figure every listener, every investor should figure out the right place for them and try to stay there most of the time. - We need to get a couch here and you could just call you Dr. Marks and you know my thing. - Now what I once wrote a memo called on the couch 'cause I think that once in a while the market needs a trip to the shrink. - Hey let's take a quick break. HubSpot help Tumblr solve a big problem. Tumblr needed to move fast. They were trying to produce trending content but their marketing department was stuck waiting on engineers to code every single email campaign. But now they use HubSpot's customer platform to email real-time trending content to millions of users in just seconds. And the result was huge. Three times more engagement and double the content creation. If you want to move faster like Tumblr, visit hubspot.com. All right back to the show. (upbeat music) I went back and I read a bunch of your old memos and the one that stood out to me was the bubble.com one. So you wrote this back in 2000 and I actually have a few of these where I feel like there's been moments in time, maybe 2000, 2008, 2012, 2020 where it seemed like consensus was going one way, maybe it was Max Greed and you went the other way. Or as Max, Fear and Panic and then you were actually very aggressive. You did the thing where Buffett says be fearful when others are greedy and greedy when others are fearful. It's cool to say but it's hard to actually do. And I thought it'd be fun if you could kind of walk us through a couple of those moments. And I don't know like, yeah, not to go too far down memory lane but just take us back to the one in 2000. What'd you see, what'd you do? How did it play out? What'd you learn from that? Take us through a couple of those 'cause I think that's your superpower. - First of all, one of my sayings is we never know where we're going but we sure as hell ought to know where we are. And at Oak Tree, we loudly proclaim our inability to make macro forecasts and our non-reliance on macro forecasts. But if we wanna do the right thing, if these have either macro, we should be able to figure out what's going on at the present time and what that implies for the future. It may not happen, the thing you think it implies but it probably has a higher chance of happening than not happening if you're logical and understand history and patterns. And I wrote a book called The Mastering the Market Cycle which was published in '18. And I always say it's a cheesy title but it wasn't my idea. The publisher wanted that title 'cause they thought it would sell more books. But I like the subtitle and the subtitle says, "Getting the odds on your side." And I believe that where we stand in the cycle determines what probably is gonna happen and how likely it is and understanding that can improve your odds. It can't make you a sure winner but it can improve your odds and that's the best we can do in an uncertain world be set by randomness. So, I don't know if you know that I started writing the memos in 1990, bubble.com on the first day of 2000 was the first one that ever garnered a response. I went 10 years, not only did nobody say, "Hey, that was good." Nobody even said, "I got it." And so one of the mysteries is why I kept it. Who are you sending them to? To our clients. How many? Crickets. Well, you know, in 1990, 100. Okay. You know, and by mail, of course, I wrote bubble.com, January the 2nd of 2000 and it had two virtues. It was right and it was right fast. If you're right slow, it doesn't look like you were right. One of the great sayings in our business is that being too far ahead of your time is indistinguishable from being wrong. So the answer is I was not too far ahead. In the fall of '99, I read a book called Devil Take the Hindmost. It's a history of financial speculation. Were you looking for books about that? 'Cause you had a hunch or you just randomly read this book? No, I don't remember why I read it. The idea comes first. My books, my memos are not research-based. They're based on ideas that resonate with me. And so I'm reading this book. I am interested in financial speculation. I'm interested in cycles. I'm interested in the extremes of financial behavior. So that's probably why I read it. But I'm reading this book and it talks about all these crazy things that people did, especially in something called the South Sea Bubble. Britain had this big national debt and they concluded that they could pay it off by starting a company called the South Sea Company and they granted them a license to trade with the South Sea by which they meant not Samoa but Brazil and they would charge them a license fee and that would pay off the debt. And it was one of the great bubbles. And so I'm reading in the book about what people were doing in 1720 and people were quitting their day jobs and hanging out in ale houses to trade the shares of the South Sea Company, et cetera, et cetera. And I said, "That's what's going on now in the tech bubble." People, you may recall that people were quitting their jobs becoming day traders. People with no money could trade stocks as long as they didn't carry any balance overnight. And young people were quitting MBA programs because they had an idea and if they waited until they graduated, somebody else would take it. So it just resonated. And one of the quotes I use the most now is from Mark Twain who said, "History does not repeat but does rhyme." There are certain themes that rhyme from generations generation and cycle to cycle because they are embedded in human nature and so they recur. And so when you get older in our business, you know, obviously one of the things I hasten to point out is there is no such thing as knowing something about the future. And if you don't know about the future and you want to figure out the future, there's no such thing as analyzing the future. It doesn't exist. And the only thing you can do to get a handle on the future is look at the past and look for the repetition of patterns as Twain said and try to figure out if they apply today. So this was very easy. So I wrote this memo bubble.com and it said what they were doing, people are doing today. And I tried to point out the folly of what I saw going on and companies with no profits and no revenues were being highly valued. Maybe no product, just an idea. And that is the epitome of the bubble. So I wrote the memo as I say January the second. Sometime around mid-year, the detect bubble started to collapse. So as I said in the introduction to one of my books, after 10 years I became an overnight success. Did you actually bet against it or did you just preserve capital by not fomowing into every tech company basically? What was the win of that for you? First of all, we're not involved, we're basically not involved in the US stock market and we're not involved in all in technology. So we wouldn't have a chance to apply that. But I think what we did is we recognize-- and by the way, things don't happen in isolation. uniquely. So when you when you see something like I describe in the tech bubble, you should realize that maybe there are ramifications in other parts of the world. And we figured out that people were engaging in optimism, not pessimism, greed, not fear, credulousness, not skepticism, risk tolerance, not risk aversion. And when as Buffett says about prudence, when nobody's afraid unwise deals can get done easily, simple as that. And the people who buy that stuff, it usually ends badly. The way that you explain it, I think everything makes sense and I totally buy into it. But that's actually quite challenging to understand this macro environment and to say this is where we are. Yeah. Well, you have to be clinical. You have to observe and without emotion, understand what's going on and what the what the implications are. And of course, the what we call what I call emotion is part of what's called human nature. If you succumb to human nature, it tends to get you to do the wrong thing at the wrong time. I came across a great quote within the last year from a guy who's a retired trader when the time comes to buy you won't want to. And that encapsulated encapsulates so much wisdom because what is it that causes the great moments to buy? It's probably the point of lowest consensus. So when most people don't believe would be the time that the price is going to be the lowest, right? It's the time with either the most uncertainty or the most pessimism or the most fear most conservatism. So you also want to be all those things. What causes those things? You're talking about you're talking about the manifestation. What's the cause? Bad news. I don't know. Bad news. Bad news either either exogenous or geopolitical or or in the economy, faltering corporate fortunes, declining stock prices, widespread losses and a proliferation of articles about how terrible the future looks. So the point, that's why you don't want to buy at the low. Who would want to buy under those circumstances? Right. And so you talk before in your introduction about zinging when others egg. The only thing I'm sure of is if you zig when they zig, you're not going to outperform. All right. This episode is brought to you by Mercury. They are the finance platform of choice for over 200,000 companies. Shouldn't be surprised because I use it myself for not one, not two, but I have eight different Mercury accounts. I have seven for different companies that I'm a part of. And then I have my own personal account because now they have personal banking, which is a really cool feature. I highly highly recommend it. Like I said, I use it myself. And the reason why is because the way that Mercury works is beautiful. It's very intuitive. And you could tell that it's actually made by a startup founder. It's entrepreneur. You could tell it's made by somebody who used other banking products in the past and didn't like all the different rough edges and annoyances and decided to, you know, actually fix it himself. And really any type of entrepreneur you are, let's say you're an agency. Well, one of the things every agency has to do is be able to send invoices, easily create them, send them to customers and stay current on your balances with all your customers. Well, you can do that inside Mercury. And so I think that Mercury is great. I highly recommend you check it out. And thank you for sponsoring the show. For more information, check out mercury.com. Mercury is a financial technology company, not a bank. Check show notes for details. Do you still feel that fear, you know, of you, like when you know you're supposed to buy, do you still feel fearful? Or do you feel like, nice, hello, my old friend. I love this emotion. This is what I'm supposed to do. Oh, yeah. Right. I mean, it's not easy, but you have to know, you have to do it. You have to know that if that what what makes buying opportunities. And if you think about it, the fortunes of companies and the outlook for companies doesn't change much. What and I'm writing a memo about this that'll come out one of these days. And what changes is how people think about what's going on and think about the future. And so what changes is the relationship of price to what I'll call value. Sometimes they hate them. Sometimes they love them. When they love them too much, you should expect them to probably go down. That sounds like a bull market or a bubble. And when they hate them too much, you should expect them to go up. That sounds like a bear market or a crash. And so you have to do the opposite. And the same developments in the environment that that affect everybody else will affect you. You're subject to them. You feel them. You read about them. You hear about them. Everybody tells you how dire the outlook is. And you know, it's hard to ignore them. But you have to do the right thing in the face of them. 1998, we had the Russian Rubell devaluation, the debt crisis in Southeast Asia and the meltdown of long-term capital management. And one of our portfolio managers who was young came to me and he said, I think this is it. I think we're going to melt down. I think it's all over. I'm terribly pessimistic. I said, tell me why he went through his reasoning. I said, okay, now go back to your desk and do your job. A battlefield hero. And I don't want to compare what we do to being a battlefield hero. But a battlefield hero is not somebody who's unafraid. It's somebody who does it anyway. And that's that's the way you have to be. Can I see? Yeah. Can I ask, let me ask you about that? Because so it's funny, interestingly enough, even though I'm the conservative one, I'm actually way more emotional, Sean's like a more mostly is a pretty stable guy emotionally. I go up and down, which I think is actually closer to the average for average folks. You said something really, you said a bunch of stuff about emotion in the past. I think you said, to be a good investor, you better be able to invest without emotion or at least act as if you don't have a lot of emotion. Has there ever been anything like a mindset shift or a practice or something that you've had to use in order to learn to be less emotional when investing? No, these things are not intentional on my part. You think you're born like like I was born on emotional, by the way, and I want to point out here because my wife's downstairs have me lunch that that I wrote in my book that it's really important to be unemotional and investing, not so good to be unemotional in life in arenas like marriage. So there it's not an advantage. But no, for me, it came naturally. I don't have to say, "Oh, there I go again. I'm getting emotional. I have to restrain that blah, blah, blah." And my partner, Bruce Garsh, who's been my partner successfully for 37 years, he's pretty much the same. So that makes it easy. I don't have to restrain him. We've guessed you up about some of your best moves. What's the worst mistake you made due to an emotional mistake where you didn't control your temperament properly and you made a mistake? My worst mistake is not, and I know you're talking about a point in time. My worst mistake is that I have always been too conservative. My parents were traumatized by the depression. I always say the question is not whether your parents were alive during the depression, but whether they were adults. My parents were adults. They were born in the 19 Oats. And so in the depression, they were in the 30s. And depression was really traumatic. Nobody knows what it was like. And it ground on for over 10 years. And so when you grow up with parents of the depression, they say things like, "Don't put all your eggs in one basket, save for a rainy day." That kind of stuff. And I ended up too conservative. And if I if it wasn't ex-conservative, I'd be richer today. I'm not sure I'd be happier. What's an example? What do you mean you were too conservative? I guess like, what makes you say, what would you have done differently? Had that not, had that wiring not been done in you? Well, I mean, I don't know. I might have gone to an into a more aggressive asset class than credit. Like equities, I might have become a venture capitalist, or like my son, Andrew, or a private or a leveraged buyout investor. But the reason I was talking about the appropriateness of credit for SAM is because while the returns are a little lower, there's much less uncertainty and downside. So I would say that if I've been in this business for 56 years, I've always spent those 56 years in less conservative asset classes, I would have made more money. Having said that, it happens that I went into things like high-yield bonds in '78 and distressed at '88. And if I had not been a conservative person, I probably wouldn't have had any clients because they would have been scared off by the risk. So it served me well in pioneering in those businesses. But that was my. I mean, I never had a mistake like we were too defensive at a crisis or too aggressive in a bubble. I just was too conservative all my life. That makes sense because I don't think you started Oak Tree until your late 40s, right? Just short of my 49th birthday. Yeah. I guess leading up to it, where you already financially successful, were you a success leading up to that? And so was it a big risk to start Oak Tree? I was secure. I wasn't rich by today's standards and I may not have been rich by the standards at the time. But I had good money and I lived well. So I started running money in '78. I joined my Oak Tree founder partners in '85, '86, '87, '88. We did a great job through a variety of environments. And we weren't worried about the ability to do a good job and we had enough money to eat. So it wasn't. I mean, I had to overcome my innate caution. My wife had to give me a kick in the ass, which she happily did. I may not have done it without her, probably wouldn't have. You said you're too conservative, but there's been times when you've been very aggressive. Oh yeah. I think the '07, '08 financial crisis, I read something that as the crisis happens, you go raise $10 billion because you see the opportunity and you started deploying something like $600 million a week, which just sounds badass to be honest. Maybe that's not as crazy in the financial world, but that sounds crazy to me. Well, your fact set is inaccurate in one regard. It did not raise $10 billion after the crisis hit because remember what I said about the guy who said when time comes to invest, you won't want to. You can't raise money in a crisis. If you went to people, you say, "Well, we're all smelting down, we're going to buy all this stuff, it's going to be a bananzer, we're going to get rich, nobody will give you money." Why? Because the same factors that influence the world, influence the people you talk to and everybody will stick their hands on their pockets and say, "Maybe later after the dust settles." A lot of people say, "We're not going to try to catch a falling knife." I believe that you make the big money catching falling knives carefully. What happened is, like I described about the tech bubble in 2000, we detected in '05, '06 that the world was behaving in a carefree manner. I would wear out the carpet between my office and Bruce's with the Wall Street Journal. I'd say, "Look at this piece of junk that got issued yesterday. There's something wrong. If a deal like this can get done, the world is exercising inadequate prudence." Specifically on mortgage? No, I don't know about mortgage. I never heard of mortgage. I never heard of sub. I don't think I ever heard the word subprime. I don't think I ever knew what a mortgage-backed security was. It just seemed that the world was operating in a pro-risk fashion. When people are pro-risk, they permit bad deals and they pay prices higher than they should. What happened was, on the first day of '07, we went out to our clients and we said, "We think there's an opportunity." I don't think we raised funds in '05 or '06 for his distressed debt area. On the first day of '07, we went out and we said, "We think there's a great opportunity coming and we'd like to have three billion." At that time, the biggest distressed debt fund in history was our '01 fund, which preceded the N-run meltdown and so forth. It was two and a half billion. Two and a half? Around there. We went out to the clients and we said, "We'd like to have three." That would be the biggest distressed fund in history. Within a month, we had eight. We can't do anything with eight billion. It exceeds our ability to invest it wisely. We're going to take three and a half billion and we're going to close the fund. We would like to have the remainder of your interest in a standby fund that will implement if the stuff hits the fan. The first fund was seven and it was three and a half billion and the next fund was seven B and by the time we finished raising money for it a year later, it was 11 billion. The fund seven got fully invested. We started investing, gradually investing, seven B in June of '08. It's sitting there on the shelf and by September 18th, 15th, it was, no, 18th. It was 12% invested. Just over a billion and Lehman Brothers declares bankruptcy. The question which you implied was, "Do you invest it or not?" You're sitting there with all that money. It looks like the world's going to melt down. Do you invest it? Very simple. As you say, I think this was one of our best moments because I reached a very simple conclusion. If we invest it and the world melts down, it doesn't matter what we did. If I don't invest it and the world doesn't melt down, then we didn't do our job. QED, you have to move forward. I also wrote that it's hard to predict the end of the world. It's hard to assign a high probability to it. It's hard to know what to do if the world is going to melt down. If you do those things and the world doesn't melt down, it's probably a disaster and most of the world time the world doesn't melt down. That was the sum of our analysis because there was nothing to analyze. There had never been a global financial crisis before. The meltdown of the financial sector had not been anticipated since the Great Depression. There were no past patterns to extrapolate. You have to resort to logic. That was the logic. As you say, we invested 450 million a week for the next 15 weeks in that fund, which was 7 billion, and Oak Tree overall invested an average of 650 million a week for the next 15 weeks. QED, How did that turn out? That's what you put in. What was the result of that investing during that time? Well, it was great except for, we got good buys and we made good money, but the Fed mobilized very astutely, cutting interest rates to zero for the first time in history at the beginning of '09 and introducing QE. Those two things saved the economy, so we didn't get the meltdown that everybody was afraid of, and there were relatively few bankruptcies, especially outside the financial sector that resulted from the global financial crisis. We've had some barn burner funds in crises. This was very good, but not a barn burner. You've done something that I love, which is, you've quoted a ton of different people. You've quoted March 20 a bunch of times. You have all these quotes, which clearly shows that you retain information that you read. Can I imagine you read a lot? Can I ask you about your reading habits? How do you pick what books you read? I've never read any books about how to be an investor, like multiply this by that, and add this, and subtract that. The books I've found most interesting have always been the ones about investor behavior. I mentioned, devil, take behind most, 99. One of the greatest books I ever read was before that John Kenneth Galbraith's book called The Short History of Financial Euphoria. That was really pivotal for me. Since I'm a slow reader, I liked the fact that it was only about 100 pages. Back in '74, I think Charlie Ellis wrote an article, "Winning the Losers Game," where he said that because you can't predict the future, active investing doesn't work. He was a believer in the efficient market. Rather than try to hit winners like the tennis player, you should try to avoid hitting losers and keep the ball in play. That has always defined my investing style. In fact, I wrote a memo in the summer of '24 or '23 called "Fewer winners, fewer losers or more winners." That's the basic choice of investing style. There's a great, I think, math paradox that you've pointed out, which is a fund. I don't know if it was your fund, but any fund, it could be never in the top 10%, but never in the bottom 50%. There's this strategy of just consistently being above average, will place you in the top 5%. It'll place you in the top percent. Can you unpack that idea a little bit? I just sort of put you in it. In 1999, I wrote a memo called "The Root to Performance." I had dinner in Minneapolis with my client Dave Van Benzkoten, who ran the General Mills Pension Fund. Dave explained to me that he had run the fund for 14 years. In 14 years, the general mill's equity portfolio was never above the 27th percentile or below the 40th. 47th percentile. So 14 years in a row solidly in the second quartile. Now if you said to the normal person not in the investment business So this thing fluctuated between the 27th and the 47th. Where do you think it was for the whole period? They would say well, let me think probably around 37th the answer is fourth So if you if you can do well for 14 years in a row and Avoid the tendency to shoot yourself in the foot in a bad year you can pop up to the top At the same time Another investment management firm had a terrible year because they were Deep value investors and they were heavy in the banks and the banks suffered terribly so they were at the bottom so the President comes out and of course things people in the investment business are great rationalizers and Communicators and he says the answer is simple if you want to be in the top five percent of money managers You have to be willing to be in the bottom Well, that makes great sense except that my clients don't care if I'm ever in the top five and they absolutely don't want to see me in the bottom five So my reaction is the first guys approach is the right one for me So that's why at Oak tree we go for fewer losers not more winners Yeah, I love that because it's one of the Unsexy ideas like I think any idea you can't you know make a movie about or Won't make you sound really cool are generally undervalued ideas when they when they actually logically math out the way that one does and So I sort of that was one that stuck out to me is I think nobody's gonna nobody's gonna give you a motivational video about being Consistently above average and just never shooting yourself in the foot right? It's all about heroic greatness and huge risks You can take and you know being willing to do it and so you know that's all you hear but but you know The financial times of London every Saturday they they have an article called lunch with the FT and they take somebody to lunch And they write an article about the person the restaurant and the food and they did that with me in late 22 and I Took the reporter to My favorite Italian restaurant near the office in New York where I go a hundred percent of the time if I have a lunch and I and I said to her eating in this restaurant is like investing at Oak tree always good sometimes great never terrible Now that to me that sounds like a modest boast But if you can do that for 40 or 50 years I think it'll compound to great results if you never shoot yourself in the foot and I think it's I I don't know if the SEC is listening, but I think it's descriptive of what of what we've accomplished There's like this some class of investor that's like kind of become like Fulcero You know like Warren Buffett's an obvious one where the like a full-carrow sort of their high integrity They make greatness seem achievable and relatable Which is like a whole skill in itself and you've become one of these like Fulcero's You know and a lot of them they have in common where they like write a lot they write well. They've got wonderful sayings They make challenging things easy to understand Did you purposely try to become like this public figure? Well, first of all you can't ask Somebody who did whether they did because they'll say no Nobody will admit that nobody will say my my public persona is a facade Me and Sam were joking before this we were saying is cool how it's interesting how I think when you started as an investor There was like no celebrity investors. There's no like famous Person who was doing what you were doing and then now you have whether it's Buffett or Munger There's like the investment guys are now like the philosophers. Yeah, the tech CEO nerds are now like the power players of the world Podcaster comedians are now like the new trusted media. It's like this very strange shift on all fronts where You know influence has sort of shifted, but I find that like Investment crossover life philosopher to be just like one of the really wholesome ones that I personally really like, you know Well, you know, I hesitate to put myself as the same category, but I think Warren as always tried to just educate People in share his knowledge and and people say well, why do you give away your secrets? Aren't you afraid that other people will emulate you and catch up with you? But I don't think so because you know we can tell them all day long What what you should do, but it's hard to do like we said at the beginning of the podcast friend of mine Richard O'Field in London wrote a book once entitled simple but not easy. I Think the things we have to do are simple. They're just not easy to do. I think Buffett Makes investing seems simple because he boils it down to the essential ingredients By the way, you said there were no favors investors I but I think Buffett started around 53 if I'm not mistaken He just wasn't famous Yeah, but and there were a few people who were famous in the investment business, but I don't think anybody was was Famous in the what wider world Well, it's interesting for like the normal guys like me and and Sean is like we learn from you about how to live life And you just and and that's kind of cool and it just like investing is just your way of like testing if your Way of living is true right. Oh investing is a lot like life But but and and by the way I'm working on a book along those lines Sam. What's it called? I don't know yet, but but If you wait a few years, I think it'll be out. Well, we appreciate you coming I do want to leave you with what it's a question for for use. We've asked you a bunch of questions, but I actually think it'd be interesting What question do you think people who listen to this should ask themselves? What's a what's a useful question? That you think people could ask themselves as a as a final final note here? Well, I would think in terms of the mistakes that investors made and I would ask yourself whether you make them So what are the big mistakes investors make? I I can think of three number one Do you think you hold do you think you understand what the future holds and and do you reasonably think that's accurate? Number two I think the biggest single mistake that investors make is that they think the world will remain the way it is That the things that are working today will continue to work the things that aren't working will continue not to work That the trends are the motion will continue and that there won't be any nutrients So do you do are you part of that and then number three is do your emotions? Rise and fall and get you to do what they want as opposed to what you should do So I think you just have to have a checklist you know in my first book the most important thing I had a thing in there called the poor man's guide to market assessment and and It says on the left a bunch of things and on the right there's a bunch of things and and and it was half tongue and cheek or maybe more than half But I mean it says you know Are the is the market rising or falling are the TV shows about investing popular on popular if an investor goes to a cocktail party is he mobbed or shunned Are the deals get done easily or hard the people rate are deals oversubscribed or left-backing you know that kind of thing and you can tell You can figure out from that checklist whether the market is overheated and too popular or Frigid and and and and too shunned and This can tell you a lot of what to do if you're methodical and clinical well Sean and I have have read your stuff forever. We've listened to so many of your podcasts It's been an honor. We really appreciate you doing this. I think the best part of our best part of our job is we have an excuse to hang out with amazing people Her way out of our leagues and this is this is one of those occasions. So thank you so much. Well, thank you Sam Thank you Sean. I've enjoyed your questions and let's do it again sometime. All right. You're the best. We appreciate you. Bye-bye My friends if you like MFM then you're gonna like the following podcast is called a billion dollar moves and of course It's brought to you by the HubSpot podcast network the number one audio destination for business professionals billion dollar moves. It's hosted by Sarah Chen spelling Sarah is a venture capitalist and strategist and with billion dollar moves She wants to look at unicorn founders and funders and she looks for what she calls the unexpected leader many of them were underestimated long before they became huge and successful and iconic. She does it with unfiltered Conversations about success failure fear courage and all that great stuff. So again, if you like my first million check out billion dollar moves It's brought to you by the HubSpot podcast network again billion dollar moves. All right back to the episode