Howard Marks & Andrew Marks: Something of Value

All right. I think we figured it out. Andrew, I think you have a bright future in technology. I appreciate it. Especially Windows technology. Yeah, you should invest in some tech startups. Welcome to this special episode of Acquired, a podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert. I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal, and I am an angel investor based in San Francisco. And we are your hosts. Today, we have two guests with very different investment styles, a value investor and a growth-oriented tech investor, head-to-head, but not just any investors. We are joined today by the legendary value investor, Howard Marks, the co-founder of Oaktree Capital Management, and his son, Andrew Marks, the co-founder of TQ Ventures. Oaktree, for those who don't know, is one of the leading investment management firms in the world, specializing in alternative investments, with $159 billion in assets under management as of the end of June. Probably far fewer of you know Andrew and his firm, TQ Ventures, but what they've accomplished so far is pretty equally impressive in a very different field. So as we'll talk about, TQ is an early-stage venture firm that Andrew and his partners started about five years ago. They have a billion dollars under management now, including, I think, a $500 million third fund that they just closed just a couple months ago. I can say I do know that their return is going to be a lot bigger than what they had before. So I'm going to talk a little bit about their return. I'm going to talk a little bit about their return. I'm going to talk a little bit about their returns so far have been top decile across all venture funds raised during that time period in all of those vintages. We got to know Andrew over the years as a acquired community member and listener, and then I've gotten to know him in the context of Kindergarten Ventures, my angelist fund that I managed with Nat Manning. And a little over a year ago, Andrew and Howard co-authored one of Howard's famous memos together, in a departure for Howard, where they were debating over COVID together as a family, as father and son, value investing versus growth investing, tech investing and what was going on in the markets. And they turned it into a memo. And it ended up becoming, we'll talk about it on the episode, Howard's most popular memo ever, which is incredible in a career spanning many, many decades as one of the most popular authors, of investment memos. Oh, Howard's memos and books are among the most coveted in the entire investing landscape. Even Warren Buffett is quoted in saying, when I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something. Well, if you want to discuss these topics with us after you listen, you should come join the acquired community at acquired.fm slash slack. Our new merch store is available at acquired.fm slash store. You can listen to the LP show by searching acquired LP show in the podcast player of your choice. Or get new episodes two weeks early at acquired.fm slash LP. Or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote shadow AI running with no security review at all. Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta agent. Think of it as a GRC engineer, that's governance, risk, and compliance, except that it's software and it doesn't sleep. 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David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. Well, it's such a treat to have you both here. So the memo you wrote together, something of value. Howard, I believe this is the most popular memo that you've written across your entire illustrious career. Is that correct? That's right, David. Previously, that was held by when I wrote, I think it was in January of 14 or 15, called Luck, in which I talked about how lucky I've been. And that I'm a big believer in luck, and it's great to be on the right side of it. And I listed about a dozen ways that I think I've been lucky, and people like that, because it showed the personal side, as did something of value. Well, you write in the memo about how this came to be of the two of you collaborating over the pandemic. But maybe here to recap on the podcast, how did this amazing thing happen of a father-son writing this incredible piece of work together? Well, Nancy and I came to California on March the 6th of 2020. Oaktree was scheduled to have a conference for its clients on the 11th. Although we canceled the conference, we did record it at the conference venue for live streaming. And so we were in LA, which of course is Oaktree's headquarters. Andrew and his family came out on the 13th and moved in with us. And we stayed that way for, I think, until June. So we were incarcerated together. And- Well, first of all, we have fun talking about what we do and kidding each other. And we have a lot of differences. We're not the same person. Andrew's business is different from mine, and his general mindset is different. What he learned 40 years after I learned what I learned initially, hopefully still learning, both of us. So there were a lot of instances of differences, and that made for a very spirited period, and I hope a spirited memo. And how many memos had you written before this first one, that you co-wrote together? I've never actually counted them, but I think it's about 160. Just trying to frame for listeners, Howard Marks' memo is a thing in the investment community. And it's crazy to see one come out with both your names on it. I mean, I remember first seeing that and thinking, oh, this is going to be cool. And I'm curious if you had, even before we get into the content and the debate that you had in creating the tension with it, did you yourself have any reservation of, oh my gosh, am I changing the nature of what the memo is by co-authorizing it? Co-authoring it with Andrew? No, because first of all, he didn't get near the keyboard. But we communicate really well. The ideas that he expressed, many of the ideas came from him as counterpoint to mine. And when he expressed them, it was clear that we'd have a really good talk. Yeah. And I think what's also interesting is that I have been an investing nerd since I was really little, but only evolved into investing more in what you would call growth companies, or what would generally be called growth companies. And I think that's a really good point. I started off being a value investor, first parroting my dad as all little kids do. And then I got fortunately into the Buffett letters really young, and so turned into a huge Buffett nerd and all the things that come with that. And so my trajectory was across the value end of the spectrum to the growth end of the spectrum. And I had to make that journey myself and understand how the two relate and why I thought spending time in one area was better than spending time in another area or whatever. And so I was sort of able to talk to my dad in his language. And so I wouldn't say it was a, it definitely wasn't a debate. It was just more of a discussion of how things have evolved and trying to examine it a little bit. And Andrew, do you recall in your journey over the course of your life, the first time where you saw what you felt was a really attractive investment opportunity in what people were doing? What people would consider growth investing or high growth investing or tech investing that felt counter to some principles that you had internalized from your dad, from reading the Buffett letters, from your style of investing earlier in life? You know, I can't remember a specific one, but I think the sort of evolution happened a little bit gradually. So a value investor, you would sort of look at what the current cash flows of the business are and kind of valuing it on that and not making much assumption for growth. And then there was a cohort of growth companies that weren't exactly tech companies in the way that tech companies looked. today, but you could look at things like where rolling out stores is a big thing, Starbucks or the auto parts companies or Walmart or Costco, all that type of stuff. And then also things where really attractive acquisitions and synergies were attractive or were a huge part of the story, John Malone's cable roll-ups and things like that. And what's interesting is you sort of learn that instead of looking at cash flows, there's this concept of sort of maintenance cash flow. And then you could think about where to reinvest that. And if you can reinvest that at really high rates, really attractive rates, that's a better thing to do than just sort of hoarding the cash or whatever. And by the way, and Buffett talks about this when he talks about the concept of owner earnings and things like that. And then it's not too far to then say, well, those same sorts of investments, you can make them out of the cash flow statement, but you can also make them out of the income statement, things like high return sales or talented engineering teams and R&D and things like that. So I think I just got exposure incrementally to different sorts of things that traverse that spectrum. And that's sort of where I found what made sense to me. I have to ask both because it's fresh on our minds, given recent acquired activity, but also you write about it in the memo. I can think of no better example company of that than Amazon. What is the two of your journey been with Amazon? Did you discuss that? Was that part of this thinking about value and growth, perhaps not being two different things? I think it's also really interesting because a typical value investor, you sort of look just at the fundamentals of the business and you look at the economics of the business. And Buffett is very famous for saying that you want a business that an idiot can run. Because eventually someone will. Yeah, exactly. And so he sort of talks about the primacy of business model over management. But I think that's kind of the opposite because you could have never dreamed that if you owned Amazon when the story was about growing as a retailer, you could have never dreamed of AWS. That shows what happens when you bet on an amazing founder who can leverage their business to create value in really compelling other ways. And so I think it's a great business case study, but it's also a case study of putting faith in a management team and recognizing the optionality that comes with that. Howard, did Amazon ever intersect with yours? No. I'm a recovered equity investor. I was in the equity research department of Citibank from 69 to 78. And then I left. And in the credit field where I've spent the last 44 years, we historically have not had contact with what you would call a tech company. Although they had some distressed debt at one point in time after the tech bubble. Yeah. But again, remember, we put a very heavy emphasis on predictability. And I think that for the most part, Oak Tree does what Warren and Charlie do. They put it on the too hard pile. I think, by the way, one other thing that I would add about Amazon that may be too wonky, but also may be interesting is I think it's also an example of one of the things we sort of talk about in the memo, which is it's hard to just take a sort of knee-jerk 30,000 foot view and you really have to sort of dive in and understand things. So what people said for the longest time was that Amazon was losing money and could never be profitable. A charity run for the benefit of the American consumer. Exactly. And that came from looking a lot at the income statement and recognizing that they were losing money partially because they were continuing to lower price to achieve scale. But I think what's interesting is they actually had a very favorable cash conversion cycle. So the business was much more sound from a free cash flow perspective, much earlier than it was from an income state perspective. Michael Movison wrote the research note that was not as popular as Amazon.bomb and Amazon.toast. But he called it cashflow.com and that's what it was. Yeah. And so I think it's just another sign of the fact that you probably shouldn't come to a conclusion about something without really trying to understand it for yourself. Well, this captures two of our earliest points of discussion. Number one, that the companies we're talking about are more complex than the simple profit earners of the, let's say, deep value era. And so you can't, as Andrews says, have a knee-jerk reaction to some superficial knowledge. You have to really get deep. And then the other concept was this idea of optional profitability. The value investor wants to maximize cashflow and profits, EPS, but the growth investor sees losses sometimes as the right thing in the interest of the future. So that's a very, very important divergence. But also very often not. And so you can't just be in one camp, and you can't say, well, I shouldn't care ever about losses, or I should just take for granted that all reinvestments and growth are good, but you also can't take the point of view that none of them are good. Right. Wasn't it Mark Twain who said all generalizations are flawed, including this one? And by the way, when I say the value investor does this and the growth investor does that, probably the biggest single theme of the memo was that that dichotomy should not be so hardwired. Yeah. Which is so great. You make the point in the memo, which we talked about a lot in our Berkshire series, Ben Graham made the lion's share of his money on Geico, which was not a value investment. Right. Well, I think one of the great enemies of profitability is rigidity, because I'm lucky when I switched to managing money by switching to the bond department at Citibank, and there couldn't be a bigger backwater at the time. They said, could you figure out what high-yield bonds means? And it started to happen. And I said, well, I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. I don't know. And I found this area where everybody said, oh, no, no, we don't do that. Everybody. Most investment organizations had a rule against buying bonds that are rated below A or below triple B. And I'm buying single B bonds. And everybody says, no, we don't do that. Well, guess what? When you go to an auction and you sit down, take your seat, and you see there are no other bidders, that's usually a good thing. So the point is open-mindedness was really the most important single theme of the memo, I think, along with continuing to evolve your thinking as you get older. Can you take us back a little bit to that moment when you were starting to do high-yield investing and nobody else was? I mean, I assume Milken wasn't active at this point in time. No, Milken was. No, Mike had been interested in low-rated bonds, I think, all along. He got out of Wharton the same year I got out of Chicago. 69. And I think that he immediately found, among other things, he wasn't dedicated to one area, but I think he found low-rated debt. And there's a famous book called Hickman, which talks about bond experience from 1900 to 19, I think, 43. And supposedly, Mike found that book and he read in it that the lower a bond's rating was, the higher its actual rate of return was. Not its promised yield, but its realized total return. Because yes, there had been some defaults in bankruptcies. And let's remember that that period included the Great Depression. But nevertheless, the excess yield you got as an inducement was more than sufficient to offset the credit losses. And that was like an aha moment for him. And at that point in time, it was impossible to issue a low-rated bond. They were called non-investment grade, speculative grade. You just couldn't issue them. Oh, so the big banks weren't doing it. Right. And the big investment banks, which in those days was separate, the big underwriters. And let's remember that in Moody's manual, it defined a B-rated bond as follows, fails to possess the characteristics of a desirable investment. And when I teach classes about this, I say to them, let's go down to the street. I have a car there I don't need anymore. And you have money and you need a car. But hopefully, before you say whether you'll take it or not, hopefully you're going to ask me one question. What is that question? I'm debating whether the question is, what's the value of the bond? And I'm going to ask you a question. What's the value of the car? What's the price of the car? But I want to know both. But the value, you can't ask me because I'm a seller. Right. Okay. I want to know what the price is. But you can ask me the price. Hopefully, before you say I'll take it or I won't take it, you know the price. But in 1978, Moody's said these bonds are not proper for investment regardless of price. How can that be? Well, the other thing that you say sometimes is, how can life insurance companies make money knowing that every single person's going to die? That's right. That was one of my real epiphanies. 1981 or 2, one of the first financial cable shows interviewed me. And the reporter said to me, how can you buy these bonds? You know, some of them are going to default. And this is one of those times when, you know, you just get the answer. It pops into your mind. I'd never thought of it before. And I said, the most conservative companies in America are the life insurance companies. How can they insure people's lives when they know they're all going to die? And the answer is, number one, it's risk they're aware of. It doesn't come as a shock when somebody dies. You know, nobody's going to die. And the answer is, number two, it's risk they're aware of. And the answer is, number two, it's risk you can analyze. And so they sent a doctor to your house to see if you're in good enough shape to get a policy. Number three, it's risk you can diversify. So nobody insures just skydivers or just people who live on the San Andreas Fault or just smokers, but they diversify their book. Number four, it's risk they're well paid to take. So they look at me, they say, this guy's going to die at 90. And they price the policy on the assumption I'm going to die at 75. There's your margin of safety. Exactly. And I said, this is exactly what we do in high yield bonds. So we started doing it and we made money steadily and safely investing in the worst public companies in America. Now, remember my background. I joined the investment business September of 69. I'd had a summer job in 68, so I got to look at it. But in 69, I went to work permanently at Citibank's investment research department. And the bank was what was called the Nifty Fifty investor. The Nifty Fifty were considered to be the best and fastest growing companies in America. Companies that were so good that A, nothing bad could ever happen. And B, there was no price too high. This was the polar opposite of the not appropriate for investment. Exactly. For the Nifty Fifty, it was no price too high. And for the high yield bonds, there was no price low enough. And of course, both stances are wrong. And if you bought the Nifty Fifty the day I got to work, and if you held it tenaciously for five years. You lost almost all your money in the best companies in America for the main reason that they had been priced too high. The normal PE ratio for the S&P is 16 post-war. These things, a lot of them were selling between 60 and 90. Gosh, I don't know any companies like that today. Yeah. Was it the case that they were not the best companies in America, or was it the case that they were the best companies in America, but they were just priced too high to make sense as investments? Some of each. They were all priced too high, but some. In addition, it was illusory. Let's go down the list. The granddaddy was IBM. The saying was, you can't be fired for buying IBM. Did IBM go bankrupt? Maybe. I don't remember. Close. Xerox was number two. They completely lost their market to imports, and they had to find a new business model. The consumer companies and the tobacco companies were part of that too. And for the most part, they did better. But I'll tell you one consumer company that didn't do well, and that's Simplicity. That was in the 50. You see a lot of people sewing their own clothes today? If so, you travel in different circles from me. But that was considered a company that could never be heard. Maybe Sears was in there. I forget. But the concept of disruption was never considered. The moats were considered inviolate. The thinking was really simple. Nobody thought about the fact that if Xerox priced their copies at 30 cents a piece, somebody from abroad would be able to buy them. Yeah. Yeah. And somebody from abroad could produce it, and that presented a price umbrella that somebody else could get underneath. So in those days, the Wall Street Journal used to run a box on the first page whenever something would crap out, showing the losses in a certain category. And we had lots of companies where you lost more than 90% from the high to the low. To go back to your question, I think if you're an investor, you have to have a couple of different skills. One is you have to think about. You have to think about the future potential of the company. And that's sort of what my dad was talking about, about moats and disruption and things like that. And the second thing is you have to think about, well, what's that worth versus what is that selling for? And if you come back to the fundamental ideas of the memo, one of them is that all investments in equities are worth the discounted value of their future cash flows from here to eternity. And for some companies, those cash flows are more in the here and now. And for some companies, those cash flows are very far away, but they all go into the formula. And by the way, if you think about the nature of a DCF formula, every company requires judgments about the future. It can be a seemingly stalwart company that has immense consistency and whatever, but those can be disrupted. Well, I think the greatest example, one of the industries that all the value people thought were impregnable, great moats, was the newspapers. Because you had newspapers. You didn't have to worry about competition from the newspaper in the town next door. You were entrenched. It only cost 15 cents, so nobody would stop buying it in tough times. And if you wanted to advertise, you wanted to advertise in the paper with the most circulation. And the local movies had to be in the local paper, the local want ads, the local car ads. And the great thing was that if the consumer bought it today, guess what? They had to buy it tomorrow because it had a one-day shelf life. What could be a better business? And 20 years later, companies that are in industry are fighting for their lives. If I could just make an observation, you sound like a crazy person when you assert that en masse, very quickly, consumer behavior is going to change. If you would have told me when I was reading the paper, and this was the most important thing in America, well, newspaper values are mostly going to go to zero because all of the consumer attention is going to be shifting to consuming everything on their computers in an interconnected web of servers that doesn't really exist yet. So therefore, the newspapers, won't have value. You'd be like, what? Or if you came to me 10 years ago, and so Facebook bought Instagram, and they're demonstrating their ability to constantly keep all the consumer attention. But eventually, actually, this Chinese company is going to start and it's going to be short form. Yeah, Facebook won't figure it out this time. And so all the consumer attention is going to shift. And I'd just be like, you're wrong. I just don't believe you. Yeah, that's, of course, true. But I think the other thing that's really interesting to note, and there are these very widely circulated charts of the speeding up of technological adoption. And so it was very possible for companies to be much more durable back then than it is today, in my opinion. I mean, if you transport yourself back to 1950, and you think about, well, how many businesses are there where I think I can say with high conviction that they'll be the same in 10 years as they are today, I think that number would probably be much, much higher than you could say today, without understanding what management is doing to further entrench their moats or fend off competition or continuously evolve or whatever. It's very, very hard to say, well, with no minding of the ship, this business will just stay consistent. There are very few businesses that idiots can run these days. But I'll tell you to second what Andrew's saying. If you go back to my youth in the 50s, when I was a young man in the 60s and 70s, you just didn't have the feeling that the world was changing. My thought model for the world at that time, looking back at it, is, kind of a consistent backdrop, like on a stage. And the actors do their thing in front of the backdrop, but the backdrop doesn't change. And so there are cycles, ups and downs, excesses and corrections and all these things, but the world didn't change much. And a comic book was a dime for my whole youth. But today, everything changes every minute. So here's a question then, should companies be worth less? Because if the future is going to be uncertain, and it's more likely that things get disrupted, and moats are less permanent than they've ever been, shouldn't we consider less future years of cash flows? Or launch new products, or going after other markets geographically or whatever, there's much more value creation to be had. And I think the ability to leverage your advantages and build more for the companies that are really doing so has probably never been higher. And by the way, with the internet, you can address global markets. We just talked about newspapers where you couldn't address the town next door. One of my favorite writings on investing, it's not actually about investing, but it's this guy, Brian Arthur. And he wrote something called Increasing Returns in the New World of Business. And that was in the mid-90s. And he made the observation that with the new world, with the new distribution models of things like the internet and whatever, the best companies could continue to get bigger and bigger, whereas you were sort of capped out more in the old world. And so you would have diminishing returns to scale over time. And by the way, that couldn't have been more right. You look at markets over the like Apple and Amazon and Google and Microsoft that just continue to get bigger and bigger. And I think a lot of that comes from the fact that they're just continue to dominate more and more of various markets. This is one of my favorite pieces of trivia of all time about that paper. Brian Arthur was friends with Cormac McCarthy, the author who wrote All the Pretty Horses and No Country for Old Men. And Cormac helped shape the prose in that piece. Oh, very interesting. One of the reasons why it's very successful. Well, yeah, I guess for an economist, it was extremely well-written. Before I lose the opportunity, I just want to add one thing to Andrew's list of criteria for success in this continued expansion mode. And that is companies that are able to avoid the negative effects of success. You have to stay lean and flexible and unbureaucratic and future-looking. Andrew, you're pointing out this really interesting thing where you have two opposing forces that have butting heads. One is now we have global warming, globally addressable markets. So TAMs are bigger, therefore market caps can be bigger. And at the same time, you have competition happens faster than ever because paradigms change faster than ever. And so therefore, the future is less certain than it's ever been, despite the fact that the opportunity for any given business is the largest it's ever been. Yeah. And by the way, I wouldn't just say global markets, I would say strategically adjacent markets as well. Again, look at the big companies and how they continue to step out and do more and more in. things that are tangential to their existing businesses. Amazon's a great example of that. They started in books, then they went to media, and then continued on and on and on. And eventually, they leveraged their scale into cloud computing and whatever. And that into databases and all sorts of stuff. Yep. Yeah, exactly. Ben, Andrew mentioned that he'd never heard your voice at real speed because he listens to podcasts accelerated. I think the way to think about it is take Darwinism and turn up the knob a few clicks. It's what it is. It's winners and losers, maybe more dramatic than ever, and happening faster than ever. And then this all, I think, dovetails into one other point that we made from the memo that I think is really important, which is that markets evolve and games evolve. I was an obsessive poker player. I've always been an obsessive games player generally. And my dad and I, we sit around and we'll play backgammon for forever and whatever. And I got obsessed with poker right when the poker and they started online poker moneymaker and Farha. Yeah, well done. That's very impressive poker trivia. So when online poker first launched, and everyone got into the poker boom, because no one knew how to play, and it was so new, you just sat around, you played aces and kings and nothing else, you could win money. And it was very easy. And then over time, people figure that out. And they sort of figured out the next level of the game and whatever. And the winning strategy turned into the very exploitable strategy. And that evolution has happened. A lot more times to the point that I'm probably terrible at poker now. But anyway, I think the same thing has happened in markets. And so back in the times when Buffett was starting, information about companies and the ability to transact in companies, and actually even finding out about companies was extremely hard. I mean, you had to go to the library, you had to take out the Moody's manual. He was driving around buying stock certificates from farmers. Yeah, I don't know if you've ever looked at a Moody's manual, but there's not that much there. And so if you're looking at a Moody's manual, you're probably looking at a Moody's manual. And so if you were interested in something, you had to mail away for the annual report and so on and so forth. And then you had to call your broker and they had to figure out how to buy in a liquid stock. And because there was so much friction to getting information and transacting, it was much more possible for value to be hidden in plain sight. And I wasn't there, but I know this because Buffett says that this is exactly what he did. You could look at something and just plainly see that the company just continued to march ahead and just plainly understand that it was undervalued relative to those prospects if you had conservative assumptions about the future continuing. And nowadays, information is totally ubiquitous. Anyone can buy a stock. There's tons and tons and tons of smart people investing in the stock market, but there are also algorithms and machine learning and all this type of stuff. And so it's very hard to believe that you can just have some knee-jerk surface level understanding of something and just look at financials and have some very elementary view on something and have it be some sort of insight that's profitable. Well, the phrase I took away from that, and it's in the memo, is readily available quantitative information about the present. And Andrew pointed out the evolution of markets. And I was taught at Chicago in the mid-60s, the efficient market hypothesis that everything is priced right because everybody's working so hard to find the bargains and the overpricings. And of course, that's a framework and it was not. Was not true that everything was priced right, but certainly over time, things are priced more right. It's become more true. Right. Inefficiencies, which I prefer to say mistakes, things the markets misprices, where do they come from? They come from ignorance and prejudice. So Moody's had a prejudice against the single B bond. It had a prejudice in favor of the nifty-fifty, as did most investors. And I was lucky to find some things that either. Others didn't know about or didn't understand. But human knowledge is cumulative. And lately, it's been rushing forward at an incredible pace. So it's hard to imagine that there's a piece of information that I can get off the internet that's going to make me any money for the simple reason that everybody else can get it off the internet. This is a zero-sum game for a fixed amount of profit. And it'll go to the people who do better at the expense of the people who do worse. So you have to have an advantage. A knowledge advantage, a skill advantage, if you're going to be one of the people who ends up on the positive side of that equation. And so to bring this back to what we were talking about earlier, it's very dangerous to just make qualitative judgments about a company that seemingly everyone has. Oh, this is a great company, whatever. And it'll just continue winning without also saying, well, to what extent is this reflected in the price? And so that's the whole point of investing, whether it's value investing or growth investing. Growth investing. And that's sort of the point we make in the memo. I mean, you have to be able to make judgments about the future prospects of the company. And then you have to be able to say, well, to what extent is this already reflected in the price? If you're talking about public equities or any public market, that dynamic is so strong that we were just talking about. There's so much information out there. Yes, maybe you can have some advantage, but it's very hard. If you're instead operating in a private market that is relatively to the public markets, much more illiquid, you can have more advantages. So you've shifted your career to doing mostly early stage private market investing. Is that a big reason for that? Well, so what I'd say is, first of all, I think you'd be hard pressed to say that venture is super inefficient. It's not a market where everyone can transact. And it's actually hard to get in the place where you can invest in seemingly great companies. But the competition to invest in those things is very fierce. So I wouldn't say that I came to the realization that venture was this super inefficient market. I wanted to capitalize on that insight or whatever. And by the way, and leaving aside the fact that I love hunting for founders, I love working with founders. I love so much that goes into the whole business of venture investing. But if you want to just talk about the proposition, the reason why I went into it is number one, it sort of suits my skill set more to make long term qualitative judgments about the future. And I think venture, so much of what you're doing is you're finding huge gaps between what you're paying today and what this could be worth if it's right. So you have to really imagine in 10 years, if this is successful, well, what could that business look like? And much more so than the that really suits my skill set much more. And then the other thing is, it's a much more probabilistic endeavor. I mean, what you're doing is you're trying to find extremely high expected value investments, where the average occurrence is that you're going to lose your money, but make enough of those bets. And so it works out to be a great return. And then by the way, try to help the companies in whatever way you can and follow them closely so you can add more capital to the ones that are doing well and whatever. And so that whole endeavor really suited my makeup much more. Oh, man, we were chatting before we started recording, I went back through my notes from business school from Howard, your book, the most important thing eliminated. And every other page on there is like risk equals permanent capital loss, do everything you can to avoid permanent capital loss. And venture is not that it's not that and I also don't think that I would be particularly great at that. I mean, if you told me I had to have a portfolio of 10 companies, where not only would the portfolio return be 20%, but they'd all be roughly 20% or they'd go somewhere between 10 and 30 or something like that. I mean, I just don't know if that would be as suited with my skill set. And in 1978, when I left the equity area, it was really because of the terrible performance of the nifty 50, which I as director of research was associated with. So they said to me, what do you want to do next? And I said, I'll do anything for the rest of my life choosing between Merck and Lilly. Because you can take the best drug analyst in the world and sit him down on the first day of every year and ask him which is going to perform better, Merck or Lilly. And my guess is he'll get it right half the time. But the good news is my boss said, I want you to go into the bond department. And it played to my quantitative skills and to my conservative personality. And if they would have said, I want you to start a venture capital fund and be ready to invest in Amazon, it starts, I would have been a disaster because I'm not an optimist. I'm not a futurist. And financially, I'm something of a chicken. So the point is, so far, Andrew and I have gravitated things that are right for us. And that's a hell of a lot easier than doing something which is wrong for you and trying to put a square pig in a round hole. One of the things that really interests me is applying some of the more traditional investing lenses or Buffett investing lenses or whatever to venture is really interesting. Because I think you have to think about, well, what can this be worth if it works? And what's the potential probability that it works? And in order to do that, in my opinion, I think it's very helpful to be able to visualize what the business could look like. And if the company IPOs in 10 years, what's that person going to be looking at when they're thinking about investing in the company? So you have to visualize, well, what could the financials of this business look like down the road, even though it's totally nascent? And what could the moats in that business look like? And how much capital might it take? To get there? And what's the likelihood of competition? And what could they evolve into after they establish themselves in that market? And et cetera, et cetera. And I think it's really interesting. And to me, I find it to be, yeah, really, really thought provoking. Remember what I said, that Andrew said, readily available quantitative information about the present is not going to give you the key to the castle. He said a couple of minutes ago, however, that he's good at making qualitative judgments about the future. And so if everybody has all the company data about today, then the means to massage it, how do you get a knowledge advantage? And the answer is you have to either somehow do a better job of massaging the current data, which is challenging, or you have to be better at making qualitative judgments, or you have to be better at figuring out what the future holds. So he's had to evolve from the old value people who, you know, Buffett talks about buying dollars for 50 cents, which is not such a terrible idea, but to doing more like he does, dealing with these challenging aspects of qualitative and future. Yeah. I mean, I think you just have to find the type of thing that suits you. And I like being an optimist and I like thinking about, well, what could this be if it works? And there are other people that like saying, well, this company clearly sucks, but it doesn't suck as much as everyone thinks, or people think this business is going to die, but I think it's only going to be maimed or something. It will die slowly over more years. You know, that's an incredibly valuable skill to have, and you can make incredible returns doing that. It's just not in my nature. Well, at Oak Trees, I think the thing we're known best for is investing in distressed debt. And when we started that in 88, my partner, Bruce Karsh and I had this idea. It was actually Bruce's idea, but he joined me and I'd been in the high yield bond business for 10 years at that point. People would say, well, that's crazy. You're going to buy the debt of companies that are bankrupt. They're not going to repay the debt. And the answer, well, that's crazy. You're going to not going to repay it in full, but they're going to pay part. That may be enough. Or if the creditors are unpaid, they get the company. That may have value. But that was good for me. It was great for Bruce Karsh. It wasn't the right thing for Andrew. So fortunately, we gravitated in the right direction. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is a. No longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. The risks are real. Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower. Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. 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So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. We wanted to ask both of you about the firm building aspect of the investment business. One thing I've certainly learned in my career is that being a great investor is a very challenging proposition and an activity that can easily be one's life work. Building a great investment firm is a very different challenge. It's very rare that people can be great at both of those. And it's also not a second challenge to take on lightly. How did each of you think of this? Well, having spent my first 17 years at Citibank, which is a management intensive bureaucracy, I was pretty good at those things. I was not a guy who started in a garage, you know? And so processes and deliberateness were right up my alley. But on the other hand, we started Oaktree at a time when the quest for alternative investments was extremely strong. The demand, I think, outstripped the supply. Most people kind of gave up on getting the returns they need from stocks and bonds. So we had a big tailwind. And what Bruce and I did for the most part is create a culture. We didn't ever have a macro-managing, micro-managing mentality. We were too busy. It was not our day job to run the company. We did that as a sideline. And it wasn't management. So we weren't great on the profit margins, but they kind of took care of themselves. And we were haphazard about compensation. You know, we kind of respond to the last person to walk in the door. But the right culture at the right time with, I think, some exceptional people was enough to make the company a success, even though it was largely an unguided missile in terms of management. How did you think about splitting up the responsibilities of the core of the business investing versus the necessary lifeblood of the business of finding capital to manage? And recruiting and everything. Well, the great advantage we had is that the people who started Oak Tree, there were five of us, three others in addition to Bruce and me, had worked together on average for nine years at the time we did it. So we weren't dealing with strangers and trying to figure out an MO. All we had to do was what we had been doing at TCW before, Oak Tree. And for the most part, that meant I was out raising the money and visiting with the clients and representing us to the greater community and clients and prospects. And Bruce and the others were back managing money. And David, you mentioned my book, The Most Important Thing. That actually evolved from a memo of that title that I wrote around 02. And that had a section on how to run a company, which I spared the readers of the book because it had nothing to do with investing. But I said in there that the key among partners is to have shared values and complementary skills. And we absolutely shared values. We're all family men and conservative people and somewhat risk averse and so forth. Andrew points out we probably could have used one founder in the mix who wasn't quite as risk averse, but we did okay. But we had complementary skills. And I could do things in the outside community that Bruce maybe couldn't do, although he's better at it than he thinks, but had no interest in doing. And he could do things in terms of managing money that I couldn't do. But the great news is we each accepted the truth of what I just said. And so that produces a lot of respect, mutual respect. And that's why we've had such a great partnership for 35 years. And for us, I mean, while I'm incredibly proud of and impressed by what my dad and his partners have built, our approach is sort of totally opposite just because it suits us. That sounds like a theme between father and son. Yeah. I mean, it's not for the sake of being opposite, but my partner Schuster and I, who we've both since we started have run the investment program and the sourcing and investment decisions. And it helps that we've been longtime, extremely close friends. And we talk all the time and we just feel like we have to really pinch ourselves that we get to do this every day, that we just love, love the investing. And to us, what motivates all of us is having absolutely world-class returns over a long period of time. You seem to share that competitive streak with your dad, even though you have different ideals in many other ways. Yeah. You know what, Ben, if you're not competitive, you shouldn't be in the investment business. Yeah. But I'm not competitive. I would say it's not competitive with others. It's competition with ourselves. I mean, we just want to be the best that we possibly can be. So everything we do at our firm is in service of that. And it's not because other approaches aren't also extremely valid or work for other people. It's just that this is what motivates us. And so we have no ambition to broaden our firm in terms of strategies or turn our firm into some big asset manager. And if our jobs turned from investing into management, we'd be extremely unhappy. And that trade-off isn't worth it. So everything we do is in service of trying to do what we love and maximize our time doing that and have the best returns that we possibly can. And so do the things that we think enable that, which in our opinion, in this business is really all about your reputation with founders and having as broad of a network of as many incredibly talented potential founders as you can, and then being able to do whatever we can to build the best relationships we can with them. And I think that comes from helping them. But I think that also comes from being great partners and also friends. That's how we build the firm. And it's very different. You point out that the nature of Oaktree and TQ's investment businesses is very different. And thus the core competencies are, you know, very different too. Andrew, you don't write public facing memos. You don't go on too many podcasts. Thank you for joining us here. But it's probably just not as important as it was at Oaktree. Look, there are other people in venture who do that stuff extremely well. Other people in venture go on podcasts? I think those podcasts are great. And I think people who do it probably do it because they enjoy it, but also because it really helps them. I mean, builds great brands with founders and increases their network and adds a lot of credibility and all that type of stuff. I think at some point, you just sort of do what suits you. And we have certain things, and other people have things that suit them. And it's not really a strategic question about if going on podcasts help us or hurt us or being public facing or whatever. It's just you sort of do what you think is right for you. Which is funny. That's the echo of Howard, something I've heard you say in the past, which is that you just have to make sure that your investment strategy suits your demeanor as an investor, which is almost saying the same thing. I mean, David and I talk about this a lot in the podcasting business. We say, should we change the content? To match what the demand seems to be? Or should we just say, you know what, let's find a way to do what's natural to us, because that's what we're going to have the most fun doing. That's where we're going to have competitive advantage, and that's where we're going to have durability. And I think that same concept applies in all three of those things just discussed. When I'm asked for career advice, when I speak to students nowadays, I say something very, very much in line with what you just said, Ben. I say, look for something that plays to your strengths and avoids your weaknesses and that you'll enjoy doing. And it sounds like that's what you've done. And turn it around. We are so lucky to have the ability to do something we enjoy. And take that out of the equation. What are you left with? We only have one life. We should make the most of it we can. I think anybody who has a choice and does something he doesn't enjoy just to make more money is. I think learning and evolution are really important. Learning at our firm is really important to us, and it's just important to who we are as people, and continuing to try and expand our competencies and rub our nose in the many mistakes we make and all that type of stuff. And so I think you have to find something that suits you, but you also can't get too hung up in your comfort zone and just say, well, this doesn't fit in my comfort zone, so I'm just going to totally ignore that. And you guys talked about this on your Berkshire episode. One critique you could make of Buffett is he just totally ignored technology. And technology not only became much more pervasive, but I also think that he's an incredibly smart guy, and he understands lots of different elements of business. And when he talked about technology, I think he was referring to science projects, where your technical advantage is what will allow your business to succeed. over time. But there are lots and lots of technology companies where what they do is not so incredibly cutting edge. And really what powers their business is moats that are very similar to other sorts of things. You also had Hamilton Helmer on here, and a lot of those sort of moats traverse both technology and non-technology businesses. So I have no doubt that Buffett could have totally nailed it, but it was just not in his comfort zone. You know, this points out a dichotomy in investing, or maybe a conundrum, of which there are so many. Because what we just talked about was it's important to stick to your last and do what you're good at and fits with you, but it's also essential to be open-minded and willing to change. I'm getting whiplash. Yeah. But look, to be a good investor, you have to be confident, because you have to back things that are iffy and stay with them if they go bad. And if you're in the public securities market, you have to maybe buy more of them when they decline, but not so confident that you're pig-headed and keep throwing bad money after good. You have to concentrate your holdings enough so that the few good ideas you get in your lifetime really make a big difference, but you have to diversify to protect against the unforeseen. So this is really the nub of it. It's such a fascinating field, because in my opinion, the things we're talking about can't be reduced to an algorithm. And this is where our humanity pays off, because Andrew talks about making better qualitative judgments about the future. I like to believe that computers will not be doing that well for some time, so that we'll still have some scope for success. Or if they do, then it will cease to become a competitive advantage. Right. Well, but we need to have some competitive advantages left. But I think it comes from qualitative and future. I always say that I don't think that a computer can sit down with five business plans and figure out which one is Amazon in advance, or meet five CEOs and know which one is Steve Jobs. And not many people can do it either. That's the important thing. But the few who can, can really help their client, and if the person who finds Amazon can also find Google and can find Facebook, and to the point where you can conclude, okay, it's skill, not luck, then you really have something. So here's a philosophical question. If there's a very credible trope to be made on either side of an argument, and you can always make both of them and then be stuck in the middle, ultimately, everything always comes down to judgment. So where does judgment come from? Well, that's a great question. I was having lunch with Charlie Munger back in 2011, when Most Important Thing was about to come out, because he worked downtown right next to me, in the building next door. And when I got up to go, he said, "Just remember, none of this is meant to be easy. Anybody who thinks it's easy is stupid." And so I wrote a memo, I think it was September 15, if I'm not mistaken. And I talked about that. I called it It's Not Easy. A friend of mine wrote a book on investing in the UK, and the title is Simple But Not Easy. The things we're supposed to do are simple to describe. It's just not easy to do them, A, better than other people, and B, consistently, and C, over time. It all comes down to judgment. Now, that's not your question, Ben. Your question is, where does it come from? And you remember that the first chapter of The Most Important Thing talks about second-level thinking, thinking at a higher level than others, differently, but also better, that is to say, more correct. It's easy to diverge from the thinking of the consensus, not always easy to diverge correctly. But that's what a superior investor has to do. You might call it second-level thinking, variant perception, knowledge advantage, insight, context, judgment, but it's an intangible. People say to me, "Can you teach somebody to be a second-level thinker?" And I said, "I don't know. It's kind of like asking the basketball coach to coach height. All his efforts won't make his players any taller. Some people get it, some don't." Yeah. I mean, I would say it probably comes from a lot of different places, but some ideas would be some combination of sort of deep knowledge and understanding of what you're doing and the real framework for what matters and what doesn't and why. I would say rationality, which is the ability to think logically and not emotionally, which sort of dovetails with knowing yourself and being able to know where your biases will infect the decision-making process. And then, I think there's intellectual humility that comes with it, knowing that there's a good chance that you can be wrong, even if all those things are true, and also knowing what you don't know. So, knowing where you can't opine and where you have to learn and where you should seek others and things like that. Andrew, I imagine this is less so for you, but certainly at Oak Tree, you recruited a lot of people. Over a thousand employees, right? So, you had to make judgment about other people's judgment. How did you do that? You know, back when I was an analyst in the early '70s, I followed Xerox, and one of the portfolio managers said to me, "Who's the best Wall Street analyst on Xerox?" Sell side. And I said, "Well, the one who agrees with me most is so-and-so." Isn't that our definition of who's the smartest? No, but the truth is, we look for smart people. We look for. What name is it? I don't know. I don't know. I don't know. What Nancy, my wife, calls smart eyes. Exceptional people who get things maybe a little better than others, who understand what's important and what's not, who can go beyond the readily available quantitative information. And look, it's very simple, like with oil. The cure for low oil prices is low oil prices. Some people get that intuitively, some people don't understand it. You have to get the people who get it intuitively. But I think also very importantly, we look for team We look for people who can work and exchange ideas can do well with ideas from their peers, from their lessors, from their superiors, managers, subordinates, and throw it all together. We don't want the lone wolf. We don't want the you eat what you kill kind of person. And we don't pay people on the basis of their one year's quantitative performance as an individual. And we don't want people to work that way. I definitely can attest to having nearly as much experience in recruiting. We've added a whole three people to our team now, but I do think that the vast majority of the venture investment decision-making is about understanding founders and having a sense for founders. I mean, again, after talking about all this business analysis stuff, we firmly believe that the vast, vast majority of the investment consideration is backing the right people. And so what you're doing, I think every day, every week is evaluating people. And so you have to do that in the same way. And so I think, first of all, when you hear a venture pitch, so many of them that we all hear are like, you know, the person gets on and it's like, here's where I went to school. Here's where I worked. And then I worked here and now I'm doing this. And let me tell you what I'm doing. And I sort of say, no, no, no, let's stop. I want to spend a lot of time understanding you. And I think the real way to suss out judgment is by going through the person's story and background and understanding why they made decisions. Because you can sort of fake your way through prospective things. And when I, and I'm sure you guys were recruiting at a school, you know, there was the vault guide for finance interviews. And you could memorize every single answer about how you would do this and how you would do that and whatever. In CS, there was a book called Programming Interviews Exposed written by three ex-Microsoft guys. And it was truly the way to whiz through any of these. Yeah. But you can't fake what you've done. And so if you really dive into what people have done and why, and if they've made decisions based on their own judgment, and if they've learned and evolved, and if they've made decisions based on first principles, and we're willing to go against the herd, and we're willing to do things because they're passionate. And if their idea comes from specific knowledge of a real problem and a real deep understanding, I think you can evaluate judgment very well based on that. And so I think that translates into hiring too, you know, really understanding what people have done in the past and why. And then I think you can also test for specific skills. In the hiring process. I mean, I think you want to understand why you want to hire someone. And then I think you can test against those things in real ways. It's funny. On the founders thing, I was having a conversation with my dad about a potential angel investment recently. And he was like, I know people always say the founder is the most important, but what is your view of what that actually means? And I sort of just barfed out this answer. Howard, sounds like your earlier story. It just came to you. And I was like, are they a weirdo? And in particular, are they a weirdo? And he was like, are they a weirdo? At something where there are four standard deviations from the mean at that thing. And it could kind of be anything. But if this person can't be in the middle of the distribution at everything or else the startup will never be successful. Yeah, well, I think what's interesting also is that there are so many ways to succeed by being amazingly good at the conventional thing by being the best at going through the map or following the map or whatever, and sort of hacking whatever the map is for you. But with startups, there's not much of a map. I mean, there might be some general principles, but in any given area, you're doing what you're doing for the first time. Or if someone else is doing it, you're trying to do it differently and better and whatever. So you have to be able to think for yourself. And you have to have real conviction in yourself. And so I think to your point, the people who are more unconventional are people who are willing to do things based on what they think is right for them and their own views versus just being the best at what's conventional. You know, my last memo came out a couple of weeks ago was called I Beg to Differ. And it was all about the need to be different. And it's exactly what you're saying. The path to exceptionality cannot come through doing what everybody else does. And the advantage of the things we do, especially Andrew does, that we've been discussing is the fact that there is no clear algorithm which will produce a consistently correct outcome. But we are dealing with challenging concepts here. And the person who sees differently and better is the one who's going to win. And David Swenson, who ran the endowment at Yale, used to talk about the need to do things that are uncomfortably idiosyncratic. You have to be idiosyncratic to split tax and to win. And for many people, it'll be uncomfortable because they'll be out of up with so-called common sense. But you got to do it anyway. One way that I sort of intuit for myself about this point about why founders are everything, sort of the question I guess your dad asked is, think of the best startup idea you could possibly imagine. I don't know. Someone gave you Google's pay drink algorithm. That's literally what I was thinking of too. And then imagine someone from your life that's mediocre or maybe better than mediocre or an A-minus or a B-plus. Or even talented at conventional things. Yeah. What are the odds that that person would have built Google? Zero. Zero, right? And that's because, number one, it's hard to build a company, even if you have a great idea, and execute on all the things you have to execute. But number two, if you're doing something well, other smart people are going to be like, hey, there's a lot of value to capture here. I'm going to go compete. So not only are you going to have to build your company, but you're going to have to out-compete everyone else. And I just think it takes exceptional people who can execute exceptional judgment, who can attract and retain other exceptional people, and all the things that go into being a great founder to build those sorts of things. All right, listeners. Now is a great time to talk about one of our favorite companies, Legora, the agentic operating system for legal work. Yes. Most of you have dropped a contract into a chatbot by now. But as a lawyer, how far can that really take you? It's never seen your firm's precedence. It doesn't respect confidentiality, and you can't check. Where its answer came from. So Legora's founders approached this the way that great founders do. Early on, the team moved into the office of a big law firm in Stockholm and learned for months how the work actually gets done. A couple of thousands of enterprise customers and 100,000 users later, they still work that way. They employ 100 legal engineers on staff. These are lawyers sitting inside of firms and legal departments to deploy Legora onto live situations like the deal closing this week, or the policy review due Friday. The product has gotten very powerful in a short period of time. A year ago, the goal was a good answer from a chatbot. With a Legora agent, you hand it the work, and it comes back with a plan. Tasks like running diligence on a data room or reviewing a new vendor contract get completed inside the tool you use every day, like Microsoft Word, and against your own precedents and playbooks. Every finding is sourced, the lawyer directs the work and signs off, and then it's ready to go. So it's a great way to get started. Every legal team can get access to the same AI models, so the models themselves do not give you an edge. What you can do with your own data, people, playbooks, that's the whole game. Today, over 100,000 legal professionals at more than 1,800 law firms and in-house legal teams in over 50 markets use Legora. And when Legora goes head-to-head with its top competitor in a pilot, it wins 70% of the time. A demo is one thing, but what matters most is an associate who reaches for it at 2 in the morning during a closing, or whether a general counsel trusts what it says before the board meeting. So if your legal team wants to check it out, whether you're at a firm or in-house, go to legora.com slash acquired, and be sure to tell them that Ben and David sent you. Well, I know we've drifted away from firm building a little bit, but I want to take us back there and kind of round that out by talking about the concept of an exit. We talk about it all the time with starting a firm, but I want to take us back there and kind of round that out by talking about startups. It's become taboo to put what's the exit strategy in the deck, but everyone wants to understand how can I get liquidity on this investment at some point. Oak Tree had, I don't know if you would categorize it as an acquisition or a merger or potentially a majority interest investment, but Howard, I wondered if you'd be willing to share with us how you thought about that and what it means for you going forward. Well, it was really a dream transaction for us. Brookfield approached us and said that credit was the obvious omission in their list of alternative investment categories that they were providing. And they could build it, but it might take 10 years and they might end up with less than what we had. So they wanted to invest in Oak Tree. At that time, this was 2018, we were half owned by the public and half owned by the founders, current and former employees. So they proposed to offer a fair price to take out the public, that's half, and to buy a fifth, of our half. So they started with just over 60%. But we had criteria for a transaction that we would contemplate. We've had them for 20 years and they were never fulfilled before. And Brookfield hit them all, which is that Oak Tree would continue to exist, would continue to be an independent entity, that we would run it, that Brookfield wouldn't tell us what to do, and that Brookfield wouldn't try to interpose itself between us and our clients. They would be oak tree clients tended by oak tree. it was really ideal for us. And also, as I said, they bought 20% of my stake, Bruce's stake, et cetera. And the former employees will sell an eighth of a year until they're done. Starting this year, it happened already. The current employees have the option to sell an eighth, but they don't have to. And Bruce and I and the other founders and senior managers had the option to sell a fifth a year, but we don't have to. Right now, we can keep it as long as we want or sell it when we want. And you reach a certain age when it's a good thing to have an exit. When did you start Oak Tree? 95. So I was 27 years old. I've worked there half my career. So let's see if you can do the math. So we have an exit at our option. We still run the place. They consult us, they help us, they provide resources. I mean- I mean, it just couldn't be better. And Buffett talks about skipping to work in the morning, and I skip inwardly. Well, another big topic I wanted to cover from the memo is just that. This is the perfect transition. Selling. You each brought very different perspectives to the topic of selling. That was our most lively interchange, I would say. I'd love to hear from each of you what your thoughts were on selling, before coming together, and then how they changed. So as you probably know, I wrote a memo in January of this year, I think it was, called Selling Out. And I observed that a lot is written about when to buy securities. It's a little bit about market timing, but not much about when to sell securities. And of course, it's half the equation. And yes, my tendency coming from the conservative background that I came from was to, what would you say? Take some money off the table, take some of the profits. I had this terribly misguided feeling that if you sell half, you can't be all wrong. But of course, I wasn't dealing with securities with the potential of what Andrew deals with. But anyway, for people whose parents were adults during the depression, who were brought up with, don't put all your eggs in one basket, save for a rainy day, that kind of thing, you take some profits. If you're more optimistic, the timing of your birth, you never heard those things. And so maybe it's easier to hold for the long run. I wrote a memo on liquidity about eight years ago, and Andrew gave me a great quote for that memo, the greatest quote. And he said, if you see a chart of a stock that's been up for 25 years, and you say, man, I wish I owned that stock. Think of all the days you would have had to talk yourself out of selling. So in Selling Out, I told the story of Amazon that I think it was 89 in 99. And then it felt the 6 in 01. And let's say you were fortunate enough to buy it at 6. Would you start selling at 12? Well, most people would start selling at 12. It's a double. Would you sell at 60? 10x? 10x. What about 600? 100x. And then it went up to 3,300. So this idea that as soon as there's a profit, you should take some of it off the table, seems like a huge mistake. Charlie Munger says, you only get four good ideas in your life. And you got to get the most out of them. What I said in the memo, Selling Out, half facetiously, but only half, is that there are two reasons people sell things, because they're up and because they're down. If something goes up, they say, I better sell some before the profit evaporates and I'll feel like a jerk. If it goes down, they say, I better sell some before it goes down more and I'll feel like a jerk. In other words- And that has nothing to do with the business. Right. Or the thing you're selling. And a huge amount of people's preoccupation, in my opinion, is with avoiding regret. Embarrassment in front of others, regret themselves. My view on selling is consistent with the general way that we talked about the value and growth dichotomy, which is that what matters in investing is really deeply understanding what you own and why you are making the investment and what you're playing for. And when it comes down to making a selling or not, what matters is understanding those sorts of things and then also understanding your opportunity cost. I mean, your money has to go somewhere. And so you have to think about decisions relative to each other. But the point of the memo was that, first of all, most people don't think about opportunity costs. And most conversations about selling are sort of academic, thinking about, should you sell this investment in a vacuum or whatever? But outside of that, most people make selling decisions based on price action. If it's up, or if it's down, or whatever. And most people confuse price action with fundamentals. Oh, this company has been up and to the right for years, and so it must be a compounder, or it must be compounding value intrinsically. So I think you should make your selling decision based on why you made the investment and how things have evolved and what you could be playing for. Take a simple example. Let's say you can buy a dollar for 50 cents. Well, that's obviously a good thing to do. But if it reprices to a dollar, you should probably sell it because there's no more in the investment. However, let's say there's a contract where you can get a dollar, but then every year, the value of what you can claim compounds by 20%. And you can buy that contract for 50 cents. Well, you can buy it for 50 cents. Let's say it goes to a dollar. You doubled your money, but you shouldn't sell it. Next year, it'll compound value to $1.20. So if it goes up to $1.20, you're up 20%. You still shouldn't sell it. The next year, it'll go to $1.44. Let's say instead of $1.44, it goes to $1.60. You probably still shouldn't sell it even though it's quote-unquote overvalued because the right to compound at almost 20% in perpetuity is extremely valuable and so on and so forth. So you shouldn't just let price action alone determine what you should do. And then I think the other thing to note is, number one, things that can do that, these sort of compounding certificates in the form of companies. Are extremely rare, but extremely, extremely valuable. I mean, if you just look at a DCF, if you really have something that can compound cash flows for 25 years, you're up 100x. So if you can do that for 50 years, you're up 10,000x. So it's really, really hard to price that in in the near term. And so number one, if you can really believe you found something like that, something crazy has to happen for you to sell it. I mean, the price can, of course, as my dad said, anything can be priced. too high. But I mean, really recognizing what you have is really important. And also recognizing that we have a huge tendency to want to act. And so sitting idle on something for decades and decades is really hard. But then contrarily, those things are extremely rare. So most things are not that. And if something appears where the price appears to be compounding, and you get comfortable that it is one of those things, you better be sure that it is. And you better know why you own it. I just think it's a nuanced conversation that comes back to, well, why do you own what you own? What are you playing for? You know, what's your confidence in the future? And then if I sold this, where could I put the money? You know, it all comes down to, maybe we can think better about the selling decision if we rebrand it, and we call it the decision to unbuy. The thought process should be the opposite of the buying decision, and not some chicken stuff about being afraid to lose. But I think Andrew points out a very important thing, that in the olden days, you look at the classic value investments, and I did some of this, you get this chance to buy the dollars for 50 cents. And that's a great thing. But once it hits a dollar, you got to sell it. You got to find another dollar for 50 cents. The concept of you buy a dollar for 50 cents, and then it goes on to be worth two and four and eight and 16. Cigar bets don't go to eight bucks. Yeah, right. And remember, I was a credit investor, and the bond investor generally, does not think in terms of getting more than 100 cents on the dollar. So when the upside is capped or non-existent, then obviously, taking profits may be somewhat more responsible. And by the way, I mean, venture is an interesting lens to look at this. The truly generational companies, the truly monstrous companies are extremely few and far between. But when you have them, selling them early is just a colossal mistake. Disastrous. They're incredibly prolific firms where their reputation is built on a handful of fantastic investments. And I think if you probably looked at the PAs of the most famous venture investors of all time, a huge majority of it is made up of continuing to hold a few things. Oh, I have a great story on this. I won't out the firm. It could be one of several firms. But I know that one of the earliest venture investors in Facebook, after the IPO, they distributed out the shares. And among the of the general partners relatively quickly liquidated their Facebook shares. But the partner who led the investment was like, nah, I'm going to let this ride. And that was a very good decision. Well, I want to start moving us to a close here. I always find that people tend to mostly consume in whatever medium they're currently consuming in. And David and I have played around a lot with like, should we write? Should we do blog posts? Should we do newsletters? People we know for 100% sure are listening to this podcast. So when I'm Pointing them to go check out your memo, I would like to do so in the podcast form. So where can listeners go read the memo that we have mentioned so many times or listen to it? Well, the memo and all my memos since 1990 are available at oaktreecapital.com slash insights under the heading of Chairman's Memos. And you can read them all one at a time in order. And the only thing I can promise you is the price is right because they're all free. When did you start writing the memos? In 1990. That's a good story, by the way. You should tell that one. Yeah, I'll tell that story. And it bears a little bit on what we're talking about here. But in 1990, I went to visit a client in the Midwest who told me that the pension fund he ran for 14 years was between the 27th percentile and the 47th percentile every year for 14 years. So if you say to somebody, well, for 14 years, it ranged each year between 27 and 47, what do you think they did for the whole period? You would say, well, probably about 37, right? And the answer is fourth. That pension fund was in the fourth percentile of all pension funds for the 14 years. Why? Because some of the other people shoot themselves in the foot. So that was a lesson in consistency. And then right around the same time, there was a deep value firm in New York, and they invested very heavily in the bank. And the banks did horribly. So the president comes out, and he says, well, obviously, if you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%. And the dichotomy between the implications of those two stories really caused me to write the first memo, the juxtaposition. My clients don't hire me to be in the top 5%. I don't care if I'm in the top 5% in any given year. I'm absolutely unwilling to be in the bottom 5%, and I think so are they. So that thing about being willing to be in the bottom 5% sounds to me like a post-justification. But anyway, that's not how I choose to operate. And so it was a great opportunity to write that up. And so I wrote that one in 1990. I think I wrote another one in 91. Then I wrote one in 93. There was no regularity. And one of the things I like to mention, David, is that for the first 10 years, I never had a response. Wow. Not only did nobody say it. It was good. Nobody ever said, I got it. And these were mail? This was pre-fax? This was the old days of mail. But they only went to our clients. So probably a few hundred. Now it's a few hundred thousand by the subscriptions. And by the way, you mentioned podcasts. These things are also available in podcast form under something called The Memo, originally enough. In any podcast player. We'll link to it. So if you like to listen, you can listen. I like to read. It was a sporadic thing. Oh, yeah. It was no plan. Well, the other thing that I think is great is, I mean, you wrote it with a lot of consistency or with some consistency, but you got no feedback whatsoever. But you kept writing it. Well, I was doing it for myself. The dam broke one day and it ultimately picked up steam. Well, I wrote one on the first day of 2000 called Bubble.com. And that one had two advantages. Number one, it was correct. And number two, it was correct quickly. Because if you do something correct, but it turns out to be correct six years later, nobody remembers you. But this one, of course, the tech bubble crapped out in mid-2000. And so I like to say that after 10 years, I became an overnight success. Were you posting them publicly always? No. I think we probably started posting probably around 2000. Maybe when we got on the internet, which was, of course, a little earlier. But when we started Oaktree, they gave me a computer. I said, I only want Excel and Word. And that's all I had. But that was 95. Then I think we moved to 98. I said, Okay, I'll take that other stuff. For the life of me, I couldn't figure out the difference between Explorer and email. But I got there eventually. This explains why Andrew is the tech investor. Exactly. And why he had to fix my computer. If you were to graph the committed capital from clients by year, is there a correlation with the data? Yeah. Yeah. There's a distribution of how widely your letters go out once you started posting them publicly and committed capital from clients. Did that meaningfully help the firm marketing? Well, you never know. One thing that's interesting to that point, though, is that you've dramatically limited your fund sizes in certain periods and then raised them a lot in other periods. Yeah. We tend to increase our AUM in bad times. And of course, that is the best time to put money to work. Or when you think there's going to be a bad. Yes, that's right. In advance of bad times. Yeah. Thank you. That job is still open for you. Most firms, if they have a very successful fund, will follow it up with another fund, which is larger on the back of that. But if you think about it, if you had a success in a given area, the good performance of that fund is synonymous with appreciation. In other words, everything in that area is now more expensive. So I would say you should. Raise less money, not more. And that's the way we operate. And if you look at our funds, we've been in business three or four cycles. There were debt crises or crises in general in 1991, 01, 02, 08, 09, and then, of course, a brief one in 2020. And the biggest funds we've raised were the funds that invested in those years, usually because we had some foresight about what lay ahead. And then, having made a lot of money in those well-timed funds, the next fund is always smaller. And we're very proud of that. We don't always say, oh, no, this is the time for our strategy. What's the perfect time for our strategy? Oh, now. Sometimes it is, and sometimes it's not. And we take great pride in telling people which is which. Well, Andrew, we've talked a lot about where folks can find things that your dad has created over the years. Where can people find you or TQ Ventures? Yeah, well, you can find TQ. TQ at our website, TQVentures.com. Number one, we try to make it fun. But number two, it's pretty sparse, and we mostly focus on our companies. But you can also always email me, Andrew, at TQVentures.com or LinkedIn or whatever. I'm actually not on other social media. You're a studious social media avoider. Yeah, so that's the best way to reach me, I'd say. Congratulations on truly winning the social media game by opting out. Well, I was on Twitter for a little bit. Again, you just have to do what? Some people have the ability to be like, I'm only going to do this for 15 minutes or whatever. And it's just, it's really tough for me. And so I was just sort of an all or nothing. And I think nothing's better, especially if I want to keep my marriage and be a good father to my kids. My wife and I both quit Instagram this summer. And we seem to be doing okay without it. Well, on that note, Andrew Howard, thank you so much. Thank you. Thank you, guys. It was a lot. It was a lot of fun. And it's been a pleasure. And David and I've been looking forward to this and glad we did it. Ah, likewise. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just tapering. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to Statsig.com slash acquired to get started. With that, a huge thank you to Andrew and Howard for coming on. Total blast to get to talk to them. So fun, too, to talk to a family doing this. What a cool, special experience to get to do something great professionally with your parent as a child and with your child as a parent. I can think of no more fulfilling experience. It's just so cool. Well, listeners, if you are wanting to discuss these topics with us after listening, because there's some really meaty stuff in here, and I can't wait to chat about it with everyone here, come to the Acquired Slack, acquired.fm slash slack. We will be talking about it. We've got merch available. Merch, finally, at acquired.fm slash store. You can listen to the LP Show by searching Acquired LP Show in the podcast player of your choice, or you can get episodes early at acquired.fm slash LP. David, anything else? No. All right. With that. Listeners, we'll see you next time. We'll see you next time. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Huh. Who got the truth?