Legendary investor Howard Marks, co-founder and co-chairman of Oaktree Capital Management, explains how he invests successfully, fully aware that nothing is a sure bet. In this conversation with Grant Williams, he breaks down how he has navigated market cycles, and outlines the dangers that lie ahead in a world dominated by moral hazard and political polarization. Filmed on January 31, 2019 in Boca Raton, Florida.
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Investing In Overpriced Markets (w/ Howard Marks) | Interview | Real Vision™
Howard, thank you for taking the time to join me today.
It's a pleasure to be here.
I know you have a busy schedule and as I said, I've read everything you've written over the years. And I wanted to thank you personally for sharing all those thoughts because they've been hugely instrumental in me being able to built my own framework. And that's a lot of what I want to talk to you about today is how you think as well as what you think.
And to start I just want to take you back to 2005, 2006 which was a time when you were making some pretty aggressive moves at the time with Oaktree's portfolio and talking about them. A lot of people kind of thinking, is he nuts? This is some pretty dramatic statements to make.
Can you just take us back to that point in time and talk about what it was you were seeing and what you felt you had to try and prepare for?
What we want to know is when psychology is too high and optimism is too high, and as a consequence, behavior becomes imprudent. When behavior is imprudent, then asset prices go too high based favorable expectations and the world becomes a risky place.
We actually made the best purchases we ever made in the summer of '02 in the world of distressed debt-- because we had the meltdown of the telecoms, who had overborrowed to build fiber, and we had the scandal companies. And that was incredible. But the world bounced back from that. Actually it wasn't an event in the world, it was an event in a little corner of the credit market.
But it came back and everything was hunky dory by '03 and well into '04. And it just seemed to go on from there. And to me, the most important thing was that in '05, '06 my partner Bruce Karsh and I spent the whole day complaining about the deals that were getting done. Any crazy deal could get done, you know? And when investors are practicing the willing suspension of disbelief, it's dangerous.
And in a prudent market where people are appropriately skeptical and risk averse, there are deals that can't get done. But in that environment, they were. And so we just took that as a great sign of danger and so we sold a lot of assets and we liquidated some large funds we were managing and only replaced them with small funds-- and raised the standards for the investments we would make.
And most importantly, at the beginning of '07, our distressed debt unds had always been a billion or two. And at the beginning of '07, we set out to raise a reserve fund that would invest if a crisis came along. And that fund eventually reached 11 billion by March of '08.
Now this was about the time when you wrote race to the bottom, which is probably one of your most widely circulated memos.
That was in the first quarter of '07.
Yeah, I'm fascinated in what it takes to go from talking about how crazy the market is and how badly all these crazy deals get done to actually doing something about it. Because it's so easy to sit there and say, woah, this is crazy. And it's still crazy three months from now. How do you galvanize yourself to take action and say you know what, we're going to go out on a limb here and actually do something about this?