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 and as I said I've read everything you've written over the years and and I wanted to thank you personally for sharing all those thoughts because they've been hugely Instrumental in me being out build my own framework, and that's a lot of what I want to talk to you about Today's 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 oak trees portfolio And talking about them in terms. They had a lot of people kind of thinking is he nuts what this is some pretty dramatic statements to make so can you just take us back to that point in time and talk about what it was he was seeing and what you felt you had to charm prepare for what we want to know is when psychology is too high and Optimism is too high and as the consequence behavior becomes imprudent When behavior is imprudent then as the prices go too high based on Favorable expectations and the world becomes a risky place We actually made the best purchases we ever made in the summer of Oh - in the world of distressed debt Because we had the meltdown of the telecoms who had over borrowed 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 bio 3 and well in 204 and it just seemed to go on from there and the to me the most important thing was that in o 506 my partner Bruce Karsch 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 it and only replaced them with small funds and raised the standards for the investments we would make and most importantly at the beginning of o7 our distressed debt funds had always been a billion or two and at the beginning of us seven we set out to Raise a reserve fund that would invest if if a crisis came along and That fund eventually reached 11 billion by march of oh wait now this is 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 oh seven. Yeah, you know this was I'm fascinated in what it takes to go from talking about how crazy the market is and how bad these All these crazy deals get done to actually doing something about it because it's so easy to sit there and say wow This is crazy and it's still crazy three months from now. How do you how do you galvanize yourself to take action? So, you know what? We're gonna go out on a limb here and actually do something about this my experience for some reason has enabled me to Not be afraid of being wrong, but I'm always conscious of the opportunity to be wrong but if I hold an opinion and if Bruce agrees, then I think the greater risk is is is not taking action, so You know, and the other thing is by that time You know I'd been in this business almost 40 years and I seen a lot of cycles and Cycles do tend to rhyme and we thought we were seeing the heated part of an upcycled, which is a good time to take defensive action, so the race to the bottom talked about the fact that that the securities markets and the lending markets are auctions and the opportunity to buy a security or lend money goes to the highest bidder and If you think about an auction for a painting or so like that The winner who pays the highest bidder as actually if you turned it around he's the person Who was willing to receive the least for his money? And so if you are? making a loan and There's a competition to make that loan The opportunity to make the loan will go to the person who receives the least for his money the least return and the least safety and the least structure and When the when too many people have too much money and they're too eager to put it out then the bidding goes too far and the winner of the auction is actually a loser right because he does something imprudent but this is Fascinating because you know when I read that memory it was it was so simple But I mean it hits you like a ton of bricks when you look at it in just a slightly different way But but again, this was the first quarter of oh seven Yeah, so you were still quote/unquote wrong for a year and a half, right? So, how do you how do you manage that in terms of a lot of people? Have you been expecting markets to stumble for a while now? And they haven't and we'll talk about the fend and all kinds of stuff. I'm sure in a while, but how do you manage that? Expectation and then something you're so sure about not happening. First of all, I'm never sure right don't don't use that word with me Everything I do is with trepidation. Yep henry Kaufman said there are two kinds of people who lose a lot of money the ones who know nothing in the ones who know everything I hope never to be either I use a lot of quotes and adages in my memos as you've seen in the book and when I speak and the first of the great investment adages that I have learned in the early 70s was that being too far ahead of your time is Indistinguishable from being wrong, but you have to live with that Yeah, because in our business if you're wise you have a sense for what's going to happen you Never know when and it's the people who think they know when tend to get into big trouble if you accept all of that what it says is you have to think of what you think will happen you have to take action, but you have to be willing To wait that long period until it turns out to be correct action. I mean you also said What a wise man doesn't beginning The Fool doesn't yet? Which is again another way of saying the same thing as well. The wise man is early Yeah, and he has to wait but but waiting waiting and convincing your investors to wait is another there's another level altogether I mean you obviously with your tenure in the industry your track record you you are given more leeway than other managers pets Which is perhaps the greatest advantage you can have but but still you have to manage those conversations with people and manage the fact that I Guess on a portfolio level you have to manage your risk and manage your bleed while you're what you're trying to wait for this scenario To unfold but how do you manage those conversations with investors who are saying hey Howard You said we should be worried about this. Look everything's great because everything is great optically Well, we don't have that conversation too often. But I if I had it I would say I didn't say it's gonna happen right away That's the key, you know overpriced and Going down tomorrow are not synonymous so and and you know granted it meant in our business many things are overpriced and become more overpriced and more overpriced and immoral price and that's how you go from a bull market to a bubble and So, you know we I Don't know first of all, we have the confidence of our investors secondly The money we're talking about is in closed-end funds where we don't have to worry about people withdrawing so that's That's what you talked about having the confidence of your investors. The greatest advantage in this business is having ten-year money because you know Given the errors of the herd the pressure to sell is always greatest at the bottom and If you have ten your money, you don't have to succumb to it. Yes. Sure. Well cycles, you mentioned cyclists I know you're great student of cycles And they used to be so important in markets every everywhere you look whether it was the human cycle whether it was a market cycle credit cycles everything seemed to have a rhythm and it made Investing a lot easy because you could at least have some sense of how these cycles would turn That seems to have changed significantly in the last 15-20 years And you think in your head there's I don't I don't agree with that I mean, I think that if you talk about 20 years if you came in this business 20 years ago You have seen two profound cycles, you know You had the TMT bubble and crash and then you had the mortgage bubble and crash and I think that maybe they weren't predictable But I'm not sure they ever were you know, but you think would you I mean I wouldn't classify those as cycles I kind of look at them and think they were both attempts at cycle turns that happen quickly in kind of Short order in small corners of the market and then got squashed quickly by by Fed policy Well, they were market cycles Bubble and crash. Yeah, they weren't a dynamic cycle. Okay in the traditional sense and in the last 20 years, I think that developments in the financial world have taken over in importance from Developments in the rest of the business world, you know The mortgage crisis, for example, the global financial crisis had almost nothing to do with the economy You know in the I think what you were trying to get at is the fact that if you go back 30 40 years the the the Declines in the market were produced by declines in the economy, right? yeah, but the global financial crisis the the bubble had had little to do with the Economy and the crash had I think nothing to do with the economy It happened to bring on the worst recession in a long time, but it wasn't caused by a recession It was caused by some funny thing that some people were doing down on Wall Street So so how do we get into that stage? You think where it it should be that the stock market responds to the economic cycle and recessions cause stock market crashes but we seem to have flipped that I think the financial activity became excessive I mean finance investing Financial engineering, whatever you want to call it Kind of took over in importance from the what you might call the industrial world Sometime in the last 25 years and it I Guess what? I mean? I haven't thought about this and your question prompt me to do so, which is great But I guess what we now have is is the tail wagging the dog? the tail is financed the dog is industry financing used to serve industry and Then it became a thing in its own. I think that I think that Derivatives the the concept of derivatives had a lot to do with it if you you go to a football game and The game is played down there But you're sitting here and you're making side bets With the guy next to you, you're not contributing anything to the game and that's what derivatives is its side bets on on the on the economy and Business activity. It doesn't do anything to it doesn't contribute to society Now the people who who are in favor of derivatives say it permits people the transfer of risk which which has a place but I Don't think it's all necessary to accomplish the aims of society I need more time to think it through but my reaction is that it was I mean you think about The mortgage-backed securities, you know, I think that they they took a bunch of PhDs from Harvard and Princeton and and and in places like that and MIT and they sat him around a table and the boss comes in with a box full of mortgages and he dumps these subprime mortgages On the table and he says ok prize to the winner Who can configure these? So that the largest percentage of the result is triple-a Yeah, that's called financial engineering quant behavior, but it doesn't do anything for society. And in fact in this case it hurt sure. I mean It's really been difficult for this last seems 25 years maybe to to put aside the Fed and Try not to point the finger at them for every single Yeah ill yeah, but you can't help but go back to 87 in particular and look at what happened there in October and the response to it and think at that point in time something materially changed and And something became very very clear and you've you've written about this extensively, but it became very clear that The Federal Reserve a hostage to market fortunes and it wasn't so clear then but just this week right we've had perhaps the greatest Example of that that we've seen right JPL's you too. Yeah. Well, you know that it's very challenging to run the Fed because you have three masters from for decades or centuries your job was to Manage inflation more in the last few decades. They also add the job of Supporting Employment which of course is in opposition? to controlling inflation and now they've thrown in the third which is to make sure the market goes up and I Think that's very troublesome So I don't even know if they've run there and it seems to me that the Fed have said hey, you know We'll take that will turn it but they but they really have created a road for their own banking. Well, you know Alan Greenspan saved the markets a few times and then That gave rise to the belief in the Greenspan put and Everybody figured well if anything goes wrong The Greenspan will just bailout the economy and the markets with some extra liquidity. So We don't have to worry about the risk of the things we're doing and of course that's called moral hazard Yeah, and it's a terrible thing But the the Greenspan put beget the Bernanke put which we get yell important. You know when Powell came in there's there's a Transcript of an FOMC meeting from October 2012 where he was newly on the board I think and he talks about this moral hazard He talks about the market's reaction To the Federal Reserve and he he essentially lays out the fact that he understands exactly the transmission mechanism. He understands what they message They're sending what they're doing what the market believes and what the market wants And so when he came into the role, you know, I foolishly believed that okay. Here's a guy who gets it But either way if he caved or didn't cave at least we know we'd know that it's all about Keeping the mark up or it's all about reality and I think we found out this week that it's all about the stock market So does that clear the decks? Well well maybe when you were Posing that me I was thinking So what you're doing is you are you have the game? You have the guys in the stands. Yep, and you're Changing the game for the benefit of the betters. Yep. That's exactly right. Right, and that's not a good idea The important thing is to keep the that the game is played well and the investment markets can take care of themselves When do we get to the point where a recession is something that has to be avoided at all costs? Yeah Well, it's a it's a big mistake in one of my memos post-mortem for the global financial crisis I talked about forest fires. Yep, and Good forest management you permit there to be fires once in a while and if you if you if there are fires of Moderate size occasionally it burns out the fuel and then you don't get the one big one same thing in my opinion and The the Fluctuations of the economy are natural in my opinion and Should be permitted to occur. Yeah, and if you try to forestall them then when they happen I don't think you can forestall them forever and when they happen they're bigger So when you look across the lens and excuse me, and the attempt to forestall them creates moral hazard Yeah, that's that's the key but when you look across the landscape at this this kind of Construct that we've built ourselves within the Federal Reserve or the central bank controlled world. They can't control this forever shortly, right? There must come a point where things get out of hand Do you sense? coming back to that original question at 2005-2006. Do you see any similarities in in what you're seeing? What starting to make your spidey sense tingle? similarities in the sense of Specific things repeating. Yeah, but I have felt that because people were traumatized by the Great Recession The recovery has been the slowest one since World War two and that has kept Things moderate which meant that we would certainly have a recession one of these days But it would be moderate it wouldn't when you don't have a boom. You don't have to have a bust in my belief But now between the tax bill which was a shot of adrenaline into in my opinion and already healthy patient and then the Possibility that we're going to see a Powell put in action. I think that We may get two highs that Lead to lows You know, I think that when when I was writing I'm a believer in cycles believe they always have occurred I think I understand why and I think they always will occur and And I tried to study them And then when I kind of got to the end of writing the book I said, well why? Do we have cycles if the market goes up 10% a year on average? Why doesn't just go to 10% every year why and in fact it almost never goes up between 8 and 12 So the average is not the norm. Why not and The answer I think is excesses and Corrections. So you have a trend line and most trend lines are upward sloping Yep but then you deviate from the trend line on the upside because of Some combination of optimism and greed and wishful thinking and then you have to have a correction to the downside. So Now I'm thinking we may have more of an excess which leads to more of a correction You know, I've thought a lot about this too. I'm a great believer in cycles and everything. I've read in history demonstrates Beyond any argument that they do exist everywhere, you know I when I think that through I put that down to a human of you know we are we have this a cycle of life and and markets are nothing but the collective representation of our Greed and our insecurities and our cycles and you know that that's a major theme at the bottom yeah, exactly the end, but it but it's not it's a hard thing to argue that that when Pete and I've had a lot of people tell me I'm wrong cycles don't exist and and you shouldn't really build any kind of investments theses around which I found remarkable the cycles come primarily from the behavior of people and I don't see how you can argue that people are not prone to excesses and repeating them and and you know the the big theme of the book is Mark Twain history does not repeat, but it does rhyme and the World is just too unstable a place to believe that stability is the norm and You know, if you think about it in the economy a great year is up for and a bad year is down Too so the economy has an upward trend then it kind of goes like this Then companies have leveraged financial leverage and operating leverage So their profits go like this and then the market goes like this and why? because of people yeah, you know the risk in the market does not come from stock certificates companies Exchanges it comes from people. Yeah, but people are prone to excess and and I Don't see how it can be argued otherwise and by the way when people say I Don't think we're gonna have cycles in the future because the astute Fed has it under control or whatever it is what they're saying is the the what I consider the Four worst words in the world. It's different this time, you know, okay until now we've had cycles But we're not gonna have anymore well I mean your point is so well taken particularly with the idea that if you misaligned the incentives and you offer moral hazard To we human beings the excesses are just going to get greater because that's that's what we've always done you know something else that some that cyclical is is Political leanings to left and right and this is something that's occupied a lot of my time recently Just trying to think all this through it. We are at seemingly a remarkable point in history where Capitalism is under threat. Yes. Now I would argue that we don't have capitalism anymore. It's something completely different I think we had capitalism maybe some of these problems wouldn't be here, but you wrote very eloquently about the The move to socialism perhaps you could talk a little bit about how you see there because it's a phenomenon. That's everywhere the moment Well as I say in the memo, I think that in the sixty years immediately after World War two We had a strongly rising tide throughout the world and it raised all boats and and Most people were happy some people did better than others but everybody just about everybody did pretty well and the the ones who did the best didn't didn't didn't do that much better than the ones who did the worst so we didn't have the great inequality, and so it was a sanguine environment and Reagan and Thatcher came along and talked about the wonders of the free-market system and the world applauded and So that was a swing of the pendulum in that direction but now the growth I believe has slowed the Distribution of incomes is more skewed. It's more important today to have either a Good education or capital and the people would neither who just have a strong back Because of automation and globalization, you know I think that we're running out of jobs for them and that's gonna be a big deal in the future this to me That's the biggest single problem we have in the next decades and so but especially because of the inequality and also because now the people who do best do So much better than the people who? Who do worst that? There's a lot of dissatisfaction with the results of this so-called free market system and so the pendulum in some quarters is swinging against it and we have a lot of Anti-capitalist and anti capitalism rhetoric. I mean you quote Churchill. Yeah He talks about the capitalism is the best system, you know, sorry the worst system except for the others Well, he said it about democracy. Of course Right, but but but I think it's true of capitalism either. I mean it has flaws But one of the things I said in the memos We must not adopt things Because they have benefits without thinking about the costs and we must not reject things because they have flaws Without thinking of the benefits and what? capitalism is Highly imperfect and what's better? That's the point and Where are the examples of successful? planned economies I say in the memo that I can imagine the the politician from the left Railing against capitalism on Facebook and Twitter via their iPhones in meetings they went to in via cars and airplanes and maybe ride-sharing in face-to-face meetings over a Starbucks coffee and over the cable news networks and none of those things would exist if it wasn't for the incentives of the free-market system and so everybody says and The people from the left say I don't like the inequality, so I want to change the system But they don't ask how we got to where we are or what Changing the system would do to the future and I think these are important questions and unfortunately, though Populist rhetoric Has an immediate appeal The opposite the appeal is intellectual, you know, which is not so easily Communicated was very interesting because you put the definition of populist in the moment from the from the free dictionary I think it was and it was very degrees. I hadn't read that exact definition because it talks about Disenchantment against the elite. Yes Well, actually what it said is the struggle of the people people Yeah against the elite because then I said I think what they should add is the word resentment right? Let's anyplace to resentments, but it's interesting because I hadn't thought of it in that context that Popular's populism is Necessarily against the elite ruling class or thought of it in those terms because once you do that, you instantly understand why the rhetoric is The populism is so evil and so dangerous and so troublesome, right and obviously people get painted as extreme, you know There's lots of extreme right-wing as there's no extreme left-wing. It's in which is interesting now, there will be But that's that's where we seem to be moving towards and we'll come on to that in a second but I just want to go back to that that that Income inequality you talked about because the thing that always strikes me is there's no mystery about how this has occurred it's very plain to see how this has occurred and yet nothing is being done at the grassroots zero cost of capital level that has enabled this and You and I could pull up any one of 50 charts and in any one of those charts. It's plain as day is this something that is never going to happen because it's not in the interest of those who make those decisions or Are they going to start to feel the heat and maybe decide to tweak it a little bit against themselves? 1970 I made I was a kid from Queens New York and I made my first business trip to California and I was down in Laguna Beach and I was I think speaking with My wife on the phone and we're talking about how I said so great down here you know because you call out your play on the beach and the sunshine and there's palm trees and there's Sand and I said, I just probably don't want to be around when the have-nots come up the road 16:17 now, it's 50 years later So I was again Too far ahead of what? sand and that's wrong, but the point is Now it looks more likely that the leftist sentiment will influence the debate I Don't I wouldn't go so far as to think that the that the next president will be a leftist But I think that it will just like Bernie Sanders I think forced Hillary to move her rhetoric to the left and then might have Caused her to move her actions if she were elected. I think that Ocasio Cortez and and Warren and so forth will and sherrod Brown will cause the center of the Democratic Party to Cater in some way to the left. I mean certainly seems that way when you look at the traction that That Acacio Cortez is getting and and Liz Warren and and it's clear that they both realize that This is how we're going to create that traction by going Against the elite but some of the some of the things they're proposing, you know, the seventy percent tax You know Liz Warren was on MSNBC Looking straight down the camera rail saying we're gonna find your wealth and we're gonna come and get it I mean, these are things that I'm sure a lot of people in America never thought they'd hear right in this country Well, you know I think the thing in the memo that I got he about the most and I was trying to put it out and then Friday Elizabeth Warren came out with her Wealth tax idea, but what got me was that she tweeted it out. Of course and was was the way she did it. She said something like don't quote me the rich and powerful powerful run America and Look at what they look at what they have arranged for themselves They don't They are allowed to keep their accumulated wealth Well, guess what? We're all allowed to keep our accumulated wealth and and she makes it sound like through some skullduggery they have Exempted themselves from the wealth tax you can't exempt yourself from something that doesn't exist. Yeah, but she makes it sound nefarious and That's populism. They they you know, and and it's uh, It's not constructive. You know, I I would Lay a strong bet that five years from now. My tax rate will be higher than it is today Yeah, but it should be as I said In the memo, it should be progressive but not punitive And not confiscatory Among other things People don't have to sit still and pay it. I wrote a memo back in 2016 called economic reality and I talked about a Guy I know who was who was the biggest taxpayer in New Jersey they raised the rates to a point where he moved to, Florida where there is no tax so the point is The the people who want to confiscate seem to think that There's nothing that the confiscate EES can do about it It's funny because when you look at the two we're talking about Casa Cortez and this warrant, you know Liz Warren's been around long enough to have seen this experiment tried in the UK for example in the 70s It was a complete disaster and one would think Brilliant academic that she is that she's read plenty of history and understands that this really has never worked Acacio Cortez on the other hand hasn't been around long enough to have seen it for herself. Maybe she's read about it maybe she hasn't but she's also the voice of the largest generation in history Who are now coming into the period in their lives where they need to be out of Ford homes and afford? All the kind of things that we and the generations of others have taken for granted So you can see the problems that slow writ large. Yes, but it's hard to see away when the political divide is so extreme that there's any way that the two sides can like figure out some kind of Solution to this that that doesn't cause some real problems down the road. Well, my main political activity right now is something called No Labels The goal of which is to bring the two sides together and to act in a bipartisan way It may be a pipe dream But I think it's the best hope so, how do you go about doing that? I mean on a practical basis work for the election of and you support people who will cross the aisle and work with the other side and compromise and and and a compromise would among other things today be ideological and We've reached the point where he he worked with the other side Is an epithet. Yes But you know if you go back to my boyhood That's what people did and they produced compromised legislation so instead now when when you can't work with the other side what you get is either nothing or Legislation which has no support from the other party so Obamacare was done with zero Republican support and the and the Trump tax package was done with zero Democratic support and that was the goal. Yes Now what the hell kind of goal is that it is an American To have it as your goal That you don't want the support of the other side yeah, and then all you get is divisiveness, but this this is this is a problem that you know politicians that was their art they could they could talk to the other side and come up with compromises remove it but now If you take it down to it to a family level there are families that can't talk politics over 1070 Or because they're rapidly on one side and I you know, I I kind of observed this as as an Englishman transplanted into America which is a country that I fell in love with at the age of 10 when I first came here and and it's always been this beacon to me of Everything that that you would want from from the leader of the free world and everywhere. I look I see this divisive nasaw It's really hard even if you try very carefully to tread a middle line And even in your memo, you know I you you went to great pains to reinforce that I'm not I'm not picking a side here. I'm trying to get people together it Does it take something dramatic? To bring the two sides Together or is this something that you think maybe over time will be forced to heal the rift? Well No Labels is hoping that there will be a grassroots, you know, we read for example That something like 80% of Americans think there should be some gun controls And you can't get them, but what does that mean? It means that the politics and tactics of division Somehow are stronger than the tactics of two together in this and so It has to be either a grassroots effort and By the way, things might have to get worse before they get better, but I don't know. I'm not sure how they can but Well now that we have a Democratic House and a Republican Senate, you know We're probably gonna have gridlock for a long time and I've argued in the past that we have real problems That have to be solved. For example, we know that Social Security is going to fail. Yep There are only a few things you can do. You can raise the tax rate You can raise the amount of income. It applies to you can reduce the benefits you can lower delay, the the Retirement age you can have a means test. There aren't many more than that And if you don't do any of those it's going to go bust And you don't do anything what's the last time you even heard about it being discussed because it's not good for politics and You know, the tremendous amount of our problem has to do with the media and communications and you know People say I only want to hear the news that I agree with and of course nowadays You can easily visit which means that you never hear an argument for the other side So how can views become moderated? I don't know what the solution is, but I hope there is one well But at least we've identified the problem. I guess that's the first step. Yeah, the memo is called economic reality meets political realities Well the other way, yes, right but so let's talk about the economic reality of this because the political Reality is you are never gonna get to the bottom a listen in the time we have but the economic reality How do you take what you've observed on the political scene? you take what you've looked in terms of asset prices and valuations and you take what you've seen from the Fed and the interest rate cycle How do you apply that to your investment philosophy right now? Has it changed? Anything has it made you adjust anything. I think that Grant the most important decision for an investor at a point in time regard to the intermediate-term I wish I mean not tomorrow and not 30 years But the next two to five years the most important decision to make today is whether to invest aggressively or defensively And it's not all one or all the other but how do you mix the two, you know an investor like me faces two risks every day The obvious risk that everybody knows about is the risk of losing money the other risk which is a little more subtle is the risk of missing opportunity and So what most people say is well, I don't want to lose a lot of money but on the other hand I don't want to miss all the opportunities. So I'm gonna do something that compromises on the two and each person's Positioning visa vie the two risks should be different based on their circumstances but still then this that's the first question and then the second question is You figure out your normal risk position you look at today, and you say well today, should I be worrying more than usual about losing money or more than usual about missing opportunity and you know, I just think that the world is an uncertain place and The things we're talking about contributes to the uncertainty. And so today I would emphasize Avoiding the loss of money a little higher than Than usual visa fee avoiding the risk of missing opportunity everywhere. You look across the financial landscape. There are there's a series of successful Importantly pragmatic investors who are coming out and and issuing what the headline writers called stark warnings or dire warnings Seth Klarman being the most recent perhaps during the Davos thing recently that I'm always interested that that Cacophony of voices that gets louder and louder and and more respected by the day Doesn't seem to change behavior at all we seem to be in this period where do you'll find that fear of missing out is being re-weight adjusted by the smart investors the guys who are always early and yet the retail investors are Wiping their brows and saying what December's over Kramer said the markets going to go up We should we should investigate the different Christmas say everything's good again Do you know deep deep when you look at the Y average retail investors think about this? Do you fully want to find a way to reach out to them? Say listen? You need to think about it like this. You're not thinking about this correctly. It's a tough one. Yeah grant because You know, I always imagine you know, the the movies that are made for the teenagers and over here sitting on their shoulder you have The angel saying don't do it. It's not prudent you, you know, you'll regret it in the morning and over here You have the devil saying do it? It'll be fun and the devil wins every time That's why we have the movie right but in in the in the investment business, you know You have prudence and history and knowledge of cycles and and the consciousness of the of the risks and over here The devil says do it you'll get rich and you know wishful thinking there's the desire to get rich is really dominant and and and the fear of missing out together and So we saw in the fourth quarter an incredible swing of psychology from positive to negative, but then back and most of the Damage has been made up and You know, most people don't invest in the long-term They're just trying to bet on what the market is going to do The the retail that you describe but also many professionals Yes, because they're they're afraid to be cautious and miss a good month. Yeah, because they could lose business and It kind of goes back maybe to your first question, which is that most people are afraid to be wrong and Since the market goes up most of the time being wrong consists of being out Which means most people are afraid to be out and so they they're their nature doesn't permit them to get out Until it's too late until until the crisis is upon us. Yeah, so you talk about The volatility we saw in December, which was is the first such volatility We've really had a brief night break out a little while ago They got squashed quite quickly, but this is the first you know We've seen five and eight hundred point moves down in the Dow which is come as a surprise to a lot of people But but do you think something has changed do you think what we saw in December is? an early indication that we are moving into whether it's a pause phase and the markets going to find its new course or We've reached the top and maybe we're gonna bumble around here for a while before going low You know, one of my favorite quotes is from Einstein who said something like I don't think about the future. It'll come soon enough I don't try to guess what's gonna happen I just try to make good fundamental investments and and they tend to take care of themselves either soon or later but I mean What you had was? what was a crazy swing of psychology, you know, I One of my favorite memos was in February of 16 remember the market got off to a terrible start and I wrote a memo called on the couch because I think every once in a while the market needs a trip to the shrink and I said in there that in in real life things tend to fluctuate between pretty good and not so hot But in in the market people act as if they go from flawless to hopeless and that's what happened in October you know, I know my new book came out on October 2nd and I can tell you that the mood was quite good and You know in the months and years A couple years leading up to October 2nd. The the main comment I got from people was well We know it can't keep Going on well for ever but we can't think of anything. That'll make it stop Right, and that was true up to then and then on October 4th The market decides to go down And it went down for the next 80 days in one of the worst Declines that's been seen in a long time. Wait, I think the worst December in history if I'm not mistaken, so What changed and You know my next memo maybe in this subject because I've been storing up thoughts but Fundamentally, not much changed. I mean the What was it that made the market start going down on October 4th? Well, they said be well, but the 10-year just hit three and a quarter, but of course it was expected You know rates were expected to rise Oil was weak well I don't think that's really of great fundamental importance because it's actually good for society when the price of energy goes down Well, there may be a trade war with China but that you could see coming for nine or twelve months so nothing really changed its except to the mood and I think the mood is absolutely unpredictable. So I don't even think about that and Fortunately, I don't make my business that way it's interesting because that Hearing you said it makes it real that's exactly what most people do it's all about mood They have it completely flipped around the gage sentiment. They they they chase momentum and to your point. It's not just retail investors It's a lot of professionals for some of them against their better judgment but You know, we all have to try and manage risk to me First of all, you know, I've been a trader Mike my entire life So for me, the first thing is always the risk. It's not the opportunity I always look at the risk and think okay Once uncomfortably the risk then how is the best way to play the opportunity? Is there a time when you shift the way you think about making those longer-term investments? do you have - is it a fund your fundamental investments fundamental practices behind them that are Constant or do you find that when you get to certain points in the cycles that you follow so closely? You have to shift the way you assess risk and opportunity Remember what I said aggressive defensive? Yeah so sometimes just that yeah sometimes and and but it's it's often a bottom-up thing see because it's not like well you find a bunch of investments and Sometimes you decide to go heavy and sometimes you decide to go like what it what it is Is that sometimes you find a girl a lot of great investments and they tell you that? This is the time to lead up that load up the boat and sometimes you can't find any bargains and they tell you This is a time to be defensive. So it's not an independent decision You see now you can make a lot of people make that decision top down They look at the macro. They look at the whatever the number technical and all the trading numbers and and all those things and I look at the mood of the environment I look at how people are acting and thinking and talking and that tells me Also, whether I should be aggressive or defensive as I described in oh five six but it always cut it also comes through in the investments, you know, you find things that you say Well, that's I think that's half what it should be I'm going to load up the boat. So you turn aggressive, but for the most part you don't get many of those opportunities when the market is galloping along and everybody's optimistic and and Risk. Aversion has gone out the window So it's it's all of a piece but I do think that it's desirable at the extremes to alter your behavior Now I was working on the book and I gave some chapters to my son to read who works on our family investments and I Told him you know, I think my market calls have been about right And he said yeah dad. That's because you did it five times in 50 years, right? The point is and it's I didn't even stop to think about it that much but of course I thought about it in this later days, but When you are at an extreme high or an extreme low the logic is compelling and The probability of being right is high But when you do it in between, you know the markets 5% overvalued 2% undervalued 10% override it the logic is not compelling and The probability that you're right is modest at best so five times in 50 years once a decade and that's what we tend to get we get to tend to get one of these and one of these a decade and But these are not always extreme and so You can't make a career out of playing the extremes of the cycle, but They can inform what you do and you can modify your behavior in between but you shouldn't Count on being right, you know, it's the perfect way to wrap this up. Thank you so much for doing this I've been I've been waiting to talk to you for such a long time and it's been is very for most of thank you for In you made me think about some things I hadn't thought about. Well, that's a feather in my cap. I take that from you Thank you pleasure
