Howard Marks Investor Series with Bruce Karsh

good afternoon everybody my name is Professor Chris gates II and what a great room you make today it's my great pleasure to welcome you here today for the spring 2017 Howard Marks investors series at Wharton this program which is marking its third anniversary features some of the world's most influential investors and we are grateful for our benefactor Howard Marks both are his support in his great offices which have made the series such a success to date the themes are investment philosophy seeking value and current events in the market to explore these themes today we have two individuals who have faced the challenges together for nearly 30 years in the some of their financial expertise and insight is the world's largest and most respected manager of distressed assets are speaking of course about Howard Marks himself and the other co-founder of oak tree capital Bruce Karsch first reintroduction of Howard who's our participant today as well as the sponsor of the speaker series Howard is certainly one of Wharton's most distinguished grads as well as a generous supporter he has co-chairman of oak tree capital management managing more than 100 billion dollars Howard's influence comes not only from his and his teens able management of the substantial level of capital but from the widely read investment philosophy essays called oak tree memos available on the website which themselves have been required reading among value investors for more than twenty years now if you take my investment management class here at Wharton you will read Marx he's also published a book in 2011 titled the most important thing on common sense for the thoughtful investor Howard Marks our esteemed benefactor welcome home we also welcome our guest Bruce Karsch Bruce and Howard co-founded oak tree in 1995 and Bruce's background is in the law in fact he's a very distinguished attorney and even clerked for Justice Kennedy ultimately of the Supreme Court when he was on the 9th Circuit Court of Appeals before founding oak tree Bruce and Howard worked together at PC W aka Trust Company of the West Howard and Bruce took that firm into distressed debt and credit special situations then started their own firm and by the way Bruce is not just your average ordinary ninth ninth district court of appeals clerk who became a successful hedge fund manager he's also chairman of the board of broadcasting giant Tribune media a trustee of Duke University his alma mater and serves on the board of the Golden State Warriors we won't hold that against him we also are thankful that Ruth and his wife Marsha established a scholarship program here at Penn for Kipp charter school graduates there may have been as many as 50 Kipp graduates at Penn over the years many of whom were no doubt recipients of their generosity thank you Bruce attend bolus a well-known investment banker and also as many of you know also a two-time Wharton alum referred to Bruce as a rock star in finance calling him quote the quiet secret behind the scenes at oak tree if you say the name Bruce people know you're talking about Bruce Springsteen however there's one Bruce of music and also one Bruce in finance as Ken molas said gentlemen thank you so much for being here today take it away well thanks very much to the to the audience and thanks to Bruce for coming you know the format of these things is that I interview an outstanding investor and there's no reason not to look right at home to my long-standing partner of 30 years Bruce Karsh really one of America's great investors let's start at the beginning for us tell us about your early years your how your career progressed from law to investing and you still feel that all lawyers want to stop being lawyers and as you told me 30 years ago yeah so the early years um I guess it started and I was born and raised in st. Louis and went to Duke University was my undergraduate school always wanted to be a lawyer when I was growing up so when I graduated from Duke and went straight away to University of Virginia law school where I was very fortunate to meet my wife Martha who now I've been married to her for 36 years but I had a lot of twists and turns along the way I was offered a clerkship for then judge now Justice Kennedy he sat on the Ninth Circuit Court of Appeals out in California I accepted that clerkship and based on leaving Martha 3,000 miles away I decided I didn't want to take that risk I was risk-averse back down particularly about such things so I asked her to marry me and she came out with me to California I clerked for a year we had intended to come back to the East Coast to practice law but once you go out to California it's pretty nice out there and we decided well let's let's stay here for a couple years in practice and we can always go back to the East Coast judge Kennedy I'm pretty close to even now encouraged me to come down to to Los Angeles he was in the Northern California area and he this was before Silicon Valley and he said well you know your he used to give me all the business cases and he says now they even knew then that I was very interested inclined in that direction and he said you should go down to to Los Angeles and practice law it's very vibrant practice law for a couple years and you never know what will happen to you and pure and he suggested a firm that I go to which was O'Melveny Myers big law firm in Los Angeles and I went down there with my wife we started practicing in O'Melveny and three and a half years later I got a call from a guy named Eli Broad who was interested had heard about me from a very close friend is a guy named Nick Reardon who was ultimately mayor of Los Angeles for a couple terms and Eli wanted me to interview to be his general counsel of his big company at insurance company in largest home builder in California and it was very well known in the Southern California area I was in my 20s but I figured it's worth meeting your library even though I thought it was kind of a long shot for someone in their 20s to be general counsel this big company he didn't have my resume he just heard about me from Reardon and I went into the interview with him and I told Howard the story before fifteen minutes into the interview he starts describing a position where you know I should get out of law and be his assistant and help him with investments and mergers and acquisitions and and he asked me you know how much I was being paid or O'Melveny he said he'd pay me 50 percent more and I you know the only catch was you pretty difficult guy to work for but I figured it was worth the shot so that's how I got out of law he was kind of coincidental and and and working for Eli at SunAmerica you quickly made your first investments in distressed debt and what took you in that direction and and you know was an unusual field at the time very unusual one the Eli had had made and that through the insurance companies had gotten involved in a company called Johns Manville which was a doubter stock that had ultimately fallen into bankruptcy because of asbestos liabilities and he gave me the file is it a euro lawyer figured this out and it was intriguing to me because there were bonds trading at discounts and the stock was really like an option and I came back to them and I said why I'd hold the stock and I'd buy the bonds and we ultimately did and I thought it was just a fascinating area no one really was doing much of it ultimately I ran into two of the real real pioneers Randy Smith and dazzle Vassiliou who were raising the very very very first fund that I had ever heard of or anyone had heard of it was they were trying to raise 40 million dollars we passed on it but it was something to always stuck in my mind and this is a really cool thing and something that it you know people should think about the other thing that was going on as you recall Howard is that in the 80s you had the LDL craze and one of the things that we were doing at SunAmerica is we were financing these LBOs so I was seeing over time real time how prices were getting higher and higher in assumptions getting greater and greater about growth and Eva da and the leverage that was being put was greater and greater on the companies and so it would all kind of said to me gee maybe maybe distressed securities at some point could end up being a really interesting field particularly if we ever have a recession now that was that was a matter of debate back down as you recall well at that time you know one thing we're very both very attentive to his cycles and where you are in the cycle really is a great deal to do with what you should be doing at a point in time but the interesting thing about cycles is after the things have been going well for six eight ten years everybody says well I maybe we won't ever have another cycle you know maybe you know the this has been fixed and would it be great if we never had a recession again but then what are you guys and distressed at ever going to do to keep busy right well that was the when I basically I approached Howard with this with this idea Howard was a huge figure even back then that was 30 years ago in the in the in the bond management world and high-yield in particular he was one of the pioneers and I thought would be a great to marry this distressed idea with a you know one of the leading high-yield bond businesses certainly in the United States and and and clearly in the western United States and so I sort of called him up out of the blue and he said yeah let's get together for lunch we had lunch in Brentwood somewhere I don't know where he took me but I made my pitch and you you bought it so I guess my question to you is what page you I had I done a little bit of this with Eli and I had sort of an idea and I think my pitch was you know hey there are a lot of legal issues involved with bankruptcy distress bankruptcy investing and I'm a lawyer and aren't many people like me who've had a legal background and also in some investing experience I'll be it not all that much and I made my pitch so why did why did you buy it well I think that you know having started Citibank sire bond fund in 1978 which is really the beginning of that world I had some experience going into a field that most people said what are you crazy you know and they called them junk lines and moody said they were not a desirable investment and most investing organizations had a written rule against non-investment grade investing so I I saw the benefits of doing something unconventional and if you think about it for a minute doing the things that everybody else wants to do it's hard to think you're going to find a particular bargain doing the things that everybody else fails to see the wisdom of you have a better chance of getting a bargain or or running off the cliff so so that was number one yeah go ahead and then number two since I had been in the hi Yvonne business for nine years by the time you and I connected you know every once in a while in that period we're not perfect you buy a bond at 100 goes bankrupt it falls to ten you go on the creditor committee you work it out you spend a few years of drudgery you get 30 so it was a great leap of faith for me to say well why don't we start a fund to do the ten to thirty part and that's really what it what it was conceived at and then when when he hired you this was in 87 I was supposed to come up with the business plan which I did and by the way the business plan as you recall was that we were going to look at at basically high-yield subordinated bonds watch them drop from a hundred down to ten and then enjoy the ride up don't buy them until they get down to town but and enjoyed the ride up we ultimately as we got into it I started doing some different things and in particular I learned the joys and and learn to love bank debt and the seniority and the control that it provided in the bankruptcy but my question back to you Howard is that I wrote the business plan I thought it was very sound at the time but then we have to go out and raise money which people had no idea what distressed securities were back in 87-88 and like I said Randy Smith tried to raise if I may have raised thirty or million or whatever but it was not on anyone's radar screen meanwhile we were at a very blue chip company called Trust Company the west and in Los Angeles and Howard we were we're gonna and this was all falling on your shoulders because you were the big name at the you know at that time for sure and we were going to raise we're going to try to raise a fun what went through your mind and and what was your pitch and how did you gate these institutions to not look cross-eyed at you when you started talking about buying you're going to buy companies that are going into bankruptcy that's they would look at us really funny yeah well I think that but I think that among ex people you talk to if you say you should do this because nobody else will some people get it maybe most don't get it but some people understand the benefits of contrarian ISM and and that was a big as blue says fortunately we've been able to build up a reputation at that point in time both for good performance and for trustworthiness which I think played a big part in it and you know the TCW infra matter probably helped as well so we scraped together 65 million on our first closing outdoing Randy and that was October the 28th of 88 and and we were by the way and we shouldn't overlook we were fortunate to win the seal of approval from Cambridge Associates yes and Cambridge is a consulting firm that is the the leading consulting firm for foundations and endowments and they put us on their list and we've got a lot of names from that and then the common fund figure this out and came into our second closed and put us at 96 million and we thought we had all the money in the world Howard raised almost all the money I was I was happy because Eli came in rich playing with his insurance companies on America so that helped give me a little credibility that a fairly well-respected investor like Eli Broad was in would be willing to endorse but basically it was Howard put that whole thing on her shoulders and goddess to 96 million which doesn't sound like a lot at this point but back then we were instantly I probably the second largest pond there was one other that raised a little more than us and certainly one of the top three investors in in the burgeoning the field of distressed secure one of the interesting things to note as a side note is that that other fund which was 104 million as I recall 496 that was the only fund ever faced so so it's not enough to raise it once you have to have you have that staying power well when I got into it and really tried to apply the business plan that I've written to the environment I found that I didn't love the risk Ward involved with finding subordinated bonds because they hadn't dropped sufficiently enough in price to feel like it gave me the margin of safety that was necessary so back in 89 when the first thing I did was I went to a bad bank that was set up by melon melon Bank back then called Grant Street National Bank and bought my first bank dad remember that ideal basic a cement company it was secured by cement plants paid something like 72 cents on the dollar and learned it's kind of nice to be senior it's kind of nice to be secured you know ultimately that that that never missed a coupon and paid off at par if you think about a balance sheet of capital structure like a tree it dies from the bottom so if there's a financial problem first the equity loses its money and then among the creditors the senior that subordinated bonds are in the first loss position and one of the important things in investing is to invest within your site they say oh say in football you know you should play within yourself you should play within your capabilities you must have a plan of operation which is sympatico I don't know if you use that word anymore with with your personality if you're an aggressive guy you just can't play it safe if you're if you're a chicken you just can't play it risky and we're both conservative investors and I think Bruce when he found the idea of the ideal basic trade like the fact that the bank loan is basically in the last loss position so everybody else has to lose all their money pretty much before you start losing and it so obviously you take less risk in theory you are do a lower return but in truth I think in our experience that conservative position enables you to do it more strongly yeah and in that first one how are you will recall that there was a energy collapse in the late 80s so what did we do in the first fun sort of waiting for the environment to come our way was basically play around in the in the in the oil patch drilling rigs buying debt secured by drilling rigs whether it was reading in baits or Zapata also there was a utility that had issues because of nuclear problem public service in New Hampshire bought some of that and secured debt there basically kept it very very safe grinded out some pretty good returns and then in late 89 early 90 we could tell that something was going on in the economy and this is when I turned to Howard and I said boy it would be great to have a lot of money right now now a lot of money back then was like couple hundred million dollars um but again I put I put the horse on on Howard's back and I said can you raise us a lot of money because I think there could be a great opportunity here particularly if the faults in the high-yield bond market pick up well and in fact the LBOs that Bruce described as having taken place in the LBL boom of 85 to 90 where generally financed with 95 or 96 percent debt payoff so there was just a tiny cushion of equity at the bottom and and once you got through that in terms of the diminution of value you would start having defaults quickly so we went out to raise fund 2 and we raised as I recall 280 million which was a lot I don't know how we did that frankly but I have no recollection but but the and then me but but then if you but then if you look even further what what I really can it was actually 400 in total to to be are you ok sorry I I gave away the punchline on fight fight if you but what I really can't remember if you look back and maybe you can is we you know in our business in the fun business the the norm private equity venture capital what-have-you the norm is you raise a fund you can't raise the next fund until that funds normally 80% invested so we raised fun too but we put in there we asked for the ability that if while we were investing fun - if great opportunities come along we should be able to raise fun to be even if - hasn't invested yet and I don't remember where we got the nerves to ask and I don't remember why anybody said yes but they did well I do let me tell you why this could have been the very very first Howard Marks memo because he wrote him he's brilliant writer as you know but even back then it was brilliant writer and you crafted a memo probably on one page because you like to get everything on one page and laid out the case for why investors should give us money in this in this Beach watch and it was brilliant and we found some takers and so we raised - as I recall it memories are not perfect but as I recall we raised to 84 the for fund to 10 to 40 for fun to be so so we raise fun - in July of 90 and then in the fall we said yes there's there's going to be more defaults and the faults were starting to happen so we raised to 44 fund to be in December of 90 and I put that money to work very quickly the markets in 90 and 91 arm we're in a very deep recession was unfolding which by the way was accompanied by S&L failures and more global Gulf War depression not the primary serious recession in the real estate air in real estate industry and the government mounted he had against high-yield bonds drexel burnham michael milken went to jail yeah when and and when they took out the leading investment bank for high-yield bonds that was meant there was nobody around to do exchange offers and default rates in the high o bomb markets like to double digits two years in a row it was really a great time to be a distress investment and by the way we we have much more money than virtually anybody else I mean this was I think that period really put us on the map yeah oh yes well and those returns were yeah you know better than those recurred those 40% 45% a year for now on those funds without using any leverage so if you're ever tempted to compare the returns versus private equity for example which I would say in those days probably aspire to the same thing but was using five times leverage so this is you know now this is an interesting thing you who here has learned about the efficient market hypothesis okay I think it's it's I think you can state on the face that if the markets are efficient it should be impossible to ever make forty five percent a year without using leverage so I think that I think that this record proves that that there are let's say at minimum there are excess exceptions to make one other point in in this environment I decided and you know how and I would always confer on these kind of issues but I decided you know hey maybe this is not the time necessarily to be safe and secure and stay senior you know buy something at 70 that's just going to go 200 maybe now's a good time to buy something at 10 and 20 the original business plan yeah and we did that in spades and and that's one of the reasons we got the kind of return to God yeah because really and truly bonds that were selling at 5 and 10 cents recovered 30 and 40 cents but this goes back to cycles and and and I don't know if they teach a course here on cycles Chris probably not but but I mean one of the greatest learn lessons you can learn is to observe and learn from cycles now that happens to be a plug for my next book which will be on cycles but but I think it's very important and and the point is that as you know in the environment in the world as the economy gets better and companies report better results and securities appreciate what happens is people become more enthusiastic and more bullish and less risk-averse and they buy buy buy then what happens eventually things often the economy comes down corporations report worst results markets decline people get depressed sell sell sell so what are we doing if you if you think that's an accurate representation they're buying up here with the greatest fervor I mean obviously they're buying all along that's why the markets right but they have the greatest fervor here that's what makes a top and then they sell down here and that's what makes a bottom and clearly that's the opposite of what you should do so it's extremely important that everybody understand where we are in the cycle and what behavior is called for you should not act consistently throughout the cycle now I want to I want to ask our two question because we had a great run in to and to be and then we raised our next series of funds three and three B and those did quite well fact those were double I mean we had 1189 plus a separate account of a hundred so we had really almost 900 million dollars which is now all the sudden you're talking real money even back down um I mean I would say in Everett Dirksen would say but nobody would get right okay um and we and we did a nice job putting that money to work and then it was time for so everyone's loving us we are their favorite manager best performing funds great IR RS they're throwing dollars at us now all of a sudden Howard it's not so hard to raise the money but we made an interesting business decision for fun for for fun for and I think it's worth trying to talk about what went through Armand and it really dovetails with with your notion of cycles so for fun for on the back of this great success we went to people and we said for every dollar that you had in three and three B you can put in 50 cents in four and fun for was 386 million it could have been four times that easily and and and and there were not many opportunities for fun for having a smaller fund permitted us to take advantage of the ones that were there and we had a decent return in the 20s yeah but but not what it had been the key is there's a great temptation if you have a great fund you make the next one bigger because the higher the bigger the fund the more your fees the more your potential carried interest I think that the that was a huge decision on our part the great success of Bruce's funds to do b33 be put us on the map but I think that action in for created our reputation he really did the clients stood back and said wow these guys are taking a quarter of the money they could take and they're telling me they're doing it because they want to keep the returns high they share they're looking out for me they care about my interests more than their interest because their interest would be to raise the most money possible and I think from a business perspective that was a huge thing and I think it helped us as we then started oak tree oak trees necks right and and and and we so we started oak tree 95 and and you know the neat thing is we did not have a budget we didn't have a profit plan we never nobody ever said how much money would think was going to make what we said was we've done a good job for the clients we produce good returns if we can keep doing that we'll have a success period that was the whole mantra was put the clients first yes the client sisters always comes first and you know that was the reputation we developed over time now I've got a question for you oak tree was your idea you came to me yeah and asked me hey how would you feel yeah what what motivated you besides an answer well you know cuz why ya my wife give me a big kick in the pants but no but the truth is I think that we have positive reasons and negative reasons I think the positive reason was that we thought we could do a good job for the clients we wanted to have a firm that ran our way but we were when we were at ECW we were one division of a company with 50 divisions run 50 different ways and you know aggressive defensive top-down bottom-up forecasting diagnostic every which way and you know I I had a senior position there and I didn't want to show four for businesses I didn't believe it and we had a as we as you can see we had a feeling for how money should be run and we wanted to have an organization that ran that way that was the positive reason and of course we thought we could make money because at ECW they got half the fees and we didn't think you know in a business like Bruce's we get 20% of the profits and if there's a management fee and they do the marketing and the market support and the accounting and the legal and the premises and every okay they get their percent of it but when if you can if Bruce can turn ten dollars into twenty and you get a $2 carried interest on the profit why should they get half of it and that's where they drew the line at half so we left and we thought we could make more money so those are the positive reasons and and the negative reasons were that we could not we want it to become owners in that firm in a substantial way and they didn't want to share that so we went out and we did our own but I want to I want to tell everybody in this room something I think is really important as Bruce said I was the boss and I haven't said it result can I say my piece first and then let you talk yes sir so I was I was asked about you know my relationship with our which is 30 years now and I said well you know he was my boss he hired me I said she was the world's greatest boss I mean is it just so constructive optimistic you know always encouraging and you know never if I made a mistake which of course everyone makes mistakes would never get down on me for I've just just the world's greatest boss and you know I would tap dance to work every day and you know that that culture that you know he said that we ultimately sell together has permeated throughout oak tree and it's really I think created some real business success for us but when he came to me and said hey how about being my partner and starting oak tree and we thought you know III said surely are we equal partners yeah well actually the way I tell it you know Bruce said to me food he's not such a teddy bear as he sees and I said well how about starting our own firm he said sure come with meets with proposed economics and I and and I went to him I thought it over for a couple days and I went to him and I said look here's what we do I'll get 40% you'll get 25% and and our other colleagues will split 35% and Bruce said no no we should be equal and and I thought about it for a minute and I said yeah you're right and that was the best decision I ever made and you know if you can and it's a great lesson for business because there's a tendency for each person to want to keep more for themselves but the truth is that's not always the right decision and the our joint decision to be equal partners was the best decision that we ever made and the point I want to make is when he was my boss and then when we were partners we've had this enjoyed the same relationship throughout it's just it's been a joy and I think it really has contributed greatly to the success of our enterprise but um I mentioned that earlier that in 30 years we've never had an argument we have business disagreements certainly but never an argument and it's by hashing out our business disagreements that we get to to better answers than either of us could come to by ourselves but you know this business of about keeping more for yourself when we when we went out on the road to try to convince we had so we had seven billion under management when we left ECW and our hope was that we would bring it over so we went around to the TCW clientele and we tried to win them over and one of the questions they asked was well what is your attitude towards sharing the ownership of the firm with other employees and I told them the story that I got from a kids book when when I was reading to my son that the the Sun and the wind are having an argument about is more powerful and they can't settle it so they say well you see that guy walking along the mountain ridge he's wearing a coat whichever of us can get the coat off that guy is the more powerful so the wind blows and blows and blows and blows and blows and the stronger it blows the tighter the guy holds the culture and then the Sun shines his warming rays and the guy takes the coat off and and it's really just an example that any business can be an incredibly positive place and we've had an incredibly positive experience and and sharing and integrity and straightforwardness and as Bruce says putting the client first makes it incredibly rewarding and you know we've been successful professionally and monetarily but I think both of us would say that the greatest thing has been the opportunity to be successful on the high road yeah definitely definitely that's that's I guess when we started oaktree howard rode our investment philosophy our business principles and sharing the fruits broadly was one of our key business principles in fact we were one of the very first of our type firm to really broaden the ownership of the equity we did it after our first year in business we were there were five of us who owned it when we started at the end of the first year we made that eighteen two years later we made it 26 in a few years left is at 35 I remember you saying at the time I want to have less and less of a growing pie and ultimately that's what and that's how you make it grow is by owning less and less now on the other hand remember I said we were in Vincennes office and I said who's Princeton okay and I said I said I'd like to see everybody in the firm no one considered what's big to have normal no nobody oh no and and I said like like them I said I wanted everybody in the firm to be an owner and Bruce said he said no he said the people who can really make a difference you know it should be an owner so sit from the beginning we've had twenty-five to thirty percent of the of the people that oak tree have been the owners the day that we sold stock to outsiders first through a private offering and then by going public we had about 120 owners as I recall if you look at the other firms that went public early in the alternative investing business wave they had three or four owners you know a couple of months before their IPOs and I think that has made a big difference we've had very low turnover we have happy people and and we have camaraderie and nobody is afraid again stabbed in the back there's not a lot of currency and gossip everybody understands that team success produces success for them and one thing I'm very proud of is we do not keep individual balance sheets you know there's this expression you eat what you kill and I I don't we don't care for that and we don't say this person made us 300 million and that person made us four hundred million in that person may is 200 million let's pay him in proportion to their profits last year we pay on the success of the company the team and the individuals contribution not just quantitative but qualitative also not just this year but over the years and what we see for the future and and obviously we do it because we think we're right culture meant so much to us when we were starting out oaktree um you know look we could both made a lot of money at ECW we wanted to leave I could have retired then in there but if we're going to build a firm we want it and we're going to work hard and we're going to spend a lot of time there we want to do it with people that we really like and respect it and enjoy their company and we wanted to literally continue to tap dance into work every day and that's something that we put a lot of time and effort into in the early day and in our business there are a lot of people who are really smart and can make you a lot of money and their payment he has to work with and we've had a no shall we say no lady it's palsy yeah and turned that and we stuck to that pretty well and and we in there was a point in time where we had to part with somebody because we concluded that we had made a mistake under that policy and we did it and boy the organization loved it because they said because they said this is the you know that we really put our money where our mouth is and this was an individual who was making us a lot of money but we concluded that it was wrong for the culture can I come back to something I mentioned I mentioned that Howard Penn the investment philosophy of L Korea and the business principles day one which again I'm not sure we've changed a word of them in 2020 almost 22 years now so I've been told by several people that Howard Marks is the greatest brand builder in our business and he's built a tremendous brand oak tree and I think it dates back to the early debt you know the investment philosophy and the business principles my question to you is was that conscious did you set out for that or what what prompted you to put that down in writing and and have you thought about a lot of what you've been doing is building the oak tree brand well I would say that building a brand sounds cynical or manipulative no but building a reputation building a standing okay is what I wanted to do and and you know I for some reason I never felt that all I wanted to do was make money but I felt that I wanted to have number one build money make money the right way and number two have a great experience you know and number three associate with people who are worth associating with if looking at the investment philosophy the very first one was control risk kind yeah and the great thing about having that as our number one investment principle in our investment philosophy is that everyone and only by zone and that's huge Howard mentioned that at ECW we had learned that people were managing money all different ways and some cared about taking maximum risk and others you know they're all different ways to do it but at oaktree we all bought into the philosophy of you know remember my my first letter to investors I quote I quoted Warren Buffett my hero yeah and he had two simple rules of investing never lose money on any investment and don't forget rule number one and so you know everyone bought into that and it's really made of different it's great to have an explicit Creed for everybody to follow and every employee knows what what what what the essence is and the route to success and every client knows what the route to success and we don't promise that we can shoot the lights out in the good markets we promise that we will do very well in the good markets but protect them in the bad mark that's why I don't I didn't take the comment about building a brand as being cynical because to me the brand that's built is risk consciousness and putting the clients first you know all those kinds of positive things is was the connotation well I thought so I saw and I think the answer your question what was the motivation is that we I and we wanted people to know what we stood for what do you stand for you know and I think I think by the way in the it's great if you go into a business career and you stand for something other than making money and and so we put it out and and it has helped us immeasurably the clients say oh well oak tree is this this and this but they're not that and that and that's the mix we want well anyway obviously we can go on for a long time but and we love what we do and we do it together but I also want to have some time to answer your questions so who's got the best question there's there's the first hand anyway all that there is a microphone right I put it right in the middle Jen [Music] more crowded and so it's maybe argue that come from the same bias tandem cell effete at 32 to really happen substantiate at what was quite something worth it I was learning to talk about how you how you maintain edge good question question is how you maintain well when the field gets more crowded how do you adjust you know well you just have to be more conscious with risk and be more secure and just be you know just just be more defensive be more cautious more patient those are a lot of P it's hard for a lot of investment professionals to do that it's in our DNA it's it's you know if it's time to sell we'll sell if it's time to you know hunker down we'll hunker down and and and another thing I'll add though is that you know I learned about the efficient market hypothesis literally fifty years ago and and and what were the things that contributed to inefficiency ignorance failure to understand lack of data lack of infrastructure in the market you know lack of legal permission and so forth and in all of these regards the world has become more efficient and I know you don't mean to say that the stress debt has become more efficient but not the others every field I wrote a memo in January of 14 called getting lucky not in the campus sense but but I and I talked about I talked about I talked about the luck that I had experienced in my life one of which part of which was to find markets in their F&C high-yield and 78 distressed debt in 80s and 88 when when others weren't doing them the world has become much more efficient today and I spent half the memo on that subject and it should it makes no sense that it wouldn't knowledge is cumulative and in particular in the investment business if somebody goes into a field at its beginning and produces good results for ten years everybody else says hey let's go into that field and it becomes more crowded but there's no magic formula for continuing to be on top but number one I have to think that you must be aware of the process and and number two though and I say in the memo it has gotten harder to beat the competition the margin of superiority probably has declined but as long as you're the best in turning 2.3 you will be well paid and and and I think we still are and let me just add one quick thing don't give up on distressed debt there's a lot of corporate debt out there and and we have a saying that's the supply Trump's demand and we said that before what's-his-name but on supply Trump's demand and you get a pickup into false with the kind of two trillion dollar high-yield bond market we have right now I don't care about all the incremental competition was come in we can we can complete and find some good returns well in in 2007/8 our funds had always been a billion or two we thought there was something coming and we raised eleven billion for what we thought would be a crisis which did materialize number one and we were able to raise it because we had always told clients the truth and told them when who wasn't trying to invest so that made it easy when it was time to invest and but they said well we're going to back you because we believed in you but where would you possibly find opportunities to invest 11 billion yeah and you know when when the stuff hits the fan and when the credit market slams shut and when defaults start to roll in and there are there are deep markdowns and and rating reductions and for sales and margin calls as bruce says supply trance demand we invested five at an 11 billion in three months October through December 2008 another question when they've gotta listen to the junior here at thank you very much experience I have a question to make you work earlier than experienced but a lot of time to save you time another large institutions and they kind of speak about how you just came up with the idea that it was time to on your own more make as college students when we enter the workforce how did that blended back rifles click off that you can have a reputation for several years now why is that point even title time there's no magic these decisions are not easy you know normally there's something about your job that hopefully there's something attractive about the job you're considering and something you want to get away from in the job you have some way you can improve upon your situation and eventually the balance of the evidence tilts in the in favor of going as I said before it helps to have a wife who gives you good kick in the butt once in a while I was I tend to be more more contented but you know and by the way I was the last of my colleagues to leave City Bank and everybody said what's wrong with that guy he you know he what makes him so happy with with the bureaucracy but I think I got the most out of it and I left that a good time but there's no magic time these decisions are not always easy but I will I like to tell stories I'll tell you one story I hope this doesn't offend anybody all humor offend somebody but you know there's a flood in a small southern town and you know there's always a flood in the small southern town and and they're going around in a rowboat to try to find people to rescue and they find the guy sitting on the edge of the roof with his feet dangling in the water and they say okay hop in the boat we're going to save you okay he says no he says I'm a born-again Christian I put my faith in God I know God will save me so thank you very much you may go on they go away they come back a couple hours later now the guy standing on the peak of the roof they say okay hop in the boat now we're really going to save he says no I told you before I have faith that I will be saved so you needn't worry go about your business come back an hour later in a helicopter this time the guy standing on the chimney and he on his tiptoes and he's creating his neck and the water's up to here and they say okay we're going to drop a rope you're lucky we're going to save you he says no I've told you before I will be saved my faith is intact go away so they go away the water rises a little bit the guy drowns it goes up to heaven runs into God and he says you know I put my faith in you and you let me drown how could you do that and God says what's the matter to roll oats and a helicopter isn't enough look you know the point is these things come along there's no sign which says this is the time you got to dope it out you will pass up a few things that you should have taken you may jump too soon but you you'll measure the pros and cons and and hopefully you'll make a good decision yes you ask equip do you want right there yes you mentioned the importance of knowing this Bible and where the cycle is we're using we are in cycle today beginning of the end or the end of well wait we're in an advanced stage we're not we're not at the bottom we're not just beginning to recover we're not in the midpoint Bruce and I agree that we are in an advanced stage there are very few bargains around nobody's negative the capital markets are extremely generous you can do unwise deals you've a poor company's poor companies can get funding you can raise money without announcing a purpose you know the market is not acting as a disciplinarian prospective returns or low prices are high so that's not the juicy part of a cycle that's the extended part the only thing is it may be the beginning of the end but that doesn't tell you where the end is and you know we could go on this way a year two years three years we probably think that it's not going to go for years but you never know and you know the business the idea that I'm only going to buy when when time is ideal is impossible because you never know when it's ideal you never know when you're at the bottom in terms of buying you never know when you're at the top in terms of the cycle and you never know with the catalyst entry that's right and all you can do is is adjust your behavior I face life through all the dices incoming hello I let Howard answer that one well there's a couple of reasons number one when it became possible starting with the going public of fortress in 2007 area fo 7 I think it was companies like ours became very valuable and you know a year or two before that we weren't talking about big numbers all of a sudden were talking about think numbers and number one so we could we were able to do our first deal in O seven at a seven billion dollar capitalization we had already given away a third of the company to our colleagues and we frankly we didn't feel like giving away the other two-thirds and we wanted to continue to have a generational transition and to continue giving stock to our colleagues as we have but we also thought it would be nice if we got a public price for the balance and we thought that a public offering was a way we could accomplish the generational transition we also felt that while there was the possibility of conflicts of interest or other negative effects from being public we thought we could manage that and I think we're very strongly in agreement that we have not had any negative impact from being public and it's now around the world that's actually burnished our reputation to some extent right last question I'm sorry yes you've been waiting a long time this is normally archetypal with the ladies it was a question laughs but when you're inviting to Khayyam Tina's like 30 cents on the dollar would make that kind of decision what you're announcing or letter calm excited nama Gravano people are doing Ramos's were maybe like academic announce it but that's your background with all common sense and where are we in the cycle what's right for the client what's coming you know there's no such thing as an analysis of what's coming we don't know anything about the future and you can't prove any about the future but if you've been in business and you've seen some cycles and you've gained some experience and you've gone through those cycles with your eyes open saying what are the implications of cycles and for our behavior then I think you can reach a point where you say you know what it just feels like the the power is in the hands of the issuer's not the buyers it's a it feels like there are many sellers just a lot of buyers and the market is not acting in a discipline way we want to buy when the market is panicked not when the market is saying so you know Buffett says the less prudence with which others conduct their affairs the greater prudence with which we must conduct our own affairs when other people are optimistic we should be worried when other people are panicked we should turn aggressive and that's what we try to do but it's it's been and when you read my book there's a chapter saying that the most important thing is knowing where we stand and and it's all it's almost all intuitive subjective qualitative [Applause]

Channel: Wharton School

Views: 26,282

Rating: 4.8981819 out of 5

Keywords: Wharton, The Wharton School

Id: kR7oodru0TQ

Length: 56min 35sec (3395 seconds)

Published: Wed May 24 2017