Investment Legend Howard Marks on Mastering the Market Cycle

[Music] [Applause] good evening everyone and welcome to UCLA Anderson School of Management what a marvelous night this is we have a room that is just filled to the brim with energy and curiosity we have students alumni and faculty alongside many friends from the Los Angeles community and we're all just eagerly waiting to hear from one of the most brilliant minds in finance my name is Laurie Santee c'n I am a professor of finance and strategy here at Anderson I also have the distinct honor of serving as the faculty director of our fing Center for finance and investments which is endowed by UCLA is very own Larry Fink on behalf of the Fink Center the office of alumni relations and the entire use of the Anderson family I'm thrilled to welcome you to campus for this very special event I also want to extend a very warm welcome to our alumni chapters in San Francisco in Seattle we can't see them but they are joining us by livestream as part of worldwide welcome weeks this is a truly fantastic series of programs that our alumni office hosts around the globe every year tonight's event in many ways epitomizes the Fink Center's mission to bridge the academic study of finance with insights deep from the trenches of practice to train our students and cutting-edge skills and broaden the network of people and ideas to which they're exposed to inspire our alumni to remain lifelong students and as in this room to join the Anderson family together with the professional finance community for stimulating discussions on topical issues and finance and business so in a few minutes we will observe and participate in one such discussion between two giants and their own right so let me start with Dean al Osborne he's our moderator for the evening if you've engaged with UCLA Anderson in any capacity during the last 45 years or so al Osborne's infectious energy has no doubt inspired you al where's his pride on surprise for the school on his sleeve or rather on his hats and his socks and his ties and these days he wears quite a few hats for the school in addition to being a professor of global economics and management he's the founding faculty director of the price center for entrepreneurship and innovation and has long served as senior associate dean for External Affairs most recently he became the interim dean of UCLA Anderson he joined UCLA after earning four degrees from Stanford University including a PhD in Business Economics and an MBA in finance we are tremendously grateful for his service to the school and for joining us here tonight Howard Marks is the reason this event has a wait list he is co chairman and co-founder of Oaktree Capital Management a leading investment manager with more than a hundred and twenty billion dollars in assets he holds a master's degree in economics from the Wharton School at the University of Pennsylvania and an MBA in accounting and marketing from the Booth School at the University of Chicago when Howard Marks speaks everyone listens he's known for his memos to clients that become required reading material really for all leaders in finance warren buffett for example has said when I see memos from Howard Marks in my mail there the first thing I open and read I always learn something at UCLA Anderson we're thrilled to host one of the first stops on Howard's national tour for his new book mastering the market cycle getting the odds on your side Ray Dalio calls it a must read and according to Charlie Munger it tells us how to learn from history and thus get a better idea of what the future holds so everyone get comfortable in your seats and get ready to learn to master the market cycle from the master himself please join me in welcoming Howard Marks and aloes born well Lori thank you for those inspiring remarks I didn't quite believe that I've been around here that long and now it becomes real I think man know you almost that as well so it seems I thank you for being with us my pleasure this very glad to be here that we've been privileged to have done this once before right and where the conversation was with the one and only Charlie Munger right who has been a real part I think of sort of you you developing perspective right uh you know your investments there's a lot of things we could talk about a Howard but I want to really just start with a couple of things that I think are fundamental to how you look at the world and could you tell me a little bit about how you were able to think and synthesize your perspective on markets and and how they work well I think al it's extremely important to the word is synthesized and you have to have something to synthesize which means that you have to have a large number of diverse inputs and you know it's it's not enough to have some exposure to some things you you should always worry about the things you haven't had exposure to so I think that reading broadly is extremely important and then of course I think it's it's it's essential to exchange ideas with others I happen not to like solitary activities as much and you know if you if you have some colleagues or peers that you respect and you exchange ideas you probably it's possible for both of you to learn it can be a win-win and of course we we all have ideas on what we think are is is going to happen and what we think we should do about it it's great to have those ideas challenged and see if they can stand up in the face of challenge so exchanging ideas I think is is extremely important and then you know thinking broadly and we we have to you know really challenge every day now you know I write these memos I started 29 years ago and when I write the memos and when I write the books you know invariably I think of something in the process that I hadn't thought of before it's not yes it's it's not like it's not like create writing a book consists of trying to get your thoughts on paper when you write the book you get new thoughts and then in this book for example I had an outline when I started to write of course and I thought I'd write about the economic cycle and the profit cycle and and the the cycle in psychology and then I realized that there was a chapter missing that deserved its own chapter and that was the cycle in attitudes towards risk when people are Cavalier toward risk and happy with risk and embrace risk then by definition prices go high because there is no concern or caution and then when the when the cycle turns down and they become allergic to risk they generally sell without regard the price at prices that are far too low so the the and the cycle and risk is enormous ly influential and determinative I hadn't thought I'd have it in there I put it in so I think that you know writing is important and to get more ideas and then lastly I would recommend strongly that you live a long time and you and your diligence and you experienced a lot of markets and a lot of cycles and because if you don't experience it then you have to only you can only learn about it by reading or speaking with others if there's nothing like experiencing it first time and you know one of the things I believe strongly is that experience is what you got when you didn't get what you wanted we learn a lot from tough times and and from failure and we learn relatively little from excess you put money in the market it goes up what have you learned you've learned number one it's easy number two risk-bearing pays number three there's nothing to worry about and those are horrible lessons and and you know you learn much more from from difficult times than from success and I guess you sort of have to know what's knowable in that context and success though in the market as I read your book requires an ability if you master the cycles as we talked about to develop patterns could you talk a little bit about how you think about this pattern recognition idea yeah we go through ups and downs and the question is are they random inconsistent and therefore not study Abul or are there patterns that recur that we can learn to recognize and Lori with Oh Lori mentioned to Ray Dalio had some nice words from my book well I have some nice words for his he put out a book earlier this year called principles and he talks about how they work at Bridgewater and he says that you know they've they've studied so long and they have so much experience and they've recorded so much experience that they look they see something happen and they say oh that's one of those and saying that's one of those is a hell of a lot easier then saying I don't know I have no idea what's going on I've never seen one like this before I have no idea what's gonna happen next and and what I should do about it and so I think that if there are patterns we should recognize them if we try to impose patterns in an area where there are no patterns then that's folly but but I think that in in the financial and the investment world there are patterns the one of the main ideas that pervades the book is a quote attributed to Mark Twain history does not repeat itself but it does rhyme and in in every cycle compared to the last one the amplitude of the fluctuations is different the speed of the fluctuations difference the duration of the cycle is different the immediate causes are different and the effects are different and one of the things that happens a lot nowadays especially since you know what I talk about the book is people say to me well which cycle is this one like and the answer is it has some similarities 207 and some similarities 282 and and and but in but there are also ways in which is different but it's very very helpful to identify similarities and you know along the lines of Mark Twain even though the details are different of every cycle I conclude in the book that in every boom I've lived through and I probably lived through about a half a dozen booms in the market there have been some common threads there have been things that do rhyme to use Twain's word so every boom that I have seen has been characterized by too much optimism too little risk aversion and too much money in the hands of people who are too eager to spend it and if you think about it excess optimism dearth of risk aversion too much money is a very good formula for a bubble you can easily see how those things would lead to a boom and if you think about it for a minute you can see how hard it would be for a boom to take place without them so if that's true if those are common themes that do rhyme then we know that we can help ourselves by watching out for those and when we see that the three ingredients we can do something about it you know in your book when you talk about mastering the disciples which is this ability to recognize patterns and know when they come back which you develop over years of understanding you did mention that it's important to know your positioning yeah that is to have a good sense of sort of where you're at mmm could you talk a little bit of how you think about that sure well first of all what everybody wants to know is what's gonna happen tomorrow mark was down 800 yesterday 550 today what's going to happen tomorrow what's going to happen over the next year over the next three years and the answer is nobody knows and I don't believe in forecasts another one of my heroes John Kenneth Galbraith said we have two kinds of forecasters the ones who don't know and the ones who don't know they don't know and I am firmly in the first camp I don't know what's going to happen in the future and what I say is we never know where we're going but we sure as hell or to know where we are it may be challenging to predict the future it shouldn't be that hard to predict the present and if we can as if if we can think in terms of a normal trend line perhaps for the market or a a level which represents fair value and then the fact that the market oscillates around it then clearly it's very important to know where in that oscillating pattern we are because if this is fair value and we're here then clearly the expected value of the expected performance from here should be lower than the historic average the historic average was compiled by buying at prices all along the cycle but clearly if we're at the peak of a cycle our prospective return is lower than historically it has been on average and it's harder to make money than it historically has been and easier to lose money whereas if we're buying here when prices are depressed then the expected value is higher than the historic average and it's easier to make money and harder to lose so it makes a profound difference and I think it's extremely important that we figure it out we don't know where we're going but where we are has implications for where we're probably going eventually now the word eventually is very important because if I tell you we're over that the market is high in its cycle and is overpriced one of the most important things for you didn't realize is that overpriced and going down tomorrow are not synonymous and so if you think about the market its fluctuating this way around thier value then when it goes above the line its overpriced when it goes higher is more over priced higher more over price and markets which are overpriced tend to become more overpriced before eventually they reach a top and turn down so it's it's a big mistake to think that overpriced and going down tomorrow or synonymous you can you can say that's overpriced you can sell it and it goes up another 20 percent you feel like an idiot and and you get fired by half your clients but that doesn't mean that it was wrong and and it's I'm straying a little bit from your question nobody else okay I'll bring it back okay with it but but you know all you can do in this world is do what's right you can't necessarily do what's going to work tomorrow I when I started at Wharton 55 years ago this month and the first lesson I remember learning at Wharton was that you can't tell the quality of a decision from the outcome now this is a counterintuitive and in fact perplexing and most people who are not analytical or insightful would say well of course you can good decisions work bad decisions fail but the truth of the matter is that in the world there are a lot of things that are unpredictable and random and as a result good decisions fail all the time and bad decisions succeed all the time and we all know people we say oh he was right for the wrong reason or he was lucky or he was unlucky and and so you you can't you can't think of the world as a place where good decision good outcome bad decision bad outcome doesn't work that way you know richard fineman the physicist said that physics would be much harder if electrons had feelings and the truth is that markets there is no such thing as a market there's no place it might be a building or it might be virtual what is a market it's a bunch of people who buy and sell and those people do have feelings and so they don't always act in a way which is predictable they don't always act in a way which is right sometimes they do things which are counterintuitive to predict the movement of the market then at the time when people do things which are unpredictable you have to be able to predict it which by definition you can't which is a which is a good reason why we have the business judgment rule imagine putting distance together so the process and kind of how you came about it it really speaks to the quality but the outcome you could be wrong because of a whole bunch of other things sure oh we see it all the time here well if I can take one more minute the next to last I will yes the next only other power the next the last paragraph in the book quotes from Peter Bernstein who was a great market observer and sage and he said the future is not ours to know but it helps to know that being wrong is inevitable and normal not some terrible tragedy not some awful failing and reasoning not even bad luck in most instances being wrong comes with the franchise of an activity whose outcome depends on an unknown future now you know imagine if you were a baseball player you have five trips to the plate and you make out on three of them and you kill yourself the point is that very few you know Ted Williams got two hits and every five trips and he was the best in history nobody gets sick three out of five or four out of five and it's the same and investing none of us get it right all the time all we can do is have a better batting average than others if you have a better batting average then you'll be a superior investor well in baseball if your bat 333 its Hall of Fame you're exactly so maybe the investors out there ought to think about you lose seven don't worry about it because you'll win three right you've prompted me to think a little bit about your notion of being aggressive or defensive hmm in different kinds of market situations you you talk about that as something you know that governs a lot of how could you explain a little bit well I really think that the most important single decision for what I call the medium term in investing is whether it to be more aggressive or more defensive at a point in time now I'm not talking about the short term like the next day week or month and I'm not talking about the long term like 30 years when you can ignore the interim fluctuations I'm talking about two three five years if you're positioning your portfolio today for the next three years I think the most important question is whether it should be an aggressive portfolio or defensive portfolio and it's not stocks versus bonds high quality versus low quality growth stocks versus value stocks US stocks versus foreign stocks the developed world stocks versus emerging stocks large companies versus small the most important question is offense or defense if you have an aggressive portfolio in a period when defense was called for you'll get chewed up and it doesn't matter how you answered all those other questions and if you have a an an aggressive portfolio at a time when it turns out that aggressiveness was propitious it doesn't matter how you answer those questions either you'll be successful so I really believe that that's the key let me talk about it in another direction now I believe that every investor myself included everyday faces two risks they call them the twin risks what are they the first one is obvious it's the risk of losing money the second one is a little more subtle it's the risk of missing opportunities and we have to confront these every day now if you say to me I want to be absolutely sure that I don't lose any money then I'll say okay we'll put you all in t-bills you can't lose any money but you miss every opportunity if you say I want to be a hundred percent sure I don't miss any of the opportunities then I say okay no t-bills for you will and put you all in risk assets and you will be a hundred percent exposed to the risk of losing money so you can eliminate one but it puts you firmly in the crosshairs of the other or you can compromise on the two and most people what do they say well I don't want you know I I don't want to lose any money but on the other hand I don't want to miss all the opportunities so I'm gonna do some of these I'm gonna balance aggressiveness and offensiveness I'm going to balance worrying about avoiding losing money and worrying about missing opportunities and that's the right thing to do all one or all the other makes absolutely no sense okay manage the two risks balance them in what proportion that's the next question so the way I think about this proposition so in July of of 17 I wrote a memo advising some caution and some guy on TV says that's it Howard Marks says it's time to get out and when I when I ran into him the next time I said there's only two things I would never say get out and it's time because I know I am never that certain and the investment world does not permit that level of uncertainty it's not black or white and when you go on on the TV shows as I do sometimes they want you to say buy or sell in or out but it's not black or white it's a it's how you balance and the way I think about it is there's a speedometer like on the dashboard of your car and it goes from zero to 100 and zero is all cash and a hundred is fully invested in risky securities and perhaps using margin or leverage and the question is where should you be in between now if you want to invest and most people say I want to make some money so I'm going to invest and they said they try to think about whether they should buy Apple or Amazon but they missed the step the first step that everybody who considers investing should take is to say from zero to a hundred who am i given my age my financial position my income my requirements my dependents my psyche where should I normally be if you're young if you have a great career ahead if you're making more money than you need if you have no dependents and you have and if you make a mistake in investing you have decades more to make it right then you can be an 80 or a 90 if you're approaching retirement and you have a dependent spouse and you're not going to be earning your income any more from your job and if you are concerned about your ability to live with the ECMO tional impact of fluctuations then you might be a 30 so every person should perform serious introspection and figure out where they should be and the emotional content is extremely important because the one thing you can't do in investing is you can't do the right thing if you can't stand the pain and everything that happens emotionally conspires to make us make mistakes most people get excited the better things go they feel better about stocks the higher the prices they tend to buy more when the prices are at high levels and then when it turns down they get depressed and they get sad and they rue the day they ever bought a stock and they tend to sell at low prices that's what most people do how can we tell that that's what most people do because stocks go up and when they get too high then they come down and most people are buying up here that's what puts them up here and they're selling down here that's what puts them down here so emotion works to our destruction you must figure out whether you can live with the emotional ups and downs and if you can't you know there are things you can do you can turn your money over to other people to manage you can there are ways to put your your investing on autopilot anyway background so you there's a speedometer it goes from zero to a hundred each one in the audience should figure out normally where they should be and say I conclude that I'm a seventy five next question where should I be today should my portfolio be riskier than my normal portfolio because I think there are great times ahead and and prices are low and psychology is depressed and I think it's a propitious time to add risk or should I have less risk than normal because I think prices are high and optimism is every place and euphoria and and and and the the pendulum of psychology is probably going to swing back towards the midpoint so I think it's extremely important to figure out where we are in the cycle and consequently where we should be positioning our portfolio risk wise relative to our normal position or that sounds like a lot of discipline Howard well you know also most people to do I mean they want to follow the herd don't they well they want to my father heard but the herd is usually wrong yeah and and in investing there's something called contrarian behavior and all the great investors are by definition contrarian in order to have a great investment result what do you have to do you have to buy when everybody else is selling and prices are low you have to get out when everybody's buying and prices are high you have to avoid the things that everybody loves and has bid up and you have to buy the things that everybody hates and and have permitted to drop like a stone you have to do the opposite but it's not easy the and Dave Swenson who runs the endowment at Yale which is I think the best performing endowment in the country over the last 33 years that he's been there as a says in his book that superior investing requires the adoption of uncomfortably idiosyncratic positions and those two words are fabulous because if you want to be a superior investor even if you want to avoid these horrible mistakes that I described by definition you must invest differently from the herd you must invest idiosyncratically but by definition idiosyncratic positions are uncomfortable why because the markets going like this every stock is getting more valuable every day you say it's overpriced you get out it continues higher everybody else is making money telling you what an idiot you are to get out and you know there's a book about bubbles and crashes by Charles Kindleberger he says there is nothing worse for you dis for your equilibrium that the watch a friend get rich that's human nature and so and by the way so you get out of something nobody ever identified an asset there was overpriced and got out only to see it go down the next day the overpriced assets general rule over price assets become more overpriced and you have to be able to live with that and it's uncomfortable and there's an old saying in our business that being too far ahead of your time is indistinguishable from being wrong but you have to live with that because there is no alternative but you know your words have real power last month in one of your letters you discussed the prospects for the Fang companies Facebook Amazon Netflix and so on and their prices fell I'm certainly not always right okay and you know I try my best and some people and the Layton and I wouldn't recommend it okay I mean the fangs have gone up and up and up yeah I mean look like multiples but you know and you know I wasn't in that memo I wasn't saying that the fangs are a bad idea okay what I was saying is that the performance of the fangs the levitation of the fangs indicates to me I had a whole list of things in that memo that the memo was came out two weeks ago it's called the seven worst words in the world and I had a whole list of things that to me were indicative that this market was elevated and thus risky and the belief in the fangs and the willingness to pay an extremely high and ever-rising price for a company that it makes no money it's not a mistake it's not right it's not wrong but clearly it is indicative of the presence of optimism and I want to know when optimism in the market is riding high and all things being equal I want to cut my wrist posture and I want to know when pessimism is overarching and all things being equal I want to increase my wrist posture so that's all I did I didn't it wasn't comment about the fangs themselves and I wasn't telling anybody sell the fangs but I think it's really important that we know what's going on around those seven words that people should our seven worst words in the world too much money chasing too few deals and you know every once in a while we see this at the height of of of cycles when when money is trying to get into risk asset classes and there's too much money for the deals people are ignoring risk and riding high on eagerness and and an auction takes place every transaction in a marketplace is an auction transaction now it's not always obvious other means of Christie's are not at the door there's nobody with a gavel there's no announcement but the truth of the matter is that if I come out and I want to sell my general motor stock in some sense there's bidding and you enter in did it 32 and you at 32 and an eighth and you were 32 and a quarter you at 33 today and you don't see each other's bids you know it's not out for an outcry but eventually my stock goes to the person who bids the most it's an auction if I want to if I want to borrow money for my company I go to all my banks and they bid one says I need 7% interest the next one says I'll take six and the last one is very eager to put out money so they say I'll take five and one banker says I need very protective documents and the second one says I will give you loose documents and the third one says I'll give you I don't need any protection and so the one that Bank that last banker gets to make a 5% loan with no protection he won the auction or did he but when we see the auction getting hot when there's too much money in the hands of would-be suppliers of money and they're too eager to put it out then the market then the auction goes too far and the price goes too high which means that the prospective return is too low and the risk is elevated but it's different this time well as to and there are the four worst words in a well he's a break he's a great straight man the four worst words in the world are it's different this time and we I've seen this several times in my life and what it means is the old risk the old rules don't apply so in in as I told you that the average p/e on a stock price earnings ratio on a stock since the World War Two has been 16 and in 2000 it was 32 and if you said to somebody who was a tech stock aficionado at that time well aren't you scared about the elevated p/e ratio on the on the stocks and in fact there were so many internet and e-commerce stocks that didn't have any earnings and were selling on a multiple of sales if they had sales but many didn't have sales and they were selling on a multiple of Dreams or of eyeballs or something like that and and if you said to somebody what about the the old rules and they say no no you know you're wrong it's different this time the old rules don't apply because these the Internet's going to change the world and history is irrelevant and guess what the internet changed the world but 99% of the stocks disappeared and it turns out that history did apply so when you hear somebody say this time it's different hold on to your wallet well you know I remember when many analysts with creating different measures of Ubud ah hmm and calling him all kinds of things yeah well now as an effort to justify yeah the elevated Pease well this is this is uh this is one of the things that going it's going on now so you know there are norms I don't want to get al started but we there are people who don't believe that we have to Hue to the norms the traditional norms right but there are norms and one of the norms for example is maybe when when one company buys each other another company they should only use they should only use six times EBIT ah for the for the amount of debt so for the company makes twenty million dollars you might be willing to use a hundred and twenty million dollars worth of borrowed money to buy it and any excess of that over in the price should be in the form of equity which which is safer and in this memo seven worst words in the world I talked about the fact that I detect that that's the condition today so I went out to my oak tree colleagues and I said give me nominees for dumb deals because when dumb deals can get done easily that's indicative of the fact that the world is a buoyant euphoric place and that's dangerous and so you know they sent me things where well here's a company to just issue debt and they issued the debt is seven and a half times EBIT ah but it's now seven and a half times something called adjusted Eva da and adjusted EBIT da is the money they would have made if things would have been different or more analytical multiple analysis which adds back marketing expenses Zach when you don't have to pay up so so for example what you say is well this company made twenty million dollars and this company made twenty million dollars but if you put it together they're together they're gonna make sixty million dollars because of economies so you have adjusted EBIT da and and there were I gave the example of companies whose eBay Justin Evita was a hundred and fifty and two hundred percent of their reported EBIT ah but in a buoyant risk tolerance unconcerned market people will ignore the old norms and and and lend against dreams and the whole point of the book is that when that's the case you want to know it and act accordingly and that's really very good I could go on all evening with you Howard as you know and I want to get to some questions but I believe that here we are at the Anderson School you were a Chicago at a very important time in financial history yeah when farmer Fisher Jensen and roll were there and you may want to make a comment about that sure I got about two or three minutes before I get the hook okay and I know you're a great philanthropist and you're very important in in doing a bunch of things not only for the schools where you went to but the city of New York and so maybe take a minute to talk to each of those if you're well you know look Cicero the philosopher said that the thankful heart is not only the greatest of all the virtues but it is the parent of all the other virtues and I think you we all have a lot to be thankful for and and if we're not thankful for it then we're really stupid and and I have been incredibly lucky in my life and one of the ways I was lucky one of the minor ways I was like it was getting to University of Chicago in 1967 and the people that al mentioned who were the the really the pillars of finance theory had developed the main theory at Chicago in 62 3 4 so that means when I got there in 67 I was when the in the one of the very first classes to learn that stuff and that was good luck and I appreciate that and among other things that has caused me to want to get back to Chicago and so you know I've given them some contribution and out some some fellowships and fellowships for and and what primarily directed at students from California but you know I I think that our lives are less than they should be if we are not appreciative of our good fortune because we should I mean and I wrote this memo back in January 14 called getting lucky and I talked about how lucky I been and I say in there that you know I could I could take the approach that no no I haven't been lucky it's been all my skill and my hard work and and because you know some people might feel that if they attribute some of their success to lock that they've been diminished I think will be I feel so great about having been lucky and it makes me very optimistic because as irrational as it may be I think I'm going to keep being lucky and it makes me feel really good and it makes me feel like I want to give back and philanthropic and you wanted very generous yeah and and there's there's nothing like it the book is March 3 the market cycle but the key words are getting the odds on your side and we've had a conversation with Howard Marks one of the great investors of our day with some good homespun thinking that will useful to interview all who want to go out and do the right thing Howard thank you very much for being a part of this we really appreciate it you're terrific thank you now we want to open this up to some questions okay we see some some movement a little cycle here I've started my name is Yvonne gate our public company treasurer how are you been speaking about defensive and aggressive portfolios he what is your definition of a defensive portfolio for example okay thanks for asking that most people think that defensive means you sell and raise cash and aggressive means you put cash to work but the truth of the matter is that anything you want to do in the investment business you can do aggressively or defensively and there are so many ways to be aggressive or defensive for example one of the things that I and historically and oaktree have worked in is high-yield bonds so-called junk bonds and you might say well junk bonds are aggressive but if you want to have some junk bonds there are a defense of ways to do it you can have company with higher ratings companies that are larger larger companies with critical mass tend to tend to survive better you can invest in companies that are in so-called defensive industries like food people don't stop eating as their or as opposed to aggressive industries like movies where you know sometimes people do stop going the movies you can you can put your money in a mutual fund run by somebody who has a history of doing great in bad markets and not so great in good ones as opposed to people who are have a history of doing great in good markets and not so well in bad ones so there are many things you can do if you want to be aggressive you can go into funds that use leverage if you want to be defensive you would not use leverage there are ETFs now you can buy an ETF which which will go up or down twice as much as the SP three times as much four times as much so you can actually dial your risk and and and there are many ways especially through ETFs and other forms of derivatives and financial engineering you can you can have as risky or safe a position as you want to have without going to cash hi our thank you for your time today odd the fortune to intern for Oak Tree in the summer of seventeen and since then I've really enjoyed reading your memos and learning more about you I was wondering what do you think about the current rising interest rate environment and how it bodes for the bond management industry specifically here in Southern California the most important thing to know about interest rates is for the last ten years they have been unnaturally low and you know when when the central bank lowers interest rates it tends to stimulate the economy more people can afford a mortgage and buy a house more people can afford a car manufacturers can borrow money and put up factories and in every way low interest rates are stimulative and the central banks of the world cut interest rates essentially to zero sometimes negative ten years ago in order to pull the world out of the global financial crisis now the central banks outside the US did it later than the US that's one of the reasons why we've had a much better recovery here than they have but anyway the point is though the first point is interest rates have been unnaturally low number two most people come to boot school most people maybe are here tonight because they believe in the free market system and most people believe that the free market system better known as a capitalist system or free enterprise is the best allocator of resources and you know business tends to put its capital and its workers and it's in its expertise in areas which where they will be the most productive and I believe that very strongly you try to find me the countries where the government does the allocating which have been successful you won't have much success free markets allocate resources we haven't had a free market money for ten years the price of money has been administered and controlled and artifice oppressed not allowed to roam free in response to supply and demand I think that the Fed wants to get out of that business and if they I mean anybody with the brain who's an economists would want to get out of that business and you know Bernanke started Geithner started talking no Bernanke started talking about it close to five years ago and in the last few years it's been happening and there been eight increased rate increases so far and most people think there'll be about five or six more in the current series and when interest rates are a artificially low and be freed up and especially see when the economy is prosperous and there's a demand for capital you should expect to see the price of money rise it has been rising it probably will continue to rise not terribly far you know I've seen interest rates of I have a slip on my wall from when I had a loan outstanding from a bank at twenty two and three-quarter percent and I don't see think we're going to see that again and I you know back back in oh six seven I had a lot of money in five-year Treasuries at six and a half percent I'm not even thinking we're going to see that again but today the five-year Treasuries is in the twos and I think that's gonna rise and I think it should now the problem is my partner Sheldon stone goes around doing this all day what does this mean interest rates up bond prices down interest rates down bond prices up that's how bonds are priced when interest when contemporary interest rates rise old bonds become worth less and their prices fall so in answer to your question we're probably going to see rising interest rates which means we're probably going to see falling bond prices and and I think that's inescapable and interestingly the the the pain which has been felt in the stock market in the last six trading days is largely attributed to the fact that interest rates have been going up how can that come as a surprise you know and and and and as I said Bernanke signaled that five years ago and he started doing it two to three years ago and and how all of a sudden last Thursday every Oh hit interest rates are going up I better get out of the stock market bang you know and that just goes to show you you know that it that at the University of Chicago they say the people are rational and objective calculators of value and to hell with that you know they they are they are emotional and erratic okay so we have this new field in behavioral economics we're gonna go to San Francisco so stand right there for a second so how do we get to San Francisco we have a question from San Francisco oh thank you our marks for presenting and talking to us can you see me yes I'm Chris I bought a current fully employed MBA student and I question centers around with companies or financial companies that invest based on algorithms and how that has affected market cycles like what do you think those market amplitudes have looked like over the recent years I wrote a memo in June that everybody might want to look by the way I talk about the memos once a while they're all available at WWF recapitalize of insights and the price is right they're free and and you know theirs is 29 years worth so you can keep busy on a winter night so I wrote a memo in June entitled investing without people and it talked about index and passive investing algorithmic and systematic investment and AI artificial intelligence and machine learning and so I hope you'll read it for full treatment of the subjects but in answer to your specific question it is not my feeling that these things have elevated the stock market you know I think that especially algorithmic which is your specific question they're buying and selling every second every microsecond so I don't see how they can be doing enough net buying to put air under stocks I don't think I don't think they are the culprit Chris okay and Seattle Oh yep hi thank you how is James Reagan class of 92 hello professor Osborne as well have a question about debt we're seeing record levels both on the federal public side corporate debt and household debt as well how do you view those levels now and what does it mean for your kind of optimist optimism index and now you look at the markets boy yes well if you go back to the memo of two weeks ago seven worst words in the world there's an extensive discussion of the factors that I think make the world riskier now and-and-and-and are indicative of the presence of optimism and eagerness and greed and risk tolerance and credulous nests and all these things and we are much more indebted in many ways than we were in the past and all things being equal this adds to the risk again it adds fundamentally to the riskiness of the environment and it is also indicative of the elevated animal spirits which are dominant in the market today now the interesting thing however is that the only thing we know is that there is more debt and all things being Google that makes the world riskier but we don't know exactly how much it means when I was a kid we used to have there used to be debates about whether was okay for the government to owe money whether it was okay for there to be a national debt we seem to have gotten over that and and of course now we have national debt in the 20s of trillions and we seem to still be doing okay most people think there is some number out there at which the debt becomes unwise and lethal but nobody can tell anybody what it is so I'll just say we'll we'll see we'll see absolutely let's go back to Los Angeles here and UCLA Thank You Howard for your and for this wonderful talk my question is regarding the current environment taking the temperature as you like to do just seeing what's going on where you see like Softbank and venture capital raising an enormous amount of money seeing the cryptocurrency phenomenon and seeing similarities to the dot-com seeing private equity raise enormous and lots of money my question is all of these signs and with the current valuation of equities the market cycle you know maybe when it when it turns will they'll link up and will it be a big washout where hedge funds private equity start withdrawing venture capital starts disposing Manhattan real estate starts tipping how do we know if the cycles will be singular you know linking together I know that's a hard question but just you know just the other day hearing a venture capitalist mentioned that it's just all one big Ponzi scheme and venture capital this was social capitals ahead how do you kind of linked up the different market cycles with with all what's going on well again I would refer you to the seven worst words in the world and and no I mean not to the memo which which came out two weeks ago on a 26 September 26 and I touch on all those things there Softbank venture capital private equity real estate it's all there like with an owl's question about the fangs look the point is in the 90s very successful venture capital funds raised a hundred or two hundred million dollars and in I think fiscal 99 or fiscal 2008 had a triple digit rate of return and of course that makes everybody in heat to put money into venture capital and in 2000 those firms raised 1 billion or two billion those funds were singularly unsuccessful too much company too much money chasing too few deals now Softbank Japanese firm is or has organized most of a hundred billion dollar fund to invest in technology not necessarily at the venture level but at all at all stages of development but I don't think you can put a hundred million dollars or billion dollars to work thoughtfully in technology and one of my friends who is a venture capitalist told me recently that what happens is they go to a younger company and they say we want to invest two billion dollars they say well we we don't need two billion dollars we can't use two billion dollars and by the way we don't want to sell 80 percent of our company and they say if you don't take it we're gonna give it to your competitor he's going to put you out of business so you know now too much money is not only bad for the people whose money it is but it's bad for whole industries in my opinion so this is just indicative of what happens when there's too much money right and by the way if Softbank raises a hundred then one of the firm's that raised a billion in 2000 can say we're going to raise ten billion look how disciplined we are and you know this is the process through which markets they get into trouble right and in in the memo the seven worse words in the world I refer to a memo I wrote in February oh seven called the race to the bottom and I discussed this concept of too much money being around and what that does to discipline and it makes it really hard and you know I can't tell you exactly how this is gonna unwind and manifest itself I can't but I mean I tend to think that all of these things that have been elevated on excess money and excess animal spirits will come to earth that's the way things usually are thank you yes and let's take the gentleman with the red tie that's yes you I kid and they get the last question so it better be good oh so much pressure Howard thank you so much really terrific hearing from you and I was just curious if you had any insights on managing margin within the market cycle basically piggybacking on the 0 to 100 I guess risk profile I'm managing margin margin the use of margins yeah well you know look margin means is now called leverage it's using borrowed money to supplement your own money to buy more and it should be obvious that leverage never makes an investment a better investment it only amps up its sense of sensitivity and it in if it's going to be successful it increases your games and if it's going to be unsuccessful it increases your losses but it doesn't make it better and doesn't change the odds of success if you go to Las Vegas Mall sakes but it mathematically mathematically is enjoyable and if you go to Las Vegas once in a while the pit-boss will walk by and you put down a bet and he'll say just remember the more you bet the more you win when you win and and you can't argue with that and that is and that's margin so obviously if you are a high risk investor with with financial resources and an emotional capital and patience you might think about using margin now I would argue that you shouldn't use margin regardless of where we are in the cycle but a high risk investor in a good part of the cycle should consider margin on the other hand a low risk investor even in a good part of the cycle probably should not consider margins because his or her financial position and emotional makeup will not permit it to be used wisely so clearly margin is one of the things that we can adjust to calibrate our the riskiness of our portfolio but i think it has to be used with really with with kid gloves and in in doing so would you say that the the objective would be to I guess get out early or do you just hold onto your hat through the through the cycles well I mean it's obviously well look some people consider themselves buy-and-hold and some people try to get in and get out I think the whole I wouldn't written the book if I didn't think it was a good idea to have less risk at the top and more risk at the bottom so that's the position I would advocate but if you conclude that a you can live with the interim fluctuations and be you're not able to get in at the bottom and out at the top then I think buy-and-hold beats the heck out of what most people do which is buy at the top and sell at the bottom thank you very much thank you so much I'm Jill bald off class of 81 Associate Dean Alumni Relations and I want to thank all of you for coming out to share in this really wonderful partnership between the Fink Center and Alumni Relations for worldwide Welcome Week we're especially happy to be thinking in the next and welcoming our San Francisco and Seattle chapters we have a lovely reception set up in the Marion Anderson courtyard for all of you tonight to reach it simply head down any staircase and step outside there there will be a table set up where Howard will be signing a few books for those of you who put who purchase books and if you haven't purchased a book yet you can also do that outside in the Marion Anderson courtyard so thank you again for coming go Bruins go Anderson you [Music]

Channel: UCLAAnderson

Views: 55,994

Rating: 4.888268 out of 5

Keywords: UCLA Anderson, UCLA, UCLA Anderson School of Management, MBA, Bschool, Business School, Los Angeles, finance, investment cycles, howard marks, getting the odds on your side, mastering the market cycle, lori santikian, Stock Market, market cycles, financial education, financial literacy, fink center, fink center for finance and investments

Id: 6ATUoZ6qjpI

Length: 61min 8sec (3668 seconds)

Published: Thu Nov 08 2018