- [Matthew] So, Howard, welcome. - [Howard] Thank you. So this, I've really thought hard about how I got a, you know, actually introduce these guys
and I hope I do a good job. And I'm gonna start with Bob Steers, Executive Chairman of Cohen & Steers. Bob co-founded Cohen & Steers
with his partner, you know, gentleman by the name of
Marty Cohen back in 1986, where they really pioneered
the REIT Mutual Fund Strategy. Early in his career he worked with
Citi Corp, which is gonna play
into our story here a little bit. But that's where he met Marty. And fortunately for us, he graduated from Georgetown University's
undergraduate business school and has been an extraordinarily
loyal son of the university. And I'm always really proud. I've really worked at
two places in my life and I've been proud to work
at both of those places. And I'm always proud when
I say I work at Georgetown. One, I love the institution, but two, to say that I am associated with the Steers Center
for Global Real Estate because of the quality of Bob Steers. He's of the finest quality and
we're very lucky to have him at the head of our ship here. And to his left is Howard Marks, he's the co-chairman of
Oaktree Capital Management. And man, I'm really privileged
to have the opportunity to introduce him. Originally from Queens, New
York, Howard, excuse me, went to Wharton where he pursued an undergraduate degree in finance, graduated cum laude, then
went to University of Chicago to focus on accounting and marketing. And he picked up a CFA as well. He was also at Citi
Corp for about 16 years. He was the director of research and the senior portfolio manager who oversaw convertible
and high yield debt. He joined TCW in 1985 where he was until he co-founded
Oaktree Capital Management in actually 1995 with partners from TCW. Now there's tons of videos
with Howard speaking and I saw one of him from 2015, which really spoke to me and he referred to himself as a teacher. And that really resonated with me 'cause I think we've all
read his memos to clients over the last 30 plus
years and he's teaching, they're very long lessons, but they are definitely
some of the best learning and teaching you're
likely to see and read. So that, you know, spoke to me. And at Georgetown we talk a
lot about value of an asset and its price, right? And so oftentimes a
student will say, well, I don't like this investment. I'm like, what if I gave it to you? Assuming there's no environmental issues or something we don't know about. They're like, yeah, I'd like that. So it's a price issue, right? So our students are
very lucky at this point in time to be able to have, you know, the opportunity to listen to Howard Marks. So with that, I'm gonna
turn it over to Bob Steers. Thank you very much both
of you guys for being here. We appreciate you. - Great. (audience applauding) Thank you for that, Matt. And thank you for the NTR panel. I think this is a
particularly exciting time to be gathering here. We've had a day and a
half of board meetings filled with real estate
investment professionals and students trying to figure
out where we are in the cycle, whether it's real estate, the economic or interest rate cycle. Under the category of
better lucky than smart, Howard first said yes to
Luminaries three years ago, and then Covid hit and that was that. And so we've been waiting for the opportunity to
get back together again. And I would venture to say that, you know, this is one of the most uncertain times for a lot of these things that
we've seen in quite a while. So I think it's really an
exciting time to have someone with Howard's experience. And I would add to the
introduction that Matt had, Howard's really been
a pioneer in many ways in the high yield space a long time ago. As Matt said, the founder of Oaktree. I think Howard, you've also spawned a
few other money managers such as DoubleLine and I will give you an
assist on Cohen Steers. Howard hired Marty and
I, gave us our first jobs out of graduate school in 1977, about 45 years ago, as lowly
equity research analysts when you were director
of research at Citi. And so thank you for being here. Thank you for the many
contributions you've made to the asset management industry. So given the environment we're in, I think we have a lot to cover, maybe more than we can cover. I'm thinking in terms of
three broad categories. I think many in this room
read your December letter entitled, Sea Change. And I know our firm, and I think many in the
discussions that we've had over the last day and a half
agree, there is a significant, we're in the midst of a
significant regime change with interest rates, capital
flows, potentially liquidity, the banking system. So I'd love for you to
share your thoughts on, that you articulated so well
in your Sea Change letter. We obviously want to spend some time on commercial real estate, especially in the rates are
going to be higher for longer and what does that mean for the industry. And lastly, if we have time, talk a little bit about higher rates, commercial property,
impact on the financial and banking system. So, but before we get
into that, particularly for the benefit of the
students in the audience, I recently heard a personal
story that you told about your initial job search, which was somewhat shocking to me and there's some lessons
to be learned from that. So if you wouldn't mind sharing that. - Sure. - That anecdote. - What Bob's alluding to is the fact that when I was getting out of Chicago in 1969, I knew I wanted to go into finance, but I had no idea what I
wanted to do within finance. I really did not have a leaning. And so I applied to six
jobs in six different areas. Investment banking, investment management, public accounting, corporate accounting, consulting, et cetera. But I was kind of
indifferent between the six. In part because my knowledge
of them was superficial. (audience laughing) But there was one that
seemed more prestigious and more glamorous than the others. So I said, well, if I get
all six, I'll take that one. And that's the one I didn't get. So 30 years later, the guy from that firm who
was the campus interviewer did something auspicious for Chicago. And I wrote him a letter and I said, I don't know if you remember me, but I interviewed with you
and I didn't get that job, but I want to congratulate
you on what you've done. Now, this was the days of letters, so that means it took him a week to get it and a week to answer. And then I heard from
him a week after that. And and I get a letter from him and says, Of course I remember you
and I followed your career and you've done great. And by the way, if you ever wanna know why
you didn't get that job, gimme a call. (audience laughing) So now it takes about 10
seconds to grab the phone and I call him up and I
say, well thanks Eric. What's the story? He said, well, it's simple,
we hired the wrong guy. I said, oh, you know,
you're sweet to say that. He says, no, no, no. He says, I don't mean it like that. He says, I mean that all the
recruiters voted to hire you. And when the partner came
in that morning hungover, he called the wrong guy. (audience laughing) And they actually gave
the job to my roommate. (audience laughing) This is a true story.
And I said, but I wrote, I talked about this in a memo
I wrote in '14 about luck. 'Cause I said that if it wasn't
for that stroke of bad luck, I could have spent the next
40 years at Lehman Brothers and ended up with nothing to show for it. (audience laughing) So the real lesson is. - [Robert] So literally Lehman Brothers was the job you didn't, didn't get. - Yeah. That's the job I didn't get. And so what it means is, you know, there's an old saying that
man plans and God laughs. You don't ever know for sure
what the right course is and you don't know what to hope for and you kind of have to roll
with it, don't you, Bob? And I think the great
philosopher Shaquille O'Neal. (audience laughing) It's experience isn't what happens to you, it's what you do with what happens to you. - Well, I hope the students
in the audience there get the message. I think it's a good one. All right, so let's get down to, to business here. The Sea Change memo that you put together, I thought was provocative and
I won't steal your thunder, but it, you know, it threw out lessons from the past about
investors who get enamored with a particular strategy
type of investing, you know, FANG, FOMO, memes,
all those types of things. And if we really are pivoting
or in a regime change here, I think it would be helpful to think about what that could mean and what does the next regime look like? - Sure. Before I answer
your question directly, Bob, I want to respond to something you said at the very beginning 'cause you said this is a
particularly uncertain time. And in my experience, there
are two kinds of times. There's the times when you
know what's gonna happen in the ne in the coming 10 years and the times when it's uncertain. And the main difference is that
the first time you're wrong. (audience laughing) If you think you know what's
gonna happen, you're wrong. And that's kind of what
my experience showed. And you know, I wrote a memo in October called the Illusion of Knowledge. And I quoted the
historian Daniel Boorstin, who said, "That the enemy of
knowledge is not ignorance, it's the illusion of knowledge." When people believe they know and present themselves
as knowing it interferes with exploration. And maybe the other way of saying it is what Mark Twain said, he said, "It ain't what you don't know
that gets you into trouble. It's what you know for
certain that just ain't true." And so I would say right now, Bob, we don't know anything for certain. There have been other times
when we did know for certain and we were wrong most of the time. But anyway. - But it, it does seem
that we're, you know, we've been through 40 years
of declining interest rates. - Yeah. Yeah. - And at least 15 since
the financial crisis. And that's ending and. - Yeah. - There is this great unknown now. - Sure. And I say in the memo that in 1980 I had a loan outstanding from the bank in Chicago,
personal loan, at three quarters over what was called prime at the time. And I would get a slip crudely
generated slip from the bank each time the rate changed. And I have framed in my office, the one that says the the rate on your loan is now 22 and a
quarter, December 19th, 1980. 40 years later, I was able to
borrow at two and a quarter, fixed for 15 years. So this was a massive change. And whereas I assert
that I don't know much about the future, the
one thing I'm sure of is that rates are not gonna go down by another 2000 basis points. Right? (audience laughing) And so if this massive
period of of decline is over, then the question is what does that imply for all the things we do? And as Bob says, it
was the 40 year decline from fed funds rate of 20 to zero. And then more recently again, the Fed set the fed funds
rate at zero at the beginning of '09 to pull us out of
the global financial crisis. Left it there for seven years for some reason that I
find in inexplicable, and kept rates basically low
from the beginning of '09 through the end of '21. And
those 13 years are the subject that I explore most in the memo. And of course this was
facilitated by the fact that, despite the high level of
stimulus from the zero rates and quantitative easing
and the resulting decline of unemployment, we still
didn't have inflation in that period, which
permitted the Fed to maintain that regime of low interest rates. And that's in my opinion, what's over. Now I'm not saying that
rates having come down are gonna go back up. I merely say they'll probably
kind of skate along here. And you know, anybody
who joined the industry in the last 15 years probably thinks we're in a high interest rate environment today. - [Robert] Right. - But we're not, we're in a normal interest
rate environment, I would say. - [Right. - Largely normal. And I think we're, and
so one of the tenets of Oaktree's investment philosophy is that we don't predicate our
investments on macro forecasts. We don't believe in macro
forecasts, especially our own. And so we try, but interestingly, you have to have some thought
about the macro environment in order to make a prediction and you have to predict
earnings, cash flows, whatever it might be in order
to be able to buy an asset. So, but the answer is that
we make neutral assumptions. And today I think the neutral
assumption is the rates stay where they are. - [Robert] So what do you do with that? You know, do valuations
revert to some historic mean, you know, what happens after
15 years of your 2% loan? - Yeah. Well, I mean, for every
basing interest rate, there's a range of
appropriate discount rates or whatever cap rates,
whatever you wanna call it, for every asset. And, you know, the cap rate that is, a friend of mine bought retail
on Fifth Avenue 10 years ago at two and a half cap rate. I dare say that's not, - [Robert] Oops. - I dare say that's not appropriate today. - Yeah, right. - You know, what is it
for that property now? Seven or eight? - Yeah. - Yeah. Okay. But anyway, you know, the other thing is, one of the most important
lessons is never confuse brains with a bull market. And I was talking to Bruce
Karsh, my partner, two days ago, we had a call with a client. We're talking about this
thesis. And when I got off, I called Bruce and I said, you know, what occurred to me is
just think of somebody who had the idea to buy an asset, whether it was a property
or a building or a company within the last 15 years
and went to the bank and bought it with borrowed money just before having interest
rates declined steadily. You'd have to be seriously
deficient person to lose money, you know, because the a
declining interest rates make every asset more valuable, discounted present value
of future cash flows. When the discount rate declines, the present value increases. And then you borrowed
money and every time you had to renew your loan,
it was at a lower rate. How could you not make
money on that basis? This was a great period for
people who owned assets, great period for people who borrowed money and a double bonanza for
people who bought assets with borrowed money. But if that's changing, if
rates are done declining, then you have to know that. - So, and I think I want to
save the real estate questions for a little bit later, but so some of us have done the math on, so rates stay the same, the four and a half trillion
dollars of mortgage capital out there is going to
refinance at the new rates. And there's projections that
to maintain current loan to values with these higher rates would require an additional
500 to 600 billion of additional equity capital. That's just in real estate. I want to focus on the
broad economy and markets. - [Howard] Right. - If you believe that where we are today is not only the old normal, it's the new normal and
it's gonna maybe be higher for longer, maybe forever. Have you or Oaktree thought through, okay, so like the real estate example, if that flows through the economy. And I'm particularly concerned
about away from real estate, I think more money's
gone into private equity. - [Howard] Oh yeah. - Financed probably with leverage loans, three or four year maturities. We don't have any way of tracking that. In real estate we can track,
we know what's going on there. And if those loans are upside down, what is the impact on the
economy, on the stock market, on the banking system? - Sure. Well, you know, I
put out a memo last Monday about the banking system, a lesson called, Lessons
from Silicon Valley Bank. And I don't think that
the bank is threatened, the banking system is threatened. I don't think it's comparable to '08. You know, in '08 we, we saw
a Merrill, Bear Stearns, Wachovia Bank, Washington Mutual, and ultimately Lehman either disappear or require rescues or be acquired. I don't think this is
as thoroughly taken up within the financial system
as were the subprime mortgages and the relating RMBS. And of course remember
that the banks at the time were making so much money
from packaging mortgages into RMBS that they would
bought buy the bottom tranche in order to facilitate the process. - [Robert] Right. - And I don't think that the
banks own the bottom out. I think they own the top. I don't think this is going to be a. - [Robert] I'm not concerned about the banking system either. - Yeah. Okay. All right. - But the impact on the economy. - Well, people will, you know, people are gonna lose money
because when Bob talks about it requiring a half a
trillion of equity capital to reequitize the real estate industry, and you know, let's say a similar amount for the private equity industry, what he omits to say is that
the old equity might be gone, you know, somebody's
gonna eat those losses. - [Robert] Right. - And, you know, Oaktree's
greatest business is investing in distress debt. And we started that in '88 and it's been a great business for us. But it's mostly predicated on
the fact that even good assets can get over levered. And if they're over levered,
they're the probability of getting through a rough patch declines. Your ability to get through a
rough patch is all else equal, is proportionate to the amount of equity on your balance sheet. And of course, when things are going well, people disregard that and they go for the highest
leverage they can get. Because, you know, as
they say in Las Vegas, the more you bet, the
more you win when you win. (audience laughing) But so what we do is we buy the debt of those over-leveraged companies when they suffer difficulty. And we do it with properties too. And because not everybody's
gonna put in their share of the half trillion. - [Robert] Right. And not everybody has it
to put in and, you know, and people let things go. So there'll be losses and, you
know, throughout the economy, certainly throughout the investment world. And that will, you know,
have a deleterious effect on everything. And it'll seem, you know, you think it's uncertain
now, when that happens, everybody will be certain that
it's going down the drain. - [Robert] Right. Hopefully. - But of course, it never does. And remember that I think
the global financial crisis was much worse for the
financial system than this is. And we got through that. - Well, what do you think this is? - Pardon me? - What do you think this is? Plain vanilla recession, typical cycle? - Yeah. You know. - How does Oaktree or you think about it? - Well, I think it's gonna
be a moderate recession, you know, and by the way, that's one of the many
forecasts I don't believe. (audience laughing) But, you know, nobody thinks it's gonna be an economic cataclysm among other things. You know, if the normal description
of a cycle is boom/bust. We didn't have a boom in the real economy. - Right. - We had the longest economic recovery in history of exceeding 10 years during this period I'm talking about. But it was also the slowest. So we didn't have a boom.
Where you had excesses, perhaps were in leverage
finance, you know, and so equity investors will lose money and junior debt holders will lose money. I think that's what's gonna happen. - So are you excited, you
know, for the, you know. - Yeah. - Transitioning from a
decade where growth did well - and value did not.
- Sure. Yeah. And feels like we're rounding into the perfect opportunity
zone for oak tree. - Well, you know, I don't want to jinx us. (audience laughing) - But no, but the truth is that
the period I describe, look, if you look at '09
through '21, you had low and declining interest rates,
thanks to no inflation. You had a healthy economy
stimulated by the Fed, you had a paucity of
defaults in bankruptcies, you had no real fear. The greatest fear was
the fear of missing out. Nobody was afraid of losing money. You had happy asset holders, eager buyers, easy access to capital. So you put that together,
that's a pretty glowing period. And of course the trouble is that idyllic periods like
that encourage risk taking, - [Robert] Right. - So people push up their LTVs and try to limit their equity. - [Robert] Sure. - And they become willing
to engage in riskier assets. You know, and one of the
interesting hallmarks of the last 15 years was, you
know, prior to 15 years ago, I think you couldn't issue a bond for a company that lost money. And in the last 15 years,
it became possible. Prior to 15 years ago, the
private equity industry, for the most part, would not invest in
technology or software. And then they said, well, maybe it's okay. And so you have a lot of tech and software that was the subject of LBOs for which a lot of debt was raised. And you know, these things will be tested. Buffet says it's only
when the tide goes out that we find out who was swimming naked. And the tide, we believe
the tide will go out. So we are very optimistic. - [Robert] Yeah. - The 13 years I'm talking
about were a tough period. Well, it was a great period
for asset owners and borrowers. It was a terrible period for
lenders and bargain hunters, which is what we are at Oaktree. That's what we consider
ourselves to be. And you know, the distressed debt funds 35 year record, a gross return of 22% a year, unlevered. Now if you can make 22% a
year on unlevered investments, it gives you a sense for the bargains we were able to secure. That's how you make that kind of money. The value investor, his goal is to buy things
for less than they're worth. Makes perfect sense. - [Robert] Yeah. - They're most commendable. Right? But the trouble with that is that it requires the cooperation of somebody who's willing to sell an asset for less than they're worth. And that happens in the bad times. That happens when people say, you know, I bought it at a hundred, it's 50 now I gotta get out
before I lose the other 50. You know, and things
will never get better. And that was not the case in the 13 years. So we had a hard time accessing bargains and the funds in that
category, for example, had the worst stretch ever. Now
they all earned at least 10. - [Robert] Right. - Which not the worst thing in the world, but it was far from our long-term average. Now we think we have a shot at
the long-term average again, because we think that there
will be motivated sellers for sellers and you know, those are the people you wanna buy from. - So you're saying that
we're entering the 20% zone. - For us? Yes, I think so. - Really? - Well, I think so. - And are we there now or you
think we're getting there? - No, we're not there yet. - Right. - You need desperation. - And how will we know
that when we see it? - We'll be buying. (audience laughing) - No. - That's so bad. - I mean, look, I actually argue for an activity that I describe
as taking the temperature of the market. You have to assess the mood
of the market participants. Are they happy and
celebrating and, you know, putting down orders at the
Ferrari dealer or are they, you know, hunkering down and, you know, telling their wives
they can't go shopping. - Right. - And we'll know, you know, we'll know when people are suicidal. (audience laughing) - I don't think our real estate
guys are quite there yet. - No. Well, you and I were talking
before we started about denial, and. (audience laughing) - I didn't say that. I didn't say that. - And well, what happens
in liquid assets, you know, what happens in the liquid markets, the listed markets, is
that prices collapse. What happens in the private markets is that there are no transactions, right? - [Robert] Right. - Because the buyer wants a
price which is commensurate with current conditions, and the seller hasn't accepted that yet. - [Robert] Right. - So obviously there's
no meeting in the mind, there's no transactions.
And usually after a while, somebody has to sell for
any of a variety of reasons. And that's when the prices
of private assets decline. There's been a big discussion of, last year was one of the
worst years on record for the stock market and
first or second worst year on record for the bond market and maybe the worst year
on record for the 60/40 mix of stocks and bonds. And yet most private investors didn't mark down their
portfolios much, if anything. So there's been a
discussion of the propriety of that relationship, and every private asset
owner has an explanation for why they haven't marked them down. - [Robert] Yeah, I've heard a few. (audience laughing) - And I want to interject
here that they're not all nuts because the argument
is that private assets have not shown enough volatility. But I would submit that public assets exhibit too much volatility. And you know, when you mark
your private portfolio, the decision rule can't be set a price which is commensurate
with the doomsday thinking that's prevailing in the public markets. That's not the right idea either. - [Robert] So that's a great segue. I'm gonna move into commercial property. I hear you've been making the media rounds badmouthing commercial property. So we're gonna delve
into this a little bit. So I think we all
acknowledge rates are higher, liquidity's lower, REIT prices
were down 25% last year. Non-traded REITs were up, we had a discussion earlier
in our segments that, while to your point, Howard,
while the public markets are a pretty perfect leading indicator, directionally with regard to magnitude, as you say, they tend to
overshoot and undershoot. So, but REITs were down 25% last year. Private Core was up,
Bid-Ask spreads are wide, transaction activity has cratered. - [Howard] Right. - I think cap rates are starting to rise, but it's hard to tell with a
lack of transaction activity. Moving to the real estate mortgage market, a four and a half trillion dollar market, about seven or 800 billion matures each of the next four or five years. A third of loans or floating rate, and, you know, a lot of
multi-family and some office. And again, probably a need to inject five, 600 billion over the coming
years to maintain loan to value. So I guess I'm asking what your opinion is of that market and where
do you see opportunity? - Well, I believe that, as I said before, when interest rates go up, the notional value of
all assets goes down. And last year we saw the fastest increase in interest rates in history. The fed funds rate went
from zero to four and a half in nine months. Never been
anything like that before. And at the same time, psychology swings from,
you know, I always say that in the real world, things
fluctuate between pretty good and not so hot. But in terms of investor psychology, it goes from flawless to hopeless. And, you know, we're on the way. We've made some, nobody thinks the outlook
is flawless anymore. I don't think anybody has
accepted that it's hopeless. And I don't know if they will, but certainly psychology is
more moderate today than it was. So you have higher rates
to depressing value. You have a negative twing in psychology, and then in certain sectors
you have a real deterioration of fundamentals, long-term
fundamentals, maybe office. - [Robert] Right. - And certainly as you said
before, certainly office, that's not great properties. - [Robert] Old. - Old. Old or ill located. - [Robert] Right. - Or something like that. So, now nobody can say
whether the 25% decline of REITs is appropriate,
not enough or too much. But you know, anything which hasn't been
marked down is suspect. - Right. In the financial
crisis that peak to trough for REITs, 72%. So if REITs are an
indicator at all, you know, to your point earlier, the magnitude versus '08, '09
is substantially different. - But those are publicly
traded REITs. Yeah. Now, one thing I want to
stress to everyone here is that if you looked at a chart of
the economy over the long term, it would kind of look like this. It has a moderate slope
and moderate fluctuation. The long term average is 2% a year, sometimes three, sometimes
one, occasionally four, and occasionally negative. But it's kind of like this. If you look at a chart of profits or maybe net operating income,
it looks like this, right? The fluctuations are greater. Why? Companies and properties are levered. Companies in particular
have operating leverage. So when revenues decline by 20%, profits go down by half and vice versa. And then they have financial leverage, so that whatever the change
in the value of the asset is, the impact on the equity is magnified. So earnings fluctuate much more than GDP. And then if you look
at public asset prices, they go like this. What makes up the difference? How do you explain the difference between this kind of
fluctuation in profitability and this kind of fluctuation in prices? - [Audience Member] Psychology. - Bingo, psychology, people
go from flawless to hopeless. So clearly the decline in the
prices of REITs was overdone. Right? And you went in
and you bought a lot and you made a lot of money. - Right. - So this is why. (audience laughing) He says grudgingly. But
this is why we can't say whether the 25% decline
in REITs is too much or not enough. - Right. So is Oaktree
looking at commercial property and would you invest,
you know, it seems like, and I remember this from back when the energy market was in
the tank and you went around, talked to institutions
and nobody owned energy. And I've heard today, I
heard on the panel today that everyone's been
selling office for 10 years. - [Howard] Nobody owns it. - They sold it.
- So you. - So they're waiting. - They sold it, but nobody bought it. - Exactly. (audience laughing) Well that's my question. So everyone on the panel said 3%, the office REITs only
represent 3% of NARI today of all the public markets. So who owns this? - You're much closer to it
than I am. But, you know. - Would you buy office? - Well, but this question,
you said something about, you know, would people buy it. And you've given me a chance
to respond to something that Matt said earlier. If I
gave it to you for nothing, would you take it? And one of the things I
talk about in the memo on the sea change is a
change in the mentality in the investment
business around '77, '78, which is when you went to
work and when I switched from equities to high yield bonds. And prior to that time,
the job of the fiduciary was described as buying
high quality assets. And this is one of the reasons we both survived the Nifty 50. That's one of the reasons
why the Nifty 50 did so well. They were considered great companies and because they were so great,
there was no price too high. Which is the inverse of what Matt said. Matt said, maybe is there
such a thing as a price which is low enough. When I started with high yield bonds, which were really invented in '77, '78, Moody's defined the B
rated bond as follows, fails to possess the characteristics of a desirable investment. (audience laughing) That's it. You know, and when
I talk to audiences like this, I say, you know, I drove
over here this afternoon. I got my car downstairs, I
really don't need it anymore. I like to sell my car. And you have money. I know you have money. (audience laughing) And you might be able to use
my car, so would you buy it? But I say to him, but there's probably one
question that you would ask me, hopefully, before you say yes or no, which is what's the price? And Moody's was saying
that for a B rated bond, there is no price low enough. And the converse is for
a high quality asset. There's no price too high, both of which were terrible ideas. Which now, and the first sea
change that I lived through was the switch in that mentality. 'Cause now we don't say that
the professional is somebody who buys high quality or low risk assets. Now we say, is it risky? How risky is it? What's the prospective return? Is the prospective return
sufficient to compensate for the risk? That's what we do today. And you know, if we were still living in that mentality where it's
the job of the professional to buy high quality assets, by definition we couldn't
have distressed debt funds because all the companies
we've invested in were either bankrupt or
considered certain to become so. How could you responsibly invest in those? Well, the answer is, there's
such a thing as low enough. And the problem of course is that there's no place you can look to find out what that price is, and that's when you have to use judgment. But everything we're talking about here ultimately comes down to
judgment, not algorithms, not formulas, not rules,
superior, subjective judgment. - So applying that judgment
to commercial property. - Yeah. - Do you or Oaktree have a view of what the opportunity could be? So a lot of your comments about sea change or backward looking and
learning from history, you know, most everyone in this room
has gotta figure out a way to generate high returns. - [Howard] Right. - And in commercial property
in particular, you know, we're kind of in suspended animation here. The, you know, markets are
clearly at a turning point or regime change. And I think no one here can predict where cap rates are
going, where, you know, whether liquidity will
improve going forward. But do you have a house
view? And, you know, what is your view on the
opportunity in property looking out three years? Not today, but. - Our mantra in investing
in distressed situations has always been good
company bad balance sheet. If you can find a good company, well-run, good business
fundamentals, good business model, hopefully good management, and it gets over levered because
it participates in an LBO and then it fails to
get through tough times. That's easy to fix. So, you know, we've been
successful in buying the debt of those companies. And then you take it through a
bankruptcy and the old owners are wiped out and the old
creditors become the new owners. And if you bought it
at a low enough price, that's a good model. Which is, as opposed to bad
company, which is hard to fix. So we're not a turnaround
investor, good company, bad balance sheet. And so in real estate,
commercial real estate, today you have good assets
which may be underwater, upside down and will need more equity. And one way to do it is by
buying the debt and equitizing it if the owners don't
want to add more equity. And, you know, if you
can convince yourself that the operating income is sustainable and the cap rate is
high enough, you buy it on a restructured basis. - But it sounds like you're
not a as focused on properties versus recapitalizing companies. - Well, no. Well, my
experiences with companies, we have a real estate
division, but that's not me. But the same will be true in real estate. You find a, you know, a property which is where the price has fallen and the equity and maybe some of the debt looks like it's underwater, but you can convince yourself
that the cash flows will be X and the cap rate based
on that cash flow is Y. And that's adequate to cover
the risk then you buy it. Good property, bad balance sheet. But the question is always what do you do about the things you think are bad properties? - [Robert] Right. - And you know, on the one
hand it's easy to say that for, I think somebody wants to
use the expression that for an office building on Third Avenue, there's no price low enough. But Matt would say that
there is. And question is. and the people who will
get rich are the people who say there is a price
low enough and we're there and who turn out to be right. That's how you get rich. But don't forget the latter
part. You gotta be right. (audience laughing) Merely buying things that have
declined a lot is not enough. You know, you have to be right that there will be some cash flow. And I'll tell you, 20 to 25 years ago, Oaktree is based in LA and there
were a couple of buildings, just a block or two from
us, empty buildings, mid-rise office, empty, that
you could buy for a song. The question was are they worth song? - [Robert] Right. - What's an empty building worth? And an empty building that's obsolete in terms of its qualities,
what's it worth? And it's really hard to say. And I keep coming back to the fact that there is no formula
that you can apply. It's just personal judgment, you know? And Sam Zell is famous for having applied that personal judgment and
taking big risks correctly. And, you know, we don't hear
as much about the people who took those risks incorrectly. (audience laughing) - All right. I wanna leave
some time for questions, but I'd love to just get your take on, we've touched on it peripherally. The health of the
banking system, you know, the impact of rising rates. Some of estimate estimated
it's reduced the value of financial assets by over $30 trillion. You know, we've had
the SVB, CS, Signature, we were talking inside earlier. You don't sound particularly concerned about the health of the banking system. - I don't think that the
problems are systemic. And you know, among other things, the banks usually take the
top slice of the credit and if they loaned money at reasonably conservative
loan to value ratios and took the top, they shouldn't
have widespread problems, I don't think. - Now would you look
at, I've heard from some that agree with your viewpoint,
but hold out the likelihood that there'll be some individual
regional banks that have, you know, idiosyncratic
risk made mistakes. So there could be some more of that. Would Oaktree look at
a situation like that and were you looking at, you
know, CS or any of those? - Well, we, you know,
we're open to anything. You know, we have to convince ourselves that the fundamentals are sound and that the price is low enough. - [Robert] Right. Getting that message - But we're certainly open to it. And by the way, the
statistics, which I got from a, I think reasonable source, which was probably you. Said that on average banks
above 250 billion of assets have four and a half
percent in real estate. And banks below 250 billion
of assets have 11% of assets in real estate. - [Robert] Right. - The banks above 250 have
half their regulatory capital in real estate. And the banks below 250 have 167% of their regulatory capital. So clearly, and some
banks are in worse areas and some banks concentrated by industry and made inferior loan to value decisions and loaned too much to quote,
good long-term customers who are now gone. - [Robert] Mm hmm. - And, you know, some of
them will have problems, there's no doubt about it. But I just don't think
it's gonna be systemic. And you know, if you look
at '08 when we had Merrill and Bear and Lehman and others disappear, we still got through it. Those were much more important
systemic institutions and we got through it. - [Robert] Right. - So I think we'll get through it again. - Any concerns, you know,
getting back to private equity and how that is financed, any concerns about the CLO
or leverage loan markets, which to me are somewhat opaque? - Well, they are opaque,
but they look at your market and they think you're opaque. (audience laughing) But you know, risk is a
function of the quality of the underlying assets
and the amount of leverage. And, you know, so CLO tranches right now appear to be offering
very high rates of return, especially relative to their ratings. - [Robert] Mm hmm. - And, you know, an A rated
CLO tranche out yields an a rated corporate
bond by 300, probably. People make a big mistake
when they take the ratings at face value. - [Robert] Right. - You know, because, you
know, in America today, I believe there are three AAA companies, Mike Milken tells me that during
the global financial crisis or just leading up to global financial, there were 16,000 AAA CLO tranches. So something was wrong and
we know which one was wrong. - [Robert] Right. - So I just would caution
everybody in the audience who hasn't had an experience
that you can't take ratings at face value and you
can't compare the rating on a corporate bond with the
rating on a tranched security. - [Robert] Right. - Okay. Matt, we have some
questions from the audience. - [Matthew] Yes, we do actually. So Howard, what is a belief that you hold with what you think a lot of
people would disagree with? - Well, I haven't had anybody, you know, it's four months since
I put out Sea Change and I haven't heard
anybody say, you're right. You know, every, everybody
knows what the history shows that rates are down and
the stock market's down and bond values rates are
up and stocks are down and bonds are down and it's
harder to finance, et cetera. But I think that most
people are still treating it as a normal cyclical fluctuation, which is different from a sea change. And if I'm right about the sea change and if my view describes
the next five to 10 years, then that's a very different story. - [Matthew] So another question here, so obviously your memos are
very widely read and, you know, Warren Buffet is pays
attention, of course. So how do you determine
what is memo worthy? - You know, I try to write
when things need explanation and I try to write more
when the world is roiled. And you know, and I prefer to write when I think I see something
that most people don't see, 'cause I'm trying to add value, you know. And that's why I started
the SVB memo by saying, I'm not gonna give you
another history of SVB, I'm gonna try to give you the lessons. To me the most important
thing is not what happened. The most important thing is
what inferences should you draw from what happened? And what
lessons should you learn? - [Matthew] So related to that, you obviously write a lot, right? And there's a lot, you know, that that's a challenging
process, just, you know, the writing of things. So how do you think about writing? Like. - No, for me it's fun. You know, I always point out
that if you look at the memos, there's almost invariably
one published in September and one published in January, which means that I wrote
over summer vacation, I wrote over Christmas. (audience laughing) I'd rather write than not. For me, it's my creative outlet, you know, I get great pleasure from,
from writing and, you know, it's easy to say that I
get a lot of good put ups for the memos and, and
that's my psychic reward. But in the first 10
years, from '90 to 2000, I never had a response. Not only did nobody ever say it was good, nobody ever said, I got it. (audience laughing) And I kept writing. I think, you know, for my own enjoyment. - [Matthew] So we have a
actually a really good question from a student currently
for young investors trying to develop their subjective
investing judgment. What is the best way to learn and grow? - Well, the best way to learn
is by being wrong for a while. You know, you learn nothing from success. And my 2018 book was called
the Mastering the Market Cycle. And it talks about the economic
cycle, the profit cycle, the psychological cycle,
the real estate cycle, the market cycle, all
these different cycles. And the last chapter is
on the cycle of success. And what I say in there
is that you learn nothing from success. What you learn
is I can do it, it's easy, I can do it again, I can
do it with more money, I can do it in other fields, and I can do it without my team. And these are terrible lessons. And, you know, the day I
came to work in September of 1969 at Citibank's Research Department, if you would've bought
the Nifty 50 that day, which career-wise I did, and
if you held it for five years, these were the greatest
companies in America about which people believed, number one, nothing could ever go wrong. And number two, there
was no price too high. If you held those stocks for five years, you lost over 90% of your money. And that was very educational. (audience laughing) And what I took away from
what I took away from that was the conclusion that
it's not what you buy, it's what you pay. And that success in investing doesn't come from buying good things, but from buying things well. And if you don't know the difference, you're in the wrong field. And so you gotta learn those
lessons at some point in time. - [Matthew] All right, one more and then we'll turn it back to Bob here. So Howard, how do you think about ChatGPT in your memos in the future here? - Well, I wrote a memo about six or seven years ago entitled,
Investing Without People. And I talked about index and passive, systematic and algorithmic,
AI and machine learning. And you know, when I went to Chicago, the professor told us
that the statistics showed that most mutual equity mutual funds did not equal the S&P before fees. And the vast majority lagged after fees. He says, why don't they just buy one share of every stock in the S&P? There was no such thing as index funds at that time or indexation. And of course, Jack Bogle
popularized it in '74. And now I believe that passive
and index investing accounts for the majority of mutual
fund equity capital, not because passive results are so good, but because active was so bad. And so, you know, if you
go back to when we started, you could go into this business, you could hang up your shingle, you could manage equity money, you could lag the S&P and
you could charge a high fee. The world's a smarter place
now, and you can't do that. And that's why the money has
flowed into passive funds. And by definition, on average,
most people do average, and most people don't beat the average, which means they don't
deserve high fees before fees and they fall further behind after fees. So that was a flawed business model, which is in the process
of being corrected. And that's why a lot of money
has been turned over to, let's say, machines, something mechanical. And I still believe that there are people who have superior insight
and see things better. And you know, the future is not a fact. The future does not yet exist, and we can sit here today and predict it, the future will develop.
And there are people, small minority who see the
future better than others and who understand the shape
of the probability distribution and whether the expected
return compensates for the pitfalls that lurk
in the left-hand tail. Those people deserve to do
very well. The rest do not. And especially one of the
crazy things that has changed during our careers is
that now incentive fees, people getting 20% of the
profits is ubiquitous. And you know, when you give
somebody 20% of your profits, you're essentially giving
them all the profit on 20% of your money. And that's pretty exceptional. And so you should only get that
for exceptional performance. And the world hasn't really
figured that out yet, I don't think. There are thousands of hedge fund managers and thousands of private equity funds, and they all get 20% of the profits. - [Robert] Why do you think that is? I mean, the hedge fund industry
has under delivered as much as active long only, you know, managers have under delivered. - It's a long story,
but I'll take a minute. In 2000, the tech media and
telecom bubble melted down, and the S&P 500 was down in 2001 and two, the first three year decline since 1939. And everybody lost interest
in the stock market. The fed took rates to one or
two and bond yields collapsed, and people lost interest
in the bond market. So most people concluded that
they couldn't get the returns they wanted or needed
from stocks and bonds. And that was really the birthday date for so-called alternative investments. And what did they turn
to first? Hedge funds, because hedge funds did quite
well during that period. And so hedge funds that
used to be 50, a hundred, $200 million, received
billions of dollars, mostly from the pension industry. - [Robert] Right. - And people don't
understand that an onrush of money changes everything. And I wrote a memo on hedge funds, I think it was around
'05, and I said, you know, over the next, this this
the only time I ever touched on hedge funds. And I said, I think the average hedge fund over the next 10 years will
return between five and six, and over time people will get tired of paying two and 20 to make five or six. - [Robert] Right. - And Barron's called me 10 years later and they said the return was 5.2, we'd like to do an article. And still there are trillions of dollars in hedge funds today. So you tell me? You know, I mean, and I've been on number
of investment committees at nonprofits. I still am. And the message I give
them is very simple. There is no room in a forward looking pool of permanent capital for an asset whose only virtue is that it
has a very high probability of producing a low return. (audience laughing) But people still own them, you know? - [Robert] Yeah. - Now, there's a lot of psychology and I think one of the things is people feel the diversification is good, but I think Buffet would
say that including a fund which is 80% likely to
produce a 5% return, is what he calls the diworstification. And he's right, of course. But, you know, people, I
think a lot of people say, you know what? The return's been rotten, but the day I sell it is the
day it's gonna start going up. You know, I don't know why they do this, but there's still
trillions in hedge funds. - [Robert] It's shocking. - Yeah. - [Robert] All right. My last question. - And as opposed to
commercial real estate, somebody actually owns them. (audience laughing) - That's right. It's like Office. - Yeah. - Just getting back to Sea Change and some of the comments you've made. Besides opportunistic
or distressed investing where you obviously feel good
about the return prospects. Do you think as the broad
economy and the markets digest, the higher for longer scenario
that we're broadly speaking, destined to go through
a a multi-year period of low or no returns in stocks, bonds? - Well, look. When, because. - You made the case when
interest rates, you know, started there declined 40 years ago, the S&P 500 during that time
generated 10.5% annually. - Yeah. Right. Yeah. - And you could just buy the index. - Yeah. - It was free money. - 10 And a half percent a year for 40 years is a lot of profit. - For 40 years, it's a lot of money. - So when rates go up, everything has to offer a
higher prospective return. - [Robert] Right. - In order to be at equilibrium
with current conditions. And the only way, the main way you get to offering
a higher prospective return is a fallen price. So there has to be a period of adjustment for ownership assets, whether it be properties
or companies or shares. And so I, you know, we
saw some of it last year, but there's been a substantial rally. And so my own personal
feeling is that it's not done. But the other thing is that, as I said, that was a terrible period to be a lender. I think the current period is
a better time to be a lender because, you know, a
year ago high yield bonds yielded about four, there was a lot of issuance in the threes and there was even an issue in the twos. Can you imagine a high
yield bond that yields 285? But today high yield bonds yield, and leverage loans, yield
in the upper single digits. That's a useful rate of
return. It may go higher. - [Robert] Yeah. - As the prices go down. But
that's a good starting point. - [Robert] Right. - So, you know, I think
that after 13 years in the wilderness, I think that credit investing is looking at much better returns. But someday ownership
assets will get cheap enough that they're a place to be. But if interest rates are gonna stay up, then there has to be a
period of adjustment. - [Robert] You'll come back and let us know when that time comes. - Anytime. - [Robert] Okay. Thank you Howard. (audience applauding)
Lmfao I wonder how tf he chooses which interviews and appearances he chooses to appear in. Guy's doing this FT now lol