I'm 80 and I wasted 25 years of my life. Don't make my mistake. - Howard Marks

Transcript

If you wait until you have nothing to be afraid about, probably the opportunity has passed. Howard, it's good to see you again. We had a lot of fun last time and we were like, look, I don't know if other people are going to like that, but we loved that. And then over a million people listened to the last one. And so this morning I was reading, you wrote this blog post about how you changed your mind about AI. You had written a couple of months back about the possibility of an AI bubble. And then as a good thinker tends to do, you got new facts. You reassessed the situation. You wrote a new post about AI. Do you want to summarize the story of how you changed your mind on AI? Well, the story is very simple. I have this son named Andrew. He's a VC. He's dealing with AI every day. His companies use AI. Some of them create AI, et cetera. I had written the first memo around December 9th, as I recall. And then in early February, he said, Dad, so much has happened. You have to update the memo. And so I rewrote the memo entirely. I was rereading one of your old books. And you repeat this phrase a bunch, which is it's important to be rational. And you can't get seduced into thinking something is a good idea because that's when smart people can make bad decisions, when you get emotional about something. But then when I was reading part two, I was reading it. And I was like, Howard, you sound a little seduced. You sound a little seduced. You sound like you're into this. Are you at all approaching this in an emotional way, you think? It depends on your definition of emotional. I upgraded my opinion of AI and its potential because its ability to talk about its own strengths and weaknesses, to use humor, to put information in the context of me, to use what it knows about me. And this is really exceptional stuff. [SPEAKER_00] There's a quality to AI or more than one quality, which are unprecedented, in my opinion. The first, the obvious one, is autonomy. All the other technological innovations from the railroad to computers to the internet, et cetera, were all tools or things to speed up and increase productivity. There's never been anything with the quality of autonomy. The idea that you can give it a job and not tell it how to do it and it'll figure it out is really unique. And what comes with that, of course, is this nagging concern that it may take over. So that's really important. The other thing, and this is not quantifiable, is there's never been anything, in my opinion, so unpredictable. I don't think anybody knows the shape of the future. So I've never had that sense before. I never thought that the internet, for example, was beyond comprehension or beyond prediction. [SPEAKER_02] Do you think that AI will be able to do what you do? And I know you talk about this in the memo. And I got to be honest, when I read it, I almost felt like you read stories about Warren Buffett reading the Moody's Manual page by page, 800 companies, and trying to digest that information. Well, AI can do that in a heartbeat, right? A lot of the things that go into making investment decisions, it can do very well, very fast. And then also, it's advancing so fast. So whatever we thought it could do three years ago is laughable compared to what it can do today. And as you pointed out, even three months ago. So I guess in your heart of hearts, do you think in the future, the next Howard Marks is not a human, but maybe a human with AI or just AI? [SPEAKER_00] Everything I say on the subject I preface with, I'm no expert, but I think I told the story in the memo about the fact that indexation put a lot of people out of the equity. Because it disclosed that they couldn't do what they claimed to do. And most active equity investors underperformed the averages. And AI will unfrock or defrock another group of people whose talents are not as great as they purport. So I used to say about computers, when I went to school and learned about computers, all they could do was read, remember, add, subtract, and compare. They could do it with a lot of data. They could do it really fast. They could do it without making arithmetic mistakes. They could do it without making emotional mistakes. So while the list was limited, it was still better than most people. Now, what's the list for AI? Is the list for AI unlimited or limited? That's a big part of the question right there. And I don't know the answer. Maybe you do. Maybe you do. Maybe you do. And then, is there anything left that AI can't do? And one example is, I think we've helped our clients over the years by not investing with bad people. And sometimes, you talk to people and for undefinable reasons, you just say, you know what, it doesn't feel right. As somebody said to me, the hair on your neck goes up. And if that's true, and if AI doesn't have hair on its neck, then maybe there's a role left for experienced investors with judgment. I believe so. First of all, there will always be things for which there is no history to train on. And to the extent that a certain big percentage of what AI does is knowing history and recognizing and extrapolating patterns, there will always be stuff for which there is no history. There are just some people who have a better understanding of the probability distribution that defines future events. [SPEAKER_01] I was reading this book on Steve Cohen. Do you believe that you have a better person who is a good investor good, but also how the average person could get better? Or do you believe that's not even possible, that you just have it or you don't? [SPEAKER_00] Well, in my first book, The Most Important Thing, Columbia, which published the book, we were talking about the book. They said, well, write us a sample chapter. So I sat down and I wrote a chapter that I had never even thought about. And it turned out to be the first chapter in the book. [SPEAKER_01] And it says, on this show, we have spent hours talking to some of the best investors alive. Well, lucky for you, the team at HubSpot, they have pulled out the principles that matter most and turned it into a very simple, easy to read wealth guide. It's 35 principles from the top investors. We're talking guys who have been on the pod like Howard Marks, Manish Pabrai, Morgan Housel, Kathy Wood, and a ton others. [SPEAKER_00] They said, well, write us a sample chapter. [SPEAKER_00] So I sat down and I wrote a chapter that I had never even thought about. [SPEAKER_00] And it turned out to be the first chapter in the book. [SPEAKER_01] And it says, on this show, we have spent hours talking to some of the best investors alive. [SPEAKER_01] Well, lucky for you, the team at HubSpot, they have pulled out the principles that matter most and turned it into a very simple, easy to read wealth guide. [SPEAKER_01] It's 35 principles from the top investors. [SPEAKER_01] We're talking guys who have been on the pod like Howard Marks, Manish Pabrai, Morgan Housel, Kathy Wood, and a ton others. [SPEAKER_01] So these are all their frameworks, their mental models, their rules, how to play the long game and how to avoid ruin. [SPEAKER_01] You can get it in the link below. The most important thing is second level thinking. Second level thinking says, if you don't see anything different from everybody else, you can't possibly be superior. So to be superior, you have to at some point see something different from other people, what's called a variant perception. That you have to either think that the consensus of investors overstates the quality of the company, the growth rate of the company, the earning power of the company, or the multiple it deserves. And you have to have this variant perception and you have to bet on your perception. And you have to be right. Right. So that's second level thinking. I say in the book, and when people ask me, I say, can you teach me to be a second level thinker? And the answer is no. I say in the book, I don't know. But I think it's more no than yes. Because what I say is, I can teach you the importance of being a second level thinker, as I just have in this chapter. But I can't tell you how to have perceptions that are at odds with the consensus of investors and correct. In basketball, there's a saying you can't coach height. And I think there's something called insight. And I think some people have it. [SPEAKER_00] And I don't know if AI can have it. [SPEAKER_00] Because when you talk about artificial general intelligence and AGI is when a computer or AI can do everything that a human can do. [SPEAKER_00] Can it do that? [SPEAKER_00] Don't know. [SPEAKER_00] And when I talk about the mysteries of AI, that's a big one of them. Are there things it won't be able to do, even when it reaches full flower? [SPEAKER_01] Can you think back to some of the biggest calls that you've had? [SPEAKER_01] How strong did that feel? [SPEAKER_01] Did you still have doubt? [SPEAKER_01] Or was it 100% conviction? [SPEAKER_01] I'm curious to hear what it feels like. Great. I think in our last episode, we talked about the day Lehman went under. September 15th, maybe, of 08. And we had thought that there was going to be a mess. And we had raised, in the distressed debt world, the biggest fund in history prior to 07 was our 02 fund, which was $2.5 billion. And in 07, we raised $11 billion for a distressed debt fund because we thought that there was a lot of distress coming. And we had it on the shelf. It was for deployment when the stuff hit the fan. And Lehman goes under, which I think qualifies as saying the stuff has hit the fan. But people are talking about the end of the world. And all the financial institutions are going to melt down. And everything having to do with money is going to atomize. So we were faced with the question, do you invest the money? And there's no pattern recognition for the end of the world. And in the pandemic, a Harvard epidemiologist said, when we make decisions, we have data, analogies to past experience, and supposition. Well, at the time of the Lehman bankruptcy, we had no data and no prior experience. We only had supposition. So this is an interesting question. Can AI have engaged in this kind of thinking? And what we said is that if the financial world melts down and we invest, it doesn't matter. But if we don't invest and the financial world doesn't melt down, then we didn't do our job. So we have to do it. And we invested on that basis. [SPEAKER_00] And Bruce, who runs those funds, invested an average of $450 million a week for 15 weeks, $7 billion in a quarter. [SPEAKER_00] On that, was it only on that? [SPEAKER_00] We also, on quantitative measures, assuming the world doesn't melt down, we were getting great bargains. [SPEAKER_00] We were buying the debt of companies where we would break even if companies that had been bought out by private equity guys two, three, four years earlier, if they ended up being worth a fifth or a fourth of what they had paid, we would still be okay. So that was pretty easy, quantitatively. But we were absolutely not confident. [SPEAKER_01] You weren't confident? [SPEAKER_01] No. [SPEAKER_01] I thought you were going to say the opposite of that. No. No. But I mean, we're the kind of people who always say I could be wrong or it could work in a way that's never been seen before. And so we always, I wrote a memo three or four years ago called Taking the Temperature about the five major calls, macro calls that I made. [SPEAKER_00] And conclude, no, I should invest. But I'm not immune to what everybody else is reading. If you do these things without any trepidation, maybe there's something wrong with you. But people who look at the world probabilistically and admit to ignorance and uncertainty can't act without trepidation. [SPEAKER_02] Hey, can you tell me about raising $11 billion? [SPEAKER_02] Because you said that very casually. [SPEAKER_02] So we raised an $11 billion fund. [SPEAKER_02] And that's like if I just said, hey, I just turned water into wine. [SPEAKER_02] I think for most people, I'm just actually curious. How does that happen? Is that you go to people and you say, hey, we think the world's, you make a really persuasive case. Are you using a pitch deck? Is this just prior relationships? Are you selling upside? Are you selling safety against downside and fear? What actually goes in to raising $11 billion? [SPEAKER_00] So there's a list of things. [SPEAKER_00] Number one, certainly prior experience. [SPEAKER_00] Relationships. hey, I just turned water into wine. I think for most people, I'm just actually curious. How does that happen? Is that you go to people and you say, hey, we think the world's, you make a really persuasive case. Are you using a pitch deck? [SPEAKER_02] Is this just prior relationships? [SPEAKER_02] Are you selling upside? [SPEAKER_02] Are you selling safety against downside and fear? [SPEAKER_02] What actually goes into raising $11 billion like that? So there's a list of things. Number one, certainly prior experience. Relationships. People have, we started this business in 1988. And so we're talking about 20 years later. And in the 20 years, we managed a lot of money and had very good results for a lot of people. And so you can work on that reservoir of goodwill. Number two, this strategy is particularly well-suited for crisis. And we had managed money through a few crises, 1991 and 01, 02, and done exceptionally well. So we were able to convince people that, number one, so many of your investments are set up for prosperity. This is a good way to hedge it by making an investment that will do particularly well if the stuff hits the fan. But we were also able to call attention to flaws in the environment. The things that gave rise to the global financial crisis, we could talk about and we could point out. And the fact that the market was not acting as a disciplinarian, which is its main job. Main job is, people come in and say, I want money for this, this, and this. And the market's job is to say, no, that doesn't make any sense. That's a stupid idea. We're not going to invest in that. That's the job. And sometimes the market doesn't do that job. And when the market doesn't do that job, then dumb ideas get financed. And when they turn out to be dumb, people lose money. So I think we were able to convince people that some dumb things were happening. And then, of course, there's great respect for Bruce Karsh for the investing he's done over the years. I think those are the main reasons why we were able to do it. And by the way, you hit the nail on the head. We did it in advance of the crisis. The best time to invest is in a crisis. You can't raise money during the crisis because the news is so terrible. My wife and I have a favorite movie we watched called Spy Game with Robert Redford. And he says, Redford says, when did Noah build the ark? Before the flood. You got to build the ark before the flood. You have to have some sense that there may be a flood. But one other point. In the prior 20 years, there had been these occasions when we thought there was going to be a great investment opportunity. And we were generally right because we took the temperature of the market accurately. And we raised a large fund and we invested in it and we made a lot of money. But then our next fund was smaller because we thought the opportunities weren't as good. Now, most people in the investment business, if they have a fund that does great, the next fund is bigger because they can sell on the back of those results. But we make it smaller because we think those results mean that things have appreciated and are not so attractive. And I think that having done that for 20 years, I think we gained a lot of credibility and people tend to say when Howard and Bruce say there's a great opportunity, they're not just trying to raise money, they really believe it. And they tend to be right. And sometimes you have to speak against your own interest and admit your limitations and admit your uncertainties. So in 1998, we had the meltdown of long-term capital management. We had a Russian ruble crisis. We had a panic in Southeast Asia. And especially with long-term going under, one of the skilled portfolio managers, young portfolio managers at Oak Tree came to me. He says, I think this is it. I think we're melting down. It's all over. And I said, tell me your concerns. And he laid out his concerns. And I said, okay, I understand it. Now go back to your desk and do your job. A battle hero is not somebody who's unafraid. It's somebody who's afraid, but does it anyway. If you're running into a hail of bullets and you're not afraid, there's something wrong with you. But you do it anyway, because it's what you have to do. And I don't want to elevate, I'm not saying we're analogous to a combat hero, but you have to do it despite your trepidation. And by the way, if you wait until you have nothing to be afraid about, the opportunity has probably passed. [SPEAKER_02] That's a great point. [SPEAKER_02] You mentioned Bruce, and I wanted to ask you about this because it seems like you guys have had a very long-term partnership now, what, 30 plus years. [SPEAKER_02] I think people don't talk about that enough, the value of compounding in a relationship and how to be a good partner for the long term. [SPEAKER_02] A bad partnership can ruin you, but we don't really talk about what it takes to make a great partnership at the same time. [SPEAKER_02] If you were going to teach me and Sam, if we said, hey, me and Sam want to do this podcast for 30 years, or I have a business partner, Ben, I want to be in business with him for 30 years, what do we got to get right to do that? Well, it's a great question, John. [SPEAKER_02] the value of compounding in a relationship [SPEAKER_02] and how to be a good partner for the long term. [SPEAKER_02] A bad partnership can ruin you, [SPEAKER_02] but we don't really talk about what it takes [SPEAKER_02] to make a great partnership at the same time. [SPEAKER_02] If you were going to teach me and Sam, [SPEAKER_02] if we said, hey, me and Sam want to do this podcast for 30 years, [SPEAKER_02] or I have a business partner, Ben, [SPEAKER_02] I want to be in business with him for 30 years, [SPEAKER_02] what do we got to get right to do that? Well, it's a great question, John. It's very important. Bruce and I have been partners for 39 years this month, and it's one of the greatest things in our lives. Because after, I think we would both say that after family and maybe some good friendships, it's really the best thing we've had. We've worked together closely for all that period. We've obviously produced a lot of success, had a lot of fun, have never had a fight. We have intellectual disagreements, but we've never had a fight. Probably because neither of us is really a financial maximizer, and a lot of fights are probably about money. The bedrock of our relationship is mutual respect, and I think it would be very hard to have a successful long-term relationship with a partner if you didn't have respect for each other. And that ties into something I wrote in 02, I think. [SPEAKER_00] But in 02, I wrote a memo [SPEAKER_00] called The Most Important Thing. [SPEAKER_00] And there was a section in there [SPEAKER_00] which talked about having a successful partnership. [SPEAKER_00] And I said, [SPEAKER_00] the key to a successful partnership [SPEAKER_00] is shared values and complementary skills. [SPEAKER_00] If you don't share values, [SPEAKER_00] I don't think you can have a successful partnership. [SPEAKER_00] Let's say one person is super aggressive [SPEAKER_00] and the other is a chicken. [SPEAKER_00] One person is super ethical [SPEAKER_00] and the other one cuts corners. [SPEAKER_00] I don't think you can have [SPEAKER_00] a successful relationship, partnership. And I've seen many, many, I mean, a friend of mine, when I was a kid, AT&T went public. Can you imagine the days before AT&T was public? But anyway, they went public. It was the biggest deal in history. And they had a full-page tombstone ad in the newspaper. And it listed all the investment firms that were the investment bankers. And there were probably 40. And a friend of mine, Ed Ramsdell, used to carry that ad around. And every time one went out of business, he would mark it off. And eventually, I think they almost all disappeared except for Goldman Sachs. But why do they go under? You have some cowboys and some chickens. And in bad times, the chickens say the cowboys are getting us killed. And in good times, the cowboys say the chickens are holding us back. And they disparage each other. So you have to share values, in my opinion. The other thing is, you have to have complementary skills. So the beauty of a partnership is when your partner can do things you can't. That means that you are both additive to each other, synergistic. If I can do everything you can do, or if I think that, what do I need you for? It's not going to last very long. Because eventually, I'm going to say, you're overpaid. I don't need you. And the beauty of my relationship with Bruce is that we both recognize that there are things that the other is good at that we're not. And that the other wants to, is willing to do that we don't want to do. For example, from the very beginning, Bruce approached me in 87 with the idea of a distressed debt fund. I went into the high-yield bond business in 78. And he had a background in law and got into some distressed investments, which went well. And he said, he came to me, he said, we should do a distressed debt fund. And it was quite a novel idea. But from the beginning, I go on the road and talk to people. And Bruce stays back and manages the money. I go on podcasts with people like you. And Bruce doesn't. But the third element is you got to be appreciative. And you have to thank your lucky stars that you have a partner who will do the stuff you don't want to do. [SPEAKER_01] Can you do the same towards parenting? [SPEAKER_01] Because both on this episode and last one, [SPEAKER_01] you referenced your son a bunch. [SPEAKER_01] Do you have any insights [SPEAKER_01] into how you've been able to raise a kid [SPEAKER_01] that you not just love, [SPEAKER_01] but you enjoy being around? Well, you know, I think it was Forbes, 30 or 40 years ago, had an article about so-and-so who was the only shrink with an office on Wall Street. And they asked this guy about his patients' problems. And he said that his patients' problems, and they were all men, of course, because it was Wall Street a long time ago, his patients' problems were inversely proportional to the support they got from their fathers. We had people over for dinner last night. And one of the guys, and we were talking about so-and-so who was a character of some kind. And one of the guys said, well, you know what? His father treated him like hell. I just never wanted to be that father. And it's amazing how many men, and especially successful men, have to assert their superiority over their sons. because it was Wall Street a long time ago, his patients' problems were inversely proportional to the support they got from their fathers. We had people over for dinner last night, and one of the guys, we were talking about so-and-so who was a character of some kind. And one of the guys said, well, his father treated him like hell. I just never wanted to be that father. And it's amazing how many men, and especially successful men, have to assert their superiority over their sons. Maybe daughters too, but I think it's more with sons. And I guess it's Freudian or something else. But what a terrible thing that you have to, if you have this kid, prove you're smarter. So I always let Andrew be smarter than me in some things. And of course, I always gave him full support in the things he wanted to do. If your kids want to do something, and A, it's not going to be injurious, and maybe there's no B. Let him do it. When my daughter was getting out of lower school and had to choose an upper school, she applied to the two good schools in L.A., got in, and we let her choose. My wife and I had a sense for which one we wanted her to go to, but we concluded that we could be wrong. Our choice could be the wrong choice. And anyway, of the two choices, while one might be better than the other, neither was a bad choice. So if that's true, let the kid make the choice. And they get experience with making choices, and maybe they get experience with making incorrect choices. [SPEAKER_02] Which is very important. [SPEAKER_02] On the subject of choice, I'm interested to know, when you were younger, let's say you're 21 years old, and you're trying to figure out what you want to do with your life. Probably one of the more important questions you should figure out at some point is what do I want to actually do every day for eight hours a day, half my waking hours. And I doubt that a lot of 19-year-olds wake up and say, I want to work with distressed debt and bonds. That's not a knowable answer at that stage. What do you think is the right approach to figuring out your thing? [SPEAKER_00] First, I want to say, Franshan, that the thing you describe, I did a terrible job of. I was unconscious. The decisions I made in my first 20 years, as they say in religion, I did not apply intention. I just let other people make the decision. I made decisions haphazardly. I didn't think about it a lot. I'm embarrassed at how terrible my decision-making process was. In fact, it's a misnomer to apply that term. [SPEAKER_00] But having said that, I think it's desirable to make your choices with intention, well-reasoned, et cetera. And what I tell kids is my favorite quote is from a writer named Christopher Morley who said, there is only one success, to live your life your own way. I think it's a beautiful quote. [SPEAKER_00] I go to Wharton and Harvard and all these places and Columbia and I say, the fact that you're in this room probably means that you can live your life your own way. You probably have what it takes to live your life your own way, intellectually and work ethic and so forth. But you have to figure out what it is. That's the hard part. Who are you? [SPEAKER_00] And what I say to them is try to find something that will play to your strengths, avoid your weaknesses and make you happy. What that means is well, that sounds obvious. Well, who the hell wouldn't follow that instruction? Well, the answer is, what it means is you can't let your friends decide what you should do. You can't do things because your friends are doing them. You can't let society decide what you should do. You can't let your parents decide what you should do. You have to think it out for yourself. [SPEAKER_00] Having said that, it's very difficult because it's hard to know yourself and we know that in 20 years you'll be a different person. How can you make a decision today on what will make that person happy? Very difficult. [SPEAKER_00] You can't let society decide what you should do. You can't let your parents decide what you should do. You have to think it out for yourself. Having said that, it's very difficult because it's hard to know yourself and we know that in 20 years you'll be a different person. How can you make a decision today on what will make that person happy? Very difficult, but you've got to try. That's my advice, which I didn't take when I was a kid and I was derelict, but I got lucky. Well, you eventually did become, as you described, living well-intentioned. Yes. Something must have changed. Do you remember, did you do any exercises to become that way? Not that I recall. I think part of it, I said for the next 25 years I didn't do it. That took me up until roughly 95, which is when I left with Bruce to start Oak Tree. That was really... [SPEAKER_01] That's so ancient. Wait, so you think that up until the age of 50 or 49, you were floating or living according to other people? Well, not just that, but just not making good decisions, conscious decisions. Why did I go to Citibank Investment Research Department when I got out of University of Chicago in 1969 because I had a good summer there the year before? Why did I move from the Equity Research Department to the Bond Department? Because my work in Equity Research was unsuccessful and I was told to get out. Why did I move to California in 1980? Sunshine, palm trees. I just can't claim that I was making good decisions. I got sent to the Bond Department at Citibank in 1978 and three months later the head of the Bond Department calls me up since I didn't have that much to do. I was fairly idle and he says, there's a guy named Milken or something in California and he deals in something called high-yield bonds. Do you think you can figure out what that means? That was just luck. If you read Malcolm Gladwell and Outliers, it was just luck. Right time, right place. And if that call came at lunchtime and I had been out at lunch, maybe somebody else would get the call and they'd be me. [SPEAKER_02] Your humility is very striking to me. We have a lot of people on this podcast that I think claim to be humble or try to be humble. You really are an extremely humble person. One note I wrote down is from now on at the top of all my investor memos, I'm just going to start it with I could be wrong, but because I think whenever I make an investment, I'm so boastful about my excitement and my exuberance and why this is right and why it's the right move to do. And I think you've infected me with a little bit of your humility there. Well, you make the investment because you believe in it, but it's important to see the other side and know what you're doing. By the way, Churchill said he's a humble man and he has a lot to be humble about. But Mark Twain says, 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 I always tell people in line with what you just said, Sean, no sentence that starts with, if I could be wrong, but, or I don't know, but, ever got anybody into trouble. The sentences that get people into trouble are, I'm 100% convinced that, and if you really feel that you're 100% right and you bet like you're 100% right and it turns out it was only 80-20 and the 20 comes up, that's how you get into big trouble. So I think the thing that Mark Twain said was incredibly important. [SPEAKER_01] Yeah, last memo Sean sent me The sentences that get people into trouble are, "I'm 100% convinced that," and if you really feel that you're 100% right and you bet like you're 100% right and it turns out it was only 80-20 and the 20 comes up, that's how you get into big trouble. So I think the thing that Mark Twain said was incredibly important. [SPEAKER_01] Yeah, last memo Sean sent me about some deal he had was, "Bet everything you have, this is it." [SPEAKER_02] Mortgage the house. Hey, can I ask you about Buffett? Buffett famously has said he reads your memos. I assume you guys have interacted. Do you guys hang out? What's he like? Give me some Warren Buffett stories from your life, your experience. Well, Bruce actually was always a Buffett watcher and if you go back to the 80s, no, I don't think anybody had heard of Buffett, maybe not the 90s, I don't remember exactly. In the late 90s, people said Buffett's lost it because he's not in tech and then, of course, tech blew up and then they said, oh, maybe Buffett knows what he's doing. But anyway, when Enron melted down, Enron did most of its misbehavior through off-balance sheet entities and there was a lot of opportunity there and so we became the largest holder of the debt of one of them. It was called Osprey and Warren was the second largest holder and I don't remember how it came to pass, but he gave us his proxy and he let us run that position for him and Bruce did a masterful job of restructuring that company and we came out with a big win. So this was around 2002. So around 2003 or 2004, Warren writes Bruce a letter and he says, "Nice job on Osprey and if you ever find yourself in Omaha, let me know. We'll have lunch." So Bruce and I write him a letter, Bruce writes him a letter, he says, "It happens that Howard and I will be in Omaha this week. Can we take you to lunch?" And so that's how we met and the relationship had a lovely start and it went on like that. We never actually did any business together after that because he was always looking for something big that he could acquire and we don't really deal in big, acquirable things. But it was a very nice personal relationship and I've never said this to anybody else before, but in 2009, I wrote a memo in which I mentioned him and I sent it to him and I said, "I want to make sure that you see this memo because it mentions you" and he says, "I do see the memos and blah, blah, blah. And I have seen this. He says, "And by the way, you should write a book and if you do, I'll give you a blurb for the book." And that's why I wrote the first book, The Most Important Thing. I always thought I'd write a book when I retired, but instead, when you get that kind of note from a guy like Warren Buffett, you can't let it sit. So that was the start of that. But I've been fortunate to visit him a few times and it's a big plus. [SPEAKER_01] Is there any part about the Warren mystique, the Buffett personality that you think popular lore gets wrong or is inaccurate? No, I think it's mostly what you see is what you get. The one thing I'll say that I don't think people know about, they don't get wrong, they don't know about is the depth of his love for Charlie. And Warren sent out a note, I think it was at Thanksgiving last year, and he said, "I'm not going to be at the Berkshire meeting and I'm not going to be writing this or that," whatever it was. And he talked about his relationship with Charlie and anybody who wants to should get a hold of that letter and see it because it's we talked earlier about the importance of a partnership and how great a contributor to your life it can be. And that's what he had with Charlie. I think he, [SPEAKER_02] I think, as I recall, he talked about Charlie being the big brother and himself being the little brother and I think we can say that about my relationship with Bruce. And for one reason or another, he's always been very kind to me about my role, and generous about my role. And he, look, he's certainly to your life it can be. And that's what he had with Charlie. I think he, as I recall, he talked about Charlie being the big brother and himself being the little brother. And I think we can say that about my relationship with Bruce. And for one reason or another, he's always been very kind to me about my role and generous about my role. And he, look, he's certainly as smart as I am and as talented as I am, maybe in different ways, but there was always this feeling of respect and affection and love. And as the more time passes, the more we're conscious of that he and I. And that's what Warren and Charlie had. And it was a beautiful thing to watch. And also, Warren used to love telling funny stories about Charlie, of which there were a lot. And their relationship was always suffused with humor. [SPEAKER_01] Did they make a lot of the decisions together? I mean, I've read a little bit about them and their relationship was a little challenging for me to understand because I don't think they've ever lived in the same place. [SPEAKER_01] Yeah. [SPEAKER_01] Did they talk daily? I don't know exactly how they made their decisions, but I think Warren used Charlie as a sounding board, a logic checker. That kind of thing. Of course, Charlie's great credit is that Warren Buffett used to engage in what we call cigar butt investing. I don't know if you know about this, but cigar butt investing means you're walking down the street and you look in the gutter and you see a used cigar and you pick it up and you conclude that it has three puffs left. So you pick it up. It's a disgusting thought. You pick it up and you smoke it and you get three puffs for free. That's cigar butt investing. But Warren would buy really cats and dogs because they were cheap. And Charlie's great contribution was talking Warren out of cats and dogs, out of cigar butts. And his revolution was that he convinced Warren not any company at a great price, great companies at a good price. Most people credit that as Charlie's greatest contribution. So, but, synergistic, mutual respect, love, complimentary skills. Interestingly, they probably had the highest combined IQ of any partnership in history, but they were different kinds of IQ. Charlie was more of a classicist and humanist and a man of letters. And Warren, of course, was an incredible computing machine. [SPEAKER_01] A man of letters. Sean, we need to bring that back. That sounds beautiful. It was beautiful. I want to be a man of letters. Charlie, when we would get together, he wouldn't talk about investments or money or companies, mostly. He would talk about ideas. [SPEAKER_02] Well, let's wrap it with one last quick one, which is, give us some homework. Give us a book that shaped the way you think or brought some good ideas to the forefront. What's a book we should read as recommended by Howard Marks? So, one is A Short History of Financial Euphoria by John Kenneth Galbraith. This was very influential in my thinking, and it teaches you about the mental weakness that gives rise to booms and busts. And of course, taking an objective view of cycles is a big part of what I do. So that was very influential and I was lucky to get to meet Galbraith. And then, the other book would be Fooled by Randomness by Nassim Nicholas Taleb and it talks about, see, I'm a great believer that a lot in life is random. And so, this is one of the reasons, maybe it's my rationale for not being such a decisive thinker. Taleb basically says, in the short run, anything can happen. Fooled by Randomness by Nassim Nicholas Taleb. It took me and it talks about, I'm a great believer that a lot in life is random. And this is one of the reasons, maybe it's my rationale for not being such a decisive thinker. Taleb basically says in the short run, anything can happen because of randomness. And this determines our attitude toward risk, our attitude toward portfolio construction, our attitude toward published records. You see a published record, the guy had a great return that year. Is he a great investor? Did he get lucky that year? Et cetera. And so I think that Fooled by Randomness is really, and I've written some memos if anybody wants to, what we used to call the classic comic version. They can read the memos rather than reading the whole book. But I think it's very valuable and I would recommend it strongly. [SPEAKER_01] Well, we appreciate you, man. This is fun. I hope so. [SPEAKER_02] We've got to do one with your son, actually. That would be a lot of fun. Well, we did one in January of 21 called Something of Value because he moved to us during the pandemic and I thought that the opportunity for three generations of Marxists to live together was great, was of great value. And we spent most of the time arguing about value investing. And I think that with the possible exception of the latest AI memo, I think that one got the most positive reception. But we'll keep working together and you guys don't need an excuse for another session. [SPEAKER_01] Thanks. Thank you for playing therapist for us. Okay. Thank you so much, Howard. That's it. That's the pod. Thank you. and we let her choose. My wife and I had a sense for which one we wanted her to go to, but we concluded that, like I always say, we could be wrong. Our choice could be the wrong choice. And anyway, of the two choices, while one might be better than the other, neither was a bad choice. So if that's true, let the kid make the choice. And they get experience with making choices, and maybe they get experience with making incorrect choices, which is very important. On the subject of choice, I have a, I'm interested to know, you know, when you were younger, you, let's say you're 21 years old, and you're trying to figure out what you want to do with your life. Probably one of the more important questions you should figure out at some point, is what do I want to actually do every day for eight hours a day, half my waking hours. And I doubt that, you know, a lot of 19-year-olds wake up and say, I want to work with distressed debt and bonds. You know, that's not a knowable answer at that stage. What do you think is the right approach to figuring out your thing? First, I want to say, Franshan, that the thing you describe, I did a terrible job of. I was unconscious. The decisions I made in my first 20 years, as they say in religion, I did not apply intention. I just, I let other people make the decision. I made decisions haphazardly. I didn't think about it a lot. I'm embarrassed at how terrible my decision-making process was. In fact, it's a misnomer to apply that term. But having said that, I think it's desirable to make your choices with intention, well-reasoned, et cetera. And what I tell kids is my favorite quote is from a writer named Christopher Morley who said, there is only one success, to live your life your own way. I think it's a beautiful quote. You know, I go to Wharton and Harvard and all these places and Columbia and I say, and you know, the fact that you're in this room probably means that you can live your life your own way. You probably have what it takes to live your life your own way, intellectually and work ethic and so forth. but you have to figure out what it is. That's the hard part. Who are you? And what I say to them is try to find something that will play to your strengths, avoid your weaknesses and make you happy. What that means is, well, that sounds obvious. Well, who the hell wouldn't follow that instruction? Well, the answer is, what it means is you can't let your friends decide what you should do. You can't do things because your friends are doing them. You can't let society decide what you should do. You can't let your parents decide what you should do. You have to think it out for yourself. Having said that, it's very difficult because it's hard to know yourself and we know that in 20 years you'll be a different person. How can you make a decision today on what will make that person happy? Very difficult, but you've got to try. That's my advice which I didn't take when I was a kid and I was derelict, but I got lucky. Well, you eventually did become, as you described, living well-intentioned. Yes. Something must have changed. Do you remember, did you do any exercises to become that way? Not that I recall. I think part of it, you know, and I said, I said for the next 25 years, I didn't do it. That took me up until roughly 95, which is when I left with Bruce to start Oak Tree. That was really... That's so ancient. Wait, so you think that up until the age of 50 or 49, you were floating or living according to other people? Well, not just that, but just not making good decisions, conscious decisions. You know, why did I go to Citibank Investment Research Department when I got out of University of Chicago in 1969 because I had a good summer there the year before? Why did I move from the Equity Research Department to the Bond Department? Because my work in Equity Research was unsuccessful and I was told to get out. Why did I move to California in 1980? Sunshine, palm trees. I just can't claim that I was making good decisions. I got sent to the Bond Department at Citibank in 1978 and three months later the head of the Bond Department calls me up since I didn't have that much to do. I was fairly idle and he says, there's a guy named Milken or something in California and he deals in something called high-yield bonds. Do you think you can figure out what that means? That was just luck. If you read Mathlam Gladwell and Outliers, it was just luck. Right time, right place. And if that call came at lunchtime and I had been out at lunch, maybe somebody else would get the call and they'd be me. Your humility is very striking to me. We have a lot of people on this podcast that I think claim to be humble or try to be humble. You really are an extremely humble person. I mean, one note I wrote down is from now on at the top of all my investor memos, I'm just going to start it with I could be wrong, but because I think whenever I make an investment, I'm so boastful about my excitement and my exuberance and why this is right and why it's the right move to do. And I think, you know, you've kind of infected me with a little bit of your humility there. Well, you make the investment because you believe in it, but it's important to see the other side and know what you're doing. By the way, Churchill said he's a humble man and he has a lot to be humble about. But Mark Twain says, 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 I always tell people in line with what you just said, Sean, no sentence that starts with, if I could be wrong, but, or I don't know, but, ever got anybody into trouble. The sentences that get people into trouble are, I'm 100% convinced that, and if you really feel that you're 100% right and you bet like you're 100% right and it turns out it was only 80-20 and the 20 comes up, that's how you get into big trouble. So I think the thing that Mark Twain said was incredibly important. Yeah, last memo Sean sent me about some deal he had was, bet everything you have, this is it. Mortgage the house. Hey, can I ask you about Buffett? You know, Buffett famously has said, you know, he reads your memos. I assume you guys have interacted. Do you guys hang out? What's he like? Give me some Warren Buffett stories from your life, your experience. Well, Bruce actually was always a Buffett watcher and if you go back to the 80s, no, I don't think anybody had heard of Buffett, maybe not the 90s, I don't remember exactly. In the late 90s, people said, well, Buffett's lost it because he's not in tech and then, of course, tech blew up and then they said, oh, maybe Buffett knows what he's doing. But anyway, when Enron melted down, Enron did most of its misbehavior through off-balance sheet entities and there was a lot of opportunity there and so we became the largest holder of the debt of one of them. It was called Osprey and Warren was the second largest holder and I don't remember how it came to pass, but he gave us his proxy and he let us run that position for him and Bruce did a masterful job of restructuring that company and we came out with a big win. So this was around 2002. So around 2003 or 2004, Warren writes Bruce a letter and he says, you know, nice job on Osprey and if you ever find yourself in Omaha, let me know. We'll have lunch. So Bruce and I write him a letter, Bruce writes him a letter, he says, it happens that Howard and I will be in an Omaha this week. Can we take you to lunch? And so that's how we met and the relationship had a lovely start and it went on like that. We never actually did any business together after that because, you know, he was always looking for something big that he could acquire and we don't really deal in big, acquirable things. But it was a very nice personal relationship and I've never said this to anybody else before, but in 2009, I wrote a memo in which I mentioned him and I sent it to him and I said, I want to make sure that you see this memo because it mentions you and he says, I do see the memos and blah, blah, blah. And I have seen this. He says, and by the way, you should write a book and if you do, I'll give you a blurb for the book. And that's why I wrote the first book, most important thing. I always thought I'd write a book when I retired, but instead, you know, when you get that kind of note from a guy like Warren Buffett, you can't let it sit. So that was the start of that. But, you know, I've been fortunate to visit him a few times and it's a big plus. Is there any part about the Warren mystique, the Buffett personality that you think like popular lore gets wrong or is inaccurate? No, I think it's mostly what you see is what you get. The one thing I'll say that I don't think people know about, they don't get wrong, they don't know about is the depth of his love for Charlie. And Warren sent out a note, I think it was at Thanksgiving last year, and he said, you know, I'm not going to be at the Berkshire meeting and I'm not going to be writing this or that, whatever it was. And he talked about his relationship with Charlie and anybody who wants to should get a hold of that letter and see it because it's, you know, we talked earlier about the importance of a partnership and how great a contributor to your life it can be. And that's what he had with Charlie. I think he, I think, as I recall, he talked about Charlie being the big brother and himself being the little brother. and I think we can say that about my relationship with Bruce. And for one reason or another, he's always been very kind to me about my role, you know, and generous about my role. And he, look, he's certainly as smart as I am and as talented as I am, maybe in different ways, but there was always this, this feeling of respect and affection and love. And, and, and the, as the more time passes, the more we're conscious of, of that he and I. And that's what Warren and Charlie had. And it was beautiful thing to watch. And also the, the Warren used to love telling funny stories about Charlie, of which there were a lot. And their relationship was always suffused with humor. Did they make a lot of the decisions together? I mean, I've read a little bit about them and their relationship was a little challenging for me to understand because I don't think they've ever lived in the same place. Yeah. Did they talk daily? I don't know exactly how they made their decisions, but I think, I think Warren used Charlie as a sounding board, a logic checker. You know, I think this, this makes sense, that kind of thing. Of course, Charlie's great credit is that Warren Buffett used to engage in what we call cigar butt investing. I don't know if you know about this, but cigar butt investing means you're walking down the street and you look in the gutter and you see a used cigar and you pick it up and you conclude that it has three puffs left. So you pick it up. It's a disgusting thought. You pick it up and you smoke it and you get three puffs for free. That's cigar butt investing. But, and you know, Warren would buy, you know, really cats and dogs because they were cheap. And Charlie's great contribution was talking Warren out of cats and dogs, out of cigar butts. And his revolution was that he convinced Warren not any company at a great price, great companies at a good price. Most people credit that as Charlie's greatest contribution. So, but, you know, synergistic, mutual respect, love, complimentary skills. Interestingly, they probably had the highest combined IQ of any partnership in history, but they were different kinds of IQ. Charlie was more of a classicist and humanist and a man of letters. and Warren, of course, was an incredible computing machine. A man of, a man of letters. Sean, we need to bring that back. That sounds, that sounds beautiful. It was beautiful. I want to be a man of letters. Charlie, you know, when we would get together, he wouldn't talk about investments or money or companies, mostly. He would talk about ideas. Well, let's wrap it with one last quick one, which is, give us some homework. Give us a book that shaped the way you think or you thought brought some good ideas to the forefront. What's a book we should read as recommended by Howard Marks? So, one is A Short History of Financial Euphoria by John Kenneth Galbraith. This was very influential in my thinking, and it teaches you about the mental weakness that gives rise to booms and busts. And of course, you know, taking a objective view of cycles is a big part of what I do. So, that was very influential and I was lucky to get to meet Galbraith. And then, the other book would be Fooled by Randomness by Nassim Nicholas Taleb and it took me talks about, see, I'm a great believer that a lot in life is random. And, so, this is one of the reasons, maybe it's my rationale for not being such a decisive thinker. Taleb basically says, in the short run, anything can happen because of randomness. And, this determines our attitude toward risk, our attitude toward portfolio construction, our attitude toward published records. You know, you see a published record, the guy had a great return that year. Is he a great investor? Did he get lucky that year? Et cetera. And, so I think that, I think that Fooled by Randomness is really, and I've written some memos if anybody wants to, what we used to call the classic comic version. They can read the memos rather than reading the whole book. But, I think it's very valuable and I would recommend it strongly. Well, we appreciate you, man. This is fun. I hope so. We've got to do one with your son, actually. That would be a lot of fun. Well, we did one in January of 21 called Something of Value because he moved to us during the pandemic and I thought that the opportunity to, for three generations of Marxists to live together was a great, was of great value. And, we spent most of the time arguing about value investing. and, and, and I think that, I think with the possible exception of the latest AI memo, I think that one got the most positive reception. But, but we'll, we'll, we'll keep working together and, you guys don't, don't need an excuse for, for another session. Thanks. Thank you for playing therapist for us. Okay. Thank you so much, Howard. That's it. That's the pod. Thank you.