[Music] in the world of finance one breed of investors has endured the test of time [Music] through discipline and rationality they make profits when others lose they find values in places no one dares to look and yet none of them has the same investment strategy all are unique [Music] one of the most different is how remarks the 150 billion dollar vulture [Music] howard marx is raised in a jewish family in regal park queens a prosperous middle class neighborhood at the time his father is a successful accountant money is rarely an issue for the family but underneath the peaceful family life their struggles howard mark's mother has suffered from multiple near-fatal illnesses forcing her to stay at home and leaving her unable to work just when all hope is lost his mother turns to christian science trying to overcome her illness with strong beliefs in christ although raised as jewish howard mark's mother is about to give up her religion and fully embrace christianity as far as she's concerned her unlikely recovery is a proof that jesus christ healed her but the young howard was not as passionate as his mother in fact he starts questioning religion or more specifically how can a person believe in something with absolute certainty i think this tendency to question document or be skeptical about the status quo is one of his strong traits which will ultimately make him a great investor but as a kid howard marx shows no signs of superior intellect when i i was a kid growing up in queens new york i didn't know school was important i didn't work hard my mother came back from every parent-teacher conference and said your your teachers all say you're an underachiever and i didn't know what that meant or why that was a problem but for the first time the young howard start to dream big he wants to take a shot at getting into wharton howard mark learned that as every student in his high school his chance of getting into wharton was extremely low but it didn't cost him much to try and the potential reward was huge somehow or other i decided i want to go to wharton i went to the guidance counselor she said you'll never get it and but i happened to be taking accounting the accounting teacher was the manager of the tennis team he let maybe the he put me uh uh kept me i carried the balls around he liked me and he and he wrote a letter and somehow or other i got into ward and that changed my life he practically made a asymmetric bet and it worked out to his favor and i figured i would study accounting there and become an accountant my dad was an accountant but when i started taking my courses i found finance more interesting more creative than accounting accounting is primarily a form of record keeping finance was more interesting so i switched my major to finance driven by the desire to understand different worldviews howard marx also decides to study japanese philosophy as a minor so i took this course in a japanese philosophy we came across mujo mujo literally means the turning of the wheel of the law in other words the operation of life the essence is impermanence and because the wheel does turn and also the unpredictability of the future and these were really formative for me and they have unconsciously informed everything i've done one of the remarkable things that happened was that howard marx was essentially training his mind to become a great investor although finance and zen philosophy didn't seem to have much in common the eastern philosophy has given the young howard clarity of mind he graduates from wharton in 1967 and becomes an mba student at boot school of business at university of chicago at age 23 howard marx earns his degree for the prestigious business school and is flooded with job offers he sees a clear future lion head of him a career on wall street [Music] after graduating from the very best business school in america the 26 year old howard marx instantly lands a lucrative job at citi bank as an equity research analyst the timing is impeccable just two years earlier the legendary banker walter b riston became the chairman and ceo of the bank in the coming years he would turn citibank into an absolute financial powerhouse walt spent nearly four decades at the service of citibank during which he had a major impact on the development of both the u. s and international banking system among the key innovations citibank introduced under his leadership were the first certificate of deposit credit cards and automated teller machines in the early 1970s banks started to take more risks by issuing more equities and doing more numb banking businesses like investment management walter riston at citibank trained a new breed of profit-oriented bankers who fanned out from citibank to other banks in 1972 citibank held a dinner meeting for security analysts an unheard of event [Music] as equity researcher howard mark's job is simple studying companies and forecasting their future marx excels at the job consistently making the right predictions he quickly gets promoted to the director of research the number one guy at that department but there's a lingering question did he make those forecasts correctly because he was good at it or simply because he was lucky how remarks is about to find out the hard way [Music] as the head of the equity research group at citibank howard marx is leading a team of analysts aiming to predict the directions of different stocks in america be an equity analyst is a tricky job since the u. s stock market tends to turn upward in the long run if you're always bullish you will end up being more right often than ron the challenge is to spot bear market and to spot bad companies in the mid-1970s howard mark's research group recommended a group of 50 stocks so called the nifty 50s to their clients expecting them to go up by the end of the decade but by 1979 those stocks lost 90 percent of their value so the banks invested in the nifty 50.
that certainly included citibank we were the great leaders that meant ibm xerox kodak polaroid murder lilly and unlike that the great great great companies and if you would have invested in those companies the day i started work in september of 69 and held them for five years diligently you would have lost almost all your money so that taught me an important lesson i i i concluded at the time it's not what you buy it's what you pay for it how remarks realizes the reason he has gotten this far in the industry is perhaps just pure luck it may be that it is impossible to predict stock prices after all [Music] by the end of 1977 the former hotshot on wall street now has a decision to make after recommending stocks to clients that turn out to be big losers howard mark's reputation and track record are tainted he can either quit now or get fired eventually but fate intervenes over the years of working at citibank howard marx has many allies the chief investment officer at citibank recognizes how remarks is still worth a great deal to the company he decides to give marx a second chance by giving him another job my reign as director of research at citibank involved as it was with the nifty 50 was not so successful i was very fortunate the break of my life came in 1978 when i was assigned to the bond department i wanted to get into money management marx now will manage a portfolio of junk bonds a niche investment at a time but will soon explode [Music] in the 1970s the american economy is forever changed after nixon abandoned the gold standard the fed is struggling to contain the hyperinflation while others see volatility some see opportunity after earning his mba from a procedure school howard marx came to wall street hoping to build a successful career in finance but in less than 10 years his stock recommendations fell over 90 percent he now questions everything he's learned about investing is it possible to succeed in the investment business without trying to make predictions about the future he will soon find the answer in an entirely new industry junk bonds and then in august of 78 i got the call that changed my life from the head of the bond department he said there's some guy out in california named milken or something and he deals in something called high-yield bonds can you figure out what that means because a client had come in and they said we want a high yield michael milken is the king of junk bonds like marx milken joined wall street in 1969 as an investment analyst but his research centered around particularly those that are considered junk bonds compared to governments junk bonds yield a juicy five and a half percent interest rate but with that extra interest comes risk what seems great today can quickly seem terrible when the economy turns south milker realized that some of these low-grade bonds tend to be undervalued because the market tends to perceive them to be overly risky than they actually are so the risk and reward payoff makes him very attractive investment but melkin wants to have skin in a game by 1975 the head of his firm decided to give melkin capital to test its research on junk bonds a year later milken makes a hundred percent profit [Music] milken has struck gold after witnessing his incredible performance many wall street firms start following suit among them is citibank howard mark's research in equities failed to provide profitable guidance but to rectify his reputation in a company he is about to join the gold rush learning from his mistake howard marx now believes the right mentality to make an investment is not to predict when something will happen but to rely on probability and common sense i don't believe in forecasts i don't think that my efforts to be a superior investor are aided by macro forecasts if you if you're getting your information from a forecaster the fact that he was right once doesn't tell you anything the views of that forecaster would not be of any value to you unless he was right consistently and nobody's right consistently in making deviant forecasts the best analogy is the firemen department they don't know when and where the next fire will occur but they're always prepared howard marx practically becomes a value investor he discovers that when a company is in distress the market becomes overly pessimistic causing the bump price to crash the company's bond gives rated triple c's or below these are the bonds of companies that are bankrupt or they appear destined to be to go bankrupt you say well how can you possibly invest in bankrupt companies but the answer is if you get the securities so cheap you can make a lot of money even if the sat company goes bankrupt they can still recover a great value for the bondholders by selling their assets like inventories and real estate properties but if the company survives he can convert the bond to stocks and he will make great returns on his investment over the next seven years howard marks fortified his investment strategy while consistently generating profits for citibank he even moved to california to be close to michael milken and then joins a fund in los angeles tcw group compared to citibank tcw gives howard marks more autonomy and more capital to focus on distressed bonds ones that are rated even worse than typical junk bonds but even that can't satisfy his ever growing ambition three years later howard marx is ready to start his own firm what makes howard mars a great investor is that he has an in-depth understanding of the nature of uncertainty you know we have to think about the world as a probability distribution and so when you look at a historical event you have to say was that outcome inevitable or was it subject to randomness and could other things have happened just as well this idea is very well established in probability theory one of the most common traits of these great value investors is that they are more of a generalist they read and learn much more broadly brilliant. org is a great place to learn probability game theory and systems thinking what makes brilliant stand out from the rest is its emphasis on interactive learning it makes a learning process fun and more importantly it's proven to be more effective than traditional lectures the point is not to learn anything too specific it's about training yourself to think more logically and probabilistically to get started for free visit brilliant. org at phineas or click the link in the description the first 200 people will get a 20 off brilliant annual premium subscription [Music] to start a fund he'll need capital lots of it nothing short of a billion dollars will suffice even he can't bankroll that much but marx has a bold vision creating america's biggest fund that is solely designed for investing in distressed securities they're basically just two options here first is just to walk away taking away some tcw's clients we see that all the time in the font management business clients tend to be more loyal to the money manager than to the company the second way is more friendly which is to ask tcw's to invest in his new fund to leave on friendly terms and also to benefit both parties marx chooses the second way of exit but in a surprising twist tcw rejects howard mark's offer mark stern the founder of tcw feels this is the betrayal of the high's order and decides that tcw will not have anything to do with howard marks howard marx knows right now it is ugly times ugly and that's when the ugly get going [Music] tcw just had a massive loss in his mortgage back bonds a year earlier not losing more clients to hour marks will spelt doom for the company tcw may never recover after coming to his census mark stearns decides to give in to howard mark's demand and invest 2.
5 billion seat capital to his new fund howard had a lot of confidence and a big bargaining chip mostly because of one man bruce karsh who is his version of charlie munger bruce karcz is one of the first to capitalize on the 80s junk bond gold rush he graduated summa laude from duke university and was on his way to becoming a lawyer after working at a corporate bankruptcy court and then as an executive assistant for the insurance company sun america bruce carr developed a king sense for value and risk as a former lawyer he knows how the bankruptcy process works and also as an insurance executive he has this ability to access risk and reward better than most in 1987 bruce carr's insurance company became a client of tcw group howard marx hired him immediately they started the 100 million dollar fund at tcw with assault focus on distressed debt but by 1994 they have outgrown their positions at tcw they dream of a fund biggest in america that is solely focused on distress investing they quit tcw and start oak trade howard marks knows his strength is that big picture philosophical thinking and communication he decides to become the public face for oaktree while bruce karcz is the quiet executioner behind the scenes they have a simple investment proposition in 95 to start archery everything we had done was about going into these risky asset classes with the risks under control and and when we drew up our investment philosophy we put risk control first consistency second after the risk is controlled with uttermost discipline they will find companies into stress situations whose investors are overwhelmed with fear when i started at the bank citibank 50 years ago they had a cartoon on the wall it said scared money never wins and it's true there's only one problem while distress investing has worked on a smaller scale no one has done it with a large amount of capital they have and that is about to change from 1993 to 1995 is the height of the dotcom bubble people rushing into the market like never before productivity improved at the fastest pace in nearly eight years at the end of 1993 and at the same time labor costs fell at their fastest rate in 10 years american businesses are thriving ipl's are almost a daily phenomena financed by easy money through the equity market and junk bonds a great number of dot-com businesses are being built from nothing after making a killing in the junk bond era howard mark started his firm oak tree with the chief lieutenant bruce cars they aimed to build the largest investment fund for investing in distressed securities such a strategy only works if there are a lot of companies on the verge of bankruptcy as the internet boom continues they are forced to wait for the next three years they focus on doing smaller deals to validate their investment theses while keeping the majority of their assets in cash by 1999 they realized the market has reached an inflection point and a surprising opportunity has come to their intention it will be an investment of a lifetime welcome to regal cinemas regal cinemas was established in 1989 in knoxville tennessee in the early 1990s it went on expansion spree acquiring smaller chains as well as building new modern multiplexes by 1996 the feds started raising interest rates in an effort to calm down the market the bond market opened lower and stayed that way throughout the day also affecting bonds today was word that the treasury would likely have to cancel three and six-month bill auctions set for monday and be unable to roll over debt coming due on wednesday the entertainment industry like the theaters is what's called a cyclical industry they're often the first to be affected by macroeconomic movement by 1999 due to a heavy debt burden regular entertainment is facing bankruptcy becomes a disaster for its shareholders no investor is willing to come to the rescue except for one while other investors run scared howard marx and bruce cars see a bargain that he cannot miss for companies like retail stores restaurant chains or theaters have a lot of physical assets like real estate and they tend to have a better chance of bouncing back than other companies howard marx teams out with a denver billionaire philip n shoots they put up 800 million dollars to purchase regal's bad debts pennies on a dollar they expect after the bankruptcy companies assets will be re-evaluated to be much higher than right now which will allow them to make a profit not only they expect the company to go bankrupt now they can actually force the company to go bankrupt the investment is a success their original 800 million swells into 3. 5 billion by 2002 more than 4x their original investment people like marx are called vultures they pick pieces out of dying companies but they do play a beneficial role in the financial ecosystem which is providing money to certain companies that will save them from total collapse for vultures there's no better time to invest than during the bear market when there's a blood on the street have to be aggressive when people are depressed and defensive when people are excited in other words we have to think and feel differently from others and that's not easy we have to be either unemotional people or we have to learn the importance of emotional restraint and how to do it over the span of three years during the dot-com bubble they have more opportunity to invest in the bankrupt companies than their capital allows counter to the sentiment at a time they invest in companies that are thought to go extinct because of the internet for example they put three billion dollars in a newspaper company in a leveraged buyout deal with the notorious real estate mogul sam zell [Music] howard marks and burst cars built their fund by exploiting market recessions by early 2007 they have sensed that another bear market is coming they believe this crash may just be a typical recession but they have no idea what is about to happen it's estimated that more than two million homeowners with subprime mortgages are at risk of foreclosure and with the delinquency rate up 8 percent and rising some predict 8 out of every 10 subprime homeowners will default what was once thought to be a safe investment the mortgage-backed security market collapses it catches everyone by surprise i anticipated that it was going to happen i just didn't know exactly when but nobody forecast the 2008 crisis the easy money the gradual deep regulations since the 80s the invention of financial derivatives all contributed to this perfect storm but there's another factor we deal with type a personalities and type a personalities know everything in the world banking became a pissing contest no mine's bigger than yours that kind of stuff the wall street firm with one of the most aggressive cultures is lehman brothers at the time lehman brothers is one of the oldest investment banks on wall street its history traced all the way back to 1850. for nearly a century lehman brothers has won and lost many battles and has been targeted by many wall street titans by 1994 it regains its independence when its parent company primerica decides to spin it off lehman brothers now has a new ceo dick fold nicknamed the gorilla dick vote turns lehman around surviving the 1997 asian financial crisis but the real growth comes after 2001 when dickfield aggressively expands lima's trading business generating 3.
1 billion dollars net revenue in 2003. dick fole has rebuilt lehman brothers to his own image which is all about aggressively seeking profits by any means necessary its biggest money maker comes from what used to be a boring asset mortgage-backed securities but when the tie fades lehman suddenly finds himself exposed and vulnerable what they thought was secure mortgage assets turn out to be junk worth close to zero but in spite of the trouble lehman's facing dick fo is confident that lehman brothers will survive his wall street friend now the secretary of treasury hank paulson will bail him out i made frequent calls to dickfall we had told him repeatedly that the government can't put in capital this was a tactic plain and simple if we didn't communicate that all the other wall street banks would believe that the fed you know would be there to put capital in but paulson may have underestimated the impact of lehman bankruptcies on the global financial system a day after the failure of lehman brothers and the fire sale of merrill lynch attention turned to aig the world's largest insurance company american international group is seeking emergency funding as it struggles to stay afloat i describe it as an economic pearl harbor the 1929 panic was nothing like this the system had stopped how remarks has been observing the storm unfold as far as he's concerned he doesn't have a choice but to invest we had prepared for the global financial crisis but then we also raised an 11 billion dollar fund for distressed debt investing that we put on the shelf and then we had uh lehman brothers bankruptcy on september 15th of 08 and i put out a memo a couple days later and i said look there are two states of nature either the world is going to end or it's not and if it ends it won't matter whether we bought or sold but if it doesn't end and we didn't buy then we didn't do our job how are marx and bruce cars decide to go all in buying as many distressed debts as they could get their hands on we were able to buy the debt of companies the senior debt of companies at prices which implied that those companies were worth a quarter or a fifth or a third of what some very astute buyout funds had paid for them one and two years earlier and they usually don't get it wrong by a factor of four or five so we swung into action we had the money we had the will and we had the bargains and we spent about 600 million a week but their actions are met with resistance by their investors and clients to calm them down he starts regularly writes journals and memos explaining his investing idea and philosophy to his clients and the public but the crisis of 2008 still shocks them by its severity for months oak trade continues to lose money like the rest of the country its fate hangs in the balance in spite of the pressure and doubt they continue to do one thing the motion is adopted after rejecting the bush administration's tarp plan only four days ago the house passed it today the big question now whether investors will take comfort in the news with the help of a government bailout the financial market stabilizes howard mark's investment pays off making oak trade six billion dollars from their investments during 2008. [Music] better than bruce america barely survived the 2008 housing crisis [Music] trillions of dollars of so-called assets evaporated into thin air but howard marx emerges from 2008 victorious making billions by buying distressed securities due to their fearless and disciplined approach to investing by 2011 oaktree has made 19 analyzed return since 1995.
it's the perfect time to go public the success of 2008 investment allows oak tree to stand out from the crowd howard marx believes it should be easy to raise extra money by doing an ipo well the world's biggest investor in distressed debt is taking a page from its competitors we're talking about oak tree capital taking a cue from blackstone and kkr and filing for an ipo intending to raise 46 dollars a share for his oak tree capital management company surprisingly he could only raise 43 a share he may have miscalculated as a value investor you have to be a bit of contrarian and you're often betting against the same people you're trying to raise money from that is why warren buffett keeps berkshire's asia really really high as a way to filter out short-term investors once again howard marks decide to learn a lesson from warren buffett he's going to double down on his investor communication in the same year he publishes a book the most important thing marx aims to build a personal brand that draws in the right type of investors who think in long term who are brave enough to buy and resilient enough to hold his personal brand will be useful to keep his investors intact as the market is about to become extremely difficult for value investors [Music] since 2008 the u.
