[Music] hello everyone and welcome to at Barons I'm Andy serwer and Welcome to our guest Howard marks co-chairman of oak tree Capital Howard great to see you nice to see you Andy so first of all can you tell us a little bit about oak tree for people who aren't familiar with the firm well oak tree is a global alternative investment manager which basically means not mainstream stock bonds uh with its roots and credit we're approaching 30 years old and uh we're around $200 billion under management and Brookfield is now the owner of the company you
guys have a big stake in it the original partners that right well they may say the owner we may say they're our partner okay uh Brookfield has bought out the public and bought part of our stake and they now own 68% and employees ex employees and Founders uh own the remaining 32% jumping right into some of the topics you like to talk about which includes risk and I know you did a video recently about the misconceptions that people have about risk what are they and can you explain what you meant by that well the main
misconception Andy is uh that people want to be able to take the word risk or the concept of risk and use it in a formula to do computations to figure out what are the best possible Alternatives and how did people do well in the past in a risk adjusted sense so the only number that's available for them to use as a proxy for risk is volatility or the standard deviation of prices or returns so they do I think that that's not what risk is risk is really if you think about it it's the possibility of
having an undesirable result uh simply translated or I should say most simply translated the probability of losing money uh uh so that's risk the other thing is not risk on the other hand there is no number you can use for that because there's no place you can look to find out what the probability of a bad outcome is today or what it was six months ago when you made the investment so you you can be quantitative but not accurate or accurate but not quantitative you can't do both shift gears a little bit what is your
thinking about the high net worth Market both in terms of selling to it and in terms of investors looking for things to buy I think that uh look uh America is distinguished around the world by the magnitude of the high net worth Market by the number of people who have large amounts of uh of net worth um and the fact that more people are joining that group all the time so it's a great Market uh and um you know alternative investment firms like mine uh have the opportunity of selling into that market the people are
historically underrepresented you know the institutions did it first in other words things like private Equity uh distressed debt private credit real estate uh anything along these lines um so it's a great opportunity uh I think that to really do our job right we have to pair it with education uh educating the consumer is not that easy at any level and um the singular goal should not be to sell products to that market it should be to educate that market and then uh sell it the things that are right for it um and you know I'm
very interested in education and spend a lot of time on that myself but sort of increasing allocations for high net worth individuals could be appropriate given that they have a good understanding of what they're getting into right as long as you use the word could right uh could be appropriate it's not there's nothing that's right for everybody um people have to understand how to make decisions about how much return to pursue uh how much risk is involved and what's the right risk and return Target for them right you recently wrote a piece where you talked
about the difference between ownership and debt and said that was really critical to understanding investing what do you mean by that and why do you say that well people talk about the many ways there are to invest stocks bonds real estate private Equity I've named a derivatives you mentioned derivatives currencies Commodities but really if you want to think in an organized fashion I think you should think about ownership and lending if you want to invest in a business let's say I'm your brother-in-law says I'm going to open a restaurant you and I'd like some support
you have two choices you can say okay I'd like to be a partner I'll take half I'll put up half the money I get half the profits I don't know how you'll do but I'm going to back you or you can say I'm not that confident that it'll be great I'll lend you some money but I want you to promise me that you'll pay me interest every six months and give me my money back at the end of the term and I get paid before you get paid so my my relationship with you is contractual
and Senior so that's the difference between stocks and bonds a stock is a partial ownership of a business with no promise of anything other than your share of what all the owners get if there is something a bond is a promise of interest and repayment of principal in a priority basis if you think about it the two have nothing in common they're not oh yes well stocks and bonds they're a little different they're both Securities and here's the difference no there's nothing in common and for the most part ownership assets give portfolios their dynamism and
their upside potential but at the cost of being uncertain and having significant downside potential lending assets are have a fixed promise which is Dependable but limited in its upside I remember once hearing you say how are there's no Bad Assets only bad prices what do you mean by that well look I started work in this business uh uh 55 years ago last month and at a bank and the banks invested in what were called the nifty50 the fif the stocks of the 50 best and fastest growing companies in America companies that were so great there
was no price too high nothing could ever go wrong and if you bought the stocks the day I got there and held them tenaciously for five years you lost over 90% of your money why because they were too expensive it's not what you buy is what you pay that determines a good investment now the longer your time Horizon the quality of the thing you buy matters more and the price you paid matters a little less but still uh people have to understand that good asset is not synonymous with good investment to make a good investment
you have to be price conscious and and so uh you know that that's that's really what it comes down to it's not a matter of buying good things but buying things well and you have to understand that difference and it's more than grammatical all right that leads me to ask you what you think of the equity markets right now I know you're not necessarily a big Equity person but are we in a new nifty50 era with say the mag 7 what is your thinking about equities the easy answer is to say we are not necessarily
correct you can't make any meaningful observation about assets unless you know them extremely well and I don't first of all oak tree generally doesn't operate in the stock market being alternative managers and secondly uh I am not tech savvy growth Savvy you know it's just not my thing so uh I don't want to mislead any anybody these are these are prices which on the numbers look expensive we you know we gauge that by looking at the price earnings ratio they have high percentage ratios but you know uh sometimes a a high-priced car is worth it
and a low priced car isn't worth it so so you know uh low prices and and cheapness are not synonymous uh I think I think these are everybody thinks these are great companies they may be great companies they have high PE ratios they may be be deserved so I I I don't I I don't think people should have a knee-jerk reaction on that subject and I try not to getting back to the paper you wrote recently you talked about a SE change in interest rates and you mentioned the 2009 to 20 2021 era yeah can
you explain that a little bit more well I start I start the memo change December of 22 available to all your uh viewers uh Gratis on the Oak Tree website um and I say that in 1980 I had a bank loan outstanding on a personal basis and I got a slip in the mail saying the rate is now 22 and a quarter 40 years later in 2020 I was able to borrow at two and a quarter so interest rates went down for me by 2,000 basis points 20 percentage points anybody who came into this business
after 1980 that's 44 years ago so it's almost everybody in the business has only pretty much lived through declining interest rates or ultra low interest rates and interest rates hit their their all-time low in the period you're talking about 09 to 21 which is the subject of the memo I think the FED funds rate which is the overnight rate that the FED charges Banks um got down to zero at the beginning of 09 because they had to fight the global financial crisis stayed low pretty much until uh the end of 21 when they decided to
raise it to fight inflation and in that period the FED funds rate was Zero most of the time and I think averaged about a half a percent now people tend to say well this is what I live through this is normal I'm going to extrapolate it to the Future and the whole point of the C change memo is that they should not extrapolate that experience because that was an unusual time we were fighting crisis both the the global financial crisis and then the pandemic and um you should not make financial decisions based in my opinion
on the assumption that the future is going to look like that so declining interest rates on ultra low interest rates dominated the history of the last 44 years but I don't think they're going to be the norm going forward and that is a sea change why do you think we're going to be in a higher rate environment though Howard I think we're going to be in a normal rate environment and that period wasn't normal that period as I said fighting the global financial crisis and fighting the pandemic through monetary policy uh was very important it
was well uh called for and well delivered and it worked we're still here you know in after the Leman bankruptcy in 08 people were talking about the Meltdown of the financial system didn't happen thanks in large part to the treasury and the FED but the emergency is over the emergency rates of zero are no longer called for in my opinion and uh when rates are extreme they skew the financial markets when rates are too low they subsidize asset owners and borrowers and they penalize Savers and people living on fixed income and lenders and I think
the authorities the fed the treasury should not be in the business of doing that they should let interest rates uh occur naturally through negotiation between borrower and lender and I don't think when when the lender and the borrower sit down to negotiate they're going to agree on half a percent or zero you also wrote in the in the memo Howard I've been urging increased investment in credit why is that and in particular when others like Paul tutor Jones and Stan Ducker Miller are saying bonds are a bad investment or even short treasuries Etc the things
that I say are not talking about what's going to happen the next week month or year I'm not a Trader my investments are for the long term I think that's that's what's that's the difference between trading and investing I'm not predicting that bonds are going to go up in price I'm not saying it's a favorable trade what I what I do think is that there are lending Investments today bonds loans Etc from which you can get a substantial contractual return and that in itself can be attractive and you can do it on a on a
Dependable basis for example example take high yield bonds which is an asset class that uh uh that I've been in for the last 46 years ever since I started that activity for City bank today they offer about 7% interest well that's that's a good level and if if you're somebody who's got some money you want to invest it you want to make a good return you don't care about hitting a home run uh let's say you're close to retirement you'd rather have a a a substantial income on a steady basis than have a lot of
moonshot potential you might say I like 7% I'll take it and of course for the individual you have to pay taxes everybody has to pay some management fees Etc you can have some credit losses but I think that if you if you invest in a portfolio of high your bonds at seven in over the long term you're likely to get six at least a lot of people should in my opinion say sounds good to me I'll take it uh somebody who's smarter who say you know I think the next move of interest rates is up
which means the next move of bond prices is down may not want to do it at that time it may not be attractive for a trade but it may be a good long-term investment and my goal is not to predict the movement of prices it's to make loans to companies that will pay me back right I love that point that you made that people should understand the risk return relationship and then consider whether or not there's an alpha manager a manager that deliver Alpha out there but Alpha managers are not often sustainable are they Yeah
well yeah that I think that's right or or uh Don Meredith once said on Monday Night Football they they don't make them the way they used to but then again they never did um you know by Alpha we mean managers who have above average skill sufficient to produce above average returns without above average risk I think that's my definition and uh they're clearly not everybody can be above average not everybody who claims to be above average is probably above average some people who look to be about above average for a short period of time it
may turn out to have been luck or that they ran into an environment that was perfect for them but there are probably some managers out there who are dependable and uh above average we try very hard to be one um and uh hopefully they can get you an increase in return which is not accompanied by an by a proportional increase in risk and obviously a person like that a firm like that can be very helpful uh to the investor yeah that's one of the great debates of the investing world I want to ask you about
the business private Equity private Credit in particular a little bit you were one of the Pioneers there but a lot of people have been rushing into this business are you concerned there's too much Capital there maybe even a bubble well I don't think it's a bubble in this a bubble is a certain word which has come into broad use I would say in the last 20 years I mean it's it's always been around but it's been popular especially in the media in the last 20 years and a bubble to me means a psychological State of
Mind where people have lost their mind and they're excessively euphoric making silly Investments and riding for a fall I don't think that's what we're talk about here most things are elevated today uh you asked about the stock market Bel before the stock market is clearly on the expensive side uh we look at the PE Ratio the price earnings ratio of the S&P it averaged 16 for the postwar period today it's 2223 it's a little above average it's not crazy in 2000 it was uh 32 that was crazy 22 or 23 is not crazy but it
is certainly not cheap even when you take out the The Magnificent Seven Which pull which are substantial in the index and pull the average up you're still not uh uh you're still probably in the High Teens expensive but not nutty uh most things are expensive today why because most investors are optimistic we've we've gone through a good period we've beaten the challenge of inflation apparently without producing a recession what they call a soft Landing uh normally you fight inflation with tight policies which produce a recession not necessarily in this case so things are going well
people are optimistic they they have bid prices up to most things there people are unworried uh that usually equates to high prices so there aren't too many great bargains around uh I wouldn't argue that almost any Market is uh kind of you know desperate uh on the bargain counter uh but still uh there are smart things to do today but this is not the climate in my opinion in which to push out on the risk curve because we talked before about the importance of buying things well it's harder today to buying thing buy things well
if things are a little elevated in price I want to ask you Howard a little bit about you have you ever considered looking back in your life why you decided to become an investment manager growing up for instance well no growing up there was nothing uh it was not pre-ordained um but uh you know in high school one of my buddies said hey they're teaching a course in accounting we should take that and we took it I fell in love with accounting I figured I'd be an accountant my dad was an accountant uh I pushed
to go to Wharton my guidance counselor said I wouldn't get in I got in anyway I switched to finance because I found that more interesting and and and and so forth and then you know I got a summer job at city in 608 in the investment research Department their choice they assigned me there it wasn't my idea I liked it I stayed and 56 years later uh I'm still there and final question Howard you have been sharing a lot of your ideas over your career why do you do that are you afraid though of giving
away the secret sauce of your success talk to us about that a little bit well first of all uh for me writing the memos which share these things which I would not Elevate to the level of Secrets uh it it's a creative outlet for me I enjoy doing it I like to educate uh the client like to get them and and today the broader audience likes to get them I'm happy with that um uh uh I can tell people about the importance of the things we're discussing that that NE that will not necessarily able them
to do the things so I don't think do Tre is giving away uh all of its uh competitive advantage and uh you know I I think that I think our clients are better clients when we have a relationship which has been built been built on education and a clear understanding so I'm I'm happy to do it and I'm not worried that I'm going to put oak tree out of business Howard marks thank you so much for your time it's a pleasure Andy thank you for your good questions this is at Barons I'm Andy serwer we'll
catch you next time [Music]
