You have to accept the likelihood that

what you're doing is closer to

speculating. And I don't say that word

pajoratively

than analytical investing. [music]

There's a spectrum which goes from what

I'll call analytical investing in

[music]

prosaic

understandable companies to speculative

investing [music] in futuristic

companies that can't be described at

all. You should calibrate your

activities based on where you are on

that [music] spectrum. That's the whole

thing. And it's very hard to do. This is

the hardest thing I think I've ever seen

in the investment world because of this

[music] enormous degree of uncertainty.

Welcome to Profy Markets. This could be

one of the most consequential weeks for

the markets in years. Today, SpaceX is

expected to complete the largest IPO in

history, and it may be just the

beginning. Anthropic and OpenAI have

both filed to go public, setting the

stage for a wave of blockbuster

offerings. Meanwhile, some of the

richest companies on the planet are

competing for investor capital before

the IPO pipeline fully opens. As we've

discussed last week, Google announced

the biggest stock sale in history, and

Meta signaled that it too is exploring a

major equity raise. So, how should

investors think about this moment? What

happens when an unprecedented amount of

equity hits the market? What are the

opportunities and what are the risks? To

help us make sense of it all, we're

joined by someone who spent more than 35

years writing some of Wall Street's most

influential memos and has earned a

reputation as the king of common sense.

His memos inform investors across

finance, even Warren Buffett himself.

This is our conversation with Howard

Marx, the co-founder and co-chairman of

Oak Tree Capital Management. Howard,

thank you so much for joining us. I want

to start with a quote that you said in

one of your earliest members. You said,

quote, "In the late stages of the great

bull markets, people become willing to

pay prices for stocks that assume the

good times will go on add [music]

infinitum. We're about to see this

SpaceX IPO. This company is about to be

priced at more than 100 times sales. We

have a feeling that this is a little bit

of investor spirits, animal spirits,

people thinking it's the good times.

What do you make of this IPO and the

other IPOs that we're seeing? Is this a

frothy market?

>> There's no question about the fact to

use Alan Greenspan's saying from about

30 years ago that we have exuberance.

That's the only thing we know for sure.

He pioneered the phrase irrational

exuberance.

The question is, is today's exuberance

irrational? Number one, I don't think

anybody can definitively say so. And the

reason I say that is that I don't think

I've never heard anybody tell me exactly

what AI will be able to do

or when or for whom or how much profit

it'll produce and for whom. There's an

arms race going on uh between what you

described as some of the greatest

companies on the planet.

I would describe what we call the

hyperscalers as uh mostly the greatest

companies I've ever seen. And they're

engaged in an arm arms race. Can only

one win? Is it win or take all? Can

several win? Nobody can tell me these

things. So I don't think there's a an

analytical

or what we call a valuebased way to

decide whether or not to participate in

these IPOs and at and if so at what

price wherein you know the AI as far as

I think virtually all of us are

concerned is a concept

we can't define its parameters

And um it's a great concept. It's likely

to be the most powerful force any of us

have ever seen.

But that's I think that's all we know.

And a decision to participate or not

participate and what price to

participate at is it's really uh well

it's what my South African friends call

a thumbsuck

you know. uh uh you can't put numbers on

a pad and figure out what these things

are worth, which is what uh value

investors like me historically have

done.

>> I guess the question then is cuz I agree

with you that you ask these questions

and investors say don't worry about it.

It's not really about the fundamentals

right now. It's about the future. It's

about the technology. It's about what's

going to happen at some point in the

timeline. That sounds a lot like the

irrational exuberance that we have seen

in previous cycles. And you've been

around to see many of them and you've

invested and made a lot of money uh

trading and and figuring out an

investment strategy to profit off of

those cycles and to time it correctly.

Um

or you could correct me on what your

strategy was. Uh but does it not seem

like those previous cycles? Does it not

feel to you like I don't know.com era?

>> It does feel like that. We have a

technological

innovation.

I've seen several. I've read about many

more over the last uh let's say 150

years. This may be the greatest. This

may be the most powerful.

It's also in many ways the least

specifiable.

So the the the technological innovations

I'm talking about let's just for a

starting point let's say the railroads

back in the 1860s

and then uh radio in the 1920s uh the

automobile uh computers in the 1950s

and60s uh internet in 2000 uh it may be

revisionist history but I think we had a

much better view of what all of those

could do.

They didn't have this unimaginable,

unlimitable

upside that AI has

or the in my opinion degree of

uncertainty.

We knew that the railroad would carry

goods and people from coast to coast. Uh

uh we knew that radio would carry

messages. um we may not have known

exactly how they would produce profits

uh or how they would become television

but um anyway

all the things I mentioned

were accompanied by what we call

bubbles.

People got excited

about developments which were

unprecedented.

They threw vast amounts of money about

uh building the infrastructure for it.

There was a winner take all race. There

was excitement. There was exuberance.

The capital flowed in like water.

In every case, too much capital flowed

in. I think it's fair to say too much

infrastructure was built and prices were

paid that were too high and a lot of the

people who provided the capital for

these

bubbles lost their money. I think it's

fair to say that those comments are have

been true in every case that I

enumerated.

So I wrote in a memo uh recently this

year and I think it's true

that if this technological innovation

with its exuberance

doesn't produce

a money losing bubble, it'll be the

first.

And now it could happen. You you know

you can't rule these things out. And you

know, uh maybe this is a good time for

me to introduce the rejoinder of the uh

of the optimist.

What do they say? This time it's

different.

Okay, that was true about the railroads.

It was true about radio. It was true

about computers and the internet. But

this time it's different. And this time

we have a development of incalculable

unlimitable

uh value. So there this time it's really

true that there's no price too high.

That's what they say,

>> right?

>> But the problem with that ad is they

always say that this time it's different

is never different.

And they've said it in each of those

bubbles that I mentioned. I think so all

nobody including me should say

definitively that this is a bubble that

the people who invest uh in in in the

these early stages of AI will lose their

money that the people who invest in the

companies you named uh will pay prices

that they'll never see again

but you must be alert to the

possibility. The way people get into

trouble is by not being alert to the

possibility.

>> And this all seems incredibly relevant

today on the day when SpaceX is set to

go public at, you know, close to a $2

trillion valuation. We'll see how it

trades. But if you're looking for

signals of everything you just

described,

it seems like that's it.

>> My favorite fortune cookie says that the

cautious hold them or or write great

poetry.

So, so you know, uh, uh, investing in

these companies today could be a huge

error, but it could be great poetry and

the people who, uh, resist because it

could be an error could miss out on the

greatest thing in history. And that's

what makes these decisions so hard.

you know the people who invest today in

in traditional industries in

transportation in distribution uh in

retailing in real estate they don't have

for the most part the risk of creating

of of committing grievous error but they

also don't have access to the possibly

best thing in history.

So you just have when you sit here with

something that's so young

and where the future is so

unestimable,

you just have to deal with it as a

concept

or not deal.

>> How does an investor deal with it, so to

speak? I I I like the fact that you

said,

you know, sort of like, you know, what

could go right. Uh the upside is sort of

unimaginable. The down I mean, it sounds

like you recognize

that both scenarios are are feasible

here. The bulls could be right, the

bears could be right, but in terms of

how do you actually invest around it?

Because I look at these companies and at

a $4 trillion valuation if it is in fact

the upside scenario I I don't see how

any other company survives. We end up

with five companies. If these companies

actually become worth 50 or hundred

trillion dollars if they have the same

type of returns we're used to getting

from Amazon or Apple or Google and they

went public. That means there's going to

be three or four companies controlling

all of the market cap globally, which I

I my mind blows trying to think about

what that would mean for society.

What if you're a 25 or 35year-old trying

to, you know, thinking about building

wealth and you got your 401k, how do you

invest around the kind of the unknowable

here

>> in dealing with the future? The way most

people deal with the future is by coming

up with the forecast.

I argue strenously that if you want to

deal with the future, you need two

things, not one. You need a forecast

and you need a judgment regarding the

probability that your forecast is right.

So, uh you can make a forecast about the

future of AI. You can make a forecast

which is optimistic. But I I I I just

think

if you say this is my judgment about the

future of AI, and by the way, I'm highly

confident that I'm right,

I think you're probably making a big

mistake. Uh, you know, I've never met

anybody who who thinks they can tell me

uh what what this world is going to look

like five or 10 years from now. And and

so why should any the young person you

described who's starting who's laying

the foundation for his investment uh

portfolio, why should he conclude that

he's probably right when all these other

people are? We know it could be great. I

bet it's probably going to be great. I

said in my last memo that it's that it

in terms of its basic capabilities, my

guess is that it's more likely to be

underestimated today than overestimated

today. But what we're talking about is

how much capital should it receive and

what is a piece of a company that

engages in this activity worth?

And you know, the value investor, the

old-fashioned investor like like me and

and and my uh fellow travelers, what we

do is we figure out what a company's

like, what what it we we look at what it

makes today and what it's what potential

earning power it's building. We try to

figure out what its earnings will be in

five or 10 years. We put a what we think

is a reasonable valuation on those

earnings largely related to the the

earnings potential in the subsequent

decades and then we look at the price

today and we try to figure out whether

today's price is fair relative to that

earnings power and you know I don't

think I've ever seen an industry or

companies where that is less feasible

you know If if somebody will will tell

me what they think anthropic

net earnings will be in 2036,

I'll bet them that they're not within

50% of the truth.

Of course, we'd have to wait 10 years to

find out. But if I'm right, how then you

and you make an investment in anthropic

stock in the IPO, you have to

accept the likelihood

that you're that what you're doing is

closer to speculating, and I don't say

that word pajoratively,

than than analytical investing.

And you have to there's a there's a

there's a spectrum which goes from what

I'll call analytical investing in

prosaic

understandable companies to

speculative investing in futuristic

companies that can't be described at

all. And you have to you you should you

should calibrate your activities based

on where you are on that spectrum.

That's the whole thing. And it it's it's

very hard to do especi this is the

hardest thing I think I've ever seen in

the investment world because of this

enormous degree of uncertainty.

>> Are there other sectors where you feel

more confident other asset classes or

other

uh business sectors where you think

you're more comfortable looking making a

forecast and saying this appears to be

overvalued or undervalued? Well, that's

what we do for a living and historically

we have made those judgments u and you

know pretty well. Uh but then since the

internet came along roughly 30 years ago

we have a new concept which is extremely

important today and that's disruption.

You take what I call a prosaic company

in a prosaic industry and you say well

that it's not so futuristic. we can

probably anticipate what it's going to

look like in five or 10 years from now

and it's not it doesn't have these

technological

things that that are going to make it or

break it. But then you think a little

further and you say well let me think

about whether that's right you know 30

years ago u

we have this word in the value investing

business or the investment business

called a moat things that surround a

company that are protective that that

make it less uh attackable

and uh historically the value investor

the cautious analytical investor has

preferred to invest in companies with

modes

So if you go back 30 years ago, what was

an example of a company with a great

moat? And a great example is a

newspaper.

And if you owned the newspaper in a

given city,

it would be hard for a competitor to

start up from scratch,

the newspaper from another city couldn't

compete against you because the the used

car ads and the help wanted ads and the

movie times would all be irrelevant in

your city. and it cost uh a quarter,

let's say, so anybody could afford it.

And if people bought one today, they'd

still have to buy it tomorrow because

yesterday's newspaper is already

obsolete. So, it's a small amount of

money that people are going to spend

regularly and and they're never done

buying it. And it can't be uh you know,

there are reasons why radio couldn't

compete and why the newspaper from the

next town could compete. That's that was

a strong set of modes and a lot of smart

people invested in mo in the newspapers

and and made a lot of money. Now it's

true of the movie industry and and and

other in particular communications

industries.

But now the newspapers are a lot of them

are out of business and uh they're under

profit pressure.

Uh so what happened to the book?

And the answer is that the internet and

digital communications came along and

put a lot of them out of business and

gave them competition that nobody

thought

was possible 30 years ago. So the so and

I'm sorry for the length of this uh uh

discussion but

what's what can't be disrupted now by

AI? Who can't lose their job to AI? I

used to say, "Well, uh, how about

everybody says plumbers?"

>> Well, maybe a maybe a robot can come

into your house and with a camera and

assess your situation and make the

needed repairs.

Then I said, "Sure.

Why can't somebody build a robot that

can give you a good massage?"

and and so

the world has become a much more

uncertain place. The the probabilities

that can be assigned to the future are

much broader

today than ever. I think that's an

important change.

When I was a kid,

the world didn't change. A a comic book

was always a dime.

new technologies didn't come along that

often. Uh

the world we were pretty confident that

the world would look the same 10 years

later and for the most part it did. But

today I think you have to uh uh accept

that much more change is possible. So

the investor has to recognize that he or

she is living in and [music] dealing in

a much less predictable world.

We'll be right back after the break.

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>> We're back with profy markets.

>> Given that you do you are a fiduciary

for other people's capital, you do have

to make forecasts and develop thesis and

invest people's capital. So at some

point I I can't imagine. So let let's

acknowledge that there's more known

unknowables or unknown unknown

unknowables than ever before given that

you are charged with deploying capital

and developing forecasts and thesis.

What are some of those forecast where do

you find value right now?

>> I still think there is a uh more

predictable part of the economy. It'll

probably be a while before the energy

business gets disrupted to the point

where we use something in lie of oil and

gas. That's probably largely true of the

food industry,

uh probably the timber industry and and

the home building industry,

uh transportation.

It's probably going to be uh a while

before we walk into a station, become

dematerialized, and show up in another

city.

retail uh you know uh has been disrupted

but it looks we're maybe we're at a

baseline level of of of in-person

shopping that's not going to go further.

I don't know but so you can identify

areas u

you know metals and mining uh paper

chemicals I guess I would say for the

most part that things that have less

intellectual content

>> are less likely to be disrupted by AI

which is uh basically an intellectual

problem solver and productivity tool

So, uh, you know, I think I think that's

you can we can make a list of things

that we think are, uh, less likely to be

disrupted by AI.

Uh, we just shouldn't be too cockshore

about it. But that's what we do for a

living, Scott. We're still investing.

We're investing according to the same

investment philosophy and in many of the

same industries. Uh but we have to

constantly renew our thinking. The worst

the it seems that the most laughable

thing to do today would be to say you

know I found some companies in industry

that industries that'll never change.

>> I'm just looking at the Schiller PE

ratio which is currently close to 42

very close to the bubble era where it

hit a peak of 44 times earnings. Um,

that right there is an example of an

indicator that we could draw whatever

meaning we want from it. Um, and I could

say, okay, here we are. We're at the

top. This is the bubble. But I'm not

sure how much I should believe that. I

guess my question to you, what kinds of

indicators do you find to be most

informative or most valuable when you're

assessing the exuberance uh and and the

value of of stocks and and bonds and

everything in the markets today. We

start with the traditional indicators of

valuation like the PE ratio whether it's

the Schiller uh uh cape ratio or the

traditional uh S&P PE ratio and you know

those things showed the the uh market to

be uh I used the expression a year ago

uh lofty but not naughty. you know, the

the the non-sheller PE ratio uh is about

23 or so today. Uh the 80-year average

is 16. Uh so we're roughly 50% higher

today. But in 2000, I think it was 32.

When I started in this business as a

young man 1969 uh in the research

department at City Bank, the bank and

most of the banks invested in what were

called the nifty50 which were considered

to be the best and fastest growing

companies in America. Xerox, IBM, Kodak,

Polaroid, Mercy, Texas Instruments,

Hulu, Packard, Coca-Cola, Avon, etc. And

most of those stocks were selling at PE

ratios between 60 and 90.

So, so to look at at the uh at the max 7

takeout uh Tesla,

they're selling at P ratios in the 30s.

Doesn't sound so expensive to me, but

that and that's just PE, but but you

know, you can't just depend on PE.

That's too simplistic. The companies are

different. Their capital intensiveness

is lower. their their marginal

profitability is higher since the

product is an intellectual product

rather than a piece of metal. Uh it

doesn't cost much to make the next one.

So they can so they can their

incremental profitability is much

higher. And then another thing is we've

never ever seen companies growing at the

rates of today. you know, and I don't

know the Pacific, so I don't want to go

there, but you know, you hear about

companies that are growing 50% a month

or 100% a year or whatever it might be.

You never seen that before. And you

know, uh, you look at AI and the

progress that it has made in the last

four years, you know, three years ago,

uh, you know, you talk about Moes, you

talk about impregnability. Uh three

years ago, most people thought software

was a great industry uh to invest in

because uh everybody who who used

computers, which was everybody, needed

software. And if you had a software

system that served your company and

industry, uh it

it would be expensive to change. And and

for the most part, it was hard to figure

out a reason to change. So that's that's

a pretty good moat.

More recently, people are wondering

whether the whole software industry is

going to go out of business because a

because nobody writes software anymore.

Uh AI writes its own software for

itself. Uh uh people have to tell it

what to write but it can write it

without any help. So now people have in

that world there's something called SAS

software as a service and around

February 1st we had something called the

CES apocalypse

where you know the the uh the great AI

companies announced some some uh coding

models and everybody said that's it the

whole software industry has gone out of

business. Now that's probably an

exaggeration.

Um but uh it's very hard to figure out

these things. I by the way I want to

come back to something that you asked me

a long time ago and I never I didn't

answer and I don't want to leave it

unanswered.

How do you invest

in this given all these uncertainties

that I'm talking about? And you know

what history has shown is that one of

the greatest mistakes you can make is

being not optimistic enough. And another

mistake you can make is to say the

future is unclear, so I can't invest.

Those two things don't necessarily go

together. The future is always unclear.

Maybe it's more unclear than ever, but

that's not a reason not to invest. You

just have to invest carefully,

knowingly. You have to be a aware of the

of the risks you're taking. So, how to

invest in AI? Uh it like anything else

there's a spectrum and at one end of the

spectrum we have ultra high possible

returns with great uncertainty

and at the other end of the spectrum

maybe we have somewhat lower possible

returns with less uncertainty.

Now all of this is more uncertain than

ever but that spectrum still exists and

so you can choose a point on that

spectrum. Let me give you a couple

examples.

uh you can invest in what we call the

hyperscalers

uh Amazon, Google, Meta, uh Microsoft um

for example,

they have established businesses with

moes, enormous operating cash flow.

They want to get into AI. they

maybe feel that they have to compete

vigorously in this winner take all

battle. Uh but still with established

businesses and cash flow and some

diversity of business

these are as I said before without

naming names some of the greatest

companies I've ever seen. So, so you

would think that investing in them would

be maybe the lowrisk way to invest in

AI, but if AI booms and takes off and

octuples in the next three years, uh,

since they have other businesses holding

back their growth rate, they're not

going to be the maximum profit winners.

Then you have, uh, established

companies.

As you said before, you don't we don't

know their profitability, their

finances, and maybe and they're one

product companies in the sense that

they're all AI. So maybe it's harder to

specify their future. But Anthropic and

Open AI for example,

Nvidia

have a very high probability I think not

being an expert, a high probability of

still being successful 5 or 10 years

from now.

They may not be the number one they are

today, but they're unlikely, I think, to

be obsoleted. So they're

depending on the price you pay and its

fairness they may be riskier than the

hyperscalers

but they're not uh make it or break it.

They're not you know they're already up

and running. And then you have startups

you have startups where you don't know

uh where they may not have revenues.

They may have revenues but no profits.

You may not even know what the product

will be,

but if you can get in at something

called uh you know u

ground level

and they turn and one of them turns into

be a big winner, you can make an

incalculable amount of money. And I

described this in a recent memo as a

lottery ticket.

and and and so at the at the riskiest

end of the spectrum, you have lottery

behavior. And if you think about the

lottery,

most people who buy lottery tickets lose

all their money.

A few people become incredibly rich. So

that's probably the

the profile of performance at the

riskiest end of the spectrum. You can

pick where to play on the spectrum. You

can mix positions on the spectrum and

then you can decide how much should all

of these companies on the spectrum be of

your total portfolio. I guess the

problem just on that point is that it

seems that we are muddying what the

spectrum actually is and we're almost

rebranding lottery tickets as

certain safe investments. And I think

the best example would probably be

SpaceX, whose losses grew 700%

year-over-year. It's an incredibly

unprofitable business, especially the AI

business. Anthropic is also

unprofitable, though maybe we're

stunning to see, although we haven't

seen the financials if if that's

starting to change. Open AI is certainly

very unprofitable. But a lot of times

when you say this, people will say, but

the revenue is growing spectacularly. it

grew as you say like 50% month

overmonth. Crazy revenue growth and

that's sort of the justification as to

why it isn't a lottery ticket. Don't

worry about the profitability. The top

line's growing really fast. And I'm

actually not sure what to make of that

argument. Part of me wants to say no,

it's still losing a ton of money. Still

a lottery ticket. But as someone who's

looked at so many companies over the

years, I mean, what do you make of that

argument? What do you make of

subsidizing these losses to the tune of

literally hundreds of billions of

dollars? This seems like we're we're

entering a new era. Uh it seems as

though profitability isn't really a

thing anymore. At least I guess it's not

a problem and they can command these

valuations. And so I guess I ask that to

you knowing that you know you're not a

VC but you're someone who's seen so many

cycles. You've experienced investments

work and not work conceptually.

What do you make of it?

>> In the heat of the moment, in the in the

exuberance, people say things like, you

know, profits don't matter. What matters

is in the future, you know, uh we used

to value stocks on earnings. Then when

we started investing in companies with

no earnings, we talked about investing

on the basis of sales, ratio of sales.

Then when we talked about companies that

had no sales, people back in in 1999

2000, people said, "Well, what's

how much per per eyeball? How much per

click?" And people put values on on

internet stocks based on how many people

were going to their site even though

they were they were going there free.

But I believe ultimately it always comes

down to value. Ultimately at some time

in the future, profitability will

matter. And if if if you find a company

that's a great tech leader today,

but and and and it looks like it has an

unlimited technological franchise and

great expertise.

And if you tell me that 20 years from

now it still won't be making money,

my guess is that the price paid today by

an exuberant investor uh will turn out

will turn will produce disappointment.

When exuberance

is replaced by sobriety,

people say well of course profits

matter. We invest in companies which we

think will make money and their profits

will give will make money for us. So

it's silly to disregard completely the

possibility of profits. And by the way,

Warren Buffett said in connection with

the internet in I think 2000,

uh he said there's no doubt about the

fact that the internet will add to

efficiency,

but that's not the same as adding to

profitability

and that's relevant today also. You

know, uh AI is going to change the

world. I have no doubt about that.

Who will it make money for?

you know, I mean, if it's a if if if all

the hyperscalers plus the uh anthropics

and and open a eyes of the world and

Tesla uh and some of the startups, if

they all engage in battle

and compete against each other at

enormous costs, how profitable will they

be? Who will make the money? And if AI

is primarily a laborsaving device, which

I think might be an accurate

description,

who gets the benefit of the labor

savings? Maybe the customer,

the shipping company or the retail

company or the warehouse company

benefits from a price war among AI

providers such that the user adds to his

or her profits, but the purveyor of AI

services doesn't do that great. You

know, [music]

these things can't be specified. Now,

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>> We're back with Prof Markets.

>> I want to ask a question about your

business. I obviously I've been in your

business nearly as long as you, but I've

been around it. And I remember when I

first moved to New York, I was in San

Francisco in the 90s and then New York

from 2000 on I just knew a ton of people

making a great living in your business.

Now I know a small number of people

making an astronomical living and the

rest are gone. The rest it feels like

there's been just an just an incredible

consolidation in your business. Uh where

you're either you're either a Leviathan

or you're in no man's land. I would just

love to get your take on your business

as a business and how you've seen it

change and where you think it's headed.

>> How long do you have? [laughter]

>> I mean that that's that's a pretty

that's a pretty broad question.

>> Sure. First of all, you know, uh I'm I'm

pretty sure I predate you. Uh when I

attended the University of Chicago in

1968,

uh the professor pointed out that the

average mutual fund did worse than the

S&P before fees and then charged a high

fee. And so he says, why don't they just

in buy you just buy one share of each

stock in the S&P? There were no index

funds or no concept of indexation but it

came along and it it uh you know today

the majority of mutual fund equity

capital is managed by indexation or

passive investment. That's that's one

reason why a lot of people have

disappeared. The consumer was not

wellinformed and paid a high fee for for

a defective product which is not a great

business model. Uh on the other hand in

the last uh well let's say 40 years

which is a maybe it's a little more less

there have been all these innovations uh

that we had we lived 40 plus years in a

period of declining interest rates which

made a lot of things very successful and

a lot of people cashed in and and built

very very profitable businesses

investing in what are called alternative

investments uh private private equity,

private credit and things like that. And

and and they they found an environment

which was perfect for them. And uh

especially since March of09, which was

the low point of the global financial

crisis, things have been rosy for over

17 years. And so a lot of people have

made a lot of money. U this tends to get

sorted out in the bad times.

In the good times, the great investors

do great, the bad investors do good.

In the bad times, it gets sorted out.

There may be rougher times ahead for

some of these new new things in the

investment business and some of it may

get sorted out. Uh, by the way, let me

let me just uh closest to home for oak

tree um there in the last 15 years, they

developed a business called private

credit uh which is really just the the

the term it's a broader term for what we

call direct lending which is private

loans for midsize buyouts and I'm I'm

I'm informed on good authority that so

this ca this didn't exist in 2010 and

it's $1.7 trillion today and I'm told

that there are roughly 700

direct lending managers

And so the the the the availability of

that $1.7 trillion dollars put a lot of

people into business and made a lot of

people extremely successful along with a

very favorable e economy

and with low or generally low or

generally declining interest rates which

are salutary. So this has been an ideal

environment and we have 700 managers uh

making money in this industry today. Uh

what will it look like 5 or 10 years

from now? We'll find out. But I'm told

that of the 700 roughly 3%

uh were in business before the global

financial crisis.

So we don't know

how many of them are have what it takes

to deal with a harsh environment.

Making money in a salutary environment

proves almost nothing.

To make money in a salientary investment

environment, you can do it on the basis

of good judgment and hard work and skill

or you can do it on aggressiveness

and getting lucky. It doesn't get sorted

in the good times. As Buffett says, it's

only when the tide goes out that we find

out who's been swimming naked. So this

period that you describe

uh and particularly the period uh '09 to

date,

this has been salad daysian

days. And nobody should look at those 17

years and say, "Oh, that was that's a

long period. So that's probably normaly.

This was the greatest period imaginable

for the investment industry and

especially for the alternative

investment industry

and uh one day I think the tide will go

out and one day some of this will be

sorted. I I just a quick question to

wrap up here. We didn't touch on private

credit. There's a lot of fear and a lot

of concern around private credit right

now. Do you think those fears are

overblown, underblown? What what is your

view on the private credit market right

now? And I I realize that's an awfully

big market, but lot a lot it's getting a

lot of attention right now.

>> I think it's overblown. These were

managers who collected money from

clients and and gave loans for midsize

buyouts.

And some of them will

be unsuccessful but probably not a large

percentage. I mean this this activity

has been around on in under different

guises since 78 or 77. I was lucky to be

asked to start City Bank's high yo bond

activity in 78 and we've been making

loans to uh to companies of moderate

creditworthiness and and and doing well

for 48 years. Uh uh people who don't do

it as well will not have great results.

uh but most of the loans will pay

and the people who are throwing up their

hands uh uh are probably exaggerating

the difficulty and and and extrapolating

the the fears in software which are

probably overblown.

Having said that,

retail investors or individual investors

bought these products

and these are private loans. There's no

market for them. You can't get out of

them uh at the drop of a hat. And uh so

a lot of the I think most of the unease

concerning what you call private credit,

what I call direct lenty, is around the

fact that people have said, "Okay, you

know what? I'm not that happy. I'd like

to get my money back. And I

if if you went into a non-traded BDC,

which is what we call these things

you're talking about, the people said

you will we can only let out 5% of the

investors per quarter. And other people

said, "What do you mean? I put money in,

I can't get it out." Well, that was

always the terms. This, if you read the

perspectives, which admittedly very few

people do, it was there. None of this is

a surprise, but

people do things in the good times when

they're feeling no pain. Uh sometimes

without adequate care or research or

prudence, and they turn they tend to uh

regret them in the bad times. Some of

that is going on, but I don't think

there was a misrepresentation.

People should not be surprised that that

that they can't get all their money out

every quarter. And um but the one of the

most powerful forces in the investment

business is disillusionment. And people

went from uh being unwor

uh thinking that this ship is sinking

and that's very painful. The unw worried

feeling was uh mistaken and now the

feeling that the ship is hopelessly

sinking is also probably mistaken.

Howard, you've been incredibly

successful on Wall Street. You started

one of the most successful asset

management firms in the world. A lot of

young people listening to this podcast,

starting their careers, uh who want to

build economic security, who want to be

successful. What advice would you give

to those people who are just starting

out in their careers right now?

>> I've enjoyed a great career and and I

don't consider it over. Um,

investing is a fascinating field. I

mean, just think about this podcast and

think about the number of times I said,

"I don't know." Or something's

unpredictable or inestimable or

incalculable. So, what we do every day

is we peel an onion

and we deal with uncertainty

and we make judgments. We make the best

judgments we can in an uncertain world.

In his book fooled by randomness, Nasim

Taleb talked about made comparison

between investing in dentistry and he

said if if you go to dental school and

you learn how to fill a cavity and you

fill the cavity that way every time

you'll you'll be successful every time.

That's not true of investing. So if

you're the kind of person who wants to

be successful every time, don't become

an investor, become a dentist or an

engineer or something where you have

physical rules in play that are

reliable. [snorts] There are no physical

rules in investing that will make you

successful all the time.

Warren Buffett who the most successful

investor of all times uh attributes his

success to 12 investments

over the last uh 60 70 years. Now he

didn't have that many abject failures

but he but many many many investments

that he that he made were only

moderately successful. He did 12 great

ones. So do you want do you like dealing

with uncertainty and ambiguity?

Can you live with a a batting average

which was which is far from a thousand?

Uh the the only thing I would emphasize

is that investing has been enormously

profitable industry for those of us

participating in it in the last 50

years. You shouldn't become an investor

just because it's a high paid industry.

But if you

meet the description uh that I just laid

out, I think it's a great thing to do.

It's exciting. It's intellectually

challenging. Uh you you never reach a

point where you say, "Well, I got this

figured out." And I [clears throat] find

that to be a wonderful attribute. I wish

we could keep going for hours, but alas,

we cannot. Howard Marx is the co-founder

and co-chairman of Oak Tree Capital

Management. Prior to co-founder Oak

Tree, Markx led the groups at the TCW

group that were responsible for

investments in distress debt, high yield

bonds, and convertible securities. He

was also chief investment officer for

domestic fixed income at TCW.

Previously, Mox was with City Corp

investment management for 16 years.

Howard has published three books on

investing, including The Most Important

Thing: Uncommon Sense for the Thoughtful

Investor and Mastering the Market Cycle:

Getting the Odds on Your Side. Howard,

[music] we really appreciate your time.

Thank you so much.

>> Thank you, Howard.

>> Thank you, fellas, for your great

questions. [music] It's been a pleasure.

>> Thank you for listening to Prof Markets

from Prof Media. If you liked what you

heard, give us a follow and join us for

a fresh take on markets on Monday.

>> [music]