Investment Legend Howard Marks on Mastering the Market Cycle

good evening everyone and welcome to UCLA Anderson School of Management, what a wonderful night it is. We have a room that is filled to the brim with energy and curiosity. We have students, alumni, and faculty along with many friends from the Los Angeles community. We are all eagerly waiting to hear from one of the brightest minds in finance. My name is Laurie Santee. I am a finance and strategy professor here at Anderson. I am also honored to serve as the faculty director of our Fing Center. for Finance and Investments, donated by UCLA, is by Larry Fink himself on behalf of the Fink Center, the office of alumni relations, and all use of the Anderson family.

I am delighted to welcome you to campus for this very special event. I also want to extend a very warm welcome to our alumni chapters in San Francisco in Seattle, we can't see you, but you will be joining us via livestream as part of the global welcome weeks. This is a really fantastic series of programs that our alumni office presents around the world. Each year, tonight's event in many ways embodies the Fink Center's mission to unite the academic study of finance with deep insights from the trenches of practice to train our students and cutting-edge skills and expand the network of people and ideas to which they are exposed. to inspire our alumni to remain lifelong learners and, like in this room, to join the Anderson family along with the professional financial community to stimulate discussions on current affairs and finance and business, so in a few minutes we will observe and we will participate in one of those discussions between two. giants and in their own right, so let me start with Dean al Osborne, he is our moderator for the evening if you have contributed to UCLA Anderson in any capacity over the last 45 years or so.

Al Osborne's infectious energy has certainly inspired you. Where is the pride in him? the surprise for the school on his sleeve or rather on his hats, socks and ties, and these days he wears quite a few hats to school, in addition to being a professor of economics and global management, he is the founding director of the faculty of price. center for entrepreneurship and innovation and he has long served as senior associate dean for external affairs and recently became interim dean of UCLA Anderson. He joined UCLA after earning four degrees from Stanford University, including a PhD in Business Economics and an MBA in finance. grateful for his service to the school and for joining us here tonight Howard Marks is the reason this event has a waiting list.

He is co-chairman and co-founder of Oaktree Capital Management, a leading

investment

manager with more than $120 billion in assets. He has a master's degree in economics from the Wharton School of the University of Pennsylvania and an MBA in accounting and

market

ing from the Booth School. from the University of Chicago when Howard Marks speaks, everyone listens, he is known for his memos to clients that become required reading material really for all leaders in finance Warren Buffett, for example, said that when I see notes from Howard Marks in my email, the first thing I open and read I always learn something at UCLA Anderson, we are delighted to host one of the first stops on Howard's national tour for his new book Mastering the Market Cycle Putting the Odds on Your Side Ray Dalio Rates It as a must read and according to Charlie Munger he tells us how to learn from history and thus have a better idea of ​​what the future holds so that everyone can sit comfortably in their seats and prepare to learn to master the

market

cycle

from the master himself.

Please join me in welcoming Howard Marks and Aloes Born Well Lori, thanks for those inspiring comments. I didn't think I'd been here. so long and now it becomes real. I think the man almost knows you like that too, so it seems like I thank you for being with us, it's a pleasure for me, I'm very happy to be here, we've been privileged to have done this once before and where the conversation it was with the one and only Charlie Munger, who has been a real part of it. I think about you, in a way, you're developing perspective, right, you know, your

investment

s.

There are a lot of things we could talk about about Howard, but I really want to start. There are a couple of things that I think are fundamental to the way you see the world. Could you tell me a little bit about how you were able to think and synthesize your perspective on markets and how they work well? I think it's extremely important the word synthesizes and you have to have something to synthesize, which means you have to have a lot of diverse input and you know it's not enough to have some exposure to some things, you always have to worry about the things that have.

I've been exposed to that, so I think reading in general terms is extremely important and then of course I think it's essential to exchange ideas with others. It turns out that I don't like solitary activities that much and you know if you have some colleagues or peers that you respect and exchange ideas with, it's probably possible for both of you to learn that it can be a win-win and of course we all have ideas about what we think is going to happen and what we think we should do about it. It's great to have those ideas challenged and see if they can hold up in the face of challenge, so brainstorming I think is extremely important and then, you know, thinking broadly and we have to, you know, really challenge every day, now you know. , I write.

I started these memos 29 years ago and when I write the memos and when I write the books, you know, I invariably think of something in the process that I hadn't thought about before, it's not yes, it's not like creating by writing a The book consists of trying to put your thoughts on paper, when you write the book, you get new thoughts and then in this book, for example, I had an outline when I started writing, of course, and I thought about writing about the business

cycle

and the economic cycle. profits and the cycle in psychology and then I realized that there was a missing chapter that deserved its own chapter and that was the cycle of attitudes towards risk when people are arrogant towards risk and they are happy with risk and they accept risk and then, by definition, prices.

They go up because there is no concern or caution and then when the cycle goes down and they become allergic to risk, they usually sell without regard to price at prices that are too low, so cycle and risk are hugely influential. and decisive, I didn't think I would have it there. I put it so I think you know that writing is important and getting more ideas and lastly I would highly recommend you to live long and you and your diligence. and you experienced many markets and many cycles and because if you don't experience it then you can only learn about it by reading or talking to others if there is nothing like experiencing it the first time and you know one.

One of the things I firmly believe is that experience is what you get when you didn't get what you wanted, we learn a lot from hard times and failure and we learn relatively little from excess. You put money in the market and it goes up. you've learned you've learned number one it's easy number two taking risks pays number three there's nothing to worry about and those are horrible lessons and you know you learn a lot more from hard times than from success and I guess in a way I have to know what is knowable in that context and success in the marketplace, as I read your book, requires a skill if you master the cycles as we talked about to develop patterns, could you talk a little bit about how you think about this idea of ​​pattern recognition, yeah ? we go through ups and downs and the question is are they randomly inconsistent and therefore we don't study Abul or are there recurring patterns that we can learn to recognize and Lori with Oh Lori mentioned Ray Dalio and had some nice words from my book, well , I have Some nice words for him, he published a book earlier this year called Principles and he talks about how they work at Bridgewater and he says you know they've studied for so long and they have so much experience and they've recorded.

So much experience that they look, see something happening and say oh, that's one of those and saying it's one of those is a lot easier than saying I don't know I have no idea what's going on I've never seen one like this before no I have an idea what's going to happen next and what I should do about it, so I think if there are patterns we should recognize them, if we try to impose patterns in an area where there aren't any, then that's crazy. but I believe that in the financial and investment world there are patterns, one of the main ideas that permeates the book is a quote attributed to Mark Twain, history does not repeat itself but it does rhyme and in each cycle compared to the last, the amplitude of fluctuations is different, the speed of fluctuations is different, the length of the cycle is different, the immediate causes are different and the effects are different and one of the things that happens a lot today, especially because you know what I'm talking about the book is that people tell me well what cycle this is like and the answer is that it has some similarities 207 and some similarities 282 and and and but there are also ways in which it is different, but it is very, very useful for identifying similarities and already You know, in the vein of Mark Twain, although the details are different in each cycle, I conclude in the book that in every boom that I have lived through and I probably lived through about half a dozen booms in the market, there have been some In the threads there have been things that rhyme, to use Twain's word, so every boom I've seen has been characterized by too much optimism, too little risk aversion, and too much money in the hands of people who are too eager to spend it and, if you think about it, at Regarding over-optimism lack of risk aversion too much money is a very good formula for a bubble, you can easily see how those things would lead to a boom and if you think about it for a minute you can see how difficult it would be for a boom to take place. without them, so if that's true, if those are common themes that rhyme, then we know that we can help ourselves by being attentive to them and when we see that the three ingredients we can do something about it, you know in your book.

When you talk about

mastering

disciples, which is this ability to recognize patterns and know when they come back, which is developed over years of understanding, you mentioned that it's important to know your position, yes, it's having a good idea of ​​where you are. We're on um, could you talk a little bit about how you think about that? Well, first of all, what everyone wants to know is what will happen tomorrow. The mark dropped 800 yesterday 550 today. What will happen tomorrow. What will happen next. year for the next three years and the answer is nobody knows and I don't believe in forecasts, another of my heroes, John Kenneth Galbraith, said that we have two types of forecasters, those who don't know and those who don't know. they don't know and I'm firmly in the first camp.

I don't know what's going to happen in the future and what I'm saying is that we never know where we're going, but we're pretty sure we know where we are. It can be challenging to predict the future, it shouldn't be that difficult to predict the present and if we can, we can think in terms of a normal trend line, perhaps for the market or a level that represents fair value and then the fact. that the market oscillates around it, then clearly it is very important to know where in that oscillating pattern we are because if this is a reasonable value and we are here, then clearly the expected value of the expected performance from here should be less than the historical average.

The historical average was compiled by buying at prices throughout the cycle, but clearly, if we are at the top of a cycle, our potential return is lower than the historical average and it is harder to make money than historically and easier to make. We lose money, whereas if we buy here when prices are low, then the expected value is higher than the historical average and it's easier to make money and harder to lose, so it makes a profound difference and I think it's extremely important that Let's find out. We don't know where we're going, but where we are has implications for where we're likely to eventually go.

Now the word eventually is very important because if I tell you that we are done, the market is high in its cycle and it is overvalued one of the most important things because you didn't realize is that overvalued and going down tomorrow are not synonyms, so if You think about the market, it's fluctuating this way around its value, so when it goes up above the line, it's overvalued when it goes up. higher is more overvalued higher is more overpriced and markets that are overvalued tend to become more overvalued before they finally peak and go down so it is a big mistake to think that they are overvalued and will go down tomorrow or you can even say that It's too expensive you can sell it and it goes up another 20 percent you feel like an idiot and half your clients fire you but that doesn't mean it was bad and I'm digressing a little from your question no one Otherwise, okay, I'll bring him back, okay, but you know all you can do in this world isdo the right thing, you can't necessarily do what will work tomorrow.

When I started at Wharton 55 years ago this month and the The first lesson I remember learning at Wharton was that you can't differentiate the quality of a decision from the outcome; Now this is counterintuitive and, in fact, baffling, and most people who are not analytical or insightful would say well, of course. Good decisions can work, bad decisions fail, but the truth of the matter is that in the world there are many things that are unpredictable and random and as a result good decisions fail all the time and bad decisions succeed all the time and we all know people we say oh he was right for the wrong reason or he was lucky or he was unlucky and so you can't, you can't think of the world as a place where a good decision, a good outcome, a bad decision, a bad outcome don't exist.

It doesn't work that way, you know, Richard Fineman, the physicist, said physics would be a lot harder if electrons had feelings and the truth is markets don't exist markets, there's no place, it could be a building or it could be virtual, what is it? A market is a group of people who buy and sell and those people have feelings and that is why they do not always act in a way that is predictable, they do not always act in a correct way, sometimes they do things that are counterintuitive. To predict market movement, when people do things that are unpredictable, you have to be able to predict it, which by definition you can't, which is a good reason we have the business judgment rule. distance together, so the process and the kind of how you achieved it really speaks to the quality, but the result you could be wrong because of a lot of other things, sure, oh, we see it all the time here, well, if I can take one more. minute the second to last I will do it yes the next just another power the next the last paragraph of the book quotes Peter Bernstein, who was a great observer and wise man of the market and said that the future is not ours to know, but it helps to know it Error is inevitable and normal, it is not a terrible tragedy, it is not a horrible failure and reasoning, not even bad luck, in most cases, being wrong comes with the franchise of an activity whose outcome depends on an unknown future.

Now you know, imagine if you were a baseball player. five trips to the plate and you kiss in three of them and you kill yourself the point is that very few know Ted Williams had two hits and every five trips and it was the best in history nobody gets sick three out of five or four out of five and it's the same and investing none of us do it right all the time all we can do is have a better batting average than others if you have a better batting average then you will be a superior investor in baseball if your bat 333 is the Hall of Fame, you are exactly so maybe investors should think about you lose seven, don't worry because you will win three, right?

You've prompted me to think a little bit about your notion of being aggressive or defensive hmm in different types of market situations you talk about that as something that you know governs a lot of how you could explain it a little bit well I really think the most important decision for what What I call medium-term investing is whether it will be more aggressive or more defensive at any given time. I'm not talking about the short term like the next day, week or month, and I'm not talking about the long term like 30 years, when you can ignore it. the fluctuations in between, I'm talking about two three five years, if you're positioning your portfolio today for the next three years, I think the most important question is whether it should be an aggressive portfolio or a defensive portfolio and it's not about stocks versus bonds high quality. versus low quality growth stocks versus value stocks US stocks versus foreign stocks developed world stocks versus emerging stocks large versus small companies the most important question is offensive or defensive, whether you have an aggressive portfolio in a period when defense was required , you're going to get chewed up and no matter how you answered all those other questions and if you have an aggressive portfolio at a time when it turns out that aggressiveness was conducive, no matter how you answer those questions, you're not going to be successful either, so I really think that's the key , let me talk about it in another direction.

Now I believe that every investor, including myself, faces two risks every day, they call them twin risks, what are they? The first is obvious, it is the risk of losing money. The second is a little more subtle: it is the risk of missing opportunities and now we have to face them every day. If you tell me I want to be absolutely sure that I don't lose money, then I'll say, "Okay, we'll do it." Put them all in treasury bills, you can't lose money, but you lose all the opportunities. If you say I want to be 100 percent sure that I don't miss any of the opportunities, then I say okay, there will be no T-bills for you. and we put them all in risk assets and they will be one hundred percent exposed to the risk of losing money, so they can eliminate one, but that puts them firmly in the crosshairs of the other or they can commit to both and most people , What do they do? say well, I don't want you to know, I don't want to lose money, but on the other hand I don't want to miss all the opportunities, so I'm going to do some of these.

I'm going to balance aggressiveness and offense. I'm going to balance the concern about avoiding losing money and the concern about losing opportunities and that's the right thing to do, all one or all the other makes absolutely no sense, okay, manage the two risks, balance them in what proportion, that's the next question, so the way I think about this proposal, so in July of '17 I wrote a memo warning some caution and a guy on TV says that's it. Howard Marks says it's time to go out and when I met him next time I said there were only two. things I would never say, come out and it's time because I know I'm never too sure and the investment world doesn't allow for that level of uncertainty, it's not black and white and when you go on TV shows like I do, sometimes you get They mean buy or sell in or out, but it's not black and white, it's how you balance and the way I think about it is there's a speedometer like on the dashboard of your car and it goes from zero to 100 and zero is all effective and hundred are fully invested in risky securities and maybe using margin or leverage and the question is where should you be between now if you want to invest and most people say I want to make some money so I'm going to invest and they said they tried thinking about whether they should buy Apple or Amazon but they missed the step the first step that everyone considering investing should take is to say from zero to one hundred who am I given my age my financial position my income my requirements my dependents my psyche where I should normally be If you are young if you have a great career ahead of you if you are making more money than you need if you don't have dependents and you do and if you make a mistake investing you have decades more to do it right then you can be 80 or 90 if you are approaching retirement and you have a dependent spouse and you will no longer be earning income from your job and if you are concerned about your ability to If you live with the functional impact of ECMO fluctuations, then you could be 30 years old, so each person should perform serious introspection and figuring out where you should be, and the emotional content is extremely important because the only thing you can't do when investing is "can't." Not doing the right thing if you can't stand the pain and everything that happens emotionally conspires to make us make mistakes.

Most people get excited the better things go. They feel better about stocks the higher the prices are. They tend to buy more when prices are high. at high levels and then when it goes down they get depressed and sad and regret the day they bought a stock and they tend to sell at low prices that's what most people do, how do we know that's what they do most people? stocks go up and when they go up too much they go down and most people are buying here, that's what puts them up here and they're selling down here, that's what puts them down here, so emotion works for our destruction, You need to find out if you can live with the emotional ups and downs, and if you can't, know that there are things you can do.

You can give your money to other people to manage it. There is a speedometer that goes from zero to one hundred. Each person present should normally determine where he should be and say. I conclude that I am seventy-five. The next question is: where would I be today if my portfolio were riskier than my normal portfolio? because I think there are great times ahead and prices are low and psychology is depressed and I think it's a good time to add risk or I should have less risk than normal because I think prices are high and optimism is everywhere and euphoria and and the pendulum of psychology will probably swing back towards the midpoint, so I think it is extremely important to determine where we are in the cycle and, consequently, where we should position our portfolio in terms of risk relative to our position normal, or so it sounds.

Like a lot of discipline, Howard, well, you know, so do most people. I mean, they want to follow the herd, don't they, don't they, they want my father to listen, but the herd is usually wrong, yes, and in investing there is something called contrarian behavior. all great investors are, by definition, contrary to the opposite, to get a great investment result, what do you have to do? You have to buy when everyone else is selling and prices are low. You have to go out when everyone is buying and prices are high. avoid the things that everyone loves and has bid on and you have to buy the things that everyone hates and that you've dropped like a stone, you have to do the opposite, but it's not easy for Dave Swenson, who runs the foundation at Yale, which I think which is the best performing endowment fund in the country in the last 33 years that it has been there, as it says in its book that superior investing requires taking uncomfortably idiosyncratic positions and those two words are fabulous because if you want to be a superior investor even if he wants to avoid these horrible mistakes that I described by definition, he must invest differently than the rest, he must invest idiosyncratically, but by definition, idiosyncratic positions are uncomfortable, why, because the markets go like this , each share becomes more valuable every day? too expensive, you get out, it keeps going up, everyone else is making money telling you that you are an idiot for getting out and you know there is a book on bubbles and crashes by Charles Kindleberger, he says that there is nothing worse for you and your balance than the clock. a friend gets rich, that's human nature and by the way, to get out of something, no one ever identified an asset that was overvalued and got out only to see it fall the next day.

The general rule of overvalued assets over price. Assets become more overvalued. and you have to be able to live with that and it's uncomfortable and there's an old saying in our business that being too ahead of your time is indistinguishable from being wrong, but you have to live with that because there's no other alternative, but you know the words have true power last month in one of his letters discussed the prospects of companies Fang Facebook Amazon Netflix and so on and their prices fell. I'm certainly not always right, okay? And you know I do the best I can and some people and Layton. and I wouldn't recommend it, okay?

I mean, the fangs have gone up and up, yeah, I mean they look like multiple, but you know, it wasn't in that memo. I wasn't saying fangs are a bad idea. Well, what I was saying is that the performance of the fangs, the levitation of the fangs tells me that he had a whole list of things in that memo that came out two weeks ago and it's called the seven worst words in the world and I had a list. full of things that to me were indicative that this market was high and therefore risky and the belief in fangs and the willingness to pay an extremely high and constantly increasing price for a company that makes no money is not a mistake.

It's not good, it's not bad, but it is clearly indicative of the presence of optimism and I want to know when the optimism in the market is at its highest and, all things being equal, I want to reduce my wrist stance and I want to know when the Pessimism is widespread. and all things being equal, I want to increase my wrist posture, so that's all I did. I didn't make any comments about the fangs themselves and I didn't tell anyone to sell the fangs, but I think it's really important that we know what it is. going through those seven words people should use our seven worst words in the world too much money chasing too few deals and you know, we occasionally see this at the height of cycles when money is trying to take risks asset classes and there is too much money for deals people are ignoring the risk and are very enthusiastic and an auction is held every transaction in amarket is an auction transaction now it's not always obvious that other Christie's media are not at the door there is no one with a gavel there is no advertisement but the truth of the matter is that if I go out and I want to sell my general motor stock in some sense there is a bid and you enter you did it 32 and you at 32 and an eighth and you at 32 and a quarter of you at 33 today and you don't see the offers of others, you know that it is not a reason for protest, but eventually my actions are going to the person who offers the most, it's an auction if I want, if I want to borrow money for In my company, I go to all my banks and they offer an offer: one says I need 7% interest, the next says I will accept six and the The last one is very eager to get money so they say I'll take five and one banker says I need very protective documents and the second says I'll give you loose documents and the third says I'll give you I don't need any protection and then the bank the last banker gets to make a unprotected 5% loan won the auction or did, but when we see the auction gets heated when there is too much money in the hands of the potential money providers and they are too eager to get it out, then the market, then the auction goes too far and the price rises too high, which means the potential return is too high. low and the risk is high, but this time it's different and there are the four worst words in a well, it's a break, it's a great straight man, the four worst words in the world are, this time it's different and I've seen it.

This several times in my life and what it means is the old risk, the old rules don't apply, so as I told you, the average price of a stock relative to earnings since World War II has been 16 and in 2000 was 32 and if you told someone who was a tech stock fan at the time, wouldn't you be scared by the high P/E ratio of stocks and in fact there were so many internet and e? -trading stocks that had no earnings and were selling at a multiple of sales if they had sales, but many had no sales and were selling at a multiple of dreams or eyeballs or something like that and if you said to someone, what about the old rules and they tell you no, no, you know you're wrong?

This time it's different, the old rules don't apply because the Internet is going to change the world and history is irrelevant and guess what the Internet changed. world, but 99% of the stocks disappeared and it turns out that history does apply, so when you hear someone say that this time is different, grab your wallet, well, you know, I remember when many analysts created different measures of Ubud, ah hmm, and they called him. all kinds of things, yes, well, now as an effort to justify, yes, the elevated. Please, this is, this is, uh, this is one of the things that's happening now, so you know, there are standards.

I don't want to start, but There are people who don't believe that we have to respect the rules, the traditional rules, but there are rules and one of the rules, for example, is maybe when one company buys from each other and another company should only use it. use six times EBIT for the amount of debt, so if the company makes twenty million dollars, you might be willing to use one hundred and twenty million dollars in borrowed money to buy it and any excess of that in the price should be in form of equity, which is safer and in this memo the seven worst words in the world I talked about the fact that I detect that that is the condition today, so I went out to my colleagues at Oak Tree and told them to give me nominees for deals Fools. because when foolish deals can be easily made that is indicative of the fact that the world is a euphoric and buoyant place and that is dangerous and then they sent me things where well, here is a company to simply issue debt and they issued the debt is seven and one half of the EBIT, ah, but now it's seven and a half times something called Eva da adjusted and the adjusted EBIT da is the money they would have made if things had been different or more analytical, multiple analyzes that add marketing expenses, Zach, when you don't. you have to pay, so for example, what you say is well, this company made twenty million dollars and this company made twenty million dollars, but if you put them together, together they will make sixty million dollars because of the economies, so you have adjusted EBIT da and there I gave the example of companies whose eBay Justin Evita was one hundred and fifty two hundred percent of their reported EBIT ah, but in a buoyant risk tolerance the carefree market people will ignore the old norms and lend against dreams and The point of the book is that when that's the case you want to know it and act accordingly and that's a really good thing.

I could go on all night with you, Howard, as you know, and I want to answer some questions, but I think. that here we are at the Anderson School, you were a Chicago at a very important time in financial history, yeah, when farmer Fisher Jensen and everyone was there and you might want to make a comment about that, I sure got about two or three minutes before it arrives. The hook is good and I know that you are a huge philanthropist and that you are very important in doing a lot of things not only for the schools that you went to but also for New York City, so maybe take a minute to talk to each. one of those, if you're fine, you know, look, Cicero the philosopher said that the grateful heart is not only the greatest of all virtues but it is the father of all other virtues and I think that we all have a lot to be grateful for and if we are not grateful for it , so we're really stupid and I've been incredibly lucky in my life and one of the ways that I was lucky, one of the minor ways in which was like coming to the University of Chicago in 1967 and the people that everyone mentioned, who were really the pillars of financial theory, they had developed the main theory in Chicago in 62 3 4, which means that when I got there in 67 I was in one of the first classes in I learned that stuff and that was good luck and I appreciate it and, among other things, that's made me want to come back to Chicago, so you know I've given them some contribution and some scholarships and scholarships for and and what mainly. aimed at California students, but you know, I think our lives are less than they should be if we don't appreciate our good luck because we should, I mean, and I wrote this memo on January 14th called getting lucky and I talked about how I got lucky and I say you know I could.

I could take the approach that no, no, I haven't been lucky, it's been all my skill and my hard work and because you know some people might feel that if they attribute something. of their success to block that have been diminished I think I will feel very good for having been lucky and that makes me very optimistic because no matter how irrational it is I think I will continue to be lucky and that makes me I feel very good and it makes me feel that I want to give back and be philanthropic and you wanted to be very generous, yeah, and there's nothing like it.

The book is March 3, the market cycle, but the key words are having the odds on your side and us. I had a conversation with Howard Marks, one of the great investors of our day, with some good homebrew ideas that will be useful for interviewing everyone who wants to go out and do the right thing. Howard, thank you so much for being a part of this. I appreciate it, you're fantastic, thank you now we want to open this up to some questions. Okay, we see some movement. A little cycle here. I started. My name is Yvonne Gate, the treasurer of our public company.

How have you been talking about defensive and aggressive? he portfolios, what is the definition of a defensive he portfolio, for example? Okay, thanks for asking. Most people think that defensive means selling and raising cash and aggressive means putting cash to work, but the truth of the matter is that anything you want to do in the investment business can be done aggressively or defensively and there are many ways. of being aggressive or defensive, for example, one of the things that I, Oaktree and historically have worked on are high yield bonds, the so-called junk bonds, and you could say well.

Junk bonds are aggressive, but if you want to own some junk bonds, there is a defense of ways to do it: you can own companies with higher ratings. Companies that are larger. Larger companies with critical mass tend to survive better. You can invest in companies that are in the so-called defensive industries, such as food, people do not stop eating like theirs or, unlike aggressive industries, such as movies, where you know that sometimes people stop going to the movies , you can put your money in a mutual fund managed by someone who has a track record of performing excellently in bad markets and not so well in good ones, as opposed to people who have a track record of performing excellently in good markets and not so well in the bad ones, so there are many things you can do if you want.

Be aggressive, you can invest in funds that use leverage, if you want to be defensive, I wouldn't use leverage. There are ETFs, now you can buy an ETF that will go up or down twice as much as the SP, three times more, four times more. So much so that you can really dial in your risk and there are many ways, especially through ETFs and other forms of derivatives and financial engineering, you can have as risky or safe a position as you want without having to cash out. Hello, our thanks. For your time today, I had the strange good fortune to intern at Oak Tree in the summer of seventeen and since then I have really enjoyed reading your notes and learning more about you.

I was wondering what you think about the current rising interest rate environment and how it bodes for the bond management industry, specifically here in Southern California, the most important thing to know about interest rates is that during The last ten years have been abnormally low and you know when, when the central bank reduces interest rates, it tends to stimulate the economy for more people. can afford a mortgage and buy a house more people can afford a car manufacturers can borrow money and build factories and in every way low interest rates are stimulating and the world's central banks reduced interest rates to essentially zero, sometimes negative, ten years ago in To get the world out of the global financial crisis, now central banks outside the US did it later than the US, that is one of the reasons we have had a much better recovery here than they have, but anyway the point is that, although the first The point is that interest rates have been abnormally low.

Number two. Most people come to school. Most people may be here tonight because they believe in the free market system and most people believe that the free market system, better known as the capitalist system or free enterprise, is the best. It is the best allocator of resources and you know that companies tend to put their capital and their workers and it is in their experience in areas where they will be most productive and I think you are strongly trying to find me the countries where the government does the allocation. that have been successful you will not be very successful free markets allocate resources we have not had a free market in money for ten years the price of money has been managed and controlled and artifice has been oppressed it has not been allowed to roam freely in response to supply and demand I think the Federal Reserve wants to get out of that business and if I mean anyone with a brain who is an economist would want to get out of that business and you know, Bernanke started, Geithner started talking, no, Bernanke started talking about This was about five years ago. ago and in the last few years it has been happening and there have been eight rate increases so far and most people think there will be about five or six more in the current series and when interest rates are artificially low and they are released and especially see when the economy is prosperous and there is a demand for capital, you should expect to see the price of money increase, it has been increasing, it will probably continue to increase not too far away, you know, I have seen interest rates, I have a slip on my wall of when I had a loan outstanding from a bank at twenty-two and three-quarters percent and I don't think we're going to see that again and you know, back in six-seven I had a lot of money in five-year Treasury bonds at six-and-a-half percent.

I'm not even thinking that we're going to see that again, but today the five-year Treasury bonds are between two and I think that's going to go up and I think that should be the problem now. is my partner Sheldon Stone is doing this all day what does this mean interest rates raise bond prices lower interest rates lower bond prices this is how bonds are priced when interest when contemporary interest rates As old bonds rise, they lose their value and their prices fall so much. Answer to your question, we will probably see a rise in interest rates, which means we will probably see a fall in bond prices and I think that is unavoidable and, interestingly, , the pain that has been felt in the stock market over the last six trading days is largely attributed to the fact that interest rates have been rising, how can that be a surprise, you know, and, and As I said, Bernanke pointed that out five years ago and started doing it two orthree years, and and how Suddenly, last Thursday, every stroke of Oh, interest rates are going up.

It better come out of the stock market crash, you know, and that just shows that you know at the University of Chicago they say people are rational and objective. value calculators and to hell with that, you know they are, they're emotional and erratic, okay, so we have this new field in behavioral economics, we're going to San Francisco, so stay there for a second, how do we get there? to Saint? Francisco, we have a question from San Francisco. Oh, thank you our ratings for showing up and talking to us. You can see me? Yes, I'm Chris. I bought from an MBA student currently employed and question center with companies or financial companies that invest based on algorithms and how that has affected market cycles, for example, what do you think those market amplitudes have looked like in recent years? years?

I wrote a memo in June that everyone will want to read because of the way I talk about memos from time to time, they are all available on WWF recapitalization ideas and the price is right, they are free and you know yours is worth 29 years, for which can keep you busy on a winter night, so I wrote a memo in June called investing without people and it talked about index and passive investing algorithmic and systematic investing and artificial intelligence, artificial intelligence and machine learning, so I hope you read it for a full treatment of the issues, but in answer to your specific question it's not my sense that these things have lifted the stock market, you know, I think especially algorithmic, which is your specific question, they are buying and selling every second, every microsecond, so I don't see how they can be doing enough. net buys to put air under the stock I don't think I don't think they're to blame Chris is fine and Seattle Oh yeah, hello, thanks, how's James Reagan, class of '92?

Hello Professor Osborne, I also have a question about debt. seeing record levels on both the federal public side of corporate debt and household debt, as well as how you see those levels now and what it means for your kind of bullish optimism index and now you look at the markets, yeah, well, yeah returns to In the memo from two weeks ago The Seven Worst Words in the World there is an extensive discussion of the factors that I believe make the world riskier now and are indicative of the presence of optimism, enthusiasm, greed, risk tolerance and credulous nests and all these things and we are much more indebted in many ways than in the past and, all things being equal, this increases the risk again, fundamentally increases the risk to the environment and is also indicative of high animal spirits. which are dominant in the market today, the interesting thing though is that all we know is that there is more debt and that it's all Google making the world riskier, but we don't know exactly how much that meant when I was a kid that we used to have, there used to be debates about whether it was okay for the government to owe money, whether it was okay for there to be a national debt, we seem to have gotten over that and of course now we have a national debt in the 20s. of trillions and it seems that we're still doing well, most people think there's a number at which debt becomes reckless and lethal, but no one can tell anyone what it is, so I'll just say, we'll see.

We'll see, let's get back to Los Angeles here and UCLA. Thank you Howard for this wonderful talk. My question is about the current environment, taking the temperature as you like to do, just looking at what's happening in Softbank and venture capital. raising a huge amount of money looking at the cryptocurrency phenomenon and seeing similarities with dotcoms seeing how private equity raises huge amounts of money my question is all these signals and with the current stock valuation, the market cycle, maybe you know when it's going to be it turns out they're going to come together and it's going to be a big flop where private equity hedge funds start pulling out venture capital start dumping Manhattan real estate start tilting how do we know if the cycles are going to be singular, You know, bonding with each other, I know it's hard? question, but you know, the other day I heard a venture capitalist mention that it's all just one big Ponzi scheme and venture capital, this was equity ahead, how do the different market cycles tie into everything that's going on? happening?

I would refer you to the seven worst words in the world and no, I'm not referring to the memo that came out two weeks ago, on September 26, and I mention all those things there. Softbank venture capital private equity real estate it's all there like with an owl's question about what fangs look like, the point is that in the 90s, very successful venture capital funds raised one hundred or two hundred million dollars and I think that FY '99 or FY 2008 had a triple digit rate of return and of course that makes everyone was hard pressed to put money into venture capital and in 2000 those companies raised a billion or two billion those funds singularly failed too many companies too much money chasing too few deals now Softbank the Japanese company is or has organized most of a hundred billion dollar fund to invest in technology not necessarily at the risk level, but at all stages of development , but I don't think you can invest a hundred million or a billion dollars in technology, and one of my friends, who is a venture capitalist, recently told me what happens is that they go to a younger company and they say we want to invest two billion dollars, they say well, we don't need two billion dollars, we can't use two billion dollars and, by the way, we don't want to sell 80 percent of our company and they say if you don't accept it we will give it to your competitor, he will put you out of business, so you know, too much money is not only bad for the people whose money is, but in my opinion it is bad for entire industries, so this is just indicative of what happens when there is too much money and by the way if Softbank raises a hundred then one of the companies that raised a billion in 2000 can say we're going to raise ten billion look how disciplined we are and you know this is the process by which the markets they get in trouble and in the memo the seven worst words in the world I refer to a memo I wrote in February oh seven called race to the bottom and I talked about this concept of there being too much money out there and what that means for the discipline and it makes it really difficult and you know, I can't tell you exactly how this will play out and manifest.

I can't, but I mean, I tend to think that all these things that have been raised with excess money and excess animal spirits will come to earth, that's how things usually are, thank you, yes, and let's take the gentleman of the red tie, that's it, yeah, I'm joking and They get the last question, so it better be good. Oh, so much pressure. Howard. Thank you so much. I heard really great from you. I was curious if you had any ideas on how to manage margin within the market cycle. Basically taking advantage of 0 to 100, I guess. risk profile I'm managing margin margin the use of margin yes, well you know, look, margin means it's now called leverage, it's using borrowed money to supplement your own money to buy more and it should be obvious that leverage never makes an investment is a better investment. it only amplifies your sense of sensitivity and if you are going to be successful you increase your games and if you are not going to be successful you increase your losses but it doesn't make you better and it doesn't change the odds of success if you go to the Las Vegas mall, but mathematically it's fun and if you go to Vegas once in a while, the pit boss will come by and you'll make a bet and he'll say, remember, the more you bet, the more you win when you win and you can't argue with that and that's it and that's margin, so obviously if you are a high risk investor with financial resources and emotional capital and patience, you could think about using margin now.

I would say that we should not use margin regardless of what part of the cycle we are in, but a high risk investor in a good part of the cycle should consider margin, on the other hand, a low risk investor even in a good part of the cycle You probably shouldn't consider margins because your financial position and emotional makeup won't allow you to use it wisely, so it's clear that margin is one of the things we can adjust to calibrate the risk of our portfolio, but I think it should be used wisely. very cautious. and in doing so, would you say the goal would be to, I guess, get out early or just hold on to your hat during the cycles?

Well, I mean, obviously it's good, look, some people consider themselves buy and hold and some people try to get in and out. I don't think I would have written the book if I didn't think it was a good idea to have less risk at the top and more risk at the bottom, so that's the position I would do it. But if you come to the conclusion that you can live with the temporary fluctuations and you're not able to get in at the bottom and get out at the top, then I think buying and holding is better than what most people do.

It's buying at the top and selling at the bottom, thank you very much, thank you very much. I'm Jill Bald, Class 81 Associate Dean Alumni Relations, and I want to thank you all for coming to share this truly wonderful partnership between the Fink Center and Alumni Relations for Global Welcome Week. We are especially happy to think ahead and welcome our San Francisco and Seattle chapters. We have a beautiful reception in Marion Anderson's courtyard so that all of you can arrive easily tonight. Go down any stairs and go outside, there will be a table set up where Howard will be signing some books for those of you who buy books and if you haven't bought a book yet, you can also do that outside in the Marion Anderson Patio, so thanks again for coming , go Bruins, go Anderson, you.