The Exchanges, every show

Q There we go. Howard, in one of your memos you wrote, and I love this, you can't predict, you can prepare. How do you think about that in today's context?

A We never know what the future holds. Mark Twain said, it ain't what you don't know that gets you into trouble. It's what you know for certain that just ain't true. Given the uncertainty that surrounds the future by definition, the big mistake is to assume you know what the future holds and bet heavily on it and be wrong. So no sentence that starts with, I don't know, but, or I could be wrong, but ever got anybody into big trouble. We don't know where we're going, but we should know where we are. And if where we are is elevated in the cycle and precarious, and if the economic recovery is elderly, then we should, that's what enables us to Prepare. And I think that the market conditions in 19, twenty-nineteen and the prior years made us vulnerable to an economic shock like the pandemic produced. And when it came along, it took a toll. Fortunately, the Fed and Treasury responded as well as they did.

AI assessment note: “We don't know where we're going, but we should know where we are.”

Q see DoorDash soaring at the rates that it has done. I just have to ask you, it often doesn't seem to correlate. How do you evaluate the state of kind of the public markets today, companies IPO-ing, given what we've discussed in some ways in terms of the fragility of the macroeconomy and the situation that we're in? How do you think about and evaluate your public market performance today?

A Well, number one, everybody wants to know if we have all these problems with the disease, how can a Stock prices be at an all-time high. That's the main thing. And what I would say is, number one, for complex reasons, the prices of stocks and other assets are highly influenced by the level of interest rates. The lower the interest rates, the higher the asset price is justified. We have the lowest interest rates in history. That justifies, for example, the highest P.E. ratios in history. So when you look and you see that the average P.E. ratio in the post-war period has been 16, and today we're in the 26 or seven region. You say, well, that's, that's tremendously overpriced, but it's, it's makes perfect sense relative to the level of interest rates. Now we spent a lot of time before talking about inflation and interest rates. If interest rates go up, prices should be expected to go down. But today's asset stock prices for technology companies, for example, I think are not inconsistent with today's level of interest rates. And then the other thing is great tech companies like Amazon and Microsoft and so forth were icebreakers. They led the way by performing extremely well coming out of the pandemic. They're up substantially for the year, while non-tech is not. Their great relative performance kind of cleared the way for phenomena like you're seeing in the IPO market. The fact tha…

AI assessment note: “Their great relative performance kind of cleared the way for phenomena like you're seeing in the IPO market.”

Q start by taking stock a little bit. So, I spoke to Ray Dalio this year in March, and he said we'd be entering not a recession, but a global depression. I'm not sure that's the most cheery way to start a podcast episode, but how do you feel about this statement when doing an analysis on the year that's been for the economy? Howard, why don't we start with you?

A Well, before I I know you're going to ask a lot of macro questions, and before I start answering, I'm going to say for myself, but I think probably also for Bill, that macro predictions are very hard to make, and I don't think either of us bases our investment decisions on macro forecasts. That's not a way to have a good batting average. With that disclaimer out of the way, first of all, nine months ago, a global depression was absolutely a possibility. With the, most of the developed countries Certainly outside of Asia, shutting down their whole economies in order to limit contacts and bend the curve. You know, demand would have gone to zero. Incomes would have gone to zero for many people and many businesses. And, you know, global trade would have, could have gone very, very badly. You know, I remember around, uh, let's say March, 18th, absolutely considering the possibility of a global depression. But, uh, thank God the, uh, The Fed and the Treasury did what they did in this country, central banks elsewhere, and, uh, clearly we've had a very painful and precipitous but brief recession.

AI assessment note: “clearly we've had a very painful and precipitous but brief recession.”

Q There we go. Howard, in one of your memos you wrote, and I love this, you can't predict, you can prepare. How do you think about that in today's context?

A We never know what the future holds. Mark Twain said, it ain't what you don't know that gets you into trouble. It's what you know for certain that just ain't true. Given the uncertainty that surrounds the future by definition, the big mistake is to assume you know what the future holds and bet heavily on it and be wrong. So no sentence that starts with, I don't know, but, or I could be wrong, but ever got anybody into big trouble. We don't know where we're going, but we should know where we are. And if where we are is elevated in the cycle and precarious, and if the economic recovery is elderly, then we should, that's what enables us to Prepare. And I think that the market conditions in 19, twenty-nineteen and the prior years made us vulnerable to an economic shock like the pandemic produced. And when it came along, it took a toll. Fortunately, the Fed and Treasury responded as well as they did.

AI assessment note: “market conditions in 19, twenty-nineteen and the prior years made us vulnerable”

Q You mentioned that kind of, that very swift actions. I am interested. What policy changes would you like to see, especially in the US, but your home market, and how would you see that in terms of minimizing the economic damage? What would you most like to see that you think would be beneficial to the economy moving forward?

A You know, the analogy I use, Harry, is that sometimes when people are very sick, they put them into a coma so that the body can heal itself, and I think we need a freeze on certain things so that the economy can heal, and I think that the new government actions will have a freeze on evictions, for example, and maybe there has to be a freeze on debt collections, and maybe there could be a freeze on rents. Now, the problem is everybody says, oh, that sounds like a great idea. Why don't we tell everybody That for the next six months, they don't have to pay their rent. That would be a real help to the guy who's lost his job. Sounds like a great idea. But where do the rent payments go? And they go to landlords. So that means that the landlord loses his income. And can he live? And can he maintain the building and pay the central costs and so forth? So the solutions aren't easy, but I think the answer is that there have to be temporary actions to mitigate the short-term damage. You know, in our country, we have unemployment insurance for 26 weeks. Maybe it has to be made longer or something like that.

AI assessment note: “freeze on evictions, for example, and maybe there has to be a freeze on debt collections”

Q Can I ask, does it change anything about how you act and operate within Oatree, and maybe Oatree more broadly, given the longstanding bull run that we've had, given the very, very swift changes today, does it change the operations and the mentality at Oatree?

A Well, I mean, it, for us, it just makes us more aggressive. We've been defensive for the last several years. We have thought that practices in the financial world were too undisciplined. So we've been trying to operate in a reduced risk fashion and buy higher quality assets. And I would say now that prices are down so much and the marketplace is more disciplined, I think we can turn more aggressive. When there's a lot of money in everybody's hands and they're all eager to put it to work, then everybody bids for assets and they bid for opportunities to provide financing. And as a result, the prices rise, the prospective returns decline, And the risk rises, and that's the process I call the race to the bottom, and it's very, very dangerous for people who participate in the race. On the other hand, if we have a market where people aren't bidding to put their money to work, then maybe the few people who will invest or will lend can get a good deal with low prices and high returns and safety. So Warren Buffett, great quote, he said that the less prudence with which others conduct their affairs, The greater the prudence with which we must conduct our own affairs. And I interpret that to mean that when other people are carefree and risk oblivious, we should be terrified. But on the other hand, when other people are terrified, we should turn aggressive. So in times when other people ar…

AI assessment note: “for us, it just makes us more aggressive. We've been defensive for the last several years.”

Q do you manage the psychology of not knowing where the bottom is? And as you said, it will always fall lower than when you catch it, and there's always that ensuing time frame where it does drop. How do you manage that psychology where everyone else panics and worries and is concerned and sells at a loss? How did you manage that psychology, especially in the early days, I guess?

A Well, in the early days, I wasn't managing money. I was 44 when I lived through my first debt crisis in 1990. By that time, maybe I had grown up and learned a few things. Bruce Karsh and I, I think, are both unemotional people, and in terms of living with these ups and downs, it helps to be unemotional. Number two, we support each other. And I think that each of us can do a better job of resisting the emotional ups and downs because we have the support of the other, which is very important. But the point is this. Think about the average investor. The average investor gets excited when things go well and prices rise and wants to buy more. And the average investor gets depressed when things go poorly and prices fall and wants to sell. In other words, the model should be buy low, sell high. And the average person's psychology tends to get him to buy high and sell low. So the average person's psychology is a big enemy. It's our job to resist that. What that means, Harry, is that if you operate emotionally or psychologically, like the average person, you will have average results, which for the most part means buying high and selling low. In order to be an above average investor among all the various requirements, One is that you not follow average psychology. You have to resist it. You have to try to buy when things are low and people are depressed and panicking, and you have to tr…

AI assessment note: “Bruce Karsh and I, I think, are both unemotional people”

Q Absolutely. I do agree. I guess my question to you is, with such uncertainty ahead, How do you think about how to manage and move forward with such uncertainty, and are there frameworks one can use to analyze crisis events and moments like this?

A There are frameworks through what you tried to do at the beginning of the show, that is analogies, but when you're living through something that is unique, as we are, both in terms of the health crisis, and there's never been, I don't think there's ever been, two million new unemployment claims, which is what some of the brokers think there's going to be next week. There's never, I don't think there's ever been a A quarter with a 20% decline in GDP. So you can't say you know how this is going to end, given the fact that it's a unique experience. I think for Oaktree, Harry, all we try to do is figure out what companies will stay in business, some idea of what they're worth, and then invest in them on a senior level. And if investing in what we think are viable companies in senior debt, if that doesn't work, I think maybe nothing will. So we have to operate on the premise that will be successful as it always has been in the past.

AI assessment note: “There are frameworks through what you tried to do at the beginning of the show”

Q Can I ask, does it change anything about how you act and operate within Oatree, and maybe Oatree more broadly, given the longstanding bull run that we've had, given the very, very swift changes today, does it change the operations and the mentality at Oatree?

A Well, I mean, it, for us, it just makes us more aggressive. We've been defensive for the last several years. We have thought that practices in the financial world were too undisciplined. So we've been trying to operate in a reduced risk fashion and buy higher quality assets. And I would say now that prices are down so much and the marketplace is more disciplined, I think we can turn more aggressive. When there's a lot of money in everybody's hands and they're all eager to put it to work, then everybody bids for assets and they bid for opportunities to provide financing. And as a result, the prices rise, the prospective returns decline, And the risk rises, and that's the process I call the race to the bottom, and it's very, very dangerous for people who participate in the race. On the other hand, if we have a market where people aren't bidding to put their money to work, then maybe the few people who will invest or will lend can get a good deal with low prices and high returns and safety. So Warren Buffett, great quote, he said that the less prudence with which others conduct their affairs, The greater the prudence with which we must conduct our own affairs. And I interpret that to mean that when other people are carefree and risk oblivious, we should be terrified. But on the other hand, when other people are terrified, we should turn aggressive. So in times when other people ar…

AI assessment note: “for us, it just makes us more aggressive. We've been defensive”

Q You mentioned that kind of, that very swift actions. I am interested. What policy changes would you like to see, especially in the US, but your home market, and how would you see that in terms of minimizing the economic damage? What would you most like to see that you think would be beneficial to the economy moving forward?

A You know, the analogy I use, Harry, is that sometimes when people are very sick, they put them into a coma so that the body can heal itself, and I think we need a freeze on certain things so that the economy can heal, and I think that the new government actions will have a freeze on evictions, for example, and maybe there has to be a freeze on debt collections, and maybe there could be a freeze on rents. Now, the problem is everybody says, oh, that sounds like a great idea. Why don't we tell everybody That for the next six months, they don't have to pay their rent. That would be a real help to the guy who's lost his job. Sounds like a great idea. But where do the rent payments go? And they go to landlords. So that means that the landlord loses his income. And can he live? And can he maintain the building and pay the central costs and so forth? So the solutions aren't easy, but I think the answer is that there have to be temporary actions to mitigate the short-term damage. You know, in our country, we have unemployment insurance for 26 weeks. Maybe it has to be made longer or something like that.

AI assessment note: “I think we need a freeze on certain things so that the economy can heal”

Q On appearance, and I hope this is okay to ask a personal one, but on appearance, you've achieved all that one would want to achieve or could achieve. What motivates you today, Howard?

A Well, I think the reason that I've been successful is that I so enjoy what I do. And because I enjoy it, I don't want to stop. And what would I do? You know, I'm not a golfer or a bridge player, and I don't want to sit on a park bench. And if I hung around the house, my wife would kill me. So there used to be a rock club in the seventies or even the late sixties called the Fillmore. And it was run by a guy named Bill Graham. And, and, and he said, it's only work if you'd rather be doing something else. And, you know, there's really nothing I'd rather be doing. I have friends. I see my family. I see my friends. I like some leisure. I love to read, but I love my work. And the great thing about investing is it's different every day. And yesterday's solution may not be appropriate for tomorrow. So it's a thrill. And of course, the people I work with.

AI assessment note: “I so enjoy what I do. And because I enjoy it, I don't want to stop.”

Q cycle. I guess the big question for me is It's really a case of insertion point. I know at points in 2008, OCHE were deploying close to maybe six hundred million per week for 15 weeks running. I guess then, how do you think about when's the right time to be really aggressive versus when to pull back, given the kind of probability distribution returns being maybe more modest now?

A Well, again, you said, what the insertion point? What is the time to buy? I would try to get away from that phrase. There is no the time. This is a time. There may be several. And we never know when it's the top or the bottom, but we can have a sense whether it's a better time to increase risk or decrease risk. I think it's a better time to decrease risk for the reasons that I've been discussing, the extended nature of the expansion, the bull market, the above average valuations, the investor behavior. Frankly, investors in a low interest rate environment with the market roaring ahead as it did in, in Best return since 1997, that's 22 years. People are afraid of missing out, so they're engaging in what I call pro-risk behavior in order to get their share. All of these things taken together tell me that this is A time precaution, not B time, A time, that I believe that an investor should have less risk currently than they usually do. Now, people always wanted me to say, buy or sell, in or out, and those judgments are too black and white. It should be more nuanced. Where on the speedometer between zero and a hundred should you be today? And my answer is that whatever your normal risk position is, today I believe you should have less, not zero. I don't think we're in a massive bubble. I don't think this thing is gonna collapse anytime soon, but I do think that there is more risk t…

AI assessment note: “whatever your normal risk position is, today I believe you should have less, not zero.”

Q that you've written about, it was actually in your memo from 1993, but you said, being right does not lead to superior performance if the consensus forecast is also right, lending to the contrarianism that we just mentioned there. So, if we kind of double-click on that, can you expand on your matrix of right and wrong, and then consensus versus non-consensus, and how do you think about that matrix?

A Well, the most important thing about the matrix And, uh, that, you know, even though it's, uh, 26 years ago, it still attracts pretty good attention as you're witnessing. One of the most important things to take away from that matrix is that if you engage in conventional behavior, that is, you follow the crowd, if good things happen, you'll have good conventional performance, and if bad things happen, you'll have bad conventional performance, but either way, your performance will be conventional. If you want to distinguish yourself from the crowd, If you want to be an above average performer, by definition, you can't engage in conventional behavior. So if you instead deviate from the crowd, and contrarianism is one way to deviate from the crowd, if you do, and you get good breaks, you'll have unconventional above average returns, and if you get unlucky breaks, you'll have unconventional below average returns. But the attempt to produce above average returns Has to start with unconventional behavior. You can't expect to behave conventionally and have returns which are unconventional. That's really what that matrix is all about.

AI assessment note: “the attempt to produce above average returns Has to start with unconventional behavior”

Q How do you, how would you do things differently if you were sort of in charge of not only the, the sort of like US government and the economic cycle, but broadly, like how would you conceptualize how the world would best be maximized? How do we unleash that potential across the globe?

A Well, that raises a real interesting question, Shane, and you use the term maximize, and the greatest contributor to global economic maximization is globalization. You know, I mean, let's say you have two countries, mine and yours, and we're really good at raising sheep, and you're really good at turning leather into shoes. And so, we raise the sheep, and when they're ready, we send the hides to you, and you make the leather into shoes, and we, and this system produces a hundred pairs of shoes a year, and then some politician erects a wall. No more trade in sheep, leather, or shoes. Now, I have to I'm good at raising sheep, but I have to try to learn how to make shoes.

AI assessment note: “the greatest contributor to global economic maximization is globalization.”

Q Take me back, because I, I, it would be, it would be very stupid for me to have the former Activision, you know, guy on the show and not ask about this. In 91, what did you see in an alien company as an asset that gave you the courage to go in and take it over?

A Well, it's a great story. What happened was, We were in the software business at that point. I don't know if you remember CD-ROM software, uh, personal computers. That was a world totally different than today. You had the computers at home and the computers at work. They were not the same. And we were looking for a business to grow. And we saw Activision as a publicly traded company on the NASDAQ going bankrupt, having a huge problem with their cashflow. They were, they had over Close to twenty million dollars in debt. They had no cash. They were bleeding. And we said, you know what? Let's see if we can take it over. So we, we bought 30% of the company from one investor was a venture capitalist. We was like, you know what? I'm out. So we paid that, I think, 400 grand.

AI assessment note: “we saw Activision as a publicly traded company on the NASDAQ going bankrupt”

Q So as you describe different forms of cycles, where we sit today with private credit, and you've just written this memo about this, how do you start thinking about how investors should consider both the opportunity and the potential risk?

A Well, of course, the risk is the flip side of the opportunity. In my experience, and you can trace the narrative, you get the times when nobody wants to do something. I wouldn't touch that with the 10 foot pole. Usually, if you're willing to do it, nobody else is, you can get a pretty good deal. And I was lucky because that was high yield bonds in. Then I was approached by a guy named Bruce Karsh who wanted to partner with me and started the stress debt fund. And I think we were a TCW at that time. And I think we started one of the very first to stress debt funds from the financial institution, even emerging market stocks in. Which we went into. As I say, if you do things nobody else wants to do, you can usually get a good deal. But then eventually other people figure out that it's a good idea. They flock in. It becomes more popular. And then of course, like everything, it gets overdone. Then the opportunity is gone and all you have left is risk. So it's the swing of a pendulum. It's very pronounced. It was the subject of my second memo, which was written in 1991. I called it the pendulum. I think the memo was creatively titled second quarter performance. But to me, if you're interested in the short or even the medium term, this is the most important dimension. Do they like them or do they hate them? Buffett puts it very succinctly, first the innovator, then the imitator, then …

AI assessment note: “So where are we on that continuum? And the answer is in the early years”

Q Absolutely. I do agree. I guess my question to you is, with such uncertainty ahead, How do you think about how to manage and move forward with such uncertainty, and are there frameworks one can use to analyze crisis events and moments like this?

A There are frameworks through what you tried to do at the beginning of the show, that is analogies, but when you're living through something that is unique, as we are, both in terms of the health crisis, and there's never been, I don't think there's ever been, two million new unemployment claims, which is what some of the brokers think there's going to be next week. There's never, I don't think there's ever been a A quarter with a 20% decline in GDP. So you can't say you know how this is going to end, given the fact that it's a unique experience. I think for Oaktree, Harry, all we try to do is figure out what companies will stay in business, some idea of what they're worth, and then invest in them on a senior level. And if investing in what we think are viable companies in senior debt, if that doesn't work, I think maybe nothing will. So we have to operate on the premise that will be successful as it always has been in the past.

AI assessment note: “all we try to do is figure out what companies will stay in business”

Q guess, you know, for me, if we double click on that partnership, some of the discussions you've had in the tough times And how you maybe play devil's advocate to each other. First, my question would be, what do you think that you have so well in terms of really fostering that environment of safety and radical transparency in the partnership and also with your relationship and dialogue with Bruce?

A Yeah, well, as you say, Harry, I was very fortunate to meet Bruce Karsh in 1987. And, you know, we just clicked and he joined me at Trust Company of the West and worked for me. And together in 88, we started what I believe was the first Distress debt fund from a mainstream financial institution, and as a result, I believe we're the oldest mainstream practitioner in distress debt. Here we are, 32 years later, and I think that this was never rehearsed or formalized, but I think that our relationship is characterized by affection for each other, but importantly, by mutual respect, and we're respectful toward the other's views. You know, I think that one of the most important characteristics for any of us in our lives is Intellectual humility. And it's very simple what that means. It means the other guy could be right. And if you don't think the other guy could be right, if you're sure you're right and he's wrong all the time, then you're probably a jerk. And I wouldn't want to be that person, and I wouldn't want to work with that person. And Bruce and I, you know, we, we have strong opinions, but we don't insist we're right. We want to hear the other person's point of view and see if they agree, and if not, why? The beauty is we don't, neither of us fights to get our way. Or fights to defend our opinion just because it's ours. We want to find the right solution, and this is just t…

AI assessment note: “relationship is characterized by affection for each other, but importantly, by mutual respect”

Q What, what do you think that'll do for wages of blue collar sort of jobs?

A Well, you're seeing it already in, in this, in this rising income inequality. It, the people who have capital or technical education skills are doing very well. And the people who don't have those things are doing very badly. Don't you think that'll just continue? The people who can develop the personless bookstore or the robot will be in great demand, and the people who can create artificial intelligence will be in great demand and very valuable, and they'll all live in a small community just south of San Francisco. And the people who Can't do any of that stuff and get displaced from their jobs will be, will do very poorly, and this is dystopian, and I hate myself for thinking that way, but I'm not optimistic about a solution, and by the way, Let's be generous and say that there's a possibility that government could, could solve this or help. Not this government. This government, by, I mean, by which I mean the current state of affairs in Washington. I'm not talking about a, a person or a political party. This government can't solve any problems because they can't agree on anything. I think if, if there were a solution to this problem, it would be a big solution. There would be a national solution and revolutionary and would require Bipartisan support for something pretty radical. Hard to believe.

AI assessment note: “the people who don't have those things are doing very badly.”

Q sort of manage money, and very few, I think, have been able to act on that in the moment, and that's really interesting to me for a couple of reasons, right? One, you, you sort of overcame your evolutionary emotional programming, um, but two, I'm curious about how you test for that beforehand. How do you test how people will respond in a crisis before you actually have a crisis?

A We had lived through some lesser crises. You know, my partner, Bruce Karsh, and I, who Bruce runs our distressed debt funds, which is where most of this activity is centered. You know, we lived through, ah, a severe market downturn in 1991, and another one, you know, one oh two, so we had rehearsed. I, at, at the time of the financial crisis, I'd been working 40 years already. I've seen some of these things, and so you, hopefully, we learn from experience, you know. Hopefully, at some point, Our intellect, aided by dispassionate observation of our experience, can overcome our emotion. That's number one. Number two, maybe Bruce and I are more unemotional than most. Number three, our very activity of investing in distressed debt is inherently contrarian. You know, people say, well, how can you invest in companies that are bankrupt or destined to become so? So, you know, and at that point, we'd been doing that for 20 years. And If we succumbed to the normal view of distressed companies, we wouldn't be able to conduct that activity. And finally, I think we are unusually supportive of each other. And, you know, we've been doing, we've been partners for 31 years. Neither of us has ever said to the other one, Boy, that worked out badly. You did a stupid thing, you know. This is not an activity where you can bat a thousand, and hopefully it's better than baseball where the greatest bat…

AI assessment note: “We had lived through some lesser crises... so we had rehearsed.”

Q real strength of relationship. I guess the really interesting element is when one thinks about really embracing that within the wider team, how do you think about some things maybe you say to your team to encourage productive disagreements across a broader set of people? Is there anything that you found works In terms of inserting that I could be wrong, but, and that productive disagreement element into the discussion.

A Well, you know, Harry, I don't just write the memos for external consumption. It's also desirable that they're internally consumed, and so everybody who works here understands the working environment. If you read our business principles, which are on the website, and most people read the investment philosophy, but not the business principles, it talks about having a harmonious Working environment, and everybody who works here knows that they're safe. Again, safety is important. Everybody's safe to say what they think. If somebody disagrees with me, a junior person that disagrees with me, I don't come down on them. I don't criticize them. If it turns out they're wrong, it's not like they've signed their career death warrant. It's just one opinion, and this firm has a limited view on correctness of opinions, and everybody's entitled to have them, and the fact that you have some which turn out to be Incorrect is not a, a mark of shame, and, you know, our firm is non-hierarchical. Everybody speaks to everybody else like equals, and, and as I say, I don't think people are afraid to express opinions, even those that turn out to be wrong, or even to disagree with somebody who on the org chart is senior, and, you know, we have a relaxed environment, and I think that all these things are very helpful.

AI assessment note: “Everybody's safe to say what they think. If somebody disagrees with me”

Q What are the other sort of like moral lessons that you would start with in our family?

A We, we respect others and we care for others and we, we want good for others. In our family, it's not about getting to the front of the line and it's not about succeeding at the expense of others. We want to be part of a team effort, be it in the house, in the community, in the country, in the, in the company, in the school. We want to be part of a team effort which brings success to everybody. And, uh, it's not about getting ahead of the others. And, you know, if you go out and do a great job, you'll be successful. And kindness, um, and, you know, the golden rule. Do unto others as you would have them do unto you is, is, is very relevant. And, uh, You know, the importance of, of being good people, and being liked, and uh, for good reasons, and respected, and uh, you know, when you get to be my age, you, Eric Erickson, the psychologist, wrote about the stages of man, and you, you think in terms of how are you thought of. It's very important to you, but when you get to be my age, it's too late to change how you're thought of. And then ultimately, how do you think of yourself? And, you know, you, when I think of people who get close to the end and are unhappy with how they led their lives, I think it's a terrible tragedy. And then the other thing is, um, I, I would advise young parents if there are, if there's a choice to be made, and the two choices, let's say, are both non-leth…

AI assessment note: “We, we respect others and we care for others and we, we want good for others.”

Q Is that one of the reasons that you read broadly across subjects?

A I, I do that mainly, I mean, my reading is not so purposeful. You know, I'm not reading at this point to become a better investor. Uh, I'm not making that many investment around this decisions around here. I'm really just trying to lead the organization, the people in the culture and, and, and, and relate to the clients and write and speak and that kind of thing. I'm not making investment decisions and I'm just trying to get smarter, you know, and, uh, no more and always challenge my thinking. And, you know, uh, as I said about risk and I now have a slightly different way of explaining risk than I did before. Uh, uh, three years ago.

AI assessment note: “I mean, my reading is not so purposeful. You know, I'm not reading”

Q of people with the same sort of logic, who identified an opportunity, but what was the difference? Because One of the things that I'm so impressed with is not only did you recognize it, but you actually took action on it. Um, so a lot of people seem to, um, perfect to understand what was happening, but they were, they had an inability to act. Where did that come from?

A Our emotions conspire at every turn to make us do the wrong thing. Maybe it comes from the fight or flight mentality, which is so deeply ingrained in us, but as the economy does well, and companies report good earnings, and the media reports turn positive, and the stock prices rise, and people become more enthusiastic, It becomes very hard not to buy. In other words, emotion causes people to buy more the higher prices go. Now, in most walks of life, people buy more when the prices go down during sales. On Wall Street, they buy more when the prices rise. And then, let's say, eventually, uh, things reach a top, which is not maintained. Now the economy turns down, and the company's reporting Decreasing earnings, or maybe losses, and the media put out scare stories, and, and the prices cascade down. Now people get depressed, and when they approach the bottom, they say, I just don't want to lose anymore. Get me out. I'm terrified. I don't know what to do. I feel so terrible about all the things I've owned, and so stupid, and so in other words, emotion tends to get people to sell at the bottom, just as they bought at the top.

AI assessment note: “Our emotions conspire at every turn to make us do the wrong thing.”

Q it as a nation state, but we also operate in this global economy where tax rates on businesses make it more competitive for one country over another, um, where interest rates make investment in one country more More prone than another. How do you think about that? Not only from the individual, like United States point of view, but then in the global sort of world that we live in.

A First of all, let me say, Oaktree is not what we call a macro investor. We do not invest in broad themes of economic growth and movements in currencies and interest rates. We, we are a micro investor. We invest in individual companies and situations and properties and so forth. Uh, so I don't do this for living, but I am out in the world and I do tend to have opinions on these things. Back in May of 2016, I wrote a memo Um, entitled Economic Reality. And basically what I said, you know, our, our presidential campaign was going on at the time. In campaigns, people always say things, uh, which, uh, do not comport with economic reality. You know, in real life, if we have 10 dollars, we can't have two 10 dollar hamburgers. In politics, during campaigns, people say, I'll, you, I'll give you two 10 dollar hamburgers, and it won't cost you anything. And you don't have to choose between having two hamburgers and, and, uh, and putting money in the bank or what have you. And so, yes, economic realities define the playing field and the rules. So, for example, a nation cannot or shouldn't set its tax rates without reference to the tax rates in the rest of the world. One of the reasons we had to reduce our corporate tax rate is that our corporate tax rate was high. Relative to the rest of the world, which meant, which gave businesses an, an incentive to establish themselves elsewhere or mov…

AI assessment note: “a nation cannot or shouldn't set its tax rates without reference to the tax rates”

Q Talk to me about that. Why do we conceptualize it as a market then?

A Because, you know, if you think of a, of a market, most people flash to a photo of the New York Stock Exchange, a building. Just as if most people, well, in my day, if you talked about a stock, people would think about a stock certificate. But the building is not the market, and the stock certificate is not ownership of a company. It's, these things are only signifiers. But, A market consists of a group of people who implement their views on value by transacting, and so it's all there is is people, and people have feelings, and so the emotions tend to get people to buy, buy, buy at the top until the last potential buyer has bought and spent all his money, at which point the, the top is reached and the second derivative goes negative, And sell, sell, sell at the bottom until the last person who's going to panic out does so. And so, number one, it's very difficult to take these contrarian actions in the face of sentiment. And I don't know, I'm sure we're not the only person who did it. I don't know who else did it. Most people don't report their transactions, and most investors don't write the memos like I do. So I don't know who was thinking what at the time. I think we were, Exceptional.

AI assessment note: “A market consists of a group of people who implement their views on value”

Q Talk to me about that, that sort of change with the, we'll call it technology and automation and AI and machine learning. How is that similar to other sort of, I want to use the term like revolutions, but, and how is it dissimilar in your mind?

A Yeah, I, I was, uh, I was invited down to Tulane University. They had a speakers program, and I think, uh, I was the first speaker at the business school after the school was repaired following the terrible earthquake, uh, hurricane they had down there. And, uh, my hosts took me to dinner in, um, Basin Street, and one of the things they told me about was that New Orleans and the environs were thriving metropolis, economically thriving metropolis in the days of agriculture. And, uh, Of course, millions of people had jobs in agriculture, and then, uh, agriculture became automated. Those people lost their jobs in agriculture, and they moved to the upper Midwest to make cars and appliances, and then they, that was, they thrived, and people who worked in those industries who really maybe, maybe only had a strong back as their main asset, Did very well. They had unions, they had strong unions, the unions got great, great, great packages for them, and they did very well. But then, of course, we globalized, and the manufacturing of cars and appliances moved overseas, and Since then, the unions have been in decline on the private sector side, and now what do you do if your only asset is a strong back? You know, I think President Obama on the, on the stump said, well, we'll give them all laptops, but not everybody can work a laptop enough to make a living, and number two, in the informat…

AI assessment note: “in the information age, by definition, we need fewer people to produce GDP”

Q Just for people listening, can we give context to?

A Well, in the, in the seventies, we had runaway inflation in America, not like, you know, some African nation that had a thousand percent a year, but we had 16% a year. I think it was at the peak. And makes it very hard to live and securities collapse and people have trouble keeping up with the cost of, of living and, um, you know, commodity prices get out of hand and so forth. And, uh, and of course, short term rates go up, which makes it hard to finance business and so forth. And everybody, you know, so, so the main point about inflation is I think it's very mysterious. It's hard to say what starts it. It's hard to say what stops it. Um, deflation they have in some countries like Japan, it's hard to know what starts or stops that, but obviously has a great impact on the economic cycle. And if you think about the economy, US economy grows, let's say for rounding purposes, uh, on average, two percent a year. Why doesn't it grow two percent every year? Why is it, why sometimes three and sometimes one and sometimes four and sometimes negative? Uh, and, um, I think that, you know, and unfortunately the book is already printed, uh, and as you, uh, keep thinking about things and, and talking about them, your, your thoughts come into better focus. So I, I would summarize it as saying that cycles happen because people, not electrons, but people commit excesses to the upside, usually ou…

AI assessment note: “Well, in the, in the seventies, we had runaway inflation in America”

Q Outside of the Fed, does the government play a wealth sort of redistribution role, and how does that affect the economic cycle? I mean, we talked about the tax cuts.

A Yeah. Well, of course, what people have to understand, maybe more than anything else, is that governments don't make anything. All they do is redistribute. All they do, you know, we have these millions of people working in Washington, and All these senators and all they really do is they collect money and they spend it. They don't make it. They don't have businesses which add value to our society. And so they make spending decisions and, and, and collecting decisions. These are policies. Taxation. How much from the rich? How much from the poor? How much from interest and dividends? And how much from Uh, salaries. And these, I've seen fluctuations in these things over the years, but this is policy. And then, you know, there are people who say that we have too much inequality and it should be fixed. And there are people who say that the way to fix it is to get the rich to pay their share. Now I kind of bridle at that, uh, because it seems like a religious or philosophical statement. It's not an economic statement. There is no such thing as a fair share. And, and the only question is who determines the fair share? And my feeling is that the fair share is by definition, when people say we're trying to get the rich to pay their fair share, what they mean is we're trying to get them to pay more than they pay now. But how do you define the fair share? Right. You know, right now, peopl…

AI assessment note: “governments don't make anything. All they do is redistribute.”

Q Have you even to, have you been able to ever pull that off? Like I've been fascinated with the idea of going to a mountain and arriving at some kind of evolutionary thought in my mind, which makes me actively Transition into something. Have you been able to touch that?

A Well, I, I, I, I haven't physically gone to the mountain, but I, I think the key, uh, I've done, I've written the first pages of a book. Uh, I think the, I think the, the, the key to all of this, to all of life, Is to behave thoughtfully with your mind engaged, not just, uh, let the river take you, but give thought to what's going on. Why is it going on? What does it mean? Why did it happen? What does it imply for me? What should I do about it? And, uh, it's the, that's, that, that is, I think, uh, going through life with your eyes open. Uh, and that's how you can intentionally get to a higher stage in life by doing that. And, and the, the, the, uh, The image that comes back to me is the image of whether you let the river take you or whether you, uh, try to figure out a better place to get to and then try to get there.

AI assessment note: “I haven't physically gone to the mountain, but I've written the first pages of a book”