Howard Marks on the US Dollar, Three Ways to Add Defense, and Good Questions | The Tim Ferriss Show | Transcription

Transcription for the video titled "Howard Marks on the US Dollar, Three Ways to Add Defense, and Good Questions | The Tim Ferriss Show".


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Intro (00:00)

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Highlights Of Howard'S Investment Career & Market Perspectives

The "rare receipt" from the market of 1968. (04:31)

Thank you very much Tim it's a pleasure to be here. It's nice to hear your voice again and of all the people I could speak to on the show during these most exciting times and difficult times for many people. You are very much at the top of the list and there are a lot of different topics and a lot of different questions that I'd like to cover but I thought we could start I have a number of your memos in front of me and there's one called you bet this is from January 13th 2020 and I thought we could start with the story of arriving at first national city bank in May of 68 and how that contrasted with what you then did in 1978. Would you mind telling that story for people listening? No if you have some time. I do have all the time in the world. It'll take a while. Well as you say I arrived at the city bank for a summer job in the investment research department in May of 1968 between years of graduate school at the University of Chicago and I was assigned to the investment research department. The bank and most of the money center banks at the time in their money management departments were adherents of what was called NISTI 50 investing and they invested in what they considered to be the 50 best and fastest growing companies in America extremely high quality companies where nothing could go wrong. And you know the idea of growth stock investing in companies because their earnings grew rapidly had been born in the early 1960s and these companies epitomized that activity. IBM, Xerox, Kodak, Polaroid, Merck, Lily, Hewlett-Packard, Perkins-Omer, Texas Instruments, Avon, Coca-Cola, AIG, etc. And you know the basic idea was you hit yourself to accompany you with the bright future and rapidly grow all the earnings. And if you did so the day I got there in 1968 and if you held those stocks firmly for the next five years you lost almost all your money in the best companies in America because one thing had been overlooked in the process which was price. And nobody talked about the fairness or attractiveness of the price. The belief was that these are companies which were so good that it didn't matter what you paid and if you paid a price that was a bit high the earnings would grow so fast that kind of the stock would grow into the price. And so of course this was a painful education. These stocks generally speaking fell from price earnings ratios of perhaps 80 which even today would be practically unheard of to eight when the wheels came off the market in the early 1970s. Now some of it was the collapse of the market, some of it was the collapse of this particular field of investing and some was the function of flowering of rapid inflation which was perplexing the country at that time but for whatever reason here you are you're investing in the best companies in America and you lose 80 or 90 percent of your money. Now fast forward as you suggest Tim to 1978 in part because my meanderings with equities had worked out so badly as part of the machinery that ran this Nifty 50 effort. I left the investment research department, I always say I'm lucky I didn't get fired and my boss asked me to join the bond department which was at that time a backwater of investing and start a fund that would invest in convertible bonds which was something that very few people had ever heard of and I started to do that and I loved it so I went from being head of the department of 75 people with a five million dollar budget and membership on all the bank senior investment committees to working alone with no colleagues, no budget, no committees and I was ecstatic because rather than no two sentences on 400 companies I could know everything about a field. So I loved money management and I loved the fact that I was operating in an uncrowded area and then in August of 1978 I got the call to change my life the head of the bond department called up and he said you know there's a guy named Milken or something out in California and he deals with something called high yield bonds. Do you think you could figure out what that is because a client had asked for a high yield bond portfolio.

Howard becomes the first successful high yield bond investor. (10:12)

So I researched high yield bonds, I met with Mike Milken, I started city banks high yield bond fund late in 1978. I believe that was the first high yield bond fund from the mainstream financial institution and that was the very beginning of the high yield bond world and one of the great lessons of course as Malcolm Gladwell makes clear in his book Outliers is that it's great to be first in line and the timing accident of my being assigned to the bond department in 1978 put me at the beginning of the line in high yield bonds and high yield bonds are the bonds of companies which are not rated investment grade they're considered speculative grade by the rating agencies at the time they were verboten by the vast majority of investors and so I went from investing in what everybody loved to what everybody hated from the best companies in America to the worst public companies in America and now I'm making money safely and steadily in the worst companies in America because they were so cheap because the interest rates they had to pay in order to secure financing as a disrespected group was excessive under the circumstances so this was quite an epiphany and it has really directed my whole career and you've written in this

Luck and skill without a recipe. (11:54)

particular memo success in gambling doesn't go to those who pick winners but to those with the ability to identify superior propositions the goals to find situations where the odds are generous to one side or the other whether favorite or underdog in other words a mispricing and you explore this in the context of different types of games some games of chance some games that have different profiles and you can categorize them or you have let's just say no hidden information no luck and skill chess no hidden information luck and skill backgammon no hidden information luck no skill roulette hidden information luck skill blackjack and poker and you have quite a history with many different types of games and you I think are very good at thinking about the future probabilistically framing good questions if you were to look at our current circumstances as a game and perhaps compare it to 2008 what are the games that we're looking at well it's it's a very interesting set of circumstances we find ourselves in because nobody knows anything about the future there's you know in the fields that I'm involved in economics and investing primarily there is no such thing as knowledge of the future because the future does not operate according to a

Whats the game today? (12:48)

fixed schedule or the laws of nature like physics and so forth all we have is extrapolation from past patterns which help us in terms of our expectations for the future the problem we have now is that there is no history for what we're engaged in first of all we have I would say the worst public health crisis to come to America in over 100 years or certainly one of the worst the worst economy since the Great Depression more than 80 years old the worst collapse of oil in history and the greatest rescue and stimulus program from the Fed and the Treasury in history so we have four things going on which are unprecedented and as a result we really can't say what lies ahead in any of them and it is further complicated by the fact that they all interact and we can't know how they will interact and what that will produce so I would say that we are unusually ignorant with regard to the future today and you know one of the things I said to one of my colleagues Tim is that we all have the same information about the present and we all have the same ignorance about the future and today I think that ignorance is greater than at other times so we have to use the outline you were posing there's a lot of hidden information we don't even know how many people really have it we don't know how many people have died from it because there are unreported cases of infection and there are deaths that took place that were not known to be the result of infection so we have hidden information and we have so much about the future that we don't know you know will the disease turn down will the effect of warm weather be a positive when will a an immunological test be developed and a vaccine if we reopen business will the cases strike up again and so forth and to what extent so we are really dealing with a lot of ignorance and a lot of uncertainty and yet we have to take action in positioning our capital for the future when the future is unusually unpredictable and how do you how are you currently thinking in bets to use the title of the Eniduke book that I know you are a fan of or perhaps it's not the the best way to address the

Narrowing down uncertainty using Market Theory. (16:39)

question really but given the uncertainties given the situation how are you trying to navigate that or what questions you finding most helpful sure well I think a lot of it goes back to what you said about the memo you bet is that it has to do with the quality of the proposition I wrote a book we talked about it a year and a half ago called mastering the market cycle and I thought that the subtitle of that book was unusually helpful the subtitle is getting the odds on your side when you're dealing with the future given the ignorance you can never have certainty there's nothing that's sure to work or sure to fail you only have probabilities but sometimes the probabilities are very favorable to the investor and sometimes they are very unfavorable to the investor and the whole thing about studying cycles is trying to figure out which is which so let's let's talk about propositions and let's talk about picking winners so you go to a horse race and there's one horse that stands out among all the others it's great lineage looks terrific great recent record and this horse is by far the favorite and everybody concludes that this horse will win the race does that mean that you should bet on this horse that's really the key question in investing and the answer is it depends on the odds because when one horse is an overwhelming favorite you may have to bet five dollars to win a dollar he's so sure to win but nobody wants to bet against them and if you want to join the hordes who want to bet on that horse as I say you may have to put up five bucks to get back six there may be a long shot in that race that somebody can figure out well maybe that horse is going to have his day and that horse may be a ten to one shot or a fifty to one shot because we're so sure the favorable win that the that this long shot is absolutely unpredicted to win nobody wants to bet on this horse so if you will bet on this horse and you put up a dollar you can get fifty if you're right so even though the horse is unlikely to win it may be the better bet even though the favorite is overwhelmingly likely to win it may be a bad bet so it's not only what you think will happen but it's also the payoffs so let's take that through what we were just discussing 1968 the the nifty 50 companies were believed to be great companies with a bright future and let's assume that their future success was assured you still have to look at the proposition and the answer is that it costs so much to bet on those companies that betting on what were believed to be good companies turned out to be bad bets 1978 high you'll want now we're betting on what are believed to be bad companies but because their belief would be bad companies the payoff is extremely generous not it not expected to be favorites but highly reuniterative if they pay off so high yield bond investing was very successful now you come into the into the present and and life gets tough but you know we have to make some judgments about the future and the judgment you have to you have to say how bad will it get now how quickly will we go back to work what will be the experience when we go back to work will there be a rebound in cases how quickly will the economy come back to life what will GNT do in the second quarter of this year which is roundly believed to be the worst recession quarter in history and how fast will we get back to the 2019 levels of economic activity and surpass them when will we have a vaccine all the you know there there are dozens of questions and no answers I've been quoting Mark Lipcich who's a epidemiologist at Harvard who says that when in studying the virus there are there are facts there are inferences based on analogies to other viruses and there are opinions and when we started off in this round there were no facts the highly skilled epidemiologists could make inferences and the rest of us were left to just guess but you know there's there's some consensus developing which is that you know that the country will go back to work in the next few months clearly no agreement on the pace that there will be there likely to be a rebound in new cases but not as bad as the first and that gradually the economy will recover and it'll show much better 2021 than 2020 2021 may or may not be back to the 2019 levels but by 2022 we'll be back to or surpass the 2019 levels and with vaccines and treatments the coronavirus will be demoted to just another seasonal disease that's the consensus and of course the consensus opinion is reflected in the bidding for stocks and in the prices of stocks and other securities and that's where we are now and you know that so that's I would say I would describe that as a fairly positive forward-looking case and it's incorporated in the prices of stocks and the prices of the stocks are surprisingly high some of them or if you look at the the averages which are dominated by you know the great companies like Amazon or Microsoft those averages like the S&P 500 are surprisingly high relative to where they were on February 19th which was the all-time high and we're probably down you know low double digits of percent 12-13-14 percent depending on the date you air this and so you know the way I've described it I would say not a bad outcome not a bad future and so stocks have recovered very substantially from their lows they're up 27 percent I think from their lows because the consensus has settled on this good news now the now let's talk for a minute if I can go on about proposition the challenge today is that if the favorable unfolds and 2021 or 22 are healthy economically versus 19 nobody thinks the stock market has that far to go on the upside and if the negative case unfolds and everything I've said so promisingly fails to materialize or materializes less and later than hoped there are pessimists who think that market has far to fall and hard to choose between the optimistic and the pessimistic case so the odds for buying here the S&P 500 for example do not seem to me to be tilted heavily in

Uncertainty in decision-making (25:36)

the investor's paper now you have been thinking about uncertainty for a very very long time you for instance first read a book in 1963 titled decisions under uncertainty subtitled drilling decisions by oil and gas operators by C. Jackson Grace and junior and you've you've proven an ability to act on a sort of spectrum of uncertainty over the subsequent decades and I think the way that you phrase questions is part of that questions to yourself questions among your team and I just wanted to give an example of that from your most recent memo this is knowledge of the future and it's it's a paragraph that's discussing the word limitless which was used I think in quoting Fed chairman or someone of that type and here's the wording is the program really limitless and is that okay the stimulus loans bailouts benefits and bond buying that have been announced thus far add up to several trillion dollars what are the implications of the result in additions to the federal deficit and the Fed's balance sheet here's the part that I want to highlight just because I think it's a useful I think it's a useful framework for looking at a lot of these a lot of these elements okay so here we go to be facetious the government could send every American a check for one million at a cost of 330 trillion would there be any negative consequences from doing this such as burgeoning inflation a downgrade of US credit worthiness or the dollar losing its status as the world's reserve currency if the answer is yes is there a point below 330 trillion at which those ramifications might kick in and if so where could we be there already I'd be very curious to hear how you've attempted to answer or think about any of those things that were mentioned in that paragraph we could pick one certainly if it's helpful such as the US dollar the status of the dollar as reserve currency in in in these wildly unusual times but how have you continued to think about those questions or attempt to tackle some of those unknowns well this is the 64 dollar question these days 10 I want to make it clear before I try to do so that I'm not saying the Fed is wrong to do what it's doing the Fed is throwing everything in the kitchen sink at the problem and the problem has to be has to be solved you know back if I go back to March let's

The decision to repair the present vs. risk the past (28:14)

say 18 or 19 I think it was you know I was actively considering the possibility with my partner Bruce Karsh of a global depression comparable to the 1930s and you recall that we had we had a decade with unemployment in excess of 14 percent in the US and a total absence of growth and widespread suffering and you know we were talking about the possibility of that as this economy contracted imploded so the Fed and the Treasury came along they threw everything at it they used all the lessons learned in the global financial crisis of of 0809 things that were developed over the course of months at that time were implemented in weeks this time and certainly you know I think it was the New York Times describing Jay Powell statement as saying that the resources thrown at the problem would be limitless and I think that's the right thing because the alternative you know back in the 30s they were judicious in trying to fight the depression almost a steer and as a result a decade of suffering a generation truly scarred and you know arguably we only got out of the depression because of the arrival for World War II we don't want to wait for that as a curative so I say strongly that the Fed and Treasury were right in doing what they did but the fact that there may be negative unintended consequence doesn't mean that they weren't right but you know again we are we're battling problems we've never seen before with weapons we've never seen before and we certainly can't say that they don't have negative potential unintended consequences we just we don't know what they are we will we would probably bear them nevertheless but for example if the government floods prints money the normal reflex reaction is to say that if they print a lot of money that causes the currency to be devalued and that that that is a lockstep relationship that has always been considered now in the last you know we've been running big deficits for a long time and extremely big deficits in recent years and yet we don't have serious inflation which is the normal sign of other currency being debased if the currency is being debased and people think less of it and then if you if you want to buy a goat you have to pay more dollars to get the goat or a car or a bar of gold or whatever and or you know bunch of bananas and in recent years we haven't had inflation even though we've been running huge deficits vastly increasing the national debt and and so forth so you know economics is not a mechanical process which works according to a schematic in a dependable fashion and all the printing of money that has taken place in recent years has not brought on inflation inflation is supposed to work in response to the unemployment rate the less unemployment there is in the country the higher the inflation is supposed to be because there's less slack in the economy and the workers for example can demand higher wages hasn't happened that was this is something called the Phillips curve and it's been having it for 60 years and just doesn't work so we don't know uh but you know that's why I use that extreme and I say to say in the memo facetious example if the government sent everybody a check for million dollars and it cost 330 trillion would there be an effect on the value of the dollar on inflation etc and you have to believe there would or I have to believe there would but where does the negative effect cut in short of that since we're not going to do that but you know the government is probably spending on buying securities and pumping into the economy you know close to 10 trillion this year is that enough to cause an impact and the answer is we don't know but I would just say you know it's clear that we all have our biases and we deal with our uncertainty with regard to the future implementing our biases it's very hard to get away from that and I worry I'm not a dreamer I'm not a Pollyanna I'm not the person who says oh they'll find a solution I worry and so uh you know I worry that there will be some negative effects that I can't predict or or describe or quantify and so that would among other things uh tend to cause me to implement some caution and uh you're right that the Fed Chairman J. Powell to his his his quote was when it comes to lending we're not going to run out of ammunition which was in the Wall Street Journal that's on March 30th what what form might that caution take or perhaps more specifically if we look at the Fed buying all sorts of things that historically it would

Offense vs. defense in investing [7:30] (34:35)

would not necessarily be associated with purchasing junk bonds to stress debt etc how does how does that affect your playbook and how you think about crowded versus uncrowded opportunities sure so many things in that question require an answer um first let me say that I think every investor has to make a choice they have to balance offense and defense just like just like a uh a soccer team that a coach feels to play against another team uh you know you have to have the players on the field who in totality can both defend their goal and attack the other side's goal um so your portfolio uh for the investor has to strike a balance between trying to make money and trying to avoid losing money at the same time and the way I dope it out him is to say that every investor faces two risks every day the risk of losing money which is obvious and the risk of missing opportunity which is a little more subtle now you can eliminate either risk if you are willing to totally surrender to the other risk so I can if you want to if you want to eliminate the risk of losing money you can put all your money into T bills and then you will miss all the opportunities or if you want to make sure you don't miss any opportunities you can make sure that all your investments are aggressive and there are no T bills or cash in which case you're exposed heavily to the possibility of losing money so most people compromise most people say well I don't want to lose a lot of money but on the other hand I don't want to miss all the opportunities so I'm going to strike a balance between offense and defense that's what we all have to do if we're not crazy and so the question is how do you strike that balance today and oak tree my firm in recent years has been concerned about the market and about the fact that we thought that it was exposed to significant uncertainties and risks although we didn't enumerate a pandemic that asset prices were high that prospective returns were low because interest rates in the environment have been so low for so long and because a lot of investors were engaging in risky behavior in order to make a good return in a low return world so you put all that together and we thought that made the world a risky low return place in which one should emphasize defense over offense and when we did we adopted a mantra move forward but with caution and that has guided us now we are cautious investors so when I say with caution I mean more than usual and that's what we've done next question how do you implement defense and there are basically three ways that an investor can add to defense in his portfolio or her portfolio the first the obvious one is you sell some assets and you go to cash in part or in whole now this is very hard to do because this is black or white wrong or right and rarely is it right to be overwhelming in cash and on the rare occasions when it's right most people can't find those occasions so so going to cash is problematic and by the way to go to cash and you're wrong and you you miss good performance in the market for a couple of years you know the individual investor will root the day and the professional investor might be out of work so cash is tough the next thing you can do is you can go into more defensive asset classes we know what they are more bonds rather than stocks larger companies rather than small value rather than growth stable rather than cyclical u.s rather than foreign developed world rather than emerging and that you know there are many many ways to increase the defensiveness of your asset allocation and then the third form of going defensive doesn't even require you to disturb your asset allocation it's just that everything you want to do in investing can be done in a more aggressive or more defensive way so you might say well I have 40 percent of my portfolio in stocks and I want to keep it that way but you can provide more defensive stocks or you can put your money with a more defensive manager or you can put your money in a mutual fund which has a record of not making so much money in the up years but protecting money in the down years so there are three ways to be defensive go to cash take a more defensive asset allocation or use more defensive tactics and we've been doing the latter our asset allocation is assigned our clients give us money and they say here put this in this or put this in that for the most part we don't choose our asset allocation but what we've been doing is in recent years we have been fully invested and so we participated as the market rose but with a portfolio that we think was more defensive than most and so we came into this uh virus episode with a higher quality more defensive portfolio and that stood us quite well in the in the first quarter but frankly with the risks on the table and a lot of securities now cheaper than they used to be and a lot of risky behavior now discouraged I don't think one has to be as defensive as we were so we have shifted the balance in our portfolios move more on to offense to take advantage and if if you're looking towards offense capitalizing on some of your historic strengths what does the how does the fed purchasing all sorts of asset classes that it might not normally purchase affect how you look at those opportunities if uh that was part of your original question which I forgot but um well you know as should be clear you know we're specialists in non-kilpe edge debt kilpe edges in old-fashioned term non-investment grade debt speculative grade

The impact of the Federal Reserve into non-investment grade debt [11:54] (41:17)

debt and you know that means high yield bonds leveraged loans convertible bonds which I have mentioned before you know emerging market debt lots of lots of uh let's say less than stellar quality debt and usually in a crisis like this that stuff would be hurt more than most which meant that we could pick it up cheaper than most perhaps our one of our flagship strategies is investing in distress debt the debt of companies that are either bankrupt in default or highly likely to be in the opinion of the market and we've been investing in the stress debt uh since 1988 my partner Bruce Karsh joined me in 87 he's been running these portfolios since then and in the 32 years there were five periods uh when they were very high defaults among high yield bonds a lot of distress and when we got to take advantage of very good opportunities and those were 1990-91 2001-02 and '08 those were crisis years and in the crisis the low quality risky debt tended to melt down and we tended to get great buying opportunities so your question is well what does it mean that the Fed is involving itself in these areas and the answer is it's if we wish they'd go away uh because because it you know historically in negative times and this is something we haven't discussed much but maybe we should most people get discouraged most people shrink to the sidelines and uh you know when when when these things would cascade down in price we would be able to buy them very cheaply if the Fed comes in and buys in those markets then it makes our lives more difficult because things don't fall the way they otherwise would have we don't get the bargains we otherwise would have when you look uh well I mean I mean I want to

Are we on a path to nationalization?! [14:46] (44:11)

ask if you think the Fed is truly with infinite ammo I mean I don't know if they have the the sort of bandwidth to participate super widely indefinitely in high volume but possibly they do this is way outside of my area of expertise so it's a bit above my pay grid but where would you thinking probabilistically where would you how do you look at the possible outcomes and probabilities that this type of spending continues for a long period of time I think that the Fed and the Treasury want to soften the impact on American and its economy and I think they're going to continue to spend um until the economy is can take over for itself I think one way to think of this Tim is that you know many times if a patient has a serious disease they'll put the patients into a coma so that they can treat the disease and while the patients in the coma they keep in one life support and then when the patient is the disease has been healed the patient can be brought back and the life support can be removed so the disease is the virus in order to fight the virus we had to close businesses freeze economic activity and help people stay home so stores movies and hotels and airlines and concerts and sports all stopped cold and that's putting the economy into a coma and we have 26 million people who have filed for unemployment insurance in the last five weeks and we are expecting a decline of GDP in the second quarter here of well most people say 20 to 30 percent which would make it the worst quarter in history by a order of magnitude so they have to keep it on life support until they can bring the economy back and the life support is all this injection from the Fed and the Treasury and they're going to continue it until they're highly confident that they're out of the woods they're not going to take a chance and say well if we let's let's suspend it now and see if the economy can pick up they're going to wait until the economy is operating with some strength and growing from this depressed base before they withdraw it i'm confident of that what are the as someone who's i i've never taken an economics class which is not something i brag about it's

Your first economics course made easy (46:53)

quite uh something a source of embarrassment for me but what are the markers or metrics that they would look to to assess whether the patient can be taken off of life support well unemployment is is usually the best short-term indicator you know uh remember that unemployment reached 10 percent in the global financial crisis um and it was the down to five percent five five to five and a half is it has generally been considered something like a structural level of unemployment in other words there are people there are some people who can't get a job because they're unqualified there are people who can't get a job because they can't pass a drug test there are people who just quit a job there are people in the process of looking for a job so transactional frictionally most people assume that five five-ish percent is is uh structural and the obama administration uh over eight years did get the unemployment rate i believe down to five percent by 2016 and then uh Trump administration came in and uh continued uh very aggressive stimulus pro-business environment reduction of regulation and the unemployment got down to three and a half so it's a barometer of how the economy is doing and i would think that the they'll want well it's you see it's not going to be all or nothing it's not they're not going to spend spend spend and then stop they'll slack off the term we use it in the discipline you never studied economics is taper and they'll taper uh but you know i think that they'll support the economy certainly aggressively until the unemployment rate gets into single digits and perhaps until it gets into mid single digits and then of course they'll look at gdp they'll you know uh gdp's been growing at around two percent and Donald Trump has been trying to say he'll get it to three or four um but gdp will be deceptive because you know it's going to be so horrible in the second quarter of 20 that it's going to be easy to show growth in the second quarter of 21 but we we have to take that growth with a grain of salt and i think what they'll look for is for the gdp to be getting close back to the track that it was on if this virus hadn't that developed you're uh you you've listed some questions that debt traders on the oak tree team just in quaglia if i'm saying that correctly sam rotato that are related to behavioral change uh more than anything else so assuming that quarantine is lifted when will you take your first flight how will you react when the person next you starts coughing what has to happen to make you feel it's safe to send your child back to school uh one of my favorites is the when you go to a dinner with your wife husband friend family do you want to be served by a waiter or waitress wearing masking gloves uh so

The wise and the foolish (50:17)

these are behavioral questions and you seem to be a connoisseur of questions and i i want to bring up a quote that also was uh featured in the you can't predict you can prepare memo which was what the wise man does in the beginning the fool does in the end and these these might not be totally uh apples to apples but what types of questions uh are the wise asking these days are are any particular types of thinking or questions present in those people you you admire as good thinkers right now well the you know the future the outlook for the economy has been mostly described as a v sharp down in the first and second quarter of uh 2020 maybe some lingering effects in the third and then sharp up and uh you know there's a lot of debate about how uh sharp the the recovery will be um you know i think i i personally think we're going to come back gradually i think that people who have a choice are not going to rush back to work one of the questions that you didn't ask from that memo him was was mine uh for a new yorker when are you going to get back on the subway right that's a great question you know and and and be in close contact with all those other people um and uh you know taking an airplane flight is is a big deal because you know they want you to be six feet away from the next person and i the way i calculated it uh at best you could have one person for every nine seats and they're not going to do that though of course they'll fill the seats you know that people wearing masks uh but um you know uh i think that people who have a choice are going to wait a while before they get on a on a full airplane another question of course is assuming that there is a reopening and assuming that the that the virus hasn't been killed off and we don't have yet a vaccine um will uh people engage in their um previous activities i think that people who have a choice will not rush back um and then you you know i read about one state that that passed a rule that restaurants can reopen but only one out of every four tables can be occupied but also an article yesterday was said that a business which is operating at a low level of its capacity is probably not more profitable than it was when it was closed yeah that's definitely true that's definitely true here in Austin a lot of restaurants are opting not to open with a 25 capacity right right so you know uh the the expectation that we're going to come back is probably right but nobody knows the taste uh and these are important questions to ask um but you know one of these days i assume i assume we'll have a vaccine it's not easy to produce 330 million doses and get them into distribution or if we need to like you do for shingles for example there's 660 million doses and you know these are massive issues and they don't happen overnight and then of course um you know we have large numbers of people who don't you know only only half of americans i think it flu shots uh we're flu shots are well flu kills a lot you know kills a lot of americans i think flu probably averages 40 to 50 thousand deaths a year and yet only half the people get the shots um will people get the shots uh and uh you know there's a there's an anti-vaccine uh cohort in america and will they get them and so forth and if they don't what does it imply for everybody else so i just think that it's you know when you what i say about these unprecedented events Tim is that if you haven't seen something happened in the past you can't say you know how it's going to turn out and we have to we have to allow windage now a warrior like me allows for the possibility of bad outcomes an optimist wants to make sure he contemplates the

Critical Thought Processes In Investment

Risk tolerance and framing (54:23)

possibility of good outcomes surprised with good outcomes and so that's why we have indifference of opinion that's uh that's why uh you know that we have markets in which people can can meet and express their opinion through price uh just a few more questions Howard i appreciate that all the time today the the question of informational filtering is one i'd like to chat about for a second what i mean by that is how do you choose amongst a deluge of possible books articles sources of information uh what you read these days for instance or a better question is probably what are some of the higher signal sources of information books people anything that you're paying attention to these days well you know there there are no i don't think there are useful topical books on the subject of this episode yet it's too new we have to you know always we view our thinking how we think about propositions and odds and bets and probabilities and how we think about making decisions under uncertainty and these kinds of things and you've talked about some of those um you know i think that we all have to take in a lot of input primarily through the newspapers and

Information filtering (56:17)

of course we have to be uh aware of the biases of the newspapers when i was a boy i used to believe that if we've been in the newspapers true but you know newspapers have slants too and then importantly we have to be very aware of our own slants um and um you know we tend to we have what's called confirmation bias and we all tend to read the things we agree with more than the things we disagree with and believe the things that support our biased position more than the things that throw it into question and this is uh this is a great challenge um so we we should try to read it broadly uh we should try to read from the newspaper whose editorial slant we agree with and the one we disagree with um we should try to appreciate all the input but i think it's this is a great challenge and um you know if you if you if you read broadly and everybody on the on the internet every every brokerage and security houses putting out its own covid report nowadays and you see such disparate information by the way there are probably i don't know we've been even talking to me about questions that a Tim there are probably a hundred or two hundred three hundred questions that bear on the future and nobody can take them all into account so which ones do you think about well number one your selection of the questions the ponder will be shaped by your bias uh because you can't do them all so you know it's it's it's terribly challenging thing uh and um i think a lot about bias um and let's go back to what i said earlier quoting professor lip stitch of harvard facts analogies guesses um you know when i read layman investment people talking about the likely medical course of developments you know i i say well where's their expertise but you know everybody has an opinion and you can't argue you're right but on the other hand you can't say well i'm not an expert so i'm not going to have an opinion and uh you know it's very very difficult to decide these things in a uniquely uncertain environment like today's well how are they i i really appreciate you carving out time for the conversation uh i i think that we could cover a thousand additional topics

What is Howard is thinking about this time? (59:17)

but i'll just ask one more or maybe two more and that is what would you hope people would think more about uh or what aren't people paying enough attention to in your mind is does anything does anything occur to you well just in the in the narrow field of investing um you know most people want to hear somebody like me say buy or sell uh but it's it's a much more nuanced question than that uh you know you the person who wants advice has to think for themselves do i want to put a lot of emphasis on making sure i don't lose money or do i want to make a lot of put a lot of emphasis on making sure that i take advantage of the opportunities and those two things work in opposite directions as i explained before so the the person has to decide for themselves uh how they feel about these things now they can they can ask for advice but uh everybody has to decide this on a personal basis and uh the other thing is whether you should buy or sell has a lot to do with uh number one your current position so i i mentioned that that oak tree became more aggressive because we had been very defensive if you have been aggressive until now that doesn't mean you should necessarily become even more aggressive so you know what what's becoming increasing aggressiveness for us may not be right for everybody and then the other thing is is uh the investor has to ask themselves and be tough on themselves to spec out what their time frame is because you know if you say to me how are we going to look in five years i think in five years we're going to be okay and so you know if you if you said to me i'm going to put on a position today and i'm not going to look at it for five years i'd say okay well then you you should have a pretty normal non-defensive investment posture if you're going to look every day and if you're going to get upset if the market goes down then you might want to have a little more defensiveness than normal so again the the same answer is not right for everybody because it depends on their ability to take a long-term view rather than short and their ability to live with the agita of short-term ups and downs well

Conclusion (01:02:09)

thank you very much Howard people can find you on twitter at howard mark's book certainly i'll link to your writing to your book and everything else in the show notes including any of the memos and references that we've made in this conversation is there anything else you would like to add or anything else you'd like to suggest that people take a look at no uh you know Tim's good to link to all the memos there's a 30 years worth in the archive at it's free so you can the price is right and and you can look at what i was what i was thinking at various points in time in the last 30 years i i want to thank you Tim for inquiring about these things and asking such good questions uh there's a difficult topics they're even difficult to frame the questions uh and i want to apologize for the length of my answers but there are never easy answers and that's especially true today so thank you for having me with you oh my pleasure Howard and to everybody listening as always everything will be in the show notes and until next time thanks for tuning in.

Conclusion And Wrap-Up

Five-Bullet Friday (01:03:23)

Hey guys this is Tim again just a few more things before you take off number one this is five bullet friday do you want to get a short email from me would you enjoy getting a short email from me every friday that provides a little more soul of fun before the weekend and five bullet fridays a very short email where i share the coolest things i've found or that i've been pondering over the week that could include favorite new albums that i've discovered could include gizmos and gadgets and all sorts of weird shit that i've somehow dug up in the the world of the esoteric as i do it could include favorite articles that i've read and that i've shared with my close friends for instance and it's very short it's just a little tiny bite of goodness before you head off for the weekend so if you want to receive that check it out just go to four hour that's four hour all spelled out and just drop in your email and you will get the very next one and if you sign up i hope you enjoy it. This episode is brought to you by linkedin jobs now more than ever businesses are grappling with incredibly challenging times a lot of things in life and business are changing and we're all adapting to new priorities. While it does take time to adjust linkedin believes that it's also possible to find and create opportunities in times of turbulence and times of change. Whether you're looking to hire now for a critical role or thinking about needs that you might have in the future linkedin jobs can help. Linkedin is an active community with more than 675 million members worldwide. Linkedin screens candidates for the hard and soft skills you're looking for while putting your job in front of candidates looking for job opportunities that match exactly what you have to offer. With linkedin you can hire the right person quickly when you need them and if you need to hire for health care or essential services you can post your jobs for free right now. When it's time to find and hire that right person linkedin is here to help just visit again that's to post a job now terms and conditions apply.

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