Podcast Summary
Lessons from the 2008 Financial Crisis: Recognize and prepare for excesses and corrections in markets, particularly during financial crises. Maintain a long-term perspective and be prepared for market fluctuations.
Learning from this conversation between Shane Parrish and Howard Marks is the importance of recognizing and preparing for excesses and corrections in markets, particularly during financial crises. The financial crisis of 2008 was a result of excessive faith in mortgages and mortgage-backed securities, which led to their investment in risky financial institutions. After the bankruptcy of Lehman Brothers, there was widespread fear of a complete financial meltdown, but Marks took the stance that it was impossible to predict or prepare for such an event. Instead, he advised that investors should not abdicate their responsibility to invest, even in uncertain times, as not doing so could result in missing out on opportunities for growth. Overall, this conversation highlights the value of maintaining a long-term perspective and being prepared for market fluctuations.
Investing during a crisis: recognizing emotional biases: During crises, emotions can cloud judgment, but recognizing biases and staying grounded can lead to successful contrarian investments.
During the 2008 financial crisis, our team made the decision to invest heavily despite the uncertainty and volatility. This was not an easy choice, as emotions often lead us to buy when prices are high and sell when they're low. But by recognizing this tendency and taking action against it, we were able to successfully invest at a time when many others couldn't. It's important to note that markets are simply groups of people transacting based on their views of value, and emotions can significantly impact these transactions. Testing for emotional resilience in a crisis is challenging, but learning from past experiences and staying intellectually and emotionally grounded can help us make contrarian decisions when it matters most.
Learning from mistakes in distressed debt investing: Successful distressed debt investing requires a contrarian mindset, strong partnership, and a culture that supports learning from mistakes. Avoiding losers is important, but not enough, and a focus on risk control is essential.
Successful investing in distressed debt requires a contrarian mindset, strong partnership, and a culture that supports learning from mistakes. The speakers, who have been working together for 31 years, emphasized the importance of not being afraid to make mistakes and learning from them, as they cannot bat a 100% in this activity. They also highlighted the importance of a supportive organization where blame is not assigned, and the ability to distinguish between bad decisions and bad outcomes. The speakers have a mindset that prioritizes risk control and have a motto of "avoiding the losers, and the winners will take care of themselves." However, in an aspirational strategy like distressed debt, avoiding losers is not enough, and they have retained this motto to signify their front-of-mind consciousness of risk control. Lastly, they emphasized that the quality of a decision cannot be determined by the outcome and that improbable things happen all the time in an uncertain world.
Understanding the importance of good decisions that don't work in the short term: Good decisions that don't yield immediate results shouldn't be criticized. Employing humble, non-emotional, and non-egotistical staff can help create a mellow organization. Economic and business cycles occur due to investor psychology, with upswings leading to overshooting corrections.
Good decisions that don't work in the short term don't necessarily make them bad decisions. It's important to have a mentality that recognizes this and doesn't criticize people when things go wrong. Hiring employees who are not emotional, egotistical, and have low hubris can help create a mellow organization. Regarding cycles, they occur when people commit excesses to the upside, leading to corrections that overshoot to the downside. This investor psychology is present in both economic and business scenarios. For instance, companies may build excess factories and workforce during a recovery, leading to a faltering economy the following year. It's important to remember that there are no hard and fast rules when it comes to cycles, and history does not always repeat itself.
Positive economic recovery with potential excesses: The economy recovers slowly, but potential excesses from recent stimulus could lead to interest rate increases and inflation control measures.
The current economic recovery, while slow, is a positive sign as it lacks the excesses that often lead to corrections and recessions. The recent tax bill, while stimulative, may have overstimulated the economy and could lead to excesses, requiring potential interest rate increases to prevent hyperinflation. The Fed's role is to maintain economic balance, focusing on inflation control and employment support, which can be challenging due to their opposing goals. Governments primarily redistribute wealth through taxes and spending, and their policies can impact the economic cycle.
Economic realities impact taxation and redistribution: Economic realities, like tax rates and ability to move, impact economic policies and should be considered in decision making.
Economic policies, such as taxation and redistribution, are complex issues with no easy answers. The concept of a "fair share" is subjective and open to interpretation. The global economy also plays a role, as tax rates and interest rates can impact a nation's competitiveness. Economic realities, like the ability of individuals and businesses to move, should be considered when implementing economic policies. For instance, if a country sets high tax rates, it may drive wealthy individuals and businesses to move to countries with lower taxes. This is known as economic reality in action. The speaker, Howard Marks, emphasized that as micro investors, they don't focus on broad economic themes, but the implications of these economic realities are something he considers in his personal observations.
Tax incentives driving population and economic shifts: The new tax bill and global economic trends are encouraging individuals and businesses to relocate to areas with lower taxes and costs of living, potentially leading to population and economic shifts with implications for governments and individuals.
The new tax bill and global economic trends are creating incentives for individuals and businesses to move to areas with lower taxes and costs of living. This can lead to a shift in population and economic activity, with potential implications for both individuals and governments. Additionally, the benefits of specialization and globalization should not be ignored, as they contribute significantly to economic growth and efficiency. A trade deficit does not necessarily indicate unfair advantages or cheating, but rather reflects the preferences and comparative advantages of different countries.
Tariffs and their economic implications: Tariffs protect jobs but increase consumer prices, American consumers bear the cost, complex issue requires nuanced dialogue, potential unintended consequences for industries and companies
The current trade dispute between the US and China, as well as the use of tariffs as a tool for policy, is a complex issue with significant economic implications. While tariffs may be intended to protect jobs and punish trade violations, they ultimately result in higher prices for consumers. The Chinese government does not pay tariffs; instead, American consumers bear the cost. The decision to impose tariffs requires difficult choices, and the political discourse surrounding this issue often lacks nuance and respectful dialogue. It's essential to understand that tariffs can have unintended consequences, such as disadvantaging certain American industries and companies. The conversation around trade policies should focus on the complexities and potential consequences, rather than simplistic soundbites.
Globalization's Winners and Losers: While globalization offers opportunities for all, it's essential to minimize the suffering of the losers by focusing on equal opportunities and acknowledging the role of luck in success.
Globalization, while leading to global economic maximization, also results in winners and losers at the individual level. The free enterprise system requires both winners and losers, but it's essential to minimize the suffering of the losers. Some argue for equal outcomes, but this is not feasible due to inherent factors like birthplace, education, and luck. Instead, the focus should be on providing equal opportunities for all to flourish. However, it's important to acknowledge that luck plays a significant role in success, and it's inherently unfair. Therefore, it's crucial to have an open and honest discussion about these issues and find solutions that maximize welfare for the most people while minimizing the negative impact on the losers.
Acknowledging the role of luck and gratitude: While acknowledging the role of luck in our success, it's essential to maintain a positive attitude and practice gratitude. However, unequal outcomes and poverty require addressing the root causes, such as education and opportunities, rather than just providing a universal basic income.
While acknowledging the existence of luck and unequal outcomes, it's essential to maintain a positive attitude towards life and recognize the role of luck in our success. Cicero's words, "the thankful heart is the greatest of all virtues," highlight the importance of gratitude and sharing the fruits of our luck with others. However, when it comes to unequal outcomes and poverty, there's a debate about universal basic income. While it can help alleviate physical needs, it doesn't provide the benefits of work, such as self-satisfaction, a sense of purpose, and social connections. Instead, addressing the root causes of poverty, such as education and opportunities, might be more effective in the long run. Ultimately, it's crucial to recognize the complexities of unequal outcomes and the importance of both acknowledging luck and working towards solutions that promote equality and human dignity.
Technological Revolution Displacing Jobs: The current technological revolution displaces jobs, but investing in education and training can prepare the workforce for future opportunities.
The current technological revolution, driven by automation, AI, and machine learning, shares similarities with past revolutions in causing job displacement. However, it also presents unique challenges due to the information age requiring fewer people to produce GDP than before. For instance, the manufacturing sector has seen a significant increase in productivity and output, resulting in the loss of millions of jobs. Looking forward, advancements like self-driving cars could lead to massive job losses in various industries, from transportation to insurance and automotive repair. While the overall economic output continues to grow, the problem lies in the displacement of human labor, leaving many with few marketable skills. The solution is not to ban productivity gains, but rather to adapt and invest in education and training to prepare the workforce for the jobs of the future.
Technology-driven job displacement and its consequences: The ongoing automation of industries may lead to increased income inequality and job losses for those without technical skills or capital, creating challenges for finding a solution in the current political climate.
The ongoing march of technology is causing significant job displacement, and the jobs that are being lost may not be coming back in the same form or volume. The optimistic view is that new industries will arise to provide employment, but the pessimistic perspective is that the people who lose their jobs may struggle to find work, especially if they lack the necessary skills for the new industries. The current political climate makes finding a solution to this problem challenging, as bipartisan support for radical change seems unlikely. The ongoing automation of industries and the resulting job losses may lead to increased income inequality, with those who have technical skills or capital doing well, while those who don't have those things suffer. The future may involve a small community of highly skilled and valuable individuals, while the majority struggles to adapt. The speaker expresses a lack of optimism about a solution to this problem and a hope that experiences of extreme hardship may eventually lead to a desire for change.
Understanding Risk in Investing: Investing involves not only the risk of losses but also the risk of missed opportunities. The future is uncertain, and having a view of probability distribution can help make informed decisions. Start with the right distribution to increase chances of success, and understand that people tend to prioritize losses over missed gains.
Risk, in investing, is not only about the volatility of returns or the probability of losses, but also about the probability of gains that you might miss out on. The speaker argues that risk exists because the future is uncertain and a range of possibilities, and it's essential to have a view of the probability distribution of future events to make informed decisions. However, it's important to start from the right probability distribution to increase the chances of success. The speaker also emphasizes that people tend to care more about losses than gains foregone, and investors who work for someone else are more likely to be penalized for losses than missed opportunities. The speaker, Howard Marks, encourages readers to read his memo "Risk Revisited Again" available on Oaktree Capital's website for further insights on risk.
Probability doesn't determine outcomes: Understand probabilities, but also consider individual tolerances and preferences for successful decision-making. Differentiate from the crowd with second-order thinking to increase chances of above-average performance.
While probability can help guide decisions, it doesn't determine the outcome. Using the analogy of rolling dice, even though we know the probabilities of certain outcomes, we cannot predict the specific outcome of any given roll. This uncertainty and risk are present in various aspects of life, including economics and investing. Therefore, it's essential to consider not only the probability distribution and expected value but also our individual tolerances and preferences. Another mental model for decision-making is second-order thinking. This approach recognizes that being average is easy and often sufficient, but to achieve above-average results, we must think differently than the crowd. By diverging from the herd's thinking, we increase our chances of above-average performance.
Understanding the importance of contrarian thinking: To achieve superior investment performance, one must think differently from the crowd, identify others' mistakes, understand why they're wrong, and hold a contrarian view
Successful investing requires thinking differently from the crowd, but being right as well. This concept, known as second level thinking, involves seeing mistakes others make, understanding why they're wrong, and holding a different point of view. However, this way of thinking is not easy as it goes against intuition and is often counterintuitive. Moreover, not everyone can naturally adopt this mindset. The efficient market hypothesis, which suggests the market incorporates all available information, creates a challenge for those seeking to outperform by thinking differently. Ultimately, becoming a second level thinker involves understanding the importance of contrarian thinking and being willing to go against popular opinion. This requires a more complex and nuanced approach to investing, but it is a necessary condition for superior investment performance.
Dare to be different, wrong, and look wrong: Successful investors take calculated risks, make unpopular decisions, and consider opposing views to uncover valuable insights and opportunities
In order to achieve outperformance in investing, it's essential to be willing to be different, wrong, and look wrong. This means taking calculated risks and making decisions that diverge from the crowd, even if it means looking foolish in the short term. This ability to look stupid is crucial for success, as it allows investors to capitalize on opportunities that others may overlook. Furthermore, it's important to consider the perspectives of others and understand why they may hold different views. By plumbing the differences between your own perception and that of others, you can gain valuable insights and potentially uncover opportunities that others have missed. This concept of variant perception is key to distinguishing yourself in the investment world and achieving exceptional returns. So, in essence, to be a successful investor, you must dare to be different, dare to be wrong, and dare to look wrong, while also being open-minded and considering the perspectives of others.
Learning from mistakes and others' perspectives: Gain unique insights by learning from mistakes and challenging your own thinking. Teach kids about money, financial responsibility, and instill good attitudes for wise decision making.
Gaining a unique perspective involves learning from others' mistakes and constantly challenging your own thinking. This approach not only adds depth to the information you consume but also helps refine your understanding of risk and financial decision-making. Parenting plays a crucial role in teaching kids about money, and it's essential to discuss financial responsibility, keep money in its proper place, and instill a sense of finiteness. By doing so, children will develop good attitudes towards money and make wise decisions. Ultimately, being a well-informed and smart individual requires a multifaceted approach, including broad reading, reflection, and effective communication about financial matters.
Allowing children to make decisions and learn from mistakes: Encouraging kids to make choices and learn from mistakes helps build essential life skills and promotes growth into responsible adults.
Allowing children to make their own decisions and learn from their mistakes is crucial for their development. According to Howard Marks, it's essential to instill values such as respect, care for others, and teamwork in children. Insulating them from choices and mistakes can hinder their growth. When children make mistakes at a young age, they can learn from them and improve their decision-making skills, whereas making mistakes later in life can have more severe consequences. Marks also emphasizes the importance of accepting that being wrong is a natural part of life and encourages a positive attitude towards mistakes. Parents should trust their children to make decisions and let them experience the consequences, both good and bad, to help them grow into responsible and resilient adults.
