Podcast Summary
Learning Effective Communication Skills and Investing Insights from Experts: Improve communication skills through podcasts featuring experts and learn valuable investing insights from seasoned professionals like Howard Marks.
Effective communication skills are essential in business and life, and the Think Fast, Talk Smart podcast can help you develop these skills. The podcast, which has received nearly 43 million downloads and is the number one career podcast in 95 plus countries, features experts discussing tips on making small talk, managing speaking anxiety, being persuasive, and more. Meanwhile, in the world of investing, even a bankrupt company has value, and Oaktree Capital Management's Howard Marks, whose memos are considered required reading by many investors, believes that we are entering a new era of investing after a decade of easy money. Marks, who has seen multiple fads and trends in his 53-year investing career, believes that the current transformation is a total one and that it's happening now due to the end of the easy money era.
An unusually easy environment for borrowing and asset growth from 2009 to 2021: Low interest rates led to longest economic recovery and bull market, increased asset values, made bankruptcy difficult, and allowed 'zombie companies' to borrow. Now back to normal financing environment with higher interest rates and more bankruptcies.
The period from 2009 to 2021 was marked by unusually low interest rates and accommodative monetary policies, making it an unusually easy environment for borrowing and asset growth. This led to the longest economic recovery and bull market in history. The reduction in interest rates increased the value of assets, made it difficult for companies to default or go bankrupt, and made it easy for "zombie companies" to obtain more money despite consuming more than they earned. However, this phenomenon is largely over, and the Fed is unlikely to return to ultra-low interest rates. We are now back in a more normal environment where financing is not as easy or cheap, and defaults and bankruptcies are more likely. This was not the norm in the past 13 years, but rather an abnormal period, as shown by a chart of worldwide interest rates which were at 700-year lows during this time.
The importance of fear in a capitalist economy: During periods of accommodative environments, moral hazard can arise, leading to poorly allocated capital and stagnant returns. Stay disciplined and invest prudently to avoid moral hazard and ensure long-term investment success.
Fear of bankruptcy and the threat of poorly invested capital being punished are essential elements of a functioning capitalist economy. During periods of accommodative environments where bankruptcy is less feared, moral hazard can arise, leading to poorly allocated capital and stagnant returns. Howard Marks, the Co-Chairman of Oaktree Capital, shares his experience of Japan's 30-year period of low returns due to poorly invested capital that was not allowed to be siphoned out of the system. He emphasizes the importance of staying disciplined and investing prudently, even during periods of economic prosperity, to avoid moral hazard and ensure the long-term success of investments. Marks' book, "Mastering the Market Cycle," is a valuable resource for investors seeking to navigate the market's cycles and maintain a disciplined investment approach.
Navigating Low Return Environments: Strategies for Investors: Investors should adopt a cautious approach during low return periods and consider strategies like reducing risk, going to cash, or seeking special niches. Effective communication and realistic expectations between investors and managers are crucial.
During a period of low returns, investors must adopt a cautious approach and consider various strategies to pursue returns. The speaker, who managed investments during this period, listed six possibilities, including reducing risk, going to cash, and looking for special niches. Having well-aligned shareholders was crucial for the firm, as they relied on clients' trust and expectations to manage their investments effectively. The firm adopted a mantra of "move forward but with caution" and maintained a defensive stance, understanding that the low return environment could last indefinitely. The importance of realistic expectations between investors and investment managers was also emphasized.
Aligning expectations and communicating risk-controlled approach: Successful alternative investment relationships require alignment of expectations and clear communication of risk-controlled strategies. Oaktree Capital's reputation as a reliable investor stems from its risk-controlled approach and effective communication with clients.
Maintaining a risk-controlled approach is crucial for successful relationships in the alternative investment business. Oaktree Capital, for instance, prides itself on its risk-controlled approach and has built a reputation as a reliable and cautious investor. This expectation alignment and clear communication are essential for clients who seek a lower risk investment strategy. Despite not achieving the same returns as during more favorable environments, Oaktree managed to stay fully invested and produce respectable returns during the challenging period. The Fed's policies favoring asset owners and borrowers over savers and lenders made it a tough time for traditional investors, but private equity's ability to leverage borrowed funds during low-interest-rate periods offered a double bonus. Ultimately, understanding the environment and expectations, as well as effective communication, are key to navigating the complexities of the alternative investment landscape.
Globalization trends shifting, exporting to China may no longer be effective strategy: Rising labor costs in China and deglobalization trend may make exporting sourcing less viable, businesses must adapt to new strategies to stay competitive
The business environment and the strategies that were successful in the past may not be effective in the future, particularly as globalization trends shift. For instance, the exporting of sourcing to China, which helped fight inflation and drive down consumer durables prices for decades, may no longer be a viable strategy due to rising labor costs in China and the need for resilient supply chains. Additionally, the pandemic has accelerated the trend of deglobalization, which could reverse the progress made against inflation. The Chinese economic miracle, which allowed for the exporting of sourcing and fueled globalization, has come a long way, with Chinese GDP increasing over 100 times since 1978. However, as wages and production costs rise in China, companies are looking to other countries for cheaper labor, and the trend towards deglobalization is gaining momentum. It's important for businesses to adapt to these changing trends and consider new strategies to stay competitive.
Revival of Previously Unattractive Asset Classes: The economic shift is making previously low-yielding assets more attractive, such as high-yield bonds yielding around 8%, and reducing the scarcity of opportunities for distressed debt funds.
The economic landscape has shifted significantly in the last decade, and this change is expected to bring about a revival of various asset classes that were previously unattractive. The discussion revolved around the example of China, which was once a major exporter of deflation, but is now at a stage where it is no longer competing on price. This has led to an increase in inflation, which in turn, is making previously low-yielding assets more attractive. For instance, high-yield bonds, which were once considered unviable for institutional investors due to their low returns, now yield around 8%, making them a usable investment option. Similarly, the default rate, which averaged around 4% a year in the first 30 years, has dropped to around 2% in the last 13 years, leading to a scarcity of opportunities for distressed debt funds. However, with the current economic climate, these funds are expected to see a surge in opportunities. Furthermore, the availability of returns across various asset classes is no longer as scarce as it was in the last 13 years. While they may not be the highest ever seen, they are at least usable, providing a much-needed relief for pension funds and other pooled money that have struggled to meet their current obligations. Overall, the new economic order is expected to bring about a revival of various asset classes that were previously out of favor, making the investment landscape more diverse and attractive.
Finding value in uninvestable assets: Investing in distressed markets can lead to attractive returns by buying low and potentially reaping significant rewards. Careful analysis and a solid understanding of underlying fundamentals are crucial.
Investing in distressed markets often involves going against the crowd and finding value in assets or companies that others may deem uninvestable. This contrarian approach can lead to attractive returns, but it requires careful analysis and a solid understanding of the underlying fundamentals. The speaker emphasizes that just because others are pessimistic about an investment doesn't mean it's a bad idea. In fact, it may represent an opportunity to buy low and potentially reap significant rewards. He uses the example of emerging markets, which have faced challenges but may offer bargains due to their perceived risk and lack of investor interest. The key is to approach these investments with a thorough understanding of the risks and potential rewards, and to have a solid plan for managing those risks. As the speaker notes, even a bankrupt company has value, and its debt can be bought at a discount if you believe you can extract value from it. Contrarian investing isn't a strategy to be pursued for its own sake, but when done thoughtfully and carefully, it can lead to attractive returns.
Applying Value Investing to High Yield and Distressed Debt: Value investors can assess, diversify, and price risk in high yield and distressed debt by focusing on terminal value, distribution of value among claimants, and timing. It's a calculated and deliberate process, not a buy-and-pray strategy.
In the realm of high yield and distressed debt, investors can apply the same studious analysis as they would with small caps or growth stocks, focusing on questions of terminal value, distribution of value among claimants, and timing. Despite the perceived higher risk in this area, investors can assess, diversify, and price that risk, making informed decisions based on a clear understanding of the situation. This approach is not about buying and praying, but rather a calculated and deliberate process. It's important to remember that even in high-risk environments, there are certainties and values to be determined. As value investors, we must remain aware of the risks, assess them, diversify our portfolios, and be compensated for taking on that risk.
