Notes to Video given by Howard Marks of Oaktree Capital by Ronald R. Redfield CPA, PFS, Redfield, Blonsky & Co.

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I try to create an environment where one person’s success doesn’t have to come at the expense of another.
Everyone collectively can be more successful than they would have been separately.
You have to start with smart people who are also wise, and introspective.

I don’t get the concept of trading to make money.
So I like to surround myself with other people who don’t like the idea of trading to make money. I don’t say my way is the only way.

Many pension funds or endowments used to have a rule: we won’t invest in any bonds that are rated below investment grade, below BBB.
So if everyone is saying we won’t do that, then that is going to be cheap.

People individually and markets are ruled by emotion, and as long as emotion takes over, then efficiency will not be realized.

When everyone thinks one way, then there should be a reward for thinking the other way.
If you are the only person in the world that’s open to making investment x, then maybe it is available to you cheaply.

Having patient capital is a great advantage.
In our distressed debt fund, the money is locked up for 10 or 11 years, so we can be patient.

We always try to stress the danger of over-confidence.
It is better if you invest scared, to worry about losing money.
The most dangerous thing is to think you’ve got it figured out.
Or to think you can’t make a mistake.
You always have to recheck, to bounce your ideas against yourself and others.
You have to do things that are lonely, uncomfortable.
It is warmer in the herd.
But if you only hold popular positions, you can’t do better than average, by definition.
You have to be strong enough in ego to hold difficult, unusual positions, and stay with them.

You have to have a view which is different than the consensus and you have to stay with it, and you have to be right.
Charlie Munger said to me, none of this is easy, and anyone who thinks it is easy, is stupid.

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We define risk primarily as the potential for losing money.
We don’t have empathy with the view that risk is variability, that variability is a thing to be avoided.

In good times, I hear people say, the way to make more money is to take more risk.
-That’s ridiculous.
One’s goal is to make smart investments, even if they involve risk, but not because they involve risk.
What risk means is a greater range of outcomes, some of which are negative.
You have to only make investments where you are rewarded for taking that risk, and where you can withstand the risk.
That requires diversification, patient capital, and eventually being right in your ideas.

When 30 year Treasuries yield 3 percent, that sets the bar for everything else.
That means everything else trades at not very high returns.
That means we are in a low return environment.
One of the hardest things is to obtain high returns in a low return world.
If you insist on doing so, you can get into trouble.

I personally am not worried about the return to hyper-inflation.
Inflation is modest, it could go higher.
Everyone would like to see it go higher, because usually higher inflation is associated with prosperity.
Governments around the world would like to see it so they can pay their debts with low value currency.

I always get into trouble when I stray into the macro.
Where does inflation come from?
Demand pull comes from too much money chasing too few goods, I don’t think we have that.
Cost push comes from escalation of the factors of production, I don’t see that.
Most of the possible sources of inflation would come from international concerns.
Like the man in China who has been working for 60 cents a day, demanding $1.20 per day.
It could happen, but I don’t think it’s going to be pervasive enough to pitch us into hyper-inflation.

If you went to the horse race, would you always bet on the favorite?
The favorite, assuming the crowd is intelligent, is the horse with the highest probability of winning.
That doesn’t mean that the favorite is always the best bet.
You might have another horse, which has a lower probability of winning, but the odds are so much higher, then that’s the smart bet, leaving alone anything specific that you know about the horses.

You have to make investments where the risk can be assessed, diversified, and where you are highly paid to do so.

So called safe, so called high quality investments are not always, or in fact are rarely, the best bet.
We don’t want to invest in high quality or safe things, because a so called safe thing that has bad odds is a bad investment.
Sometimes I think the word quality should be banned from the investment business, if you want to make money,

Jim Grant called Treasuries certificates of confiscation.
They are a safe investment, in the sense that the outcome is known, and not really subject to variation.
I think they are not a good investment because the known outcome is a non-attractive one.
You can by the ten year Treasury and lock up the certainty of 1.9% return for ten years.
Is that really a good thing to lock up?
Under what circumstances will that turn out to have been an attractive investment?
The answer is, in my opinion, deflation or depression.
I don’t think we are going to have those things.
Anyway, we can’t plan on having them.
So the range of options under which that safe investment turns out to be a smart investment is rather narrow.
Jeremy Grantham said people think about the risk-free return, Treasuries are the return-free risk.

If you invest whenever you find a stock that is selling for a third less than your estimate of intrinsic value, and you don’t care about the macro, or the temperature of the market, then you are acting as if the world is always the same, and the desirability of making investments is always the same.
But the world changes radically, and sometimes the investing world is highly hospitable when price are depressed, and sometimes it is very hostile, when prices are elevated.
You are saying, just look at the micro, buy them whenever they are cheap.
I can’t argue with that.
On the other hand, it is much easier to make money when the world is depressed, because when it stops being depressed, it is like a compressed spring, that comes back.

If you buy a cheap stock when the market is high, it is a challenge.
The market, being high, is generally followed by a decline, then for you to make money in your cheap stock, you have to swim against the tide.
If you buy when the market is low, and that lowness is going to be corrected by a general inflation, and you then buy your cheap stock, then you have the tailwind in your favor.

It is unrealistic to say I don’t care what is going to happen in the world, I know a cheap stock when I see one.
If you don’t follow the pendulum and understand the cycle, then that implies that you always invest as much money as aggressively.
That doesn’t make any sense to me.

Anything that has gone down in price a lot is potentially source of opportunity.
The question is, has it declined sufficiently, relative to reality.
So if a stock was fairly priced 5 years ago at X, today the stock is down half, but in a sense, reality is also down half, then the stock is only fairly priced.
Lower in price, but not cheaper.
What the investor has to do i weigh out, on the hand price, and the other hand, reality.

Everybody thinks very dire thoughts about Europe and the euro, and I would be the last person in the world to argue against that position.
European stocks are lower in price because of macro conditions, but are the macro conditions being viewed too pessimistically?
How do you know?
Are you capable of thinking different and better about the fate of Europe?
I don’t think so.
I don’t think anybody has a good handle on what is going to happen in Europe, so how can gaming the European situation give you an edge?
If you don’t have superior insight, then how can something be to your advantage?

We don’t bet on macro forecasts.
I don’t think it is easy to be above average in correctness with regards to the macro.

We are active in less efficient markets only.

Ronald R. Redfield CPA, PFS

Howard Marks
Howard Marks