#53 Howard Marks: Luck, Risk and Avoiding Losers

**Shane Parrish** (0:21)
Hello and welcome. I'm Shane Parrish, and this is The Knowledge Project, a podcast exploring the ideas, methods and mental models that help you learn from the best of what other people have already figured out.
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On the show today is Howard Marks, the co-chairman and co-founder of Oaktree Capital Management. He's authored two books, The Most Important Thing, Uncommon Sense for the Thoughtful Investor, and Mastering the Market Cycle, Getting the Odds on Your Side. The most famous investor ever, Warren Buffett, said of Howard, When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something. And you're gonna learn something too in this conversation.
Well, it's wide ranging covering how to think better, how to position yourself to get the odds on your side, a little bit of investing in market cycles, but there's so much more to this. It's time to listen and learn. Thank you for. Before we get started, here's a quick word from our sponsor.
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**Howard Marks** (2:11)
Great, thank you very much, Shane. It's a pleasure to be here.

**Shane Parrish** (2:14)
Can you take me back to the financial crisis a little bit and explain or at least illuminate for me how it is that we had this series of events unfold and you were able to have this aha moment and take advantage of it. What happened?

**Howard Marks** (2:33)
Crises are complicated and it's hard to give a linear description of their formation. But in general, as we'll discuss later about the book, cycles are all about excesses in their creation, correction. And so, the financial crisis grew out of excesses, which were then corrected painfully.
And the excesses were basically, you know, a willing suspension of disbelief, an excess of credulousness. And, you know, there was too much faith in mortgages and mortgage-backed securities. And they were invested too heavily and too riskily by essential financial institutions, which then became precarious.
And you know, you had Bear Stearns and Merrill Lynch and Wachovia Bank and Washington Mutual, all disappear or require rescues. And it culminated in the bankruptcy of Lehman Brothers on September 15, 2008 And now, you know, I said in one of my memos that in the real world, things fluctuate by between pretty good and not so hot.
But in the investment world, investors go from, you know, perfect to no chance of survival in their psychology. And so after the Lehman bankruptcy, you know, people were talking about the end of the world, the end of the financial world, the meltdown of the financial cycle. And the truth is that it appeared to be, if you ever saw the Jane Fonda movie, China Syndrome, it looked like a vicious circle that would absolutely go nonstop and, you know, go through the center of the earth to Beijing.
And so the question was, do we invest or not? First, does the financial system meltdown? Now, this is something that could not be analyzed or proved or disproved or anything. It was not subject to intellectualization.

**Shane Parrish** (4:49)
It wasn't knowable.

**Howard Marks** (4:51)
No, that's right. And so I took the stance that it's hard to predict the meltdown of the financial system, that if you think it's gonna melt down, it's impossible to know what to do, that anything you might do to prepare for the meltdown of the financial system would be a disaster under any other circumstances. And most of the time, the financial world doesn't end. That was the extent of my analysis.
And so I said, well, we can plan on the end of the financial crisis. Number two, do we invest or not? If we invest and the financial world melts down, it doesn't matter what we did. But if we don't invest and it doesn't melt down, then we abdicated our responsibility. We were hired by our clients to invest.