How Oaktree's Howard Marks Spots a Market Bubble

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

So Joe, we recently recorded an episode with Kevin Muir where we were talking about concentration risk in stock indices, and I guess historical analogies with the.com bubble of the 2000s. And I know that this is one of your favorite subjects. I think I said it was like your own personal catnip.

Joe Weisenthal (0:43)

That's right.

Tracy Alloway (0:44)

And so I thought, you know what, I did not get Joe a Christmas present this year. In fact, I don't think I've ever gotten you a Christmas present. But wouldn't it be nice if I got him a whole episode where we're talking to one of the world's most famous investors who correctly called the internet bubble?

Joe Weisenthal (1:01)

Let's do it. Let's jump right into it. No more intro. I'm so thrilled about this conversation. Let's just get it started.

Tracy Alloway (1:07)

All right. I will also admit this is a belated Christmas present to myself as well. So we are going to be speaking with Howard Marks.

He is, of course, the co-founder and co-chair of Oaktree Capital Management. He's famously a credit investor, but he did call, as I said, the.com bubble correctly. So, Howard, thank you so much for coming on the show.

Howard Marks (1:31)

It's a pleasure to be with you, Tracy, and also Joe.

Tracy Alloway (1:34)

Maybe just to begin with, give us some context around what the early 2000s, late 1990s were like for you. What were you doing and what were you observing at that time?

Howard Marks (1:46)

Well, the 1990s were a slow time for credit investors. We're kind of opportunistic and bargain hunters, and bargains come from dislocations and people feeling urgency to get out of positions. And the 90s were generally a placid period, except for the, around 98, we had the evaluation of the Russian ruble and a Southeast Asian crisis, and we had the meltdown of a highly levered hedge fund called Long Term Capital Management. But those were all kind of idiosyncratic events, not macro and not broad based. Other than that, the investment environment was placid. Importantly, it was the best decade in history, I think, for stocks. The S&P 500 rose an average of 20 percent a year for 10 years, which is an astronomical accomplishment. If you rise 20 percent a year for 10 years, I would guess that something goes up roughly eight times in 10 years, which is incredible. Of course, this was all powered by the, what we called the TMT bubble, tech, media, and telecom bubble.

Some people call it the Internet bubble, which prevailed in 1998, 1999, and into 2000 So it was hot times, not for credit investors, hot times for equity investors.

Joe Weisenthal (3:13)

You recently wrote a memo that called back to a memo that you had written basically exactly 25 years ago. So right at the start of 2000, of course, the.com bubble or the TMT bubble peaked, I think it was in March of that year.

You got the timing right, and that's sort of extraordinary, because there were a lot of people probably starting in 1998 and 1999, maybe even earlier, like this is ridiculous. There's all these companies, they literally don't have a penny in earnings, or perhaps don't even have a penny in revenue, they just have the name.com in their name, they IPO at crazy prices. What is the experience like? That was very fortunate timing on your part, but there were a lot of people who were famously correct and early, and they had clients abandon them and so forth, and they thought it was like, oh, you don't understand the new paradigm, etc. What's that like in the years before that, as it feels like the market is becoming increasingly untethered from any sort of reality, and yet there's no payoff in being correct? Right.

Howard Marks (4:21)

Well, there's so much to say in response to your question. You know, I use a lot of quotes and adages when I write, because other people have said things so much better than we can. And one of the first adages I learned in the early 70s was that being too far ahead of your time is indistinguishable from being wrong. So yeah, it's painful to say something and predict something, and then have to wait years and years for it to come true.

Alan Greenspan famously said, I think it was in 96 that we're beginning to see signs of irrational exuberance in the stock market. And of course, the market went straight up for the next four years. And you know, there are people who pronounced that we were in a stock market bubble. I think I can think of one in June of 2020 And here we are almost five years later. And of course, we did stall out in 22 But if you went out in 20 and weren't smart enough to come back in in 22, you've missed a big ride. So I think, well, you know, one thing I argue strenuously, Joe, is that in the investment business, there's no place for certainty. And Mark Twain said, it ain't what you don't know that gets you into trouble. It's what you know for certain that just ain't true. And so you can have opinions, but you should never be certain that you're right. And you should never arrange your financial affairs on the assumption that your forecast is right, because it can be right intellectually or factually or rationally, but just take a long time to materialize. And if you can't survive between when you take your position and when your expectation comes true, then obviously it's not something you should do. And one of my colleagues once wrote a note to his clients. He says, if you name a price, don't name a date. And if you name a date, don't name a price.