Howard Marks Interview With Tim Ferriss on Mastering the Market Cycle

Tim Ferriss recently interviewed Oaktree Capital's Howard Marks on his popular podcast as part of Marks' press tour for his new book that's coming out: Mastering the Market Cycle: Getting the Odds on Your Side. Here are some notes/summary as well as the full audio below.


Howard Marks Interview on Tim Ferriss Podcast

- "You can't predict, you can prepare."  This quote is from one of Marks' memos from way back in the 1990s. He uses this to note that he didn't predict the housing crash, but he was prepared because of cautious preparation in advance.

-  His previous book The Most Important Thing outlines the concept that you have to know where we are in the cycle.  "And where you are in the cycle is the primary determinant of risk."  So his new book, Mastering the Market Cycle, focuses on that aspect because just knowing the position in the cycle is a huge advantage.

- The book focuses on looking at the future not as the past or something that's already happened that might repeat, but look at it as a range of possibilities, a probability distribution.

-  "Most of us have an inherent bias, (we're) essentially cautious or essentially aggressive."  He notes it's very important to assess your personal bias as that affects so much of your success in investing.

-  "One of the keys to successful investing is to either be unemotional or at a minimum, act like you are.  The great investors I know behave in an unemotional fashion."  The problem of course is teaching yourself to be unemotional is counter to human behavior.  So part of it is being born with that predisposition.

-  " 'I don't know.'  It's a great thing to say and not enough people say it."

-  Marks recommends people read Nassim Taleb's book, Fooled by Randomness

-  "There's nothing more dangerous in life than being sure you know something that you don't know."

-  Marks thinks the most useful chapter of his new book is the one that talks about one's attitude toward risk.  From the book: "If I could ask only one question about each investment I had under consideration, it would be, 'how much optimism is factored into the price?'"

-   "We make money from favorable surprises.  If the positive conviction is so high then by definition there can never be a favorable surprise."  Marks labeled this as a number one concept.

-  He says the greatest thing he was ever taught was about stages of a bull market and how people shift from not believing things will get better, to people accepting things are improving, to finally people believing the good times will go on forever.  Buying in the first phase gives cheapest prices because there's not much optimism in the price.  The second phase is when the favorable surprise happens.  Then you reach the phase where there's so much optimism in the price that it's unlikely to yield a profit.

-  Marks thinks we're in the 8th inning of the markets.  However, we don't know how many innings there are in the game.  In a normal game, the good times could be close to ending.  "I think this is a time for more caution than usual."

-  Marks likes playing backgammon since probability is the name of the game.

-  On cycles: the biggest mistake you can make is to ignore the repetitive nature of the cyclical pattern.

-  Marks likes reading Grant's Interest Rate Observer.  Another book that Marks has enjoyed: Factfulness, which he recommends as it takes qualitative viewpoints commonly held and debunks them with data.

- Marks believes bitcoin can't be valued.


Podcast Audio:  Here is the link to stream the podcast episode (mp3 format): click here



Be sure to also check out Marks' new book: Mastering the Market Cycle.

Marc Andreessen on Hedge Funds Versus Venture Capital & Investing

Tim Ferriss (well-known author of The 4-Hour Workweek) recently interviewed Marc Andreessen, one of the founders of venture capital firm Andreessen Horowitz.

In the very interesting podcast, Andreessen wasn't directly asked about it but he basically touched on the similarities and differences between public market investing versus investing in private companies.

Here are some interesting quotes and takeaways from the interview:
 
On hedge fund managers:

“In investing and other things, people just hate changing their mind … If you talk to the world’s best hedge fund managers, they’re the exact opposite.  They love changing their mind.  I’m one of the few people who will openly admit I love spending time with hedge fund managers, I think they’re awesome.  They’re fantastic people and they’re the most open minded people I know.  They love when you tell them that they’re wrong.  They get all excited.  Their eyes light up.  They’re like, “Why? Why do you think that?”  And they’re genuinely interested.  Because if you’re right and they’re wrong, they will change their minds.  And they’re hedge fund managers, so they’ll literally reverse the trade.  If they were long a company, they’ll flip around and go short.“

This highlights one of the main benefits of liquidity.  While it can be a tricky task to pull a mental 180 and reverse your thinking on an investment, it's even more difficult to flip your position if there's no liquidity.  This is undoubtedly one of the biggest advantages in public investing versus private.

If you're wrong in the markets, you can simply sell the position as soon as the market opens.  But if you make a mistake with a private investment, you'll either be waiting much longer to offload the stake and/or doing so at potentially less than favorable prices.  Mistakes can easily be magnified.  


On conviction:

Andreessen also touched on the concept of 'strong opinions, loosely held' which ties into the point above about the ability to change one's mind.  He summed it up succinctly by illustrating a progressive thought process: "Conviction.  Conviction.  Conviction.  New facts.  Change."

Going back historically, this is basically an adaptation of John Maynard Keynes' oft quoted words: "When the facts change, I change my mind.  What do you do?"


On the hedge fund industry versus venture capital:

"A hedge fund manager can reverse himself.  The next day he can turn around and take the opposite trade.  We don’t get to do that.  When we invest, it’s knowing we’re in for 10+ years.  It’s a commitment of dollars but it’s also a commitment of somebody’s time and the organization’s time and bandwidth, and there’s only so much of that.  When we make a decision, we then become committed to that company in that category, and so we can’t invest in their competitors, including competitors that don’t even exist yet ... Our decisions are big decisions and they have huge consequences for the firm."

This underscores how difficult it can be to think so far into the future and to try and accurately predict it.  He gives a good example about how investors in Friendster couldn't invest in Facebook because it didn't exist at the time, but by time it came around, they were already tied to Friendster and thus they missed out on a much better opportunity.
    

On good versus great investments:

"One of our theories of venture capital: Everybody thinks in investing you either make a good investment or a bad investment.  I actually think that's not the big issue.  The issue in venture capital is you either make a good investment or a great investment.  Good is the enemy of great.  We see many companies that are just fine ... founders are good, market seems good, product seems good, customers kinda like it, and they got a little revenue and it's all fine, but those companies tend to never go anywhere.  Every once in a while we'll see these companies that have some extremely strong strength, some extremely special wonderful thing going on, that by the way may have all kinds of problems and issues, but there's something at the core of what it is that's really special and magical.  And those are the ones that we want to do.  We're trying to stock our portfolio with just investments like that."

This is similar to the notion that only a few great investments in a stock portfolio drive the majority of the returns and so investors are on a continual quest to find the holy grail.  But it's not just finding them.  You have to be able to buy them at a decent price.  As Warren Buffett says, "Price is what you pay; value is what you get."

Many great fund managers keep a watchlist of great companies they'd love to own at the right price (companies with huge moats, competitive advantages, great management teams, etc).  And if volatility presents an opportunity, they strike, often selling 'good' companies to replace them with 'great' ones.


On the importance of arguing the other side:

Andreessen then goes on to discuss his firm's investment process and the importance of arguing the other side.  There are pros and cons to doing this as he warns at first that, "It'd be very easy in a conversation about the weaknesses of something to beat the idea to death and you never invest."

At the same time, he says they can create a 'red team' or people designated to argue the other side (why they shouldn't invest, i.e. the bear case in public market investing).  Andreessen says, "Whenever (a partner) brings in a new idea, I just beat the shit out of it ... and he does the same to me.  It's the torture test."

Two quotes from Charlie Munger highlight just that:

"Invert, always invert."

and

"I never allow myself to have an opinion on anything that I don't know the other side's argument better than they do." 

Andreessen notes they're trying to take contrarian, non-consensus views to guide their investments.  This is quite similar to public market value investors, or other managers who identify the consensus view and then outline their variant perception.  Risk & mitigant lists are also pretty commonplace in investment pitches these days.


Books Recommended by Marc Andreessen:

During the interview, Tim Ferriss mentioned The Four Steps to the Epiphany.

He also singled out High Output Management, which Andreessen then called "the best book on management ever written."

Andreessen also recommended Only The Paranoid Survive, written by the same author.

He also highlighted Peter Thiel's book Zero To One as a great option.

Shifting gears a bit, the venture capitalist also noted that, "Where I got a lot of my education from was reading history.  I'd go back and read about Edison, Ford, Rockefeller, J.P. Morgan.  The period between 1870-1920 is really interesting."

He singled out The Wizard of Menlo Park: How Thomas Alva Edison Invented the Modern World.

He also mentioned a book on Walt Disney as well as Schulz and Peanuts.

And while he didn't specifically name these books, here are some of the top rated biographies on the historical luminaries he mentioned above:

Titan: The Life of John D. Rockefeller, Sr.

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance


On other investors he studies:

"I study the people we compete with and collaborate with very closely.  I (also) particularly study value investors, on the completely other side of the spectrum.  Warren Buffett is the archetype but Seth Klarman, and others."

"Value investing is the only other place in the market where you can actually find long term investors."


On Warren Buffett:

"On the one hand, there's no overlap between the worlds.  Anything Warren Buffett's willing to invest in we run screaming in the other direction and vice versa.  He invests in Heinz Ketchup and the reason he invests in Heinz Ketchup is that people have been eating Ketchup on hamburgers for 100 years and therefore the best guess would be that they're going to continue to eat Heinz Ketchup for the next 100 years.  We're wired completely opposite.  He's betting against change and we're betting for change.  When he makes a mistake it's because something changes that he didn't expect.  When we make a mistake it's because something doesn't change that we thought would.  They could not be more different in that way.  But what both schools have in common is an orientation towards original thinking, willing to view things as they are as opposed to what everybody says about them or what they've believed to be."



While these are just some takeaways from the interview, Andreessen and Ferriss also touch on a myriad of other subjects and we'd definitely recommending listening to the full podcast here.