♪ >> howard marks is the legendary investor and cofounder of oaktree capital management. marks formed the firm in 1995 with a group of individuals who had been investing together since the mid-1980's in high yield bonds, distressed debt, real estate, and equities. howard: in the summer of 1978 i got the phone call that changed my life. >> mark spoke to "bloomberg opinion's" barry ritholtz about his legacy, his future, and the current economic climate. howard: we are at an advanced stage of the economic recovery and of the bull market.

>> in mark's latest book, he discusses his outlook for the market and what he has learned by investing. howard: so i think we are in the eighth inning, but i realized a year ago an important distinction -- this isn't baseball. >> howard marks on this "bloomberg opinion: masters in business." barry: i want to start with an interesting question. i think people may not be aware of your background. you began as an equity analyst. how does one of the world's most famous bond managers begin his career as an equity analyst? howard: i think certainly at that point in time, starting off as an equity analyst was the normal course. bonds at that time were considered a backwater that nobody was interested in. they had two old european refugees in the research department of citibank. and i remember they published a biweekly bond summary. and i remember at one point, one came around with a black box in the upper right-hand corner that

says, the last issue, because everybody lost interest. stocks were doing so well, bonds were doing so poorly that people lose interest. what the contrarian says is i want to get out of the thing that has been doing well and into the thing doing poorly. but contrarianism had not been invented yet at that point in time. i started off in equity research, as you say. i had a summer job in 1968, came back full-time after grad school in 1969, became a senior analyst, unit head, director of research from 1975 to 1978. and then i got my lucky break in 1978 when i switched to what was called the bond department -- but i was never managing straight fixed income -- i started with convertible bonds. in the summer of 1978 i got the phone call that changed my life. the head of the bond department called me and said, there is a guy in california named milken

or something, and he is dealing in something called high-yield bonds. can you find out what that means? a client had come in and asked for a high yield bond portfolio. i was smart enough to say yes. barry: that was the transition from equities to regular bonds to high-yield bonds. how do you end up over at trust company of the west? howard: in the first business trip of my life in january 1970, i went to california. and i was studying a group that does not exist anymore called the conglomerates. and after doing the company visits, my boss and i, his in-laws lived in laguna beach, so we went down there and spent the weekend, and i fell in love with california. i spent the 1970's trying to find a way to get to california, which i did in 1980. i got citibank to move me in 1980. and then in 1985, trust company

of the west, an l.a. company, approached me because they wanted to expand into my asset classes. and that is how i moved there in 1985. barry: so it is worth mentioning in passing that when you were working in trust company of the west, you were supervising a young whiz kid named jeff gundlach. howard: that's right. barry: tell us what it was like? he seems to be a person who does not lend himself to being told what to do. howard: well, i never kidded myself into thinking i was actually supervising him. i was asked to -- well, you used that term, which is as good as any. he kind of respected me intellectually, and so we got along. and i think with jeff, that's the key. you know, and he was very innovative in his approach.

he was managing mortgage-backed securities from the late 1980's, which was innovative. and you know, he would figure out strategies and then share with them with me in the hope that i would understand. barry: so fast-forward -- and i assume you did understand pretty well -- you launched oaktree in 1995, and a decade or so after that, jeff decides to part ways with trust company of the west and comes to you for some advice. howard: you know, he did not decide to part ways with them, they decided to part ways with him. he got canned, is the technical term. i think it was december 2009 if i'm not mistaken. and you know, he had a great following among his clients and among his staff. and as soon as he got let go, i think the rest of them all quit. barry: his whole team?

howard: i think his whole team. and then he, through a brokerage firm -- nowadays they say investment bank -- approached us and said, would you help us get started in exchange for 15% of our company? and so we were, again, smart enough to say yes. and it wasn't a matter of finances, it was a matter of infrastructure, back office, tax, legal, registration, all those things. when we started oaktree in 1995, people would say, what has been the biggest the prize? i said, the biggest surprise was how much noninvestment stuff there is involved in an investment company. jeff got involved in our company in california. we met and chat periodically, and we started with 15% of the company. with accounting rules, in order to bring in our share of their

profits, we would have to own 20%, so we bought another 7% and we got diluted down to 20%, which is where we are now. we have dilution protection. we are extremely happy to be an owner of doubleline. barry: doubleline is one of the fastest growing management arms to reach $100 billion? howard: i believe that is right. barry: let's talk about the chairman's memos, which you are somewhat infamous for. i'm going to quote warren buffett, "when i see memos from howard marks in my mailbox, they are the first thing i open and read. i always learn something." tell me what led you to publishing the chairman's memos. when did they start and why did you feel the need to write them?

howard: they started in 1990. this is the 30th year. barry: congratulations. howard: thank you. i don't remember thinking if i wrote them, i would get more business, or anything like that. but there were two events that happened in my environment, the juxtaposition of which i thought was extremely informative. and so i wanted to write it up and share it with my clients. that was all. barry: and you are well known for them today. buffett has lauded them and other people talk so approvingly of them, but when you first started publishing these, what was the response like? howard: big fat zero. barry: zero? howard: literally, barry, it was 10 years before i had a response. not only did nobody say, "oh, that was good," nobody had said "i got it." this was the day of running the xerox machine, folding them up, putting them in envelopes, addressing them, putting stamps on, and as far as i knew, tossing them down the sewer. because i never had a response

for 10 years. so i kind of remember what made me write the first one. i have no idea what kept me going. barry: so you said there was no response for a decade. that response, though -- i very specifically remember that one, because there was a cover on it, bubble.com in 2000. not only were you right, but the timing couldn't have been better. tell us about that particular chairman's memo? howard: in our business, it doesn't do you any good to be right if the timing is not good. there's an old saying in our business being too far ahead of your time is indistinguishable from being wrong. so if i had published the same insight in 1997, i would be gotten because it would have taken three plus years to work. it happens it only took a few

months to work. basically, the premise of the memo was the tmt, the tech-media-telecom bubble which pushed stocks up in the 1990's to 2000, was overdone, subject of excessive optimism and excessive faith in the future, and entirely free of any kind of analytical or valuation rigor, you know? i mean, we are used to paying 15 times earnings for an average company, and maybe 30 times earnings for what we think is a great company. but how do you value a company that has no earnings? hold on, how do you value a company that has no sales? you know? you are valuing an idea. and people were -- you see, in the investment business, there is a tendency to succumb to platitudes, generalizations. so what was going on in 1998, 1999, was "the internet will change the world."

as a consequence, any dock which is internet or e-commerce related is the right price is infinity. >> ahead on "masters in business," howard marks with his relationship with the legend warren buffett. howard: by the way, if you will write a book, i will get you close to the action. >> that is next on "bloomberg opinion: masters in business" with howard marks. ♪

♪ barry: so let's talk about that first book, which is the most important thing: uncommon sense with a thoughtful investor. you are writing these memos on a regular basis. what motivated you to say, let's now spend 300 pages and a year

writing a book? howard: that was simple. i got a letter from warren. barry: warren? howard: buffett. saying, i wrote a memo -- i forget which one it was -- which was right up his alley. i wrote him afterwards and said, did you see this one? he says, by the way, if you write a book, i will give you a quote for the jacket. enough said. barry: a blurb. howard: enough said. you don't pass that one by. i always thought i would write a book pulling the philosophy together when i retired, and instead it got accelerated. barry: let's talk about the second book, mastering the market cycle: getting the odds on your side. of all those 21 chapters, in the first book, why cycles? why did you pick that, eschewing the other 20 when you could write a encyclopedia, each volume being a book? howard: barry, i believe out of

all 21 important things, there are two more important than the others. they are risk and where we stand in the cycle. i believe that risk management, risk control is the mark of an exceptional investor. it is not hard to make money in the market. it is especially not hard when the market goes up, and the market goes up most of the time. and most of the time everyone in the market makes money. but if you don't know what you're doing, if you are throwing darts, just surfing, what we call beta schlepping, that's not an accomplishment. to me, an exceptional investor is someone who makes a lot of money when things go well, but does it with the risk under control so he or she won't lose a lot of money when the market goes poorly. so i think that -- i devote three chapters in the first book to risk -- understanding risk,

recognizing risk, controlling risk. and i think that is the mark of the superior investor. that's number one. number two, the cycle -- there is a connection here, because i believe that where the market is in its cycle determines how risky it is. when everything has been going swimmingly, and as a consequence the market is elevated in its cycle, relative to something we might think of as the midpoint or the intrinsic value, then i think it is risky. when it is depressed in its cycle and low relative to intrinsic value, or the midpoint or the norm, then i think the risk is very low. even though we can't benefit

from predictions of the future, i believe that where the market is in its cycle can tell us a lot about what the odds are. that -- you mentioned the subtitle of the book, "getting the odds on your side." i actually prefer the subtitle to the title, because i conveys, i hope, a sense for my belief that we cannot know what the future holds. the future is nothing but a probability distribution. but if we think and study right, we can have an idea about the shape of the probability distribution, and what returns are most likely. barry: it's interesting you say that you prefer the subtitle, because the title itself sort of is at odds with things you have said before about -- you have a mantra, not only can people not predict the future, they can't

time the market especially well either. how do you reconcile mastering a market cycle that seems a little contradictory to being able to time in? howard: let me say up front, i believe very firmly that we sometimes have a sense for what is going to happen. we never know when. so when you say timing, the word "time" is something i just discard. since i am a writer, everybody had oaktree has a habit of writing, everybody at oaktree writes a letter every quarter to his clients. there is a guy there -- and i review all the letters before they go out.

one of them, the portfolio manager said, if you name a date, don't name a price, and if you name a price, don't name a date. and if you think about it, if you never name both the date and a price, you can never be wrong. barry: right. howard: but i do think that you can have an idea of what the future holds, an idea of whether this is a good time to invest or not, but you never know when the things you are hoping for will unfold. >> up next, howard marks gives us his take on the u.s. deficit. howard: nobody seems to care anymore. >> that is ahead on "bloomberg opinion: masters in business" with howard marks. ♪

♪ barry: the fed, some people have been complaining they tighten too much. other people are saying they are behind the curve. you have been a student of the credit markets for decades.

what do you think of where the fed is and what their future behavior might be? howard: i talk about the fed a little bit in the book. there is a chapter on the role of government and central banks with regard to the economic cycle. the fed has a tough job. well, it actually has three tough jobs. number one, it is supposed to manage inflation and keep it under control, which means the economy shouldn't get too hot. number two, it is supposed to support economic growth and employment, for which they would rather the market did get hot. and number three, there are now a lot of people that think the fed's job is to prevent a recession and declining stock market. i don't think jay powell certainly feels the latter. but i think that interest rates, low interest rates have been the outstanding characteristic of

the financial markets for the last 10 years. they have dominated behavior over that period. they have been unnaturally low. they were made unnaturally low in order to bring the coming back from the financial crisis and the abyss of collapse. there are reasons rates should be higher. number one, rates should probably be at the naturally occurring level so the free market will allocate resources prudently. today, it has been subsidizing borrowers and penalizing savers and lenders. number two, the fed wants rates high enough so they can drop rates to stimulate the economy and so forth. there is a belief that there is an inverse correlation between unemployment and inflation, that when unemployment gets really low, that triggers inflation. that is called the phillips curve.

everybody -- since we now are at a 50 year low in unemployment, everyone has been waiting for inflation to get going, which is the fed's main concern is that it shouldn't get going too strongly. that is why they are talking about raising rates, but it hasn't happened. and everybody is mystified by why we don't have inflation. and there is no easy answer, i think. barry: is that a risk factor for a credit investor like yourself? howard: inflation? barry: the fed, inflation? howard: it is, but i also think that it's unpredictable. to me, the question over the last five years or more has been, are rates going up or not? and i believe that they would and they have, for good reason that i explained. for years, you remember, people would sort of say, do you think rates are going up in january or march?

i would say, why do you care? what is the difference." what month they go up doesn't matter. people were so preoccupied, especially when they were looking for the first rate increase, remember? the only thing that matters, are they going to go up a lot, and are they going to go up fast? and what month it starts happening in doesn't matter. and of course, nobody got it right, proving -- i think -- my point as to the timing. but they did raise rates. my guess is they will raise them a little more. but i never thought they would go up far or fast. and i still don't. barry: so at one point in time, debt investors were concerned with deficits from the federal government. it seems like we have thought our -- lost our enthusiasm for refining deficits. what are your thoughts on the government balance sheet and modern monetary theory?

are deficits now ok? howard: my mother's term for that, barry, is passe. learning about the debt and the deficit is passe. nobody seems to care anymore. when i was a boy, there were debates about whether it is ok to have debt, ok for a nation to have debt. i don't see anyone discussing that anymore. the only question is whether there is too much debt, but some people think there is, and no one can say what it is of course. historically the democrats believed in tax and spend and i would say deficits, and the republicans were the fiscal disciplinarians who would fight against deficits. that seems to have gone out of the window. nobody really stands square for deficit and debt reduction. in fact, most recently we see articles saying it's old-fashioned to worry about deficits and debt, and it's much more important to pursue society's needs, even at the

cost of the deficit. barry: i think that is the perfect place to leave us off. so before i ask for a round of applause, i just want to let everyone know there will be drinks and snacks on the other side of those doors, as well as copies of howard's book. howard: free copies? barry: well, somebody paid for them. [laughter] barry: there is no free lunch. but howard will be able to stick around for another 10 minutes, and i promised his wife i would not make him late for dinner. so let's hear it for howard marks. [applause] ♪

♪ erik: they called him the bond market king. bill gross had one of the most successful track records of all time and he played the starring role in pimco's rise. but the last chapter of his career was a letdown, and now almost 50 years after starting, he is retiring. it is for anyone who knew him, worked with him, or try to beat him, the end of an era. i am erik schatzker and i visited bill gross in california for years ago, just as he was starting his second act at janus henderson. i did not know what to expect this time. gross, always provocative, never dull, was full of surprises. ♪