The Rewind: Us and Them

Episode Summary

Executive Summary: Howard Marks revisits his memo "Us and Them," contrasting investors who believe they can forecast markets with those who accept uncertainty and invest defensively. He argues the best long-term results come from humility, risk control, contrarianism, and patience, not confidence in predictions. He ties these traits to real market cycles and current conditions, especially the risks embedded in low interest rates and complacent optimism.

Main Topics: I Know vs. I Don't Know investors (Priority: 5/5): Marks frames the core split in investing as between people who believe the future can be predicted and those who accept that it cannot, shaping behavior, risk tolerance, and performance. Consistency and long-term success (Priority: 5/5): He argues that sustained, steady performance with few blowups matters more than occasional brilliance, using sports analogies and his own track record to emphasize reliability over drama. Confidence, humility, and forecasting error (Priority: 5/5): Marks warns that confidence is useful only when merited, but overconfidence is dangerous because it encourages false certainty and poor decisions. Market mood and the danger of interpreting price moves (Priority: 4/5): He rejects the idea that the market is intelligent or informative in a simple sense, arguing that market swings often reflect collective emotion rather than truth. Contrarian, value-based, defensive investing (Priority: 5/5): The 'us' style is described as cautious, value-oriented, cash-aware, and willing to go against the crowd to exploit others' mistakes. Current macro concerns and low-rate distortions (Priority: 4/5): Marks contrasts market optimism after 2003 with concerns about deficits, debt, foreign capital dependence, terrorism, and especially the risk that low rates can make valuations look safer than they are. Historical rhyme, not repetition (Priority: 3/5): He stresses that investors should study history and atmospherics because patterns recur, while still recognizing that some periods really are different.

Key Arguments: Investors fall into two broad camps: those who think they know the future and those who accept that they do not; the latter tend to manage risk better. Overconfidence is more dangerous than underconfidence because it leads to decisions based on false certainty. The best investors are often patient, defensive, and willing to hold cash when opportunities are scarce. Good investing is more about avoiding big mistakes and blowups than maximizing excitement or forecasting every turn. The market is not a wise oracle; it is a reflection of the average of participants, and average thinking is often wrong. Contrarianism is useful only when it is disciplined and grounded in analysis, not merely in taking the opposite side reflexively. Price moves should not be overinterpreted; markets often exaggerate both optimism and pessimism. Low interest rates can support high valuations, but they also create vulnerability if rates rise. A manager’s real skill is revealed by consistency, risk control, and the absence of embarrassing years rather than occasional home runs. Studying history helps investors recognize recurring patterns and emotional climates, even though 'this time' can sometimes truly be different.

Data Points: Memo original publication date: May 7, 2004 - The episode revisits Howard Marks's memo 'Us and Them'. Career experience referenced: 52 years - Marks says he has observed the investment community over 52 years. Bubble periods cited: 1997, 1998, 1999, first half of 2000 - He identifies the TMT bubble as the greatest bubble he had seen on his watch. Earlier bubble cited: Nifty 50 (late 1960s/early 1970s) - Marks compares the TMT bubble to the earlier bubble he witnessed after entering the business in 1960. Years at Oaktree: 26 years - Marks notes Oaktree's operating history at the time of the discussion. Combined firm history: 35 years - He combines Oaktree and prior TCW years to show long-term consistency. Strategies referenced: 25 strategies - He says the firm has run 25 strategies over its history. Rate on bank loan: 22.25% - Marks recalls a framed 1980 notice showing his bank loan rate at 22.25%. Money market yield: 1% - Used to illustrate how low cash yields were in the current environment. Treasury note yield: 3-4% - Marks cites low Treasury yields as part of the valuation backdrop. High-yield bond yield: 6-8% - He says these yields looked attractive relative to very low risk-free rates. Market-neutral hedge fund return expectation: 9-11% - He notes these returns attracted capital in the low-rate environment. Private equity return expectation: 15-20% - He says these expectations were enough to attract money, compared with older 25-30% hurdles. Former private equity expectations: 25-30% - Referenced as an older, higher return target before low rates compressed hurdle rates. Market behavior in early 2015: Worst start ever to a year (first quarter of 2015) - Marks mentions this as an example of the market being manic/depressive and requiring a 'trip to the shrink'.

Pivotal Quotes: "It's frightening to realize you don't know something, but even more frightening to realize that the world is run by people who believe they do." — Amos Tversky (quoted by Howard Marks): Used to support the argument that overconfidence in forecasting is dangerous. "The market is merely the consensus of you and me and all the other investors." — Howard Marks: Marks explains why the market should not be treated as an intelligent guide to action. "The cautious seldom err or write great poetry." — Fortune cookie line cited by Howard Marks: Marks uses this to illustrate the tradeoff between caution and boldness.

Implications: Investors should prioritize humility, margin of safety, and disciplined contrarianism over prediction. In low-rate markets, complacency can overinflate valuations, so risk control and patience matter more than ever.