Howard Marks on Warren Buffett, Writing Memos, Investing Psychology & Crypto

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Joseph Cass

Hello, everyone. My name is Joe Cass, Director at S&P Global Ratings. So I am the creator and host of Fixed Income in 15 podcast. So today, I'm talking to Howard Marks, Co-Founder of Oaktree Capital Management; and Sally Moore, Executive Vice President and Global Head of Strategy, M&A and Partnerships at S&P Global.

So today, we're going to talk about investor psychology, M&A and how to become a successful investor. So the disclaimer, a quick reminder that the views of the external guests are their views alone, and they do not represent the views of S&P Global Ratings.

Joseph Cass

Okay. Let's get into it. Howard, everyone watching and listening will know about your success in investing over the past 40 to 50 years. So given your vast experience in all kinds of market conditions, when thinking about behavioral finance and investor psychology, what traits do you think make a successful investor?

Howard Marks

Well, I think, first of all, Joe, it's great to be with you today. I think that it's important to be unemotional, to either be an unemotional person or to have your emotions under control. And most of the people I consider excellent investors seem quite unemotional. You have to be able to risk the excitement at the highs and the depression at the lows.

And that's -- without that, you can't prosper. I think most of the people I think of as great investors are curious, thoughtful, think deeply. I have this thing I talk about that you have to be a second-level thinker, which is to say you have to think deeper and better than others. It's a matter of outthinking the competition if you want to be above average as an investor. And I think those are the most -- 2 most important things.

Joseph Cass

Fantastic. So Sally, as an introduction, can you talk us through your career to date thus far, your role as Global Head of Strategy, M&A and Partnerships at S&P Global.

Sally Moore

Yes. No, absolutely. And likewise, thank you for inviting me here today. So I've enjoyed, I think, the best part of over 25 years of a career spanning sort of financial services and information services. It's been a pretty interesting ride, and I feel very fortunate to have made the progression I have and incredibly lucky actually to have worked for and partnered with some world-class leaders.

So my first job straight out of school was for Coutts & Company, a private bank. I then moved to a trading desk at Sumitomo Corporation. And then I joined Reuters, a wholly owned subsidiary called Loan Pricing Corporation. I moved between London, New York, spent some time there.

And actually, it was whilst I was in New York working for Reuters that I came across a young company called Markit, and it was around 2005, and I was approached by the founder, Lance Uggla, to join Markit back here in London and enjoyed a 14-plus year career, working for Lance and the team, a very young company back then. I think I was employee #162, and it was quite interesting times in the market.

It was just before the credit crisis, there was an abundance of innovation taking shape across structured products, leveraged finance and the credit markets. So I joined Lance and the team to focus on running their loan business. I subsequently then run credit business in Europe. And then I manage sort of firm-wide strategy, worked through an IPO in 2013, I guess.

We did a merger of equals with IHS. And then it was, I guess, October 2020 when Lance took the phone call from Doug Peterson, the CEO of S&P, and Lance called to brief me that S&P had approached IHS Markit, and we began to work and prepare for the merger. And it was a successful signing of the merger in the December, and then I was appointed by Doug as, as you said, Head of Strategy, M&A Ventures and Partnerships, reporting into Doug. So look, it's a fantastic seat to occupy with a great opportunity set ahead of us. And yes, I feel pretty privileged to be in a position to guide our enterprise strategy.

Joseph Cass

Great. Thanks, Sally. So Howard, you've written countless investment memos over the years and obviously, a number of successful books, the most recent being Mastering the Market Cycle. So can you talk a little bit about what inspired you to write your first book and also maybe your broader relationship with Warren Buffett?

Howard Marks

Well, that's an easy one, Joe. As you know, I started to write the memos in 1990. I wrote them for 10 years without ever having a response. Then I wrote one on the first day of 2000 called bubble.com, talking about what I saw going on in the tech space. And that memo had 2 virtues. Number one, it turned out to be correct. And number two, it turned out to be correct soon because if it takes too long, then you don't give me credit.

I always figured that when I retired, I would write a book pulling the memos together into one cohesive philosophy piece, if you will. And then I got a letter from Warren, I think it was in '09, saying, if you'll write a book, I'll give you a blurb for the jacket. And of course, that was enough to get me going. And that book came out in 2011, thanks to Columbia Business School press.

And we came into contact with Warren as large debt holders, primarily in the Exxon matter. And we both were large holders of one subsidiary. He gave us his proxy to work it out. And I guess we did a good enough job to become friends.

Joseph Cass

Excellent. So Sally, as you mentioned, this year, S&P Global completed a huge $140 billion merger with IHS Markit. So as Global Head of M&A, you must have been right at the heart of this deal. So can you talk us through the rationale for the merger, how it happened on the ground and the challenges and kind of experiences for you personally?

Sally Moore

Yes, absolutely. So I'll start with a little bit of the rationale and the sort of deal thesis. I mean this was the merger of 2 great existing companies and 2 very strong brands. And I think the rationale and the opportunity set was quite clear early on to all the stakeholders involved. We obviously had quite an extended period of planning, and I'll talk about that in terms of challenges, both in a COVID environment and the regulatory pressures that we had.

But that planning process, Joe, was really important to really validating the rationale and deal thesis. And as we started to do that validation, our conviction grew stronger, and we're already now seeing those early customer wins post close. So taking a leading role in various aspects of the combination was a fantastic experience for me personally and definitely some learnings along the way.

But we were very much focused on, look, these businesses are highly complementary. So it was about driving an enhanced customer value proposition. It was about increased scale and enabling us to really innovate in some high-growth markets. The pro forma portfolio is more balanced and diversified, and that was an important ingredient. And then obviously, a lot of value creation along the way in terms of cost synergies and revenue synergies. So those are quite meaningful numbers, $350 million of revenue synergies and $600 million of cost synergies. So they were key.

As I said, it wasn't without its challenges. I mean, doing a merger of this size and scale during COVID was one. And then the other that I would highlight was the regulatory pressures. So during the course of the 15 months from signing to closing the deal, we had to divest, unfortunately, 4 assets, so 4 businesses.

So quite complex carve-outs, right? These assets aren't always meant to be stood up as stand-alone. So we had to work very hard to make sure that we could divest and find good homes for the businesses and our people in a very tight time frame. So it was quite exhausting and testing at times, but we got there in the end.

Joseph Cass

Fantastic. So Howard, I wanted to take you back to 1995, so when you co-founded Oaktree. So it seems like a long time ago and kind of it is quite a long time ago now. So what were the most difficult aspects of founding Oaktree kind of from the ground up? And have there been any standout challenging situations or periods during that time?

Howard Marks

At the beginning, in particular, people would ask me what's been the biggest surprise since you started Oaktree. And I said the biggest surprise is how much noninvestment work an investment management firm has to do between tax and accounting and client reporting and insurance and premises and regulation and all those things.

And it's really quite a big load. Fortunately, our first employee, we knew from one of my partners' careers in public accounting. And so we got the perfect person for the job, and that made it very reasonable. I think the greatest challenge came, Joe, a few weeks into the process. I've changed jobs twice in my life. In 1985, I went from Citibank to Trust Company of the West. And I handed the Trust Company of the West a piece of paper. I said this is my performance, and they published it.

Those -- that was then. This is now. So in 1995, we go from TCW and 5 of us leave to start Oaktree, and times have changed. You can't do that anymore. In order to publish performance, first of all, there are requirements as to the portability of records, which we passed. But in order to use it, you have to have audited data and backup statements. We didn't have anything because when you leave an employer, you don't take anything with you. The paper belongs to the employer.

So we didn't have the ability to produce statements that complied. I turned to my partners and say, guys, we don't have a record. But we figured out a solution. The first client came over from TCW to Oaktree. And we said, if you'll give us your monthly statements for the last 10 years, we'll audit that your performance is actually what it was said to be, and we had a record. So these things can be surmounted. And fortunately, they were.

Joseph Cass

So Howard, you spent a chunk of time with your son, Andrew, and his family over lockdown. So Andrew is already a successful investor in its own right at TQ Ventures. Was your view of investing crypto or just generally the world we live in influenced by spending this kind of extended period of time with your son?

Howard Marks

Yes. Well, we love to debate investing and good natured give and take. And so he is much more of the current generation. I'm a couple of generations back, and he's very comfortable with technology, with ventures, obviously, with software, with crypto and so forth. And we debated these matters for a good part of 2020. As you say, the chance for the whole family to live together is a rare one.

And the result was a memo I put out in January '21 called Something of Value because the chance to live together really was a silver lining. And it argued for open-mindedness. The equity world has divided itself into value and growth along a very, very rigid line. And Andrew's argument, which I actually subscribe to, is that it shouldn't be that hard a line that it's possible for a company with good growth prospects to be of good value. It's clearly possible for a low-priced stock not to be a good value. And of course, low price is the criterion for the definition of value. So open-mindedness, not rigid.

And Andrew made another terrific point. When I went to University of Chicago before starting work in the '60s, I learned about the efficient market hypothesis. And I believe that it has very serious ramifications for all investors. It's not absolutely true, but it is relevant. And Andrew made the point that Buffett 60 years ago used to buy dollars for $0.50, and he happily talks about that now. But today, there aren't any $0.50-dollars lying on the ground to be picked up. Most people have figured things out.

And Andrew's point, which I think was extremely well phrased, is that readily available quantitative information with regard to the present cannot give you the investment edge that you need to be a superior investor. You have to either be good at assessing the qualitative or assessing the future. But quantitative in the present moment, everybody has that information. There's no reason to believe that it will make you a superior investor.

So we spent a lot of time on crypto, the main upshot of which was he convinced me that it's not appropriate to talk about things I don't know anything about. I bought into that, too. So I think -- and he might have gotten something out of the captivity as well.

Joseph Cass

No, I'm sure. I'm sure. Very, very interesting. Sally, you mentioned before that you see S&P Global as a fintech company. So what's your view on the industry as a whole? And is there going to be a next generation of financial data providers available to investors like Howard?

Sally Moore

Yes. Look, it's a great question. I'll start by talking a little bit about sort of the industry backdrop and what we see right now. I do think we're in sort of a period of heightened fintech innovation disruption. And I think the sort of landscape is increasingly getting more complex. We've seen a ton of industry consolidation across the information services spectrum. You've seen exchanges and I would say, more traditional market structure players chasing down high-growth data assets, but also software businesses, too.

I think the other thing is we've seen a lot of innovation fueled by the significant private funding. So venture and private equity have really helped drive that wave of next-generation fintech start-ups. And I think also that sort of heightened disruption is due to the democratization of technology. But I do think we're seeing some sort of interesting value shifts and a little bit of sort of blurring of lines in the market.

You've kind of got the big tech players pondering how to deeper penetrate our markets, whether it be financial services or otherwise. You've got a lot of firms approaching innovation through the creation of venture arms, so corporate venture arms. There's a lot of collaborations that are taking shape in the industry. We were founded IHS Markit via a consortia of banks, and there are a few interesting consortia that are emerging right now.

So I think our customers are also increasingly developing and investing in data and analytics themselves, which again goes back to sort of some of this blurring of the lines. But I think the big trends going forward, I mean, Howard just touched on crypto. I mean, I would say is that continued technology-enabled innovation, further adoption of the cloud and there's this increased computational throughput.

I think disruptive financial products, so more structural innovation. I think that talks to more decentralized finance, Web3, crypto being a part of that. And then I think you're going to see continued innovation around efficiency, more automation through AI, ML, NLP. There's a lot of interesting platform strategies, no-code, low-code type platform solutions. And then I think there's evolving market activity sort of where we would see high-growth opportunity for us to invest and play would be things like private markets.

Obviously, top of mind for all of our customers is climate and sustainability agendas, index innovation, continued evolution of passive investing. We're seeing self- and direct indexing opportunities. And then I think a consequence of some of the dislocation in the market is around sort of supply chains and having robust supply chain intelligence, analytics tools, I think, is key, too.

Joseph Cass

Fantastic. So Howard, I'd be really interested to hear your views on people and culture at Oaktree. So as we mentioned before, Oaktree is now kind of 27 years old. I mean, it's going from strength to strength. There's a lot of people who would look at the institution and be kind of jealous of kind of what you guys have created and wonder how it's got to this point. So how have you guys tried to foster a positive but still productive environment at the firm? And also as a side question, what do you guys think of hybrid and remote working and how it can kind of fit in?

Howard Marks

Joe, I'm very happy to say that Oaktree was started by 5 people who worked together at TCW. We had an average of 9 years together. So we knew how we were going to invest, and we knew what kind of firm we wanted. And we had very strong ideas on the latter. And I guess as a consultant once said to me, and I think it was a great phrasing, a company has to stand for something other than assets under management.

And we, as I said, we knew what we wanted. We wanted a firm that was a great place to work. And so we wrote out our investment philosophy when we started, being a writer, I write everything down, and we've never changed the word of that. Most -- many firms, I think, have a philosophy, some enunciate them. We also wrote down our business principles, and I don't think many do that. But we wrote that we want to have a harmonious, apolitical, non-hierarchical environment.

We wanted to share the fruits of our labors with the employees. We wanted to treat the clients well, avoiding conflicts of interests when possible, acquitting them in honor of the client when they're not avoidable. We wanted to have clear, candid communications. We don't make excuses when we're wrong. We don't take credit for successes that are not our doing.

We recently added a provision on the subject of responsibility because we think that businesses -- well, let's say, businesses are people, too. And we have responsibilities to the planet and its inhabitants and our clients, which go beyond merely making money. And also, we think we have a responsibility to our employees to foster a diverse work environment with a diverse workforce where people enjoy being.

And we concluded by saying if we do all these things, we think we'll be successful. And if we don't do them, we think we won't deserve to be successful. And I'm very happy to say that our culture is a big positive and a lot of people work at Oaktree very happily. We don't get the people who say, okay, I'm just going to take the highest offer, but that's okay.

You asked about work from home. Today, I think it's very important. My partner, Bruce Karsh, makes a big point that we have to have flexibility. People want flexibility. A lot of people like the idea of working from home, of not commuting and so forth. So we have a hybrid arrangement now where you have to be in 3 days a week and the other 2 are up to you. We bring in groups on those days in whole so that you're working with your group colleagues on those days.

I don't think that it produces necessarily the best work. There are pluses and minuses. It's not all minuses. I don't think it produces the best results. On the other hand, it does produce a work-life balance, which many people need help establishing. I think it's a very important thing in life. My own son, I would say, get in the office. When there's a raise, a promotion and a great project to take on, I think the person who's in the office more is more likely to get it.

But having said that, we've all been very successful since the beginning of the pandemic, what, 27 months ago. Now, some of that was because of our pre-existing relationships which have carried over. But as the years go by and 5 or 10 years from now, when half the people in the company are new, I don't think it's going to be quite as easy. But if we make a special effort, we can probably make it work.

Joseph Cass

Great. Very interesting. Thanks, Howard. I'm going to go a bit off script here because I did a poll -- well, I did kind of a post on my LinkedIn page about a week ago. And I said, listen, Howard is going to come on the podcast. What would you guys like me to ask him about? And I got a couple of options, and it was kind of buying the dip, current financial conditions, crypto, I think one of them was working from home.

But long story short, the vast majority of people wanted me to ask you about kind of buying the dip and current market conditions. So as I promised on the post, what's your view? What's Oaktree's view of kind of the whole buying the dip mentality and current market conditions at the moment?

Howard Marks

Joe, first of all, everything in our world, we are mostly in credit. And everything in our world is much cheaper than it was 6 or 12 months ago. So whatever you're -- I don't like to talk about buy or sell because it's so unnuanced. But I think the question is, how are you balancing in your portfolio offense versus defense at a given point of time, aggressiveness versus defensiveness.

And clearly, I would be much less defensive today than I was 6 or 12 months ago. Take, for example, high-yield bonds. They yielded 3%. Most of our clients need 7%. 3% doesn't help you, pursue 7%. Today, they yield over 8%. Today, they're a help, not a hindrance. So I would buy them.

And so the answer is we are reducing our defensiveness, increasing our aggressiveness. Does that mean we're at the bottom? Absolutely not. I don't believe in the ability to know when we're at the bottom. I don't believe in the ability to buy at the bottom. The bottom is a momentary thing, and it changes very fast. And by the way, nobody rings a bell when you hit the bottom. So -- but as prices come down, one should buy more and one should switch from defensive to aggressive. And one should be willing to accept somewhat more risk in pursuit of today's higher returns.

What's the probability that the market goes down, whatever market we're talking about, any given market, for the next month? Pretty good, but maybe not. Who knows? I mean, I guess what I would sum up, Joe, for you and for the people who wanted you to ask me that question is there are 2 kinds of times in the market. There are times when we think we don't know what's going to happen, and there are times when we think we do know what's going to happen, and we don't know.

We never know what's going to happen. And -- but when Buffett, you asked about Buffett before. He says, I like hamburgers. When hamburgers go on sale, I eat my hamburgers. Well, everything is on sale relative to 6 or 12 months ago. Could there be further markdowns? Yes. You're talking not about economic, not about company performance, you're talking about psychology. And there's absolutely no basis for predicting psychology.

Joseph Cass

Excellent. Thank you very much for answering that one. So Sally, last year, I'm kind of -- I've seen you featured a number of times in kind of multiple lists, kind of the top 100 women executives, top female leaders, et cetera, over the past kind of 5 years. So as a woman in a senior position in a large company, so you're dealing with other C-suite executives, both internally and externally. So have you witnessed a real change in workplace diversity? And if so, how has that change manifested itself?

Sally Moore

So I think the answer is yes. And I'm pretty proud of the progress we've made here at S&P across all aspects of diversity. And I think we've really started to establish a diverse set of voices at the table. And I think we've also made some meaningful changes around female representation at the leadership level.

And for me, that's key, right? We all look up to strong role models, and we need to ensure that talents see throughout the organization the opportunity ahead of them. I would say if you can't if you can't see it, then you can't become it. So I think that we've demonstrated an investment at the leadership level from a female standpoint. And I see it across our peers as well. So I think it is demonstrated across the industry.

Look, personally, I dedicate a lot of time to whether it be roundtables, mentoring, conversations where I can speak to the challenges that female leaders may face. And look, I think some of those challenges do still exist, and we can't be blinkered by that. I think we're quite intentional here at S&P. We need to be invested, and we need to make sure that we continue to move the needle. So we are investing in programs, specifically around dedicated to our high-potential female leaders, equipping them with the right skills, the mindset and the behaviors to be those future leaders of the organization.

Joseph Cass

Excellent. Thank you, Sally. Howard, which individuals in financial markets as a whole, do you make a point to stop and listen to if they're on TV or the radio or stop and read on a kind of regular basis?

Howard Marks

Well, of course, Warren's annual letter and anything he says. Seth Klarman is a great investor. We tend to respect people who think the way we do. I think Seth and I think a lot alike. On the economic side, I'm not a macro person and Oaktree doesn't have economists or make investments based on forecast, but there's a guy named Conrad DeQuadros at Brean Capital that I read. Jim Grant at Grant's Interest Rate Observer also.

Joseph Cass

Yes. He's come up a couple of times actually when I've asked that question. So just a quick question for both of you now. What kind of one sentence piece of advice would you give to someone starting out in their career today? Howard, I'll start with you.

Howard Marks

Do something you'll enjoy that plays to your strengths and avoids your weaknesses. Choose something tailored for you, don't do it on the basis of what's popular, what's on TV, what your friends are doing, what your parents tell you to do. And I would say, don't pick your career based on where you can make the most money. You're going to spend your life on your career. And wouldn't it be a shame to spend it doing something you don't enjoy just so you can be richer at the end?

Joseph Cass

Excellent. And Sally, same question to you.

Sally Moore

So one sentence, goodness. Well, I agree with Howard. I think you've got to really enjoy what you do. And I think the more passionate you are about your career, the better you are at it. But I do think that I've definitely learned that sometimes you have to step outside of your comfort zone, right? Development for me often means doing exactly that, sort of stepping away from that comfort zone. I think it's how you learn and frankly, how you determine your potential.

I've definitely been pulled into discomfort and pushed myself. And I think it will be a bit scary along the way, but it can actually be very rewarding. And I think it's also don't wait for things to happen to you, have a plan, be proactive, be intentional. For me, relationships are key. I think that's why I'm in M&A and partnerships, building a great network and investing in long-term relationships, I think, make a real difference.

And I think also taking advice, perhaps this comes from having a good network, but having different forms of advice along the way. Mentors are free and they can be quite phenomenal assets. So I think that would be my sentence or 2.

Joseph Cass

Great. Great stuff. Howard, before we go, I wanted to pick up on something you mentioned quite early on in the podcast, which you said about the memos. So you said you wrote kind of memos for around 10 years and no one really kind of responded or you didn't get as much response perhaps as you get today.

Howard Marks

No, no. Nobody responded.

Joseph Cass

So my question is -- it's kind of a selfish question. So when you were creating this content essentially, how do you think creating the content through this, through the written memos, really helped you personally, but also Oaktree, too? And do you think kind of it compounded over the years? So as people expect the content to come, it potentially became more powerful as it progressed?

Howard Marks

Well, first of all, Joe, the great help to me was that I enjoyed it. And I'm sure I wouldn't have kept doing it for 10 years without any reward if I didn't enjoy it. Secondly, I have made breakthroughs in thinking while writing. I've written things that I never thought. Now, that's -- how can you write something you didn't think, but things I'd never thought before.

I don't want to overdignify, but I would say almost verging on being epiphanies. And some of those things are part of my thought process today. Look, I think that after 10 years, on the first day of 2000, I put one out called bubble.com, as I said, and that one was right. That one got a lot of attention. And I think that the memos and the books have raised Oaktree's profile and engendered some respect. And so I'm very glad I stuck to it when it wasn't rewarding.

Joseph Cass

Yes. It's an interesting one. The reason I ask is because this is kind of episode, I think episode 30, maybe even 31, and we do 1 a month of these podcasts. So I've been doing it for kind of 2.5-ish years. And it definitely feels that kind of the more that you do, the more you create the content, as you said, it helps you kind of plan out on your head kind of ideas that you had that maybe weren't fully formed.

But I feel like the more content you create and put out there into the ether, it has a kind of compounding effect with people and the fact that they are more likely to read and to listen or to watch when they understand that it's coming. But yes, just my personal experience.

Okay. Last question for you, Howard. So on this podcast, Fixed Income in 15, are usually into leaders and influential individuals from the world of finance. So we've had some of your investor peers. We had Ray Dalio joined a couple of months ago. So my question to you is, who would you recommend to be a guest on a future episode of this show?

Howard Marks

Leaving out the question of whether he would do it, but I think you should try to get Seth Klarman. He's so thoughtful and he has so much to say, and he has a great record and a great experience.

Joseph Cass

Great. Great stuff. I'll probably contact him. But as you said, it's a prerequisite if he wants to join, but it's good to hear. It's always interesting to hear the recommendations. Okay. Cool. Well, that's it. Thank you very much, Howard and Sally, for your time. And for everyone watching and listening, see you next time on Fixed Income in 15.

Howard Marks

Great. Thank you. Bye, Sally. Thank you, Joe.

Sally Moore

Thank you, Howard. Thank you, Joe.