Key Moments
Howard Marks Warning: if you invest like this, you're about to lose everything
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Key Moments
Howard Marks initially doubted AI's potential due to bubble concerns but reversed his stance after seeing its autonomy and learning capabilities, though he remains uncertain about its ultimate impact and whether it can replicate human intuition.
Key Insights
Howard Marks revised his opinion on AI after his VC son, Andrew, shared new developments, leading to an updated memo in February from an initial one around December 9th.
Marks highlights AI's unprecedented quality of autonomy, distinguishing it from previous tools that only increased productivity, and acknowledges the nagging concern of AI potentially taking over.
Marks believes AI will 'defrock' a group of people whose talents are not as great as they purport, similar to how indexation exposed the limitations of many active equity managers.
Howard Marks and his partner Bruce Karsh raised an $11 billion distressed debt fund in 2007-2008, believing in the opportunity before the crisis, an approach he likens to Noah building the ark before the flood.
A successful long-term partnership, like Marks' 39-year collaboration with Bruce Karsh, requires mutual respect, shared values, and complementary skills, not just financial maximization.
Howard Marks recommends John Kenneth Galbraith's 'A Short History of Financial Euphoria' for its insights into the mental weaknesses that cause booms and busts, and Nassim Nicholas Taleb's 'Fooled by Randomness' for understanding the significant role of randomness in life and investing.
AI's evolving potential and autonomous nature
Howard Marks initially expressed concerns about an AI bubble but has since revised his opinion significantly. This shift was prompted by his son, Andrew, a venture capitalist deeply involved with AI companies, who urged him to update his assessment. Marks now views AI's capabilities, particularly its ability to converse, use humor, and contextualize information based on user knowledge, as exceptional. He emphasizes AI's unique quality of autonomy, differentiating it from prior technological advancements like computers or the internet, which primarily served as tools to enhance productivity. The ability for AI to undertake a task without explicit instructions on how to perform it is a key factor in this revised perception. While acknowledging the unprecedented nature of AI, Marks also voices the common concern that this autonomy could potentially lead to AI taking over, a point he finds significant.
The unpredictability and inscrutability of AI
Beyond autonomy, Marks points to AI's profound unpredictability as another remarkable characteristic. He states that he has never before encountered a technology where the future is so opaque and beyond comprehension. Unlike the internet, which he felt was more understandable and predictable, the future shape of AI's impact remains deeply uncertain. This leads to a fundamental question: will AI be able to replicate the nuanced decision-making processes of experienced investors like himself? He notes that while AI can rapidly process vast amounts of data and perform analytical tasks far exceeding human capacity, the question remains whether it can fully replicate the 'art' of investing, particularly aspects that rely on intuition and qualitative judgment.
AI's potential to 'defrock' talent and the role of human judgment
Marks draws a parallel between AI's impact and the rise of indexation in finance, suggesting that AI will similarly expose individuals whose claimed talents are not as substantial as they appear. He uses the analogy of computers, which once excelled at limited tasks like reading, remembering, and calculating, but at a speed and accuracy beyond human capability. The question for AI is whether its list of capabilities is limited or unlimited. He also reflects on the intangible aspects of investment decision-making, such as the 'hair on your neck' feeling when meeting someone, suggesting that AI might lack this intuitive judgment. There will likely remain areas where human experience and judgment, particularly in novel situations with no historical data, will be crucial, even as AI advances.
Investing through crisis and the importance of 'second-level thinking'
Marks recounts his experience raising an $11 billion distressed debt fund in 2007-2008, just before the global financial crisis. This required making a significant bet on the thesis of impending distress, even without historical data or clear pattern recognition, relying heavily on 'supposition.' He emphasizes that the decision to invest, despite uncertainty and fear, was crucial; not investing when the opportunity was present would have been a failure to perform their job. This situation underscores the importance of 'second-level thinking,' a concept he frequently discusses. Second-level thinking involves having a perspective different from the consensus, either overestimating or underestimating a company's quality, growth, or value. This ability to form a variant perception and act on it correctly is what differentiates superior investors, though Marks believes it's difficult, if not impossible, to teach.
The bedrock of partnership: shared values and complementary skills
Marks shares insights from his 39-year partnership with Bruce Karsh, highlighting mutual respect as the foundational element. He stresses that successful long-term relationships, whether business or personal, require shared values and complementary skills. Divergent values, such as differing ethical standards or risk appetites, can lead to conflict, while complementary skills ensure that each partner adds unique and necessary value. Marks cites their dynamic, where he tends to be the public face and fundraiser while Bruce manages the investments, as an example of effective synergy. This mutual recognition of each other's strengths and willingness to undertake tasks the other may not want to do is key to sustained collaboration and avoids one partner feeling the other is dispensable or overpaid.
Parenting with support and allowing choice
Reflecting on parenting, Marks recalls an article suggesting that a father's support is inversely proportional to his children's problems. He contrasts this with the common tendency for some successful men to assert superiority over their sons. Marks advocates for a different approach: allowing children to be smarter than their parents in certain areas and providing full support for their chosen endeavors, provided they are not injurious. He illustrates this with his daughter's choice of high school, where he and his wife deferred to her decision, recognizing that even if not the 'best' choice, it was not a bad one and provided valuable experience in decision-making, including learning from potential mistakes.
Navigating career choices with intention and self-awareness
Marks admits to making decisions haphazardly in his early career, lacking intention and being influenced by external factors rather than deep self-reflection. He advises young people to approach career choices with intention, focusing on identifying their strengths, avoiding weaknesses, and finding activities that bring happiness. Crucially, he emphasizes the need to resist external pressures from friends, society, or parents, and to think independently about who they are and what they truly want. While acknowledging the difficulty of knowing oneself and the inevitable changes over time, he stresses the importance of trying to make these reasoned choices, lamenting his own past 'derelict' approach.
Humility, uncertainty, and the lessons of Warren Buffett
Marks expresses a profound sense of humility, often prefacing his statements with 'I could be wrong,' a sentiment he believes is critical in investing. He contrasts this with the danger of absolute conviction, citing Mark Twain's aphorism that '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.' He recounts his initial meeting with Warren Buffett, facilitated by a shared investment in Osprey, and how Buffett encouraged him to write his first book, 'The Most Important Thing.' Marks also touches on the deep bond between Buffett and Charlie Munger, highlighting Munger's pivotal role in shifting Buffett's strategy from 'cigar butt investing' (buying cheap, low-quality companies) to 'great companies at a fair price.' He notes the complimentary nature of their intellects, with Munger's humanistic and literary approach balancing Buffett's exceptional analytical abilities.
Mentioned in This Episode
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Howard Marks' Investment Principles
Practical takeaways from this episode
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Common Questions
Howard Marks initially wrote about the possibility of an AI bubble. However, after new information and discussions with his son, a VC in the AI space, he updated his assessment, recognizing AI's unique qualities like autonomy and unpredictability.
Topics
Mentioned in this video
Co-founder of Oaktree Capital Management, known for his investment memos and outlook on markets and Artificial Intelligence.
Howard Marks' son, a VC who works with AI daily, prompting his father to update his views on AI.
CEO of Berkshire Hathaway, a legendary investor whose investing style and thought process are discussed and compared to Howard Marks.
Founder of SAC Capital Advisors, mentioned as an example of an investor with exceptional market intuition.
Co-founder of Oaktree Capital Management and Howard Marks' long-time business partner.
A writer whose quote about success is a favorite of Howard Marks: 'There is only one success to live your life your own way.'
Author of 'Outliers', mentioned in the context of luck and how timing plays a role in success.
American writer and humorist, quoted for his insight on certainty and knowledge in trouble: '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.'
Vice Chairman of Berkshire Hathaway and Warren Buffett's long-time business partner, credited with shifting Buffett's investing strategy from 'cigar butt' to 'great companies at a good price'.
An economist and public intellectual whose book 'A Short History of Financial Euphoria' influenced Howard Marks.
A scholar and author whose work, particularly 'Fooled by Randomness', explores the impact of randomness and uncertainty.
Howard Marks' first book, which contains principles on second-level thinking and successful partnerships.
A book by Malcolm Gladwell, referenced to illustrate the role of luck and opportune timing in success.
A book by John Kenneth Galbraith that influenced Howard Marks' thinking on financial booms and busts.
A book by Nassim Nicholas Taleb that discusses the role of luck and randomness in life and in financial markets.
Howard Marks' and Bruce Karsh's investment firm, co-founded in 1988.
An investment bank whose collapse in 2008 signaled a major financial crisis, prompting significant investment opportunities.
Abbreviated reference to Oaktree Capital Management, the firm co-founded by Howard Marks and Bruce Karsh.
A bank where Howard Marks worked early in his career, in its investment research and bond departments.
An energy company that collapsed due to massive accounting fraud, creating investment opportunities in its debt.
The multinational conglomerate holding company headed by Warren Buffett.
A prestigious university mentioned in the context of raising children and speaking to students.
The Wharton School of the University of Pennsylvania, mentioned as a place where Howard Marks speaks to students.
A university where Howard Marks' first book was published and where he speaks to students.
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