Great Minds | We Are Undergoing A Historic Sea Change - Howard Marks (April 14, 2023) - We Study Billionaires Podcast

Hi All,

I listened to this podcast a couple of times to absorb the information. It's rare for me to listen to the same episode more than once. It's always nice to learn about great investors' philosophy, approach, and investment framework! I highly recommend you check out the full episode! I didn't know Howard Marks minored in Japanese at university, so I learned a new thing about him today!

😍 Key takeaways:

- His prediction that the financial markets are entering a Sea Change, the third such event he has seen in his over 50-year career.

🏈 Bottom line: He defines 'Sea Change' as a major shift in the economic environment. He believes that this will be the third such event he has witnessed in his over 50-year career. He cited several factors that support this prediction, including the significant amount of debt in the system, the large wealth gap between the rich and poor, and the current low interest rate environment. These factors are contributing to a number of risks and imbalances in the global economy, which could lead to a major economic shift.

- Why this Sea Change differs from normal market cyclicality

🏈 Bottom line: The Sea Change differs from normal market cyclicality because it involves major, long-lasting shifts in market trends, rather than just short-term fluctuations. It's a period of significant transition that disrupts the status quo, and it can result in new winners and losers in the market. He suggests that the Sea Change that he sees currently happening is being driven by low interest rates and central bank policies that are distorting market prices and creating unsustainable conditions.

- How a more moderate interest rate environment affects global debt and his risk assessments

🏈 Bottom line: In late 2020, as the stock market was high, interest rates were low, and inflation was low, people started talking about Modern Monetary Theory which believes that running a deficit and taking on debt have no negative consequences as long as you control your currency. However, Howard Marks believed this was too good to be true and that there must be a catch. As of mid-2022, inflation was deemed too high and not transient, and now the debt is considered too high as well. However, there is no clear line in the sand for when debt becomes excessive. Some countries with higher debt ratios than the US seem to be doing okay, while others, like Japan, have had heavy debt for a long time.

- How studies of Japan influenced his investing philosophies

🏈 Bottom line: Howard Marks' study of Japanese at university may have influenced his investment philosophy in several ways. He mentions that it may have meshed with his natural patience and mature perspective on the inevitability of change. He cites the Japanese aesthetic concept of "Mujo," which highlights impermanence and the uncontrollable nature of change. Marks believes that the world and the market will not accommodate investors; instead, investors must adjust to accommodate the world and the market. He emphasizes the importance of intellectual humility and the admission that the other person could be right. Marks believes that anyone in a field with randomness and uncertainty must allow for humility; otherwise, they are riding for a fall. In summary, Marks' study of Japanese may have reinforced his already existing investment philosophy, which values patience, discipline, humility, and the ability to adjust to changing market conditions.

- His thoughts on A.I. and Bitcoin

🏈 Bottom line: Howard Marks believes that AI and machine learning can play a significant role in the investment industry. He explains that passive and indexation investing beat most active managers in the market because they follow set rules and process vast amounts of data faster and more accurately than most humans. He believes that AI and machine learning can do those same tasks even better and faster. He further notes that AI and machine learning will knock out everybody who doesn't add value in the investment industry. Therefore, he thinks that it will be harder and harder to run money and be paid highly for producing inferior results in the future.

Howard Marks is not very close to the action in the world of crypto to answer questions about it empirically. In 2023, he acknowledges that while Bitcoin has done better than other cryptocurrencies, it is still down almost two-thirds from its all-time high. However, he did mention in a memo he wrote in January 2021 called "Something of Value" about his time in captivity with his son Andrew during the pandemic that Andrew had bought Bitcoin when it was priced at around $5-6k. Although it went up significantly and then down two-thirds, it still showed a five times gain from Andrew's purchase. Howard Marks believes that there are good uses for some coins, and Bitcoin seems to be the one in the lead so far. He thinks that people who live in places where they don't trust the financial system or have access to it may find Bitcoin useful.

-His take on Japan, and China

🏈 Bottom line: Howard Marks is skeptical of the power of governments to control the economy, including Japan's yield curve management policy. He believes that governments can intervene in the short term, but they cannot sustainably take the economy to a higher level if they stop taking actions. Marks is in favor of keeping regulators away from the economy and leaving the free market to allocate resources. He would only like to see the regulators intervene if the economy gets too hot or too cold. As for China, Marks sees it as an economic miracle and has invested in non-performing loans in the country with amazing results. However, he acknowledges recent events and remains cautious.

📚 Book recommendations by Howard Marks

• Mastering the Market Cycle by Howard Marks. I also wrote a book summary on this. => This book explores the concept of market cycles and how investors can navigate them to achieve success. Marks provides insights into how psychological and behavioral factors influence market cycles and offers practical advice on how to avoid common mistakes.
• The Most Important Thing by Howard Marks => In this book, Marks discusses his investment philosophy and highlights the most important factors that successful investors should focus on, such as risk management and understanding market cycles. He emphasizes the importance of second-level thinking and contrarianism in investing.
• Mistakes Were Made (But Not by Me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts by Carol Tavris => This book delves into the psychology of self-justification and how it contributes to mistakes and bad decisions. Tavris explores the cognitive dissonance that arises when people hold beliefs that conflict with their actions and provides insights into how to recognize and overcome these biases.
• Simple but Not Easy by Richard Oldfield => This book provides practical advice on how to achieve success in business and life. Oldfield emphasizes the importance of simplicity, clarity, and focus in decision-making and encourages readers to develop a clear sense of purpose and direction. He also shares his own experiences and insights from his career in finance.

❤️ My favorite quotes from the episode

So the point is that the machine can do better than most people, and we’re moving in that direction and AI will be the next step in that direction.

Just like passive, AI and machine learning, even maybe to a greater extent, will knock out everybody who doesn’t add value. It should be harder and harder and harder to run money and be paid highly for producing inferior.

SUBJECTIVE MATTER. QUALITATIVE MATTER. FUTURE. = AI CAN'T REPLICATE HUMAN INSIGHTS

But hopefully there will still be a small group of people who can do something that the machine can’t do. And that is understanding subjective matters, qualitative matters and the future.

This is an art form. We have thousands of people with high intelligence trying to do those things, and nobody does consistently. So that tells me. It’s not a matter of intelligence whether artificial or not. Some people get it. Some people have insight. Some people can make these qualitative subjective distinctions.

The great Peter Bernstein once wrote me a letter, he said, “The world is not, the market is not an accommodative machine. It won’t give you high returns because you need them. The market and the environment will not accommodate you. You’ll have to accommodate them. You have to make adjustments,”

PATIENCE. DISCIPLINE. HUMILITY. = Great Investors

I don’t get frustrated. I don’t say, “well, it hasn’t happened in six months, so I guess it’s not going to happen.” I review my thesis, but if I still think it’s going to happen, then I’m perfectly happy waiting with patience, discipline, and humility. What is intellectual humility? It’s the admission to yourself that the other person could be right.