In a timely episode of "20 minutes VC," host Harry Stebbings interviews Howard Marks, cochairman and cofounder of Oaktree Capital Management, to discuss the economic impact of the COVID-19 pandemic. Marks emphasizes the unprecedented nature of the current crisis, marked by a combination of economic standstill and liquidity withdrawal, and the challenges it poses due to high leverage and low asset quality in businesses. He compares the situation to past financial crises, noting the unique health aspect and the lack of a preceding asset bubble. Marks also critiques the notion of waiting for market bottoms, advocating for value investing based on judgement and encourages embracing opportunities in times of fear. Additionally, he discusses the role of government intervention in mitigating economic damage and the importance of maintaining an unemotional approach to investing during volatile times.
"He's the master of market cycles. He's a personal hero of mine, and I couldn't be happier to welcome Howard Marks back to the hot seat today."
This quote emphasizes Howard Marks' expertise in understanding and navigating market cycles, and the host's admiration for him.
"In 95, Bruce and I and three other colleagues left to start Oaktree. So we are within a couple of weeks of Oaktree's 25th anniversary, and that's the short version."
This quote provides a succinct overview of Howard Marks' journey in finance and the founding of Oaktree Capital Management, highlighting the significance of its upcoming 25th anniversary.
"So the economy is in a deep freeze. And then in addition to that, given the fact that we had eleven years of prosperity and declining interest rates in the world, people used more and more debt to buy assets of lower and lower quality to lever them into palatable returns."
This quote outlines the two-fold nature of the crisis: an economic standstill caused by the pandemic and pre-existing financial vulnerabilities due to high leverage and asset quality issues.
"Well, it's similar in some ways to eight, and it's different in some ways. The main difference is that this is life and death. This is a health crisis. That was a financial crisis."
This quote compares the current economic situation to the 2008 crisis, highlighting the unique life-threatening aspect of the current health crisis and differing financial conditions leading up to it.
"So those are the differences. The similarities are that it's a financial problem for highly levered entities which own assets that are declining in price."
The quote explains that while there are differences between the current financial issues and past crises, the common thread is the financial strain on entities with high leverage owning depreciating assets.
"The main areas in which we have exhausted our resources are interest rates, which historically, interest rate cuts have been the central bank's main tool for stimulating economies."
This quote highlights the concern that traditional tools like interest rate cuts are less effective because rates were already low before the current crisis.
"Given the potential levels of unemployment and the unprecedented levels of government spending, how does that impact and affect markets for the next 15 years, in your mind?"
This question from Bill Gurley to Howard Marks addresses the long-term effects of government spending and high unemployment on market behavior.
"We're going to be going through the next years saddled with an enormous national debt that we'll never repay."
The quote reflects the concern over the growing national debt and the uncertainty about its long-term implications for the economy.
"Deficits and money printing to service them seem inherently inflationary."
This quote indicates that the methods used to manage the national debt and stimulate the economy could result in inflation, which has been largely absent in recent decades.
"All we try to do is figure out what companies will stay in business, some idea of what they're worth, and then invest in them on a senior level."
Howard Marks explains Oaktree's approach to managing investments during times of uncertainty, focusing on the viability and value of companies.
"I wouldn't agree with your premise that valuations haven't been affected."
Howard Marks disagrees with the notion that valuations have not yet been impacted by the crisis, at least in the context of the public stock market.
"You know what, my partner, Bruce Garsch and I talking, I would say, middle of last week, were afraid of"
Although the quote is incomplete, it suggests that Howard Marks and his partner are concerned about the potential for the crisis to worsen significantly, evoking fears of a depression-like environment.
"Now, I think with the government having done as much as they've announced, it feels like the probability of a depression is down."
This quote suggests that government interventions have lowered the risk of a depression, highlighting the influence of policy on economic stability.
"But since the last one started 90 years ago, and very few people who are alive today were there, and since the circumstances for every episode are different, I don't think we can be cavalier about that."
Marks notes the rarity of depressions and the difficulty in predicting them due to changing circumstances and the lack of living memory of past depressions.
"And I think we need a freeze on certain things so that the economy can heal."
Marks advocates for temporary economic measures to allow recovery, akin to medical practices that give the body time to heal.
"So the solutions aren't easy, but I think the answer is that there have to be temporary actions to mitigate the short term damage."
This quote acknowledges the complexity of economic solutions while emphasizing the necessity of temporary actions to alleviate immediate economic harm.
"When there's a lot of money in everybody's hands and they're all eager to put it to work, then everybody bids for assets, and they bid for opportunities to provide financing."
Marks explains the dangers of a market saturated with eager investors, leading to inflated prices and increased risk.
"But on the other hand, when other people are terrified, we should turn aggressive."
This quote captures Oaktree's contrarian investment philosophy of being aggressive when the market is fearful.
"Well, in answer to your last question, it's fallen enough to engage when it's cheap, when it is selling at a discount to its intrinsic value, and offering a high perspective return with the risk under control."
Marks defines the right time to engage in the market as when assets are undervalued and offer a favorable risk-return profile.
"I believe it is our job as professionals to catch falling knives carefully."
This quote emphasizes the professional responsibility to invest during market downturns while being cautious.
"So we can catch falling knives. And most of the time, Harry, when you catch a falling knife, it goes further."
Marks acknowledges the risk of investing during a downturn, as prices may continue to fall even after an initial purchase.
"Oaktree rejects the concept of waiting for the bottom. It's impossible intellectually to know when you're at the bottom."
This quote by Howard Marks highlights the difficulty in timing the market and the Oaktree's investment philosophy which does not focus on attempting to predict market bottoms.
"The average investor gets excited when things go well and prices rise and wants to buy more, and the average investor gets depressed when things go poorly and prices fall and wants to sell."
Howard Marks describes the common psychological pitfalls that investors face, highlighting the tendency to make decisions based on emotion rather than strategic thinking.
"The important misconception is always the same, which is that it's possible, sitting here, to know what the future holds."
This quote emphasizes Howard Marks' view on the unpredictability of the future and the impracticality of basing investment decisions on attempts to forecast economic outcomes.
"My guess is that the... Well, in this little instance here, I'm going to guess that Europe will do better."
Howard Marks cautiously provides his perspective on the relative economic performance of the US and Europe, indicating a slight leaning towards Europe due to current circumstances.
"This one is particularly exacerbated because, number one, the disease, and number two, it comes on the heels of such a long and unmitigated period of prosperity and market rise."
In this quote, Howard Marks explains the specific circumstances that have made the current economic downturn particularly severe, pointing out that it should not be seen as a standard for all future recessions.
"I hope it's helpful to you and your listeners."
Howard Marks concludes his participation by expressing a desire that the information shared will be beneficial to the audience, emphasizing the educational intent of the conversation.