Source: Smart Investor
This traumatic experience (of the Nifty Fifty) also made me overly conservative. I have had a lifelong aversion to risk.
A good investment is not just about buying something good, but buying it well.
Risk is not volatility; it is uncertainty itself—the possibility of loss.
Personally, I prefer a non-interventionist Federal Reserve.
What really worries me are the remaining 493 companies in the S&P 500.
If your perspective has never been challenged, you don't truly know how solid it is.
When markets keep falling, no one wants to buy, and you're almost the only buyer—good things will happen.
You should remain acutely aware of your own good fortune and feel uneasy until you give back some of that luck.
On different occasions, Howard Marks, co-founder of Oaktree Capital, often discusses the same themes: risk, cycles, sentiment, and returns. However, during this recent fireside chat with students at Pepperdine University, he clearly slowed down the pace.
This conversation did not attempt to draw market conclusions, nor was it a high-density output aimed at professional investors. Instead, Marks started with the most fundamental questions: What is risk? Why is interest so important? How do emotions unconsciously influence prices? And how should investors view 'success' itself?
Perhaps precisely because the audience consisted of students, he broke down many of the highly condensed viewpoints from his memos into a more accessible and digestible logical path.
From entering the financial industry in the early 1970s to witnessing the rise of the 'Nifty Fifty,' the birth of the high-yield bond market, the dot-com bubble, and the global financial crisis, Marks' career spans nearly all the key phases of the modern capital markets.
However, in this conversation, he did not emphasize 'what I did right,' but repeatedly returned to a more fundamental question: which returns come from judgment, and which returns actually stem from circumstances.
When discussing risk, he reiterated a principle he has emphasized for decades: risk is not short-term price volatility, but rather the widening of outcome distributions, where bad outcomes can still occur even under seemingly reasonable assumptions.
For this reason, he has always been cautious about replacing judgment with mathematical indicators and even more wary of mistaking returns during favorable periods as a reflection of ability.
When talking about luck, he used a vivid and remarkably humble metaphor: it's like walking on a moving walkway at an airport. You proceed at your usual pace, yet find yourself moving exceptionally fast, making it easy to think, 'I'm in top form today.'
But in fact, what propels you forward may not solely be your own footsteps. This statement could almost serve as another layer of his interpretation of the word 'luck.'
When the topic turned to the current market, Marks still refrained from offering a definitive 'bullish' or 'bearish' view. Following extreme pessimism in 2022, market sentiment quickly reversed, and prices surged significantly, making it hard to consider the market cheap anymore. This does not mean disaster is imminent, but it does indicate rising fragility — precisely the moment when rational investors should heighten their awareness of risk.
This was not a conversation about 'what to buy next,' but a lesson on how to survive long enough in an uncertain world.
Precisely because of this, this gentle and patient dialogue is worth reading slowly.
Although many parts have been read countless times, it never gets old; every reading brings new insights, especially during such market moments. The Wise Investor has compiled and meticulously translated these insights to share with everyone.
01. On the Unintentionally Planned Life
Host: There are many students here today. I would like you to take yourself back to their age. At 18 or 19, did you ever imagine that you would end up on the path you're on today?
Marks: Of course not. Frankly, I'm not someone who plans my life in advance. Some people set their paths early on, but I belong to the group that doesn't do much planning.
I was very young when I went to college; I was only 17 during my freshman year. I grew up in New York and attended public schools.
One time, a friend told me that the school had just introduced a new accounting course and suggested I take it with him. I did, and it turned out that I really enjoyed it. That’s when I started thinking that becoming an accountant in the future might not be a bad idea. I applied to Wharton Business School, and although my counselor told me I definitely wouldn’t get in, I ended up being accepted, majoring in accounting. Later, after being exposed to finance, I switched my major to finance.
Afterward, I went to the University of Chicago for my MBA, still majoring in accounting.
By the time graduation approached, I didn’t really know what I wanted to do, so I applied for six different jobs across various fields. In the end, I chose a position at Citi's Investment Research Department. I had done a summer internship there the previous year and enjoyed it, so I decided to return.
To be honest, it wasn’t a particularly brilliant or well-thought-out decision. I simply followed the path of least resistance and the one I was most familiar with.
I initially worked in equity research, covering the office equipment industry, and later moved on to conglomerates.
By the way, my first business trip was to California in January 1970. I fell in love with it then and have wanted to move to California ever since. But at the time, the investment circle in Los Angeles was very small, and it took me a full decade to finally find an opportunity to relocate here.
The first truly pivotal turning point likely occurred during the oil embargo in 1973. At that time, banks were heavily focused on growth stocks, and almost all other research areas had been neglected. As a result, I was tasked with building oil and gas research from scratch, which later expanded to include basic industries such as paper, chemicals, steel, and forest products.
Subsequently, I participated in what later became known as the 'Nifty Fifty' growth stock investment wave, which turned out to be an unmitigated disaster. Following this failure, I was reassigned to the bond department, which at the time felt akin to being exiled to Siberia.
Prior to that, at the age of 29, I had already become the head of the bank's equity research department, managing 75 employees, overseeing a budget of 5 million US dollars, and sitting on five of the most central investment committees.
However, in the bond department, I had no staff, no budget, and was no longer involved in any committees, yet I felt incredibly relaxed and content. All I had to do was focus on about 40 securities and understand them better than anyone else.
This experience had a profound impact on me. Back then, we often joked at the bank that everyone wanted to be the person with the grand-sounding title, the one who managed everything. But management isn't for everyone, and you shouldn't feel compelled to follow that path just because it's what most people aspire to.
When I had the opportunity to concentrate on a smaller number of assets and excel through specialized expertise, I found it far more interesting and rewarding.
Three months later, the head of the bond department called me and said, 'There’s someone in California, I think his name is Milken, who is working on something called ‘high-yield bonds.’ A client has asked us to provide an analysis of high-yield bonds. Can you look into what they are?'
I replied that I thought I could give it a try.
That was 1978, right at the inception of this market. If you’ve read Malcolm Gladwell’s 'Outliers,' you’ll know that being among the first to enter a field can be highly advantageous. And indeed, I was there at the right time.
The fund established by Citi in 1978 was the first high-yield bond fund launched by a mainstream financial institution. It’s fair to say that everything Oaktree Capital has achieved today grew step by step from that foundation.
Therefore, I never considered my life path to be the result of deliberate planning. I have rather drifted along with the current, just with better luck.
In the real world, luck and ability are often intertwined and difficult to separate.
02, Why a Lifelong Aversion to Risk
Host: From another perspective, your long-term research on historical bubbles and investor psychology—did this give you an extra edge during phases like the 2000 Internet bubble?
Marks: There is a very important saying in life: Experience is what you actually gain when you don't get what you want.
If you had bought the so-called 'Nifty Fifty' stocks on September 1, 1969, the day I first entered the workforce, and held them loyally, steadfastly, and unwaveringly for the next five years, you would have lost 95% of your principal.
Only later did we realize that it was a typical bubble. Many companies were overvalued, and all companies were purchased at excessively high prices. This experience had an extremely profound impact on me.
It's best to learn lessons as early as possible, preferably when you don’t have much to lose. That was exactly my case.
Of course, this traumatic experience also made me overly conservative. I have had a strong aversion to risk my entire life.
However, if you look back, from the time inflation was largely resolved in 1980 until today, overall, the more optimistic people have earned the most.
That was the price I paid for that experience.
But it was precisely that failure that led me to an extremely important conclusion: the key to investment lies not in what you buy, but in what price you pay. Good investment is not just about buying something good, but buying it at a good price. The difference between the two is not merely grammatical.
Later, when I had the opportunity to invest in high-yield bonds rather than chase after assets that were highly sought after, placed on a pedestal, and priced exorbitantly, I found that almost everyone was telling me, 'I wouldn’t touch that with a ten-foot pole.'
And when you hear such remarks, a thought should flash through your mind: perhaps it is precisely because of this that I have the chance to buy it at a very cheap price.
There is no such thing as an asset that is 'loved by everyone and yet very cheap'—that in itself is a paradox. True bargains only emerge when everyone despises them.
In 1978, people would say to me, 'Young man, I believe you can make money with this, but it’s not very respectable.' I thought to myself: sounds pretty good to me. That roughly sums up my path. I did encounter some incredibly fortunate opportunities.
03, Risk is not volatility, but uncertainty itself
Host: You mentioned earlier that after experiencing those losses, you became highly risk-averse. Let’s do a little role play: if I were interviewing at Oaktree Capital now and you asked me, 'Is this investment risky?' and I responded, 'Over the past five years, the volatility of this asset has been only 6%,' how would you respond?
Marks: That’s an easy question (laughs).
When I graduated from Wharton, I didn’t actually plan to pursue graduate studies. But in my senior year, the Vietnam War broke out. If you graduated, you might get drafted; whereas if you continued your education, you could defer enlistment.
I decided to pursue an MBA. Wharton was not suitable because the content was too repetitive, and both Harvard and Stanford rejected me. In the end, I went to the University of Chicago.
Wharton provided me with a pragmatic, qualitative-focused education; the University of Chicago offered a theoretical, quantitative-oriented one. Either approach alone might have been disastrous, but the combination of these two training styles greatly benefited me.
My favorite investment course had only one question on the final exam: “How do you integrate the theories you’ve learned here with real-world investment practices?” Over the past 56 years, I have almost continuously been answering that question.
Returning to “volatility.” The core idea of the Chicago School is this: to achieve higher returns, one must accept greater risk. Thus, they measure investment performance using the Sharpe ratio, which divides return by risk.
We all know what the returns are, but how do we measure risk? They chose volatility, which represents the degree of price fluctuation.
The advantage of volatility is that it can be calculated from historical data, extrapolated into the future, and incorporated into formulas to calculate so-called “risk-adjusted returns.” However, it has a fatal flaw: it is not risk itself but merely a proxy for risk, not the true essence of risk.
Believe me, what investors truly care about is never volatility.
I have never heard anyone say, “I’m not investing in this because it may not be volatile enough.”
What people actually say is always, “I’m not investing in this because I might lose money.” That is risk.
In my view—and this is a realization I have gradually formed over the years—risk is the probability of undesirable or negative outcomes, not the ups and downs of price movements.
Warren Buffett once made an excellent point: 'I would rather have a lumpy 15% return than a smooth 12%.' As long as you can survive long enough to truly enjoy that long-term, bumpy 15%, it will far outpace the steady 12%.
Of course, there is only one prerequisite: you must survive.
Therefore, for some people, volatility matters, but volatility is not risk. If someone tells me in an interview, 'This asset has a volatility of XX,' I would probably need to give them a lesson first. To be honest, I still need to keep my job (laugh).
Actually, I have a slide here. When I was studying at Pepperdine, I came across Seth Klarman’s memo for the first time and saw this 'risk-return graph.'
The vertical axis represents return, and the horizontal axis represents risk. The upward-sloping diagonal line indicates a positive correlation – the greater the risk undertaken, the higher the expected return. This is exactly what I was taught back in Chicago.
If you ask most people today, 'What does this graph mean?' Nine out of ten would give the same answer: 'Higher-risk assets yield higher returns.'
But with a little careful thought, you’ll realize that nothing could be more wrong.
Because if an asset can reliably deliver high returns, it ceases to be a risky asset, which is logically indefensible.
What this graph truly intends to convey is this: an asset that appears highly risky must seem capable of providing higher returns; otherwise, no one would be willing to hold it. And that makes perfect sense.
Suppose I come here today with Oaktree’s sales materials and say to you:
Option One: A treasury bond fund with an annual return of 6%;
Option Two: A venture capital fund investing in AI startups, which could also achieve a 6% return if the right projects are selected.
Of course, you would choose the treasury bonds.
You might say, 'Why should I take on the risk of startups if there is no additional return?'
This would be a completely rational decision.
Therefore, a risky asset must appear to offer a higher return; otherwise, no one would be willing to hold it. However, it does not necessarily need to deliver on that return.
This is where the risk lies.
In the 2006 memo titled 'Risk,' I did something: I rotated those bell-shaped probability distributions horizontally and overlaid them onto the upward-sloping line. In this way, as you move from left to right and assume increasing levels of risk, three things happen simultaneously: expected returns do rise; the range of possible outcomes widens; and the worst possible outcome becomes worse.
This is what risk truly is.
Risk is not the volatility of a price curve but uncertainty itself—the widening distribution of outcomes and the fact that you could face worse results.
Thus, when making investment choices, we are faced with a very fundamental trade-off. You can choose an investment with modest returns but with stability, reliability, and even contractual guarantees; or you can opt for another type of investment with high expected returns and significant upside potential, but which also carries the risk of falling short of expectations or even resulting in losses.
This is the most essential choice. Do you want certainty, or the possibility of high returns? You cannot have both at the same time.
There is no such thing as 'certain high returns' in the world.
I believe this chart condenses all these issues into a highly succinct form. I often use charts because I truly believe in the saying: a picture is worth a thousand words. This is also something we teach our interns on their very first day.
04. A low interest rate environment is like the 'moving walkway at the airport.'
Host: I thought about your article 'Sea Change,' where you discussed two key changes: the shift in risk-adjusted returns and how a prolonged low-interest-rate environment has reshaped people's expectations. Could you talk about the interest rate environment?
Marks: Of course. For those of you here today, who can tell me: what is the single most important event in the financial and investment world over the past 50 years?
Many would mention the collapse of Lehman Brothers, the global financial crisis, the bursting of the dot-com bubble, or the stock market crash of 1987. However, in my view, the truly most significant event was the long-term decline in interest rates.
In 1980, I had a personal loan, and the bank sent me a notice stating: 'Your loan interest rate is now 22.25%.' Forty years later, in 2020, I was able to borrow money for 15 years at a fixed rate of 2.25%. In other words, over 40 years, interest rates fell by a full 20 percentage points.
This development has had an extremely profound impact on the entire financial and investment world.
First, a decline in interest rates makes assets more valuable. Why? Suppose you purchased a bond I issued, and I promised to pay 8% interest.
When the market interest rate is also 8%, the bond is roughly worth its face value; but if the market rate drops from 8% to 6%, the bond that still promises you 8% becomes particularly attractive, and its price will rise, potentially increasing from 100 to 110.
I have an old partner who has been my business associate since 1983, and he has a catchphrase: when interest rates fall, prices rise; when interest rates rise, prices fall. This rule applies to nearly the entire investment world.
This is because the potential return of any investment appears more attractive in a low-interest-rate environment; but when interest rates are high, say 14% on bonds, you naturally become indifferent to other assets, causing their prices to decline accordingly.
Thus, falling interest rates are highly beneficial for asset holders; they are also advantageous for borrowers, as financing costs decrease significantly.
So, what happens if your strategy is to borrow money to buy assets? You would experience a 'double dividend': on one hand, the assets you hold appreciate in value; on the other hand, your financing costs decline. It’s almost like a grand feast.
In my memo, I used a metaphor: it’s like stepping onto a moving walkway at an airport. You walk forward at your usual pace, but you find yourself moving much faster than usual, leading you to think, 'I’m really in great shape.'
But perhaps it’s not entirely your doing.
In an environment where interest rates continue to decline, leveraged investors have indeed made substantial profits, but it may not be solely because they are smarter than others.
Host: Over the past few decades, we have indeed seen higher, or at least better, returns. The entire investment industry, including even the university endowment fund system, was built around this logic. Looking ahead, is it still rational to expect such returns?
Marks: Of course, it is not rational.
You can use your own money to purchase an asset; if its value rises, you make a profit. Alternatively, you can borrow funds to increase your position fivefold, and if the value rises, your profits will be multiplied by five.
In an environment of continuously declining interest rates, this becomes even more logical as asset prices rise while the cost of borrowing decreases.
To provide a more intuitive example, imagine you have identified a company and estimate that purchasing it outright would yield an annual return of approximately 10%.
You approach an investment bank, and they inform you, 'We can arrange financing for you at a cost of 8%.' Naturally, you would respond, 'Great! I can borrow at 8% to earn 10%; this deal makes sense.'
Subsequently, interest rates continue to fall. Your investment return increases from 10% to 12%, while your financing cost decreases from 8% to 6%. At this point, you might feel like you are Bernard Baruch (one of the most famous financial tycoons in 20th-century America).' (Laughter)
This is why we often say: Never mistake luck for skill during a bull market.
When you happen to encounter an environment that is extremely favorable to you, never assume that all of it is due to your own abilities.
Most people attribute success to themselves and blame failures on others. Private equity, in essence, involves buying companies with borrowed money. Its tremendous success over the past few decades is no coincidence. It emerged in the early 1980s, precisely at the beginning of the long-term downward interest rate cycle I just described.
It should come as no surprise that it has thrived. Additionally, since 1980, the overall economic environment in the United States has been excellent, marking a golden era for entrepreneurship and asset ownership.
To put it bluntly, if you can lose money buying American companies with borrowed funds during a period of continuously declining interest rates, the fault likely lies with you. The ability to lose money under such circumstances is rather unique.
05, A Greater Preference for a Non-Interventionist Fed
Host: The Federal Reserve has frequently been in the news recently. Do you consider the 'independence of the Federal Reserve' a risk? Or did the Fed lose its independence as early as 1987?
Marks: This is an issue I am concerned about, and it worries me greatly.
But this is one of those things I cannot control, and it will affect almost everyone equally; it's not a risk you can hedge through asset allocation.
You cannot think: 'If the Federal Reserve loses its independence and interest rates rise by 3%, what should I do?' Frankly, there is no easy solution.
And by the way, if the government forces down short-term rates – which is what Trump wants – long-term rates may rise because the market would become more concerned about the long-term outlook for the United States.
In my view, interest rates are to the business world what oxygen is to living organisms – they are the environmental condition on which we depend. Much of what we do is calibrated around interest rates.
When the economy is sluggish, cutting interest rates can stimulate growth: it becomes cheaper to build factories, buy cars, and activities pick up again; when the economy overheats and inflation rises too high, raising interest rates can cool things down. That is the proper role of the Federal Reserve.
However, personally, I prefer a Federal Reserve Chair who is less aggressive and avoids excessive intervention. If the economy is creating jobs, there is no need for stimulus; if the economy is not overheating and inflation is not rising, there is also no need to tighten. Let it run its course without unnecessary interference.
I believe Powell is closer to this type of person.
By contrast, Greenspan, who took office in the mid-1990s, was more of a figure between an 'active intervener' and a 'cheerleader.' He injected liquidity into the system almost every time he could find a reason. You may recall the 'Y2K' issue. Back then, there were concerns that computers would mistake the year 2000 for 1900, so Greenspan flooded the market with liquidity just in case.
Personally, I prefer a non-interventionist Federal Reserve.
But from a political reality standpoint, elected officials always want lower interest rates: lower rates make the economy look better, and voters are happier. Add to that the fact that we now have about $38 trillion in national debt—lower interest rates make servicing that debt much easier.
Therefore, no elected official will truly favor high interest rates.
But at times, to combat inflation, higher interest rates are simply necessary. This is precisely why we need an independent Federal Reserve—to do what is right rather than cutting rates to please voters.
You might ask, 'If rate cuts stimulate the economy and reduce the burden of national debt, why not keep cutting rates indefinitely?'
There are two reasons.
First, it drives up inflation, which is bad for most people. The majority of Americans live paycheck to paycheck; if prices rise while wages remain stagnant, life becomes much harder for them.
Second, artificially low interest rates over the long term can lead the business world to make foolish decisions. Consider this example: you ask someone, 'Would you buy a bond yielding 4%?' They reply, 'Of course not; the return is too low, and companies carry so many risks—who would lend at 4%?' Yet the next moment, they say, 'But if it’s 2%, I’ll take as much as I can get.'
When interest rates are pushed too low, people make decisions they otherwise shouldn’t. I wrote a memo in early 2024 called 'Easy Money.' Prolonged and sustained 'easy money' has never been a good thing.
The Federal Reserve should neither stimulate for too long nor tighten for too long. Most of the time, who should decide interest rates? Not the Federal Reserve, not the president, not Congress, but the borrowers and lenders.
You say: 'I want to borrow money to build a building.'
The other party says: 'I’ll lend it to you at 8%.'
You say: 'That’s too expensive; I’m only willing to pay 7%.'
This is the naturally formed interest rate. There indeed exists a natural rate of interest in the world, and that’s where interest rates should be, not where someone in Washington wants them to be.
Host: Couldn’t agree more.
Marks: Let me add one more point. I assume that at Pepperdine, especially for business school students, you must teach the benefits of the capitalist system. When I was studying at the University of Chicago, Milton Friedman was the spiritual beacon there and the most important defender of the free market.
We concluded at the time (and I believe it still holds true today) that the free market is the best mechanism for resource allocation, which certainly includes capital. Only when the free market determines interest rates will capital flow to the most reasonable uses. If we artificially push interest rates too high or too low, the entire system will be distorted.
So my position is simple: try not to interfere with it.
6. The absence of losses does not mean the absence of risk.
Host: Following up on this topic, in 2007 you wrote a memo titled 'Race to the Bottom,' discussing how lenders were making concessions in transactions and auctions. Could you share what made you start becoming vigilant at that time?
Marks: That memo was written in February 2007, but in fact, I had already become extremely cautious by the end of 2004. And frankly, I was a bit early in my caution.
The reason was simple: I began to see a large number of foolish deals being executed. I previously mentioned 'easy money.' At the time, almost every day I would walk into my partner Bruce Karsh's office with a page from The Wall Street Journal and say to him, 'Look at this piece of junk they issued yesterday.'
If the market were truly dominated by diligent, cautious, and rational individuals, such transactions would never have occurred. Therefore, it could only indicate one thing: carelessness had emerged in the market.
Warren Buffett has an important saying: 'The less prudent others become, the more prudent we must be.'
When others become carefree and negligent, the market becomes distorted. At such times, we should feel fear. Only when people genuinely feel fear should we adopt an aggressive stance.
This has always been a principle we adhere to.
By the way, why does the risk-return line slope upward to the right? The answer lies in two words: risk aversion. We don’t want to lose money; we dislike uncertainty and prefer safety.
Therefore, whenever we take on additional risk, we demand compensation.
When investors maintain a sufficient level of risk aversion, the market is rational and secure; when they forget about risk aversion, the market becomes irrational and perilous. And in 2005 and 2006, what we witnessed was precisely the latter scenario.
It was against this backdrop that, at the beginning of 2007, I wrote the article titled 'Outdoing Each Other in Recklessness.' In it, I stated that the investment market is essentially an auction house for 'lending opportunities.'
For example: Pepperdine University wants to construct a building and approaches five banks for loans. Who secures this business? The winner of the auction is the bank willing to accept the lowest interest rate and the fewest protective covenants.
As a rational lender, you would typically say: 'You are not a low-risk borrower, so I require an 8% interest rate, along with a comprehensive set of stringent documentation.'
However, someone else might say: 'I’ll settle for 7%, and we don’t need as much paperwork.'
Going further, there might be someone, perhaps under constant pressure from their boss due to poor performance and declining market share, who says: 'I’ll take 6%, and we can skip the paperwork altogether.'
So, who wins the loan deal? It’s the one willing to accept the lowest return and the highest risk.
But when the market overheats, people have money to spare, are eager to invest quickly, and become less cautious, the person winning the auction ends up being the loser. Because they make a reckless investment.
If conditions remain favorable, they may get lucky and escape unscathed; but once headwinds arise, the flaws in that investment will surface, leading to losses.
This is exactly the meaning behind Warren Buffett’s famous quote: 'Only when the tide goes out do you discover who's been swimming naked.'
It is precisely when the business environment deteriorates that we truly see who made bad loans and who made bad investments.
In the book I wrote, I emphasized a key point: risk and loss are not the same thing. Risk is the possibility of a loss occurring.
When I was writing that book, I lived in Los Angeles, so I used a local example: you might live in a house with structural defects, but you would only discover them when an earthquake occurs.
The risk existed long before that; the loss only becomes apparent when the earthquake happens.
In 2007, good things happen when you are almost the only buyer.
Host: You wrote that memo expressing concern about the market's lending practices, and a few months later, the tide really did go out. If I remember correctly, after that, you invested $500 million per week for 13 consecutive weeks?
Marks: That was the scale of Oaktree Capital as a whole. On average, Oaktree invested approximately $650 million per week, or about $10 billion in a quarter. But what truly mattered was the groundwork laid beforehand.
Because we already felt uneasy in 2005 and 2006, we sold off a large number of assets in advance, liquidated several funds, and even when raising capital, we only raised a small amount while significantly increasing our investment screening criteria.
Then, on the first day of 2007, we launched a new round of fundraising for our 'Opportunistic Fund,' which you can also think of as a distressed debt fund.
At the time, the largest fund of this kind in history was only $2.5 billion (the one from 2001). We initially planned to raise $3 billion, but within a month, subscriptions surged to $8 billion.
We said, 'There's no way we can deploy $8 billion.' So we only accepted $3.5 billion and closed Fund VII.
At the same time, we told investors: if you still want to invest, we can place additional subscriptions into a 'reserve fund.' We would first take the commitments and put them on the shelf; if something really happened, we would invest; if nothing happened, it would go into the next fund.
By the time Fund VIIB was completed, its size had reached $11 billion. The fundraising concluded in March 2008.
What happened next is well-known to everyone: Bear Stearns collapsed, followed by Merrill Lynch, Lehman Brothers, AIG, Washington Mutual, and Wachovia Bank.
I recently read the memoir of Lloyd Blankfein, the former CEO of Goldman Sachs, and finished the part about the global financial crisis just last night. Believe me, the entire system was on the brink. We all knew Morgan Stanley would be next. Even Goldman Sachs—anything could happen when confidence was completely drained from the market.
At that time, nobody wanted to buy anything; everyone was selling, and prices were collapsing daily. So, we took that $11 billion off the shelf and started investing.
My partner Bruce Karsh was very brave, and I fully supported him. In that fund, he averaged $450 million invested per week.
To be honest, you didn’t need to be particularly smart at that time, nor did you need patience, discipline, or insight. You only needed two things: money and the courage to spend it.
When the market keeps falling, nobody wants to buy, and you are almost the only buyer, good things will happen.
In 2008, the current market isn't entirely bleak; a rational and cautious attitude is appropriate.
Host: The endowment fund of Pepperdine also benefited that year. You have a book called 'The Cycle,' which emphasizes pattern recognition. So, what is your view now? Where are we in the cycle?
Marks: I think the key lies in 'intrinsic value.'
Every company has intrinsic value, and so does every type of asset. Intrinsic value generally fluctuates like this: it moves slowly, but in the long term, it grows upwards. Most companies will become more valuable over time.
This line is not straight; it fluctuates up and down due to economic conditions and management decisions, but the overall trend is upwards to the right.
What about asset prices? Their movements are much more volatile. If intrinsic value grows like this, why do prices jump up and down so erratically? There is only one answer: psychology.
In the real world, things usually swing between 'pretty good' and 'not so good'; but in investors' minds, they switch back and forth between 'perfect' and 'completely ruined.'
As a result, prices can deviate significantly from intrinsic value.
If you want to determine whether now is a good time to invest, there is only one truly important question: Where is the price relative to intrinsic value?
If the price is higher than intrinsic value, you are paying a premium; if the price is lower than intrinsic value, you are buying at a discount; if the price is reasonable, you can only make money through the natural growth of intrinsic value.
What determines the relationship between price and intrinsic value is not the fundamentals themselves, but investor sentiment.
When people are optimistic, prices will be higher than intrinsic value. When people are pessimistic, prices will fall below intrinsic value. This is precisely why Warren Buffett said: when others are carefree and aggressive, you should be cautious; when others are fearful, you should become proactive.
This is what is referred to as contrarian investing, and it is something we have consistently strived to practice.
So the question you just asked was: where are we now?
There is only one key question: what is the dominant market sentiment at present?
My answer is as follows.
Take a look at 2022, which was the worst year in recent memory.
In our industry, there is often mention of a hypothetical portfolio called 60/40, consisting of 60% stocks and 40% bonds. Of course, almost no one actually allocates their assets this way anymore, but it remains a commonly used benchmark.
And in 2022, it was the worst-performing year on record for the 60/40 portfolio. There have been worse periods for stocks historically, but typically when stocks decline, bonds rise; that year, both stocks and bonds fell simultaneously.
It was an extremely challenging year.
At the beginning of 2022, people were thinking like this: 'We have inflation, which is bad; the Federal Reserve will raise interest rates to suppress inflation, which will trigger a recession, another bad thing.'
In other words, everything was bad news. This is precisely why the market was so depressed in 2022, with sentiment being extremely pessimistic.
However, by the end of 2022, the narrative began to shift.
People started saying, 'Wait a minute, it seems inflation is easing; high interest rates have not triggered a recession; and since inflation is subsiding, the Federal Reserve might begin cutting rates and stimulating the economy again.'
Suddenly, everything turned into good news.
Remember what I just said: in the minds of investors, the world always oscillates between 'everything is perfect' and 'complete despair.'
Sentiment rapidly shifted from 'despair' to 'perfect,' and the stock market began to rise around November 2022. As of now, 39 months have passed, making this one of the strongest bull markets in history.
The S&P 500 index has existed for about a century. Calculating in three-year cycles, there are approximately 97 or 98 intervals, and only six of these intervals have outperformed the past three years.
We have experienced a massive swing from extreme pessimism to extreme optimism, accompanied by a rapid rise in prices.
But now, it is hard to argue that prices are below intrinsic value. In my view, prices have exceeded intrinsic value. This suggests that the market is in a relatively fragile position.
Therefore, the appropriate stance at this moment is to remain rational and cautious.
This does not mean that the market is terrible, nor does it suggest that you should hide your money under the mattress, but it does imply that you need to exercise greater caution.
09, Three Questions for Engaging with Students
Audience 1: What do you think about AI?
Marks: I wrote a memo about AI. It was published around early December last year, titled 'Is It a Bubble?'
What is a bubble?
A bubble is irrational exuberance. When irrational exuberance occurs, prices are not just higher than intrinsic value; they soar to extreme levels above intrinsic value.
I have personally experienced at least six bubbles and learned significant lessons from them. The 'Nifty Fifty' in 1969 was a classic example of a bubble.
The current enthusiasm surrounding AI is indeed very high. However, no one today can sit here and confidently tell you whether this is irrational or not, because AI has the potential to fundamentally transform the world, possibly even turning it into a paradise.
All I can say is this: The enthusiasm is high, and so are the prices. Companies like NVIDIA have performed exceptionally well. At the same time, we are indeed observing certain signs of bubble-like behavior.
I provided an example in the memo. A woman who left OpenAI founded a company called Thinking Machine Labs. When she sought funding, she said, 'We are going to work on AI, but I cannot tell you exactly what we will do; it’s confidential.'
As a result, the investors gave her $20 billion in exchange for one-sixth of the company's shares, implying that this company was valued at $120 billion without having disclosed its product direction.
This kind of event can only occur within a market experiencing extreme euphoria. It is by no means an indication of prudence.
At the time I wrote that memorandum, she was attempting to raise additional funds at a valuation of $500 billion, with the product still remaining a secret.
As I described the years leading up to the financial crisis: when outrageous deals are able to succeed, it is itself a warning signal worth heeding. This is merely an example and does not negate the entire AI sector, but these phenomena do exist.
Audience Member 2: For students, cash appears to be very safe. Do you agree?
Marks: There is absolutely no dispute that cash is safe.
The only risk associated with cash is that it may not generate returns.
If you look at the chart I just showed, cash is considered a zero-risk asset. And zero risk means the lowest possible return.
By the way, in our industry, when we refer to 'cash,' we are not talking about physical bills in your pocket; rather, it refers to short-term U.S. Treasury bonds. A 30-day Treasury bill carries no credit risk, virtually no interest rate risk, and almost no inflation risk, hence being regarded as a 'risk-free asset.'
The issue lies here: with no risk comes the naturally lowest return.
And I can assure you of one thing: if you are a professional investor and keep your money in cash for the long term, you will definitely be fired.
So, I am not an advocate of holding cash.
Audience Member 3: What is your view on gold, Bitcoin, and crypto-assets?
Marks: That's an excellent question. In 2010, I wrote a memo where I proposed a very basic but extremely important distinction: assets in the world can generally be divided into two categories—those that generate cash flow and those that do not.
Assets that generate cash flow include stocks, bonds, companies, and real estate. After purchasing them, you will receive some form of cash return at a future point in time. Because of this, they can be valued.
For example, if I own a building that generates $1 million annually and I want to sell it to you, you might say, “I’ll offer $8 million, which gives me a 12% return.” I might respond, “No, the quality of this building is too good—I want at least $12 million, an 8% return would suffice.”
As you see, we can rationally discuss the price based on cash flows and rates of return.
However, if an asset does not produce cash flow, such discussions become impossible. This applies to diamonds, paintings, furs, crude oil, gold, and Bitcoin.
They won’t provide you with any cash, and you can’t determine the fair price of a barrel of crude oil or a gold bar.
I remember clearly that in July 2007, the price of crude oil was $147 per barrel. At that time, if you asked someone from an investment bank why oil was so expensive, they would give you a seemingly very reasonable explanation: resources are finite, we are continuously consuming them, and a significant portion is controlled by countries not friendly to the United States.
Six months later, oil prices fell to thirty or forty dollars. If you ask again: 'But don’t all those reasons still hold true?' The answer is, they do.
The problem, however, lies in how exactly you transform these qualitative descriptions into a specific and reasonable price. The answer is, you can't.
This is true for gold, and it is equally true for Bitcoin. If I ask a gold supporter: 'Why do you like gold?' He would likely say: 'It is a store of value; during times of inflation, panic, or crisis, gold retains its value.'
Then I would follow up with another question: Why does it retain its value? You might respond: 'The market has always priced it this way,' or 'Historically, it has always been so.'
The issue, however, is that there is no inherent logical mechanism at play here. There’s no cash flow, no pricing anchor, and nothing inherently makes gold a store of value.
The only reason it is regarded as a store of value is this: People believe it is.
And this precisely brings us to Bitcoin. Bitcoin, too, generates no cash flow, and its value has no intrinsic source. Its only value comes from the value people assign to it.
10. One must deliberately expose oneself to different perspectives.
Host: What do you usually read? How do you gather information and filter out noise on a daily or weekly basis?
Marks: Most of us read several mainstream media outlets. I’ve actually distanced myself a bit from The New York Times because I feel its stance is overly pronounced.
My primary reads are The Wall Street Journal, the Financial Times, and The Economist. Perhaps because the Financial Times and The Economist are not American media outlets, they appear to me to be more objective.
In addition, we all read a large number of blogs, websites, and research materials.
However, I believe there is one crucial point: you must deliberately expose yourself to different perspectives. The worst thing you can do is to only read content that aligns with your views, as that will not lead to personal growth.
I remember a thinker once said something to the effect that those who only understand their own position actually do not understand their own position at all.
The meaning of this statement is not that you fail to understand the opposing viewpoint, but rather that if your perspective has never been challenged, you do not truly know how solid it is. Ideas only approach truth when they are continuously questioned and tested. Therefore, we must read voices from different positions and angles.
11. The real concern lies with companies outside the 'Magnificent Seven' of the S&P 500.
Host: What is your view on the position of the 'Magnificent Seven' US stocks relative to the rest of the S&P 500 companies?
Marks: Indeed, the top seven companies in the S&P 500 are all outstanding enterprises, with both operational and stock price performances being extremely impressive.
Currently, these seven companies collectively account for nearly 40% of the S&P 500's total market capitalization, which has led many to worry whether the S&P 500 remains representative.
I share this concern. If an index is dominated by seven companies, it no longer represents 'companies in the general sense.'
That said, these seven companies are indeed outstanding in their own right. While their valuations are not low, they are not unreasonable either. The price-to-earnings (P/E) ratios of the six companies are roughly around 30 times.
By comparison, over the past 80 years since World War II, the long-term average P/E ratio of the S&P 500 has been approximately 16 times, meaning their valuations are roughly double the historical average.
I do not find this excessive. These companies are among the best I have encountered in my career: large scale, excellent management, strong market dominance, and clear competitive moats.
More importantly, when a company’s product is “virtual,” such as software or platforms, the cost of selling the second or third unit after the first is almost negligible, resulting in extremely impressive marginal profitability.
Microsoft, Amazon, and Apple are examples of such companies. Tesla is an exception, with a higher valuation but relatively limited profitability.
In contrast, when I first entered the industry 56 years ago, the “Nifty Fifty” had P/E ratios generally ranging from 60 to 90 times. In comparison, today's 30 times P/E ratio for truly great companies does not strike me as expensive.
What truly concerns me are the remaining 493 companies in the S&P 500. Their current average P/E ratio is approximately 18 to 19 times. The question is, why are the valuations of these ordinary companies higher than the long-term historical average that includes the 'greatest companies'? I believe the discrepancy lies here.
The reason is that index investing has become the default choice for stock investment. A significant amount of capital passively flows into the S&P 500, indiscriminately buying component stocks, which has pushed up the prices of a considerable number of companies to levels above their intrinsic value.
12. One should remain acutely aware of their good fortune and be grateful.
Host: Your investment memos have long been freely accessible to the public, and your contributions to charity are also substantial. You have come here tonight without asking for anything in return. What or who has shaped your values and code of conduct?
Marcus, I was raised with this kind of education.
There is a very famous saying in the Talmud. A great rabbi once said, 'If you do not care for others, what kind of person are you? If you only care for yourself, who will care for you? If not now, then when?'
I believe each of us has a responsibility to find a balance among these principles.
If you live only for others while letting your family suffer, it is not realistic; if you live only for yourself, that is antisocial.
What I was taught from an early age was to strike a balance between the two.
I have spoken in many places about how fortunate I have been in my life. In January 2014, I wrote a memo titled 'Getting Lucky.' That memo received the most reader feedback at the time. What I discussed in it were the various strokes of good fortune I had experienced in my life.
If you are fortunate enough in life, you have a responsibility to give back to society. Many people like to say, 'I never rely on luck, only hard work.' Let me be blunt: such a statement is dishonest.
If you were born in the United States in the 20th century and grew up in such a system and environment; if your parents supported you in receiving a good education; if you attended public schools but later entered the Wharton School and the University of Chicago; if you met the partners I met and had clients like you—then you should maintain a clear awareness of your own good fortune and feel a sense of unease until you give back that luck to society.
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