Howard Marks recounts a pivotal dinner in 1990 with David Van Benskaten, who ran the pension fund for General Mills. Over 14 years, their equity portfolio had never ranked above the 27th percentile or below the 47th in any single year. Despite this consistent second-quartile performance, their overall 14-year record placed them in the fourth percentile. The math seemed incredible, but the explanation was simple: most investors shoot for the stars but occasionally suffer huge losses that wreck their long-term record. A big loss takes a long time to recover from.

This insight inspired Howard's first memo and became the motto for Oaktree, the firm he co-founded in 1995.

In equities, if you can avoid the losers and losing years, the winners will take care of themselves.

This philosophy aligns with Graham and Dodd's concept of bond investing as a "negative art." Howard initially found the term denigrating but came to understand its wisdom. In high-yield bonds, for example, many bonds might offer the same 8% return. If 90 out of 100 will pay and 10 will default, it doesn't matter which of the 90 you buy; they all yield the same. The only thing that matters is avoiding the 10 that default. Performance is improved not by what you buy, but by what you exclude. This risk-conscious mindset, born from fixed income, remains a great guidepost for Oaktree across all its investment areas.

Investing shares parallels with sports like tennis, particularly as described in Charlie Ellis's 1975 article, "The Loser's Game." In professional tennis, players must hit winners to win points. Amateur tennis, however, is a "loser's game." Players win not by hitting winners, but by avoiding mistakes and letting their opponent be the one to hit the ball out of bounds. Howard Marks argues that investing is much more like the amateur's game because of the significant role of randomness and uncertainty. Unlike a professional tennis player, an investor does not have a high degree of control over the outcome.

Because of this lack of control, trying to hit financial "winners" or swinging for the fences can get an investor "carried out." A better approach is to play within yourself, emphasize consistency, and avoid grand gestures or big risks. This philosophy stands in contrast to the dazzling blow-ups of firms like Long-Term Capital Management or Amaranth. The common thread in these failures is misplaced certainty.

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.

Big trouble in investing comes from being 100% sure about a premise and then making bold, often leveraged, bets on it. If that premise is wrong, you can be finished. The core principle is survival; you must be able to endure life's low points.

Never forget about the 6 foot tall person who drowned crossing the stream that was five feet deep on average.

The concept of surviving "on average" is meaningless. An investor must survive every single day, especially the worst days, to reach the finish line. This leads to a fundamental choice: are you trying to maximize gains if things go right, or minimize losses if they go wrong? You cannot do both at once. An investor must consciously decide whether to pursue superior results by having more winners (an aggressive strategy) or by having fewer losers (a defensive one). Without making this deliberate choice, it is difficult to find a winning strategy.

Howard Marks suggests a framework for investors to determine their appropriate level of risk. He likens it to a car's speedometer, ranging from 0 (no risk) to 100 (maximum possible risk). Every individual or institution should figure out their normal risk posture on this continuum. For individuals, this position depends on factors like age, wealth, income, number of dependents, aspirations, proximity to retirement, and intestinal fortitude. For example, a young, aggressive person with a long career ahead might choose an 80 or 85. This is not a precise calculation, but a mental model to guide thinking.

Once an investor establishes their normal risk posture, the next question is whether to maintain it consistently or vary it based on market opportunities. This creates a tension for many investors. William Green notes the common advice to simply leave portfolios alone. He quotes investor Nick Sleep, who advised him, "Don't fiddle, William, just don't fiddle," even when worried about a market downturn.

Howard believes the answer lies somewhere between the extremes of trading every day and never trading. He finds a purely passive approach too idealistic, arguing there are rare opportunities to become more aggressive or defensive. However, these moments are infrequent. As his son Andrew once told him after he wrote about his successful market calls:

Yeah, dad, that's because you did it five times in 50 years.

There is not something wise to do every day. Overtrading is often a mistake and can be counterproductive, especially when emotions lead to buying high and selling low. Howard shares an apocryphal story about a Fidelity study that supposedly found the best-performing accounts belonged to people who were dead. While the study's existence is unconfirmed, the point is clear: for most, buy-and-hold is a superior strategy.

For people with the right ability and temperament, there are occasions to behave counter-cyclically. This means becoming more defensive when the market is precarious and more aggressive when it is generous. Howard Marks, despite his usual disdain for macro forecasts, has made about five of these major market calls over the last 25 years. He explains that this is not about predicting the economy, but rather a process he calls "taking the temperature." It's about assessing the behavior of the people around him.

Howard cites Warren Buffett's wisdom on this approach: "The less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own." When everyone is carefree, sees no risk, and their exuberance has pushed prices to dangerous heights, it's time to be cautious. In contrast, when people are depressed and pessimistic, their selling often makes assets so cheap that it's the right time to become highly aggressive. It took Howard 30 years in his career before he felt he had enough insight to make his first major call, which was about the tech bubble in 2000.

These opportunities are rare and require waiting for a compelling argument. Even then, Howard notes he never acted without trepidation. In investing, even when you feel you are right, the odds might only be 70/30 or 80/20. The key is to avoid making calls too often.

If I had made 5,000 calls, made a call every four days? What if I said every four days I got to either say buy or sell? I think that my record would be 50/50 at best. So you just can't do it all the time. You have to wait until it's compelling and then pray that you're right.

William highlights a quote from David Swensen: "Active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel." This raises the question of how Oaktree has managed to remain idiosyncratic and unconventional even as it has grown into a major institution. Howard Marks explains that he learned early on, during his 16 years at Citibank, that he dislikes institutional living and its inherent constraints. He tries to avoid bureaucratic tendencies, even writing a memo in the early 2000s called "Dare to be Great," which was a rant against bureaucracy and committees.

Howard describes being put on five committees at Citibank at age 29, which he says met for a minimum of 16 hours a week. He found these meetings unbearable, noting they lasted as long as the person who wanted them to go longest desired. This experience cemented his view that great investing and bureaucracy are incompatible. A truly great investment idea is often idiosyncratic, meaning most people are doing the opposite. Trying to get a committee's approval for such a counter-consensus move is nearly impossible.

If you have idiosyncratic insight, if you have a young Warren Buffett working for you, you better just let him do his thing rather than say, 'Well, you, Warren, you can't make any trades until you convince the majority of the committee.'

A prime example of this philosophy in action was during the 2008 financial crisis. When Lehman Brothers went bankrupt, most people thought the financial world was collapsing. Oaktree had just raised the largest distressed debt fund in history, with $10 billion available. Howard and his partner, Bruce Karsh, decided to invest aggressively despite the uncertainty. Bruce invested an average of $450 million a week for 15 weeks, deploying $7 billion in a single quarter. It was an uncomfortable, idiosyncratic move that they were not sure was correct, but it seemed like the right thing to do. Howard is certain they never could have convinced a committee to approve such a bold action in the face of widespread panic.

Howard Marks describes his partner, Bruce Karsh, as extremely analytical and highly competitive, like a chess player who looks several moves ahead. Bruce, a former lawyer, approached Howard in 1987 with the idea of forming a distressed debt fund, which they launched in 1988. Their partnership has now lasted nearly four decades and is one of the most significant aspects of Howard's life outside of his family.

Howard draws a parallel between his relationship with Bruce and the famous partnership of Warren Buffett and Charlie Munger. He references a recent letter from Buffett who described Charlie as a protective older brother and a wise philosopher, while Warren was the younger implementer doing the analytical work. A key observation from Buffett's tribute stood out to Howard.

And the words I told you so were never mentioned.

This principle of mutual support without blame is central to Howard and Bruce's relationship as well. They have made plenty of mistakes, but they have always supported each other. Howard notes that deploying $7 billion in the fourth quarter of 2008 would have been incredibly difficult without that kind of support. The foundation of their successful partnership is a healthy acknowledgment of each other's unique strengths.

We both acknowledge that the other can do things we can't do, which is such a great thing, because that's the only basis for a healthy partnership. Once you start thinking that you can do everything you can do and everything the other person can do, your partnership is doomed.

To succeed in investing, one must have a knowledge advantage. Howard Marks explains that you cannot simply rely on being smart, as the investment world is full of intelligent, educated, and hardworking people. To achieve superior results, an investor needs an edge.

Investing is an incredibly competitive game and winning consists of beating a bunch of other people who are similarly intelligent, numerate, computer literate, hard working and very highly motivated. So you have to have an edge.

Specialization is one way to gain that edge. This is particularly effective in less efficient markets. Howard defines an efficient market as one where everyone has the same information, making it impossible to gain an advantage, much like trying to predict a fair coin toss. In contrast, a less efficient market is one where skill and hard work can genuinely lead to better returns. He recounts his own career-changing moment in 1978 when he began exploring high-yield bonds, then known as "junk bonds." For years, major institutions like public pension funds refused to invest in them due to their poor reputation. This widespread aversion created an opportunity.

Oh, great. You mean it's an asset class that I can buy that nobody else will buy at any price? Well, maybe it's whole bargains. That's the way these things work.

This contrasts sharply with assets that are universally loved. Howard points to the "Nifty 50" stocks in the late 1960s. These were considered the greatest companies in America, and everyone wanted to own them. Their popularity drove prices to such high levels that investors who bought in 1969 and held for five years lost about 95% of their money. The key lesson is to be cautious about consensus and to seek opportunities on the road less taken.

But if you look at the things that everybody thinks are great and will gladly buy at any price, why should you think you can get a bargain there?

While we cannot predict extreme events like market crashes or pandemics, we can prepare for them. Howard Marks explains that we can do so by recognizing that such events will inevitably occur. The key is to make portfolios more cautious when markets are vulnerable.

Howard operates on the belief that the macro future is unpredictable. He notes a popular saying: the two kinds of people who lose money are those who know nothing and those who know everything. He avoids both extremes. Instead of predicting, he focuses on assessing the market's tendencies based on where we are in the cycle. This was the subject of his book, "Mastering the Market Cycle."

We never know what the market's going to do, but we can have a feeling for when its tendency will be to do well or its tendency will be to do poorly.

This assessment is not based on prediction, but on observation. By looking at factors like high P/E ratios or exuberant investor behavior, one can gauge the market's vulnerability. As Howard puts it, we may not know where we're going, but we should know where we are. The goal is to get the odds on your side. When the market is high in its cycle, the odds are against you; when it's low, they are in your favor. However, this is not a guarantee of short-term results.

William Green shares that this concept was a major revelation for him. The fundamental problem is that the future is unknowable, yet we must make decisions about it. The solution, deeply influenced by Howard, is to find ways to subtly stack the odds in your favor, which is both a simple and profound idea.

Great investors consistently stack the odds in their favor. One guiding principle, often highlighted by Warren Buffett, is the importance of patience. This is illustrated through a baseball analogy. A batter should wait for a good pitch, and to do that, they must first know what a good pitch looks like.

Howard Marks explains that legendary batter Ted Williams was highly studious about this. He broke the strike zone into 18 spots and charted his results for pitches in each area. He knew precisely which pitches would likely result in a single, a double, or a strikeout. This knowledge allowed him to wait for a pitch in his sweet spot.

Buffett applies this to investing by advocating patience over hyperactivity. He points out a key difference between the two fields. In baseball, you are penalized for inaction. If you let three good pitches go by, you are out. In investing, however, you are not.

In investing, unlike baseball, if you stand there with the bat on your shoulder and you let three pitches go by in the strike zone, you're out. But in investing, you can wait more. You don't get called out on strikes.

While professional money managers might feel pressure to act or risk being fired, the principle holds true. To get the odds on your side, you must play within your own abilities. This means developing your own criteria for what makes a good investment and having the discipline to wait for opportunities that meet them, rather than buying something just because it seems attractive to others.

A critical lesson in investing is not to fool oneself about the current market environment. William recalls an idea from Howard's intellectual hero, Peter Bernstein, which captures this principle: the market is not an accommodating machine that will provide high returns simply because you need or want them. This highlights the importance of accommodating yourself to reality as it is, not as you wish it might be.

Howard agrees, emphasizing the danger of wishful thinking. He cites a favorite saying of Charlie Munger, who quoted the philosopher Demosthenes:

For that which a man wishes that he will believe.

This tendency is injurious. For example, a stockbroker paid by commission might always believe there's something good to buy, even when there isn't. The mature and analytical approach is to accept reality, be patient, and understand your own biases. This means waiting for the odds to be on your side before acting aggressively.

While it is wise to have investments at all times, the level of aggression should vary. You must wait for those golden moments to really "turn up the wick." As an example, Charlie Munger used to say that he made all his money on just four major investments in his lifetime.

Charlie Munger was brilliant, extremely well-read, and loved to think. He developed mental models for thought, creating what he called a "latticework of mental models." This serves as a toolkit for pattern recognition. After living for a while and paying attention, when a particular event happens, you don't have to analyze it from scratch. Instead, you can recognize it and say, "Oh, that's one of those, I know what to do about that."

Charlie was also very outspoken and said exactly what he thought, regardless of the audience. He was a good, kind person but the furthest thing from politically correct. A biography about him is titled "Damn Right," reflecting his emphatic nature. His unharnessed brilliance would only go so far, but he harnessed it into a process.

One of his most significant philosophical contributions was convincing Warren Buffett to change his investment strategy. He encouraged Warren to stop looking for "cigar butts"—okay companies at great prices—and instead focus on buying great companies at okay prices. This shift was fundamental to what Buffett and Berkshire Hathaway became.

Howard Marks believes the current investment environment is most comparable to the dot-com bubble of 1998-2000. While not identical in degree, it is similar in kind. This comparison is stronger than ones to the Nifty 50 era, which involved established companies, or the 2005-2007 subprime mortgage crisis, which was a financial invention rather than a technological one.

The parallel lies in a new, world-changing technology firing up the market's imagination. The internet did change the world, and AI is expected to do the same. However, Howard points out a key difference. In the late 90s, there was a clearer vision of how the internet would transform society, particularly through e-commerce. Today, while AI is recognized as a powerful force, the specific ways it will become a business, make money, and impact daily life are less clear.

This fits a historical pattern where bubbles form around something novel. This novelty allows for unconstrained speculation. Whether it was growth stocks in the late 60s, the internet in '99, the South Sea Company in 1720, or Dutch tulip bulbs in the 1620s, the dynamic is the same.

The bubbles are very around something new because the imagination is untrammeled and it can take go off on a flight of fancy and you can imagine trees growing to the sky. You're never going to have a bubble in paper stocks or timber stocks. It's too prosaic... you can't have these tree grow the sky moments in the prosaic areas. It's always something new.

In contrast, prosaic industries like timber or paper don't experience such bubbles. Their fundamentals are too well understood, leaving little room for the wild fantasies that fuel speculative manias.

Howard Marks recently made two bold statements about Artificial Intelligence. First, that AI will change the world. Second, that most companies people are investing in to profit from AI will end up worthless. He explains that a world-changing technology and investors making money from it are not the same thing.

When the naive or hopeful investor takes the leap that the irresistible trend will produce sure profits, that's when you get into trouble.

This idea echoes Warren Buffett's comments about the internet during the 2000 bubble. Buffett noted that while the internet would undoubtedly increase productivity, it wasn't clear it would positively impact profitability. The same logic applies to AI. While AI might eliminate many entry-level jobs and boost productivity, the question of who benefits remains. The savings could accrue to the companies, but competition might force them to pass those savings on to consumers through lower prices, eroding profits. Nobody can say for sure how the labor-saving aspect of AI will translate into profits.

When investing in a euphoric market like the one around AI, there are common mistakes to avoid. One is assuming that today's leaders will definitely be the leaders of tomorrow. Another is investing in the laggards simply because they are cheaper. This is a "lottery ticket mentality"; if a company has a low probability of success, you should accept that failure is the most likely outcome.

Investors face a clear choice. They can make binary, sink-or-swim bets on novel, pure-play startups with no current revenue but the potential for a moonshot success. Alternatively, they can invest in large, established tech companies that are already profitable. For these companies, AI represents an incremental benefit, not a life-changing one. The decision depends on an investor's style and game plan, but it's crucial to understand the high risk involved in betting on unproven companies.

Howard Marks explains that as a value investor, the goal is to determine an asset's intrinsic value and compare it to its price. Intrinsic value is almost always derived from an asset's ability to be profitable and produce cash flow. For example, when buying a building, the discussion about its price is centered around the cash flow it generates and the resulting rate of return. One person might offer a price yielding an 8% return, while the buyer might want a 12% return, but the conversation is grounded in the building's value.

However, this analytical approach doesn't apply to assets like bitcoin, gold, diamonds, or paintings because they have no intrinsic value. Howard uses oil as another example, noting its price swung from $147 a barrel to $35 in a matter of months in 2007, even though nothing about the oil itself changed. The value of these assets is simply what the market will bear.

How can you invest analytically? If I say to a gold fan or a bitcoin fan, well, what do you think the price will be in a year? How do they reach that conclusion? What do they base it on if they don't have cash flow to base that conclusion on?

While one can invest in these assets based on superstition or a belief that they will be a store of value, it's not an analytical process based on intrinsic value. Howard notes that while gold buyers have made a lot of money recently, it has been a lackluster long-term investment. He points out that from the end of 2010, gold has had a 7.7% annual return, while the S&P 500 has returned 12.7% over the same period.

When asked for a smart, practical way for regular investors to get equity-like returns in a worrisome environment, Howard Marks explains the nature of high-yield bonds. He categorizes them as "lending assets," which also include debt, fixed income, notes, and loans. The concept is simple: you give someone your money, they rent it from you, and they promise to pay you interest and return the principal at the end.

This is why it's called fixed income; the outcome is fixed by a contractual relationship. Once you buy the asset at a fixed price with a set interest rate, there is only one moving piece in the equation: the probability that the issuer will keep its promise to pay the interest and principal. This assessment is the job of a credit analyst and is a fairly arcane skill.

It's not like buying stocks, where people might invest because they like a company's product. Howard notes you can't just buy a company's bonds because they make good hamburgers; it's a completely different analysis. For most people, the best way to access these areas is through managed products like funds or ETFs. Investing is a funny business where it is very easy to get an average return but very hard to achieve an above-average one. If you are content with an average return, managed products can deliver it at a relatively low cost. With high-yield bonds yielding around 7%, there are many managed products available to deliver that return.

When dealing with risk and uncertainty, the toughest questions are often not about what to do, but how to do it. For example, it is clear that one must keep an even keel and perhaps adopt a more defensive portfolio, but the process of making that decision is harder. The key is to prevent emotions from taking over investment decisions. Buying when things are exciting and prices are high, or selling when things are depressing and prices are low, is counterproductive. Maintaining an even keel is essential for successful investing.

This principle supports a philosophy of avoiding hyperactivity and constant trading. As Howard suggests, "Don't just do something, sit there." Investing is not a game of chance like pachinko or roulette; it works over time because economies grow and companies become more profitable. The most crucial action for an investor is to get on this "gravy train" and stay on it. Emotional control is the foundation for this long-term approach.

Invest, invest early, invest a lot and don't tamper with it. And having your emotions under control is essential if you're going to be able to do that.

Staying invested for the long haul is far more important than attempting to time the market or pick the perfect stocks. Those activities are merely "embroidering around the edges." The fundamental goal is simply to be a long-term investor.

Howard Marks explains he is not a futurist and doesn't spend much time thinking about the future, quoting Einstein: "I never think of the future. It comes soon enough." He believes the future is not a single, predictable event but rather a probability distribution—a range of possibilities. This view introduces inherent uncertainty into investing.

The future is not a set single thing that if you're smart enough, you can figure it out what it's going to be and it's going to materialize and make you right. It's a probability distribution.

Given this, he advocates for humility. One should not form a certainty around a single outcome and bet heavily on it without special expertise, which is rare. This philosophy is captured by one of his favorite fortune cookie sayings.

The cautious seldom err or write great poetry. Every person has to decide for themselves. Do I want to try to write great poetry and get rich if my bets are right, or do I want to avoid erring and be sure that I'll do okay if my bets are wrong?

This presents a fundamental choice in mindset. An investor must decide whether their primary focus is on picking winners or avoiding losers. It is not possible to emphasize both simultaneously.

Howard Marks has long emphasized the importance of a balanced life. He advises that everyone must consciously choose what is important to them. He references his contemporary Charlie Munger, who used to call people who only cared about working and making money "maniacs." Howard notes the old saying that nobody on their deathbed ever wishes they had worked more. Once you have enough money, there is little reason to sacrifice personal enjoyment just to accumulate more.

The most important piece of advice Howard offers to young people comes from the writer Christopher Morley.

There is only one success: to be able to live your life in your own way.

The challenge, Howard acknowledges, is figuring out what "your way" is. It is not easy to know at 22 what will make you happy at 70, as people change and sometimes have an inaccurate vision of themselves. The ultimate goal should be to reach the end of life and feel happy with the choices you made. This means you should not pursue work, money, and prestige just because others do or because it is glorified in the media. Instead, you should figure out what is right for you and pursue that. William observes that Howard has successfully set up his own life this way, focusing on what he loves, like writing memos and setting the firm's philosophy. Howard agrees, noting that like his idol Warren Buffett, he is happy to go to work each day.