Howard Marks, legendary investor and co-founder of Oaktree Capital, joins Sam and Shaan to discuss the current state of the S&P 500, warning that historically high PE ratios suggest a decade of near-zero returns. He walks through his most famous calls — the tech bubble memo in 2000 and deploying capital during the 2008 financial crisis — and explains why being unemotional, consistent, and defensive is more valuable than swinging for home runs.
Speakers: Howard Marks (investor, co-founder of Oaktree Capital), Sam Parr (host), Shaan Puri (host)
Introduction: Describing Howard Marks [00:00:00]
Shaan: All right, here’s what I said. I said, “Describe Howard Marks in 280 characters.” Here’s what it gave me: Howard Marks is a legendary investor and co-founder of Oaktree Capital. Known for his sharp memos, contrarian thinking, and risk-focused approach, he made billions zigging when others zagged, especially in crises. When he writes, Wall Street listens.
Sam: Pretty flattering.
Shaan: Pretty good. Okay, I think the best place to start is that idea of zigging while others zag. I want to ask about the S&P. You don’t know much about us, but the short version of the guy you see across from you — Sam — is that Sam’s an entrepreneur. Sam built his company, sold it, took the money, and said, “I worked hard for this money. Now I want this money to work hard for me, but I need it to be safe.” Sam went into mostly low-cost index funds in the S&P 500.
And anytime I ask Sam about his strategy, or I tell him, “Dude, you got to buy Bitcoin, Ethereum, you got to buy this, put some money over here” — because if Sam is vanilla, I don’t even know what I am. I’m some flavor way off to the side.
Sam: Tutti frutti.
Shaan: I’m tutti frutti over here. And I keep trying to pull him over here, but he says, “No, no, no. I like vanilla.” So he basically just says the long-term average of the S&P 500 is 10%. If I just hold this for 50 years, I’m going to double this many times. I’m good.
But I do get a little wary when anything seems too safe or too certain, or too taken for granted that this 10% number over the long term will be what it’ll be. What would your message be to Sam? Is Sam right? Is he wrong? Would you give him a cautionary warning? If he was your nephew — he looks like he might be your nephew — what would you be telling him?
Howard Marks on Risk and the S&P [00:02:30]
Howard Marks: Well, on the one hand, Sam, you’re right. If you have more money than you need to eat, the first purpose of your money should be to make you comfortable. Buffett says, “Don’t risk what you have and need to get what you don’t have and don’t need.” It makes no sense for somebody with a surplus of money to make their daily life less pleasant by going into investments that put them under pressure.
But on the other hand, the riskiest thing in the world is the belief that there’s no risk. The risk in the markets doesn’t come from the companies, the securities, or the institutions like the exchanges. The risk in the markets comes from the behavior of people.
That’s why Buffett says when others are imprudent, you should be prudent. When other people are carefree, you should be terrified, because their behavior unduly raises prices and makes them precarious. When other people are terrified, you should be aggressive, because their behavior suppresses prices to the point where everything’s a giveaway.
So look — in the long run, you’re right about the S&P, and over the coming years, American companies on balance are going to produce prosperity.
Shaan: What’s defined as long-term in this?
Howard Marks: I would say 20 years or more is the real long term. And I’ll tell you in a minute how I get there. My favorite cartoon — I have a file of cartoons from over the years — my favorite one: there’s a guy, his car is pulled over to the side of the road, he’s in a phone booth. So it’s an old cartoon because there are no more phone booths. And there’s a factory going up in the background, and he’s screaming into the telephone, “I don’t give a damn about prudent diversification. Sell my Fenwick Chemical.”
In other words, prudent diversification calls for certain positions in a certain composition. But reality says, “I see Fenwick Chemical burning to the ground — get me out.” You can’t ignore reality.
The PE Ratio Warning [00:06:00]
Howard Marks: What’s reality in this case? Reality is recognizing where things stand. JP Morgan published a chart around the end of 2024 — a scatter diagram showing the relationship between the S&P 500’s PE ratio at purchase and the annualized return over the next 10 years. And it showed a negative correlation: the higher the PE ratio you pay, the lower the return you should expect. Makes perfect sense.
There was a number on the PE ratio axis — 23 — which was what the PE ratio on the S&P was at the time. And it showed that historically, if you bought the S&P when the PE ratio was 23, in every case — no exceptions — your annualized return over the next 10 years was between 2% and minus 2%.
That’s all you have to know.
Shaan: And what are we today?
Howard Marks: 24, 25 — because prices have risen. Maybe the outlook has also risen, so maybe it’s still 23. But let’s say 24.
So you can say the S&P has returned 10% a year on average for 100 years, and “I’m happy with 10, I’m in.” Or you can say it doesn’t always return 10. And by the way — one of the most interesting things about the S&P: on average, it has returned 10% a year for 100 years, but the annual return is almost never between 8% and 12%.
Sam: Think about that.
Shaan: It either kills it or dies.
Howard Marks: Exactly. The norm is not the average.
Sam: But the issue for someone like me — a lot of our listeners, I’m one of them — I was fortunate, I had a business, I made a relatively large sum of money at a young age, but I’m not an investor. I don’t know anything about public markets. And when I hear you say that, I think, well, I don’t have an alternative.
Howard Marks: You do have an alternative. You could figure out an algorithm to rebalance your position based on relative price and put it on autopilot. I don’t recommend making judgments about the future, but there are ways to do these things even if you just use common sense.
Shaan: What would you be rebalancing into? Let’s say the S&P PE is high — what would be the second-best option for the sort of non-full-time active investor?
The Case for High Yield Bonds [00:10:00]
Howard Marks: I’ve tried to suppress my tendency to talk my book until now. But I think an alternative is bonds. In 1969 I joined Citibank in the investment research department as an equity analyst. The bank did so horribly that in ‘78 I was banished to the bond department — which was the equivalent of Siberia.
The good news is that at that time, American corporations pretty much gave lifetime employment, so I didn’t get sacked. But I’m in the bond department and I get a call from the head of the department saying there’s some guy in California named something like Milken, and he invests in something called high-yield bonds. Can you figure out what that means? And I said yes. And I became a high-yield bond investor.
When you buy a bond, there’s a contract that says the borrower will pay you interest every six months and give you your money back at the end. You can figure out the return implied by that contract. And if the borrower doesn’t keep that contract — oversimplifying — the creditors get the company through the bankruptcy process. So the borrower has a lot of incentive to pay, and they almost always pay. I’ve been involved in high-yield bonds for 47 years and they’ve almost all paid.
Today you can buy high-yield bonds — whether US, Europe, or what we call low-grade credit — and get yields of 7 to 8%. Now 7 to 8 is pretty close to 10. That’s a good thing. The bad thing is you have to pay tax every year on the income. But for those of us who are cautious — like you and me — we might say, I’ll take 8%, which in the long run gives me 4% after tax, as opposed to 10%, which after capital gains taxation gives me 7%. Or maybe I’ll mix them.
Sam: That’s what I do now.
Howard Marks: Right. Because I’m worried. It’s not all or nothing. When I’m on TV and they say, “Well, is this a sell or buy? Risk on or risk off?” I resist that formulation, because it’s never one or the other. It’s always a mix, and the only relevant question is: what mix?
The Speedometer of Risk [00:14:00]
Howard Marks: The operative way to think about managing your portfolio is a continuum that runs from aggressive to defensive. Think about a speedometer in a car. Zero is no risk. 100 is maximum risk — 100% aggressive. You should have a sense for your appropriate normal posture.
It sounds to me like Sam, you’re a little conservative. You’ve made so much money you can’t believe it, but you don’t want to give it back. So I’d say you’re a 65, and especially given your youth, you may be a 55 for your cohort. Every listener, every investor, should figure out the right place for them and try to stay there most of the time.
Shaan: We need to get a couch here. I’ll call you Dr. Marks.
I went back and read a bunch of your old memos, and the one that stood out to me was the bubble.com memo from 2000. I feel like there have been moments in time — 2000, 2008, 2012, 2020 — where the consensus was going one way, maybe it was maximum greed, and you went the other way. Or it was maximum fear and panic, and you were actually very aggressive. You did the thing where Buffett says, “Be fearful when others are greedy, and greedy when others are fearful.” Easy to say, hard to do.
I thought it’d be fun if you could walk us through a couple of those moments. Not to go too far down memory lane, but take us back to the one in 2000. What did you see? What did you do? How did it play out? What did you learn?
”We Never Know Where We’re Going” [00:18:00]
Howard Marks: First of all, one of my sayings is we never know where we’re going, but we sure as hell ought to know where we are. At Oaktree, we loudly proclaim our inability to make macro forecasts and our non-reliance on macro forecasts. But if we want to do the right thing vis-a-vis the macro, we should be able to figure out what’s going on at the present time and what that implies for the future.
I wrote a book called Mastering the Market Cycle, published in 2018. The subtitle is Getting the Odds on Your Side. I believe that where we stand in the cycle determines what’s probably going to happen and how likely it is. Understanding that can improve your odds. It can’t make you a sure winner, but it can improve your odds. And that’s the best we can do in an uncertain world beset by randomness.
I started writing the memos in 1990. Bubble.com, on the first day of 2000, was the first one that ever garnered a response. I went 10 years, and not only did nobody say “that was good” — nobody even said “I got it.”
Shaan: Who were you sending them to?
Howard Marks: Our clients.
Shaan: Crickets?
Howard Marks: Well, in 1990 — a hundred clients. By mail, of course.
I wrote bubble.com on January 2nd, 2000. It had two virtues: it was right, and it was right fast. If you’re right slow, it doesn’t look like you were right. One of the great sayings in our business is that being too far ahead of your time is indistinguishable from being wrong.
The South Sea Bubble and Tech Parallels [00:22:00]
Howard Marks: In the fall of ‘99, I read a book called Devil Take the Hindmost. It’s a history of financial speculation.
Shaan: Were you looking for books about that because you had a hunch, or did you just randomly read it?
Howard Marks: I don’t remember why I read it. My memos are not research-based — they’re based on ideas that resonate with me. And I’m interested in financial speculation, cycles, and the extremes of financial behavior. That’s probably why I read it.
I’m reading this book and it talks about all these crazy things people did, especially in something called the South Sea bubble. Britain had this big national debt and concluded they could pay it off by starting a company called the South Sea Company, granting them a license to trade with the South Sea — by which they meant not Samoa but Brazil — and charging them a license fee to pay off the debt. One of the great bubbles.
I’m reading about what people were doing in 1720 — quitting their day jobs, hanging out in alehouses to trade shares of the South Sea Company — and I said, that’s what’s going on now in the tech bubble. People were quitting their jobs to become day traders. Young people were quitting MBA programs because they had an idea and were afraid that if they waited until they graduated, somebody else would take it.
One of the quotes I use most now is from Mark Twain: “History does not repeat, but it does rhyme.” There are certain themes that rhyme from generation to generation because they’re embedded in human nature and so they recur.
So I wrote this memo. It said what people were doing then, people are doing today. Companies with no profits, no revenues, sometimes no product — just an idea — were being highly valued. That is the epitome of a bubble.
The 2008 Financial Crisis: When to Deploy [00:28:00]
Shaan: Did you actually bet against it or did you preserve capital by just not FOMOing into every tech company?
Howard Marks: We’re basically not involved in the US stock market and not involved at all in technology. So we wouldn’t have had a chance to apply that. But we recognized that when you see something like I described in the tech bubble, there are ramifications in other parts of the world.
We figured out that people were engaging in optimism, not pessimism. Greed, not fear. Credulousness, not skepticism. Risk tolerance, not risk aversion. And as Buffett says about prudence — when nobody’s afraid, unwise deals can get done easily. Simple as that.
Shaan: The way you explain it makes complete sense. But it’s actually quite challenging to understand this macro environment and say, “This is where we are.”
Howard Marks: You have to be clinical. You have to observe without emotion and understand what’s going on and what the implications are. Emotion — what I call human nature — tends to get you to do the wrong thing at the wrong time.
I came across a great quote from a retired trader: “When the time comes to buy, you won’t want to.” That encapsulates so much wisdom. What causes the great moments to buy? It’s probably the point of lowest consensus — the time of the most uncertainty, the most pessimism, the most fear, the most conservatism.
Shaan: What causes those things?
Howard Marks: Bad news. Bad events — either exogenous or geopolitical, a faltering economy, declining corporate fortunes, declining stock prices, widespread losses, and a proliferation of articles about how terrible the future looks. That’s why you don’t want to buy at the low. Who would want to buy under those circumstances?
Shaan: Do you still feel fear when you know you’re supposed to buy? Or does it feel like, “Hello, old friend”?
Howard Marks: It’s not easy, but you have to do it. The fortunes and outlook of companies don’t change that much. What changes is how people think about what’s going on and think about the future — the relationship of price to value. Sometimes they hate them, sometimes they love them. When they love them too much, expect them to go down. When they hate them too much, expect them to go up.
In 1998 we had the Russian ruble devaluation, the debt crisis in Southeast Asia, and the meltdown of Long-Term Capital Management. One of our portfolio managers came to me and said, “I think this is it. I think we’re going to melt down. I think it’s all over. I’m terribly pessimistic.” I said, “Tell me why.” He went through his reasoning. I said, “Okay. Now go back to your desk and do your job.”
A battlefield hero isn’t somebody who’s unafraid. It’s somebody who does it anyway.
Sam on Emotion in Investing [00:34:00]
Sam: Interesting enough, even though I’m the conservative one, I’m actually way more emotional. Shaan is mostly a pretty stable guy emotionally. I go up and down, which I think is closer to the average for most folks. You’ve said that to be a good investor, you’d better be able to invest without emotion, or at least act as if you don’t. Has there ever been a mindset shift or a practice you’ve had to use to be less emotional when investing?
Howard Marks: No, these things are not intentional on my part.
Sam: You think you were born like that?
Howard Marks: I was born unemotional. And I want to point out — my wife’s downstairs having lunch — I wrote in my book that it’s really important to be unemotional in investing. Not so good to be unemotional in life, in arenas like marriage. But for investing it came naturally. I don’t have to say, “Oh, there I go again, getting emotional, I have to restrain that.” And my partner Bruce Karsh, who’s been my partner successfully for 37 years, he’s pretty much the same. So that makes it easy.
Shaan: We’ve gassed you up about your best moves. What’s the worst mistake you made due to emotion — where you didn’t control your temperament properly?
The Conservative Bias [00:38:00]
Howard Marks: My worst mistake is not a point in time. My worst mistake is that I have always been too conservative. My parents were traumatized by the Depression. The question is not whether your parents were alive during the Depression, but whether they were adults. My parents were born in the 1900s, so during the Depression they were in their 30s. And the Depression was really traumatic. Nobody knows what it was like, and it ground on for over 10 years. So when you grow up with Depression-era parents, they say things like, “Don’t put all your eggs in one basket. Save for a rainy day.” I ended up too conservative. If I wasn’t as conservative, I’d be richer today. I’m not sure I’d be happier.
Shaan: What would you have done differently?
Howard Marks: I might have gone into a more aggressive asset class — equities. I might have become a venture capitalist, like my son Andrew, or a leveraged buyout investor. The reason I was talking about credit for Sam is that while the returns are a little lower, there’s much less uncertainty and downside.
If I had spent 56 years in less conservative asset classes, I would have made more money. But it happens that I went into high-yield bonds in ‘78 and distressed debt in ‘88. If I had not been a conservative person, I probably wouldn’t have had any clients — they would have been scared off by the risk. So it served me well in pioneering those businesses.
Sam: And that kind of makes sense, because you didn’t start Oaktree until your late 40s, right?
Howard Marks: Just short of my 49th birthday.
Sam: Were you already financially successful leading up to it? Was it a big risk to start Oaktree?
Howard Marks: I was secure. I wasn’t rich by today’s standards, but I had good money and I lived well. I started running money in ‘78. I joined my Oaktree founder partners in ‘85, ‘86, ‘87, ‘88. We did a great job through a variety of environments, we weren’t worried about our ability to perform, and we had enough money to eat. So it wasn’t… but I had to overcome my innate caution. My wife had to give me a kick in the ass, which she happily did. I may not have done it without her.
Deploying $7 Billion During the 2008 Crisis [00:44:00]
Shaan: You said you’re too conservative, but there’ve been times when you’ve been very aggressive. During the 2008 financial crisis, as the crisis hit, you raised $10 billion and started deploying something like $600 million a week. That sounds badass.
Howard Marks: Your facts are inaccurate in one regard. We did not raise $10 billion after the crisis hit. Remember what I said — when the time comes to invest, you won’t want to. You can’t raise money in a crisis. If you went to people and said, “The world’s melting down, we’re going to buy all this stuff, it’s going to be a bonanza,” nobody would give you money. The same factors that influence the world influence the people you talk to.
What happened is: like I described with the tech bubble in 2000, we detected in 2005 and 2006 that the world was behaving in a carefree manner. I would wear out the carpet between my office and Bruce’s with the Wall Street Journal, saying, “Look at this junk that got issued yesterday. If a deal like this can get done, the world is exercising inadequate prudence.”
Sam: Specifically on mortgages?
Howard Marks: I never knew about mortgages. I don’t think I ever heard the word “subprime.” I don’t think I ever knew what a mortgage-backed security was. It just seemed that the world was operating in a pro-risk fashion. And when people are pro-risk, they permit bad deals and pay prices higher than they should.
On the first day of 2007, we went out to our clients and said we think there’s a great opportunity coming, and we’d like to have $3 billion. At the time, the biggest distressed debt fund in history was our 2001 fund, which preceded the Enron meltdown — that was $2.5 billion. We went out saying we’d like $3 billion, which would be the biggest distressed debt fund in history. Within a month we had $8 billion. We said we can’t do anything with $8 billion — it exceeds our ability to invest wisely. So we’re going to take $3.5 billion and close the fund, but we’d like the remainder of your interest in a standby fund that we’ll implement if the stuff hits the fan.
The first fund — Fund 7 — was $3.5 billion. The second fund eventually reached $11 billion. Fund 7 got fully invested. We started investing gradually in June of 2008. By September 18th it was 12% invested — just over a billion. And Lehman Brothers declared bankruptcy.
So the question was: do you invest it? You’re sitting there with all that money, but it looks like the world is going to melt down.
Very simple conclusion: if we invest and the world melts down, it doesn’t matter what we did. But if I don’t invest and the world doesn’t melt down, then we didn’t do our job. QED — you have to move forward.
I also wrote that it’s hard to predict the end of the world. It’s hard to assign a high probability to it. And most of the time the world doesn’t melt down. So as you say, we invested $450 million a week for the next 15 weeks in that fund. Oaktree overall invested an average of $650 million a week for those 15 weeks.
Shaan: How did that turn out?
Howard Marks: It was great. We got good buys and made good money. But the Fed mobilized very astutely — cutting interest rates to zero for the first time in history at the beginning of 2009 and introducing QE — and those two things saved the economy. So we didn’t get the meltdown that everybody was afraid of. There were relatively few bankruptcies, especially outside the financial sector. So we’ve had some barn-burner funds in crisis. This was very good, but not a barn-burner.
Reading Habits and Investment Books [00:52:00]
Shaan: You’ve quoted a ton of different people — Mark Twain a bunch of times, all these quotes — which clearly shows that you retain what you read. Can I ask about your reading habits? How do you pick what books you read?
Howard Marks: I’ve never read books about how to be an investor — like multiply this by that, add this, subtract that. The books I’ve found most interesting have always been about investor behavior. I mentioned Devil Take the Hindmost. One of the greatest books I ever read was John Kenneth Galbraith’s The Short History of Financial Euphoria. Very pivotal for me. And since I’m a slow reader, I liked the fact that it was only about 100 pages.
Back in 1974, I think Charlie Ellis wrote an article called “Winning the Loser’s Game” where he said that because you can’t predict the future, active investing doesn’t work. Rather than try to hit winners like a tennis player, you should try to avoid hitting losers and keep the ball in play. That has always defined my investing style.
Never Below the Bottom, Always Above the Bottom [00:55:00]
Shaan: There’s a great math paradox you’ve pointed out — a fund that’s never in the top 10% but consistently never in the bottom 50%… does that actually place you in the top 5%?
Howard Marks: In 1990 I wrote a memo called “The Route to Performance.” I had dinner in Minneapolis with my client Dave Van Benschoten, who ran the General Mills pension fund. Dave explained that he had run the fund for 14 years, and in those 14 years the equity portfolio was never above the 27th percentile or below the 47th percentile. Solidly in the second quartile for 14 years in a row.
If you said to a normal person, “This thing fluctuated between the 27th and 47th percentile — where do you think it was for the whole period?” They’d say, “Probably around the 37th.” The answer is fourth percentile.
If you can do well for 14 years in a row and avoid shooting yourself in the foot in a bad year, you pop to the top.
Sam: I love that because it’s one of those unsexy ideas. You can’t make a movie about consistently being above average. Nobody’s going to give you a motivational video about never shooting yourself in the foot. It’s all about heroic greatness and huge risks.
Howard Marks: The Financial Times runs a column called “Lunch with the FT,” where they take someone to a restaurant and write about the person, the restaurant, and the food. They did that with me in late 2022. I took the reporter to my favorite Italian restaurant near the office in New York — where I go 100% of the time for lunch — and I said, “Eating in this restaurant is like investing at Oaktree: always good, sometimes great, never terrible.”
That sounds like a modest boast. But if you can do that for 40 or 50 years, I think it’ll compound to great results. If you never shoot yourself in the foot, it’s descriptive of what we’ve accomplished.
Investment Folk Heroes and the Public Intellectual [01:00:00]
Shaan: There’s a class of investor that’s become a kind of folk hero — Warren Buffett is the obvious one. High integrity, making greatness seem achievable and relatable. They write well, they have wonderful sayings, they make challenging things easy to understand. Did you purposely try to become that kind of public figure?
Howard Marks: First of all, you can’t ask somebody who did whether they did — they’ll say no. Nobody will admit that. Nobody will say, “My public persona is a facade.”
Sam: Me and Shaan were joking before this. When you started as an investor, there were no celebrity investors. No famous people doing what you were doing. And then now — whether it’s Buffett or Munger — the investment guys have become the philosophers. The tech CEO nerds are now the power players. Podcast comedians are the new trusted media. Influence has shifted. But I find the investment-crossover-life-philosopher to be one of the really wholesome ones.
Howard Marks: I hesitate to put myself in the same category. But I think Warren has always tried to educate people and share his knowledge. People say, “Why do you give away your secrets? Aren’t you afraid other people will emulate you?” But I don’t think so, because we can tell people all day long what you should do, but it’s hard to do.
A friend of mine, Richard Oldfield in London, wrote a book called Simple But Not Easy. The things we have to do are simple. They’re just not easy to do.
Sam: What’s interesting for guys like me and Shaan is that we learn from you about how to live life. Investing is just your way of testing whether your way of living is true.
Howard Marks: Investing is a lot like life. And by the way, I’m working on a book along those lines.
Sam: What’s it called?
Howard Marks: I don’t know yet. If you wait a few years, I think it’ll be out.
Final Question: Mistakes Investors Make [01:05:00]
Sam: We’ve asked you a bunch of questions, but I think it would be interesting to turn it around. What question do you think people who listen to this should ask themselves?
Howard Marks: I would think in terms of the mistakes that investors make, and ask yourself whether you make them.
Number one: do you think you understand what the future holds, and do you reasonably think that’s accurate?
Number two — and I think this is the biggest single mistake investors make — do you think the world will remain the way it is? That the things working today will continue to work? That things not working will continue not to work? That trends in motion will continue and there won’t be any new trends?
Number three: do your emotions rise and fall and get you to do what they want, as opposed to what you should do?
In my first book, The Most Important Thing, I had a thing called the “poor man’s guide to market assessment.” On the left, a bunch of things; on the right, a bunch of things. It says things like: is the market rising or falling? Are TV shows about investing popular or unpopular? If an investor goes to a cocktail party, is he mobbed or shunned? Do deals get done easily or hard? Are deals oversubscribed or left begging?
You can tell from that checklist whether the market is overheated and too popular, or frigid and too shunned. And it can tell you a lot about what to do, if you’re methodical and clinical.
Shaan: Shaan and I have read your stuff forever, listened to so many of your podcasts. It’s been an honor. The best part of our job is we have an excuse to hang out with amazing people who are way out of our leagues, and this is one of those occasions. Thank you so much.
Howard Marks: Thank you, Sam. Thank you, Shaan. I’ve enjoyed your questions. Let’s do it again sometime.
Sam: You’re the best. We appreciate you.