20VC Bill Gurley and Howard Marks What Happened In 2020 What Can We Expect Looking Forward to 2021

Summary Notes


In the 20VC podcast episode hosted by Harry Stebbings, investment veterans Howard Marks, Co-Chairman and Co-Founder of Oaktree Capital Management, and Bill Gurley, General Partner at Benchmark, reflect on the economic tumult of 2020, the unprecedented federal response, and the resulting impact on markets and investing. They discuss the difficulty of making macroeconomic predictions and base their investment strategies on value rather than forecasts. Marks highlights the role of central banks in averting a global depression and the mystery of inflation, while Gurley emphasizes the significance of interest rates and the challenges of regulatory capture in the US. Both express concerns about the social and political divide in America, advocating for bipartisan cooperation and the benefits of globalization. They also touch on the transformative potential of technology in matching individual skills with global opportunities, and the importance of embracing innovation to improve standards of living. The episode concludes with personal book recommendations and an optimistic outlook on the future's possibilities.

Summary Notes

Introduction to the Podcast Episode

  • Harry Stebings introduces the first 20VC episode of 2021.
  • Guests Howard Marks and Bill Gurley are introduced as investment idols and their backgrounds are highlighted.
  • The episode aims to discuss the events of 2020 and implications for 2021.

Welcome to the first 20 Vc of 2021 with me, Harry Stebings, and my word, what a start to the year we have for you with this episode, two of my all time investing idols on the show today to discuss what happened in 2020 and what does that mean? Looking forward to 2021.

This quote sets the stage for the episode, introducing the purpose and the high-profile guests who will share their insights on the past year's events and future expectations.

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Economic Analysis of 2020

  • Howard Marks discusses the potential for a global depression in 2020 due to economic shutdowns.
  • Marks credits the Fed and treasury for their actions which led to a brief recession instead.
  • Bill Gurley adds that venture capital is inherently cyclical and aggressive due to fund flows.

First of all, nine months ago, a global depression was absolutely a possibility... But thank God the Fed and the treasury did what they did in this country, central banks elsewhere. And clearly, we've had a very painful and precipitous but brief recession.

Marks reflects on the potential economic crisis averted in 2020, attributing the milder outcome to the intervention of financial institutions.

Venture Capital and Macroeconomic Predictions

  • Both Marks and Gurley express difficulty in making macroeconomic predictions.
  • Gurley shares his experience seeking macroeconomic insights from Howard Marks and Stan Druckenmiller.
  • Gurley discusses the cyclical nature of venture capital and how it's affected by macroeconomic factors.

Macro predictions are very hard to make, and I don't think either of us bases our investment decisions on macro forecasts.

This quote demonstrates the speakers' skepticism towards making investment decisions based on macroeconomic predictions due to their inherent uncertainty.

Interest Rates and Venture Capital

  • Bill Gurley talks about the impact of low interest rates on venture capital and tech industries.
  • Gurley mentions the encouragement of speculation due to near-zero interest rates.
  • He observes unprecedented valuations in SaaS companies and the push for aggressive growth strategies.

We have interest rates at unprecedented lows... It encourages massive speculation as people search for asset categories, for yield.

Gurley points out that the current low interest rates are leading to increased speculation in the market, as investors seek higher returns.

Advice for Founders in Capital-Intensive Markets

  • Gurley advises founders to play the game on the field, suggesting aggressive growth due to market conditions.
  • He acknowledges the potential outcomes of aggressive growth, including both massive successes and failures.

If you act conservatively and your two competitors act aggressively, you will be left behind... But certainly when the world is rewarding aggressive growth, don't care about profitability, you're going to have a mix of end results.

Gurley provides strategic advice to founders, emphasizing the need to be aggressive in growth to keep up with competitors and market demands.

Potential Changes in Interest Rates

  • Howard Marks discusses the Federal Reserve's stance on keeping rates low to encourage economic activity.
  • Marks suggests that high rates are only employed when inflation rises too much.

The Fed says it's going to keep rates low until we get progress on its growth and inflation targets... So until we get growth above two and a half or three, and certainly until we get...

Marks explains the Federal Reserve's reasoning behind low interest rates and the conditions that might lead to a change in this policy.

Federal Reserve and Interest Rates

  • The Federal Reserve is unlikely to increase the Fed funds rate if inflation remains above 2%.
  • Inflation and interest rates could potentially be influenced by the market or the economy.
  • There is uncertainty about the origins of inflation, drawing on historical examples from the 1970s and recent experiences in Japan and Europe.
  • The market demands positive real interest rates, which could lead to increases independent of the Fed's actions.

"If you get inflation at 3% a year, nobody wants to lend money out at 1% a year, because what they're doing is locking in at 2% a year loss of purchasing power, and the market would demand positive real rates."

The quote explains that if inflation exceeds the interest rates, lenders experience a loss of purchasing power, which leads to a demand for higher interest rates to maintain positive real returns.

Government Stimulus and Inflation

  • The economic theory suggests that government deficits and money printing can stimulate the economy and potentially lead to inflation.
  • Despite government deficits since the global financial crisis, there has been no significant inflation.
  • The Phillips curve, which posited an inverse relationship between unemployment and inflation, is now being questioned due to low unemployment without corresponding inflation.

"But our government's been running deficits since the global financial crisis, and this was the slowest recovery in postwar history, and it didn't kindle any inflation."

The quote emphasizes the disconnect between traditional economic expectations of inflation due to government deficits and the actual low inflation experienced after the global financial crisis.

Employment and Labor Markets in 2021

  • The Federal Reserve has taken significant actions, such as rate cuts and bond purchases, to stimulate the labor market.
  • The success of labor market recovery is tied to the vaccine rollout and achieving herd immunity.
  • There is a concern for the long-term employment prospects due to technological advancements replacing labor.

"I personally believe that when we get to herd immunity and when the number of cases falls radically... I think that we'll have a very good recovery in the economy and in employment."

The quote suggests optimism for economic and employment recovery contingent upon achieving herd immunity against COVID-19.

Technological Impact on Labor

  • The fear that technology will eliminate jobs may be overstated, with historical examples like bank tellers increasing despite ATMs.
  • The U.S. does not emphasize the importance of learning programming and tech skills, which are in high demand.
  • Societal biases and outdated educational curriculums may contribute to the lack of focus on tech education.

"Learn to program. Because you can make 50 to 100 grand coming out of undergrad and there's unlimited employment for those job types."

The quote highlights the opportunity and demand for programming skills in the job market, suggesting a need for a shift in educational priorities.

Distressed Debt Investing in a World of Innovation

  • Oaktree has been successful in distressed debt investing during financial crises.
  • The big money is made by purchasing undervalued assets, which occurs when others are unwilling to take risks.
  • The current market conditions with the Fed's intervention have reduced fear and urgency, leading to fewer distressed selling opportunities.

"We made money because we were able to buy things cheaper than we should have been able."

The quote explains the fundamental strategy of distressed debt investing: buying assets at prices below their intrinsic value.

Public Market Performance Evaluation

  • Public stock prices are at an all-time high despite the pandemic, influenced by historically low-interest rates.
  • Asset prices are justified by low-interest rates, which also explain high PE ratios.
  • The state of the public markets needs to be evaluated in the context of interest rates and potential rate increases.

"The lower the interest rates, the higher the asset price is justified."

The quote connects the concept of asset pricing to the level of interest rates, indicating that low rates can justify higher prices for stocks and other assets.

Stock Prices and Interest Rates

  • Current stock prices for technology companies are seen as consistent with the current level of interest rates.
  • Amazon and Microsoft are examples of tech companies that have performed exceptionally well post-pandemic, leading the way for others.
  • There is a distinction between justifiable valuations of established companies and the soaring prices of IPOs.

But today's stock prices for technology companies, for example, I think are not inconsistent with today's level of interest rates.

This quote highlights the perceived alignment between current tech stock prices and interest rates, suggesting a rationale behind the high valuations.

Federal Reserve's Response to the Pandemic

  • The Fed's swift action during the pandemic prevented a scarcity of capital, unlike previous financial crises.
  • The availability of capital led to increased speculation and investment in the stock market.
  • There are concerns about the long-term effects of flooding the market with money.

And because the Fed hit so quick this time, money never got pulled in.

This quote emphasizes the speed of the Federal Reserve's response in providing liquidity to the market, preventing a repeat of past financial contractions.

Tech Companies and Compounding Growth

  • Successful tech companies have demonstrated the power of compounding growth due to network effects.
  • Investors are inclined to overlook high entry valuations due to the historical performance of leading tech firms.
  • The IPO process is flawed, leading to inflated valuations that may not hold up in the long term.

The best thing you could have possibly done in a portfolio 20 years ago is just to buy the leading tech players and never think about selling them, just put them away.

This quote reflects on the successful strategy of long-term investment in leading tech companies, highlighting the impact of compounding growth.

Valuation and Growth Expectations

  • Valuations should eventually reflect a company's earnings or cash flow, not just relative performance.
  • There is skepticism about the sustainability of high growth rates implied by some valuations.

Your stock will eventually trade at or below 30 times earnings.

This quote conveys the expectation that stock prices will ultimately be anchored to traditional valuation metrics like price-to-earnings ratios.

Lessons from the Nifty 50

  • The concept of 'invincibility' in investing can lead to bubbles where psychology detaches from reality.
  • Even companies with great potential must be valued with some rational basis.
  • Historical examples like the Nifty 50 show that high confidence can lead to overvaluation and subsequent market corrections.

A bubble is a point in time when psychology takes off and gets free of its moorings.

This quote defines a bubble and warns against the dangers of overconfidence in the invincibility of certain assets or companies.

Retreat from Globalization

  • The retreat from globalization is believed to slow down economic growth.
  • Globalization allows for specialization and comparative advantage, which improves overall welfare.
  • The decline in globalization could lead to higher costs and reduced standards of living.

Globalization has been incredible for the world, and I hate to see it decline.

This quote expresses support for globalization and concern over its retreat, stressing its benefits to the world economy.

Comparative Advantage in a Global Economy

  • Comparative advantage is crucial; certain goods are more efficiently produced in certain countries.
  • A lack of globalization can affect job fluidity and the distribution of work globally.

There is probably no chance we can make a $30 microwave in the US.

This quote illustrates the concept of comparative advantage, where it is more beneficial for countries to produce what they are most efficient at and trade for the rest.

China's Role in Global Leadership

  • China is gaining experience and organizing itself for global leadership.
  • Concerns about regulatory capture in the U.S. suggest that China might address problems more efficiently due to its political system.

They've already started being a lender of capital across the globe, heavy in South America.

This quote acknowledges China's expanding influence in global economics, particularly as a capital lender.

Reading Recommendations During Pandemic

  • The pandemic and social issues like the George Floyd incident have increased awareness and sensitivity towards certain topics.
  • Reading is suggested as a productive activity during increased time spent at home due to the pandemic.

In the middle of the pandemic, we had the George Floyd incident, and I think many of us have become more sensitive to considerations.

This quote connects the recommendation of reading to the current social context, suggesting that literature can be a way to engage with pressing societal issues.

Reflections on Racial Inequality and Civil Rights

  • Harry Stebings reflects on the significance of racial inequality issues highlighted by the death of George Floyd and the passing of civil rights leader John Lewis.
  • He mentions reading John Lewis's autobiography, finding it instructive and inspirational.

"I spent some time reading the autobiography of John Lewis. John Lewis was a congressman who was very active, great leader in the civil rights movement and passed away this year. So his passing, plus the George Floyd, made it a great time to read that book, and I found it very instructive, inspirational."

  • The quote underscores the impact of current events on Harry's choice of reading and the value he found in learning from a prominent figure in the civil rights movement.

The Influence of Literature on Finance and Innovation

  • Howard Marks discusses his early interest in finance, which was sparked by reading memos under a duvet at boarding school.
  • Bill Gurley recommends Matt Ridley's books "How Innovation Works" and "The Rational Optimist" for insights into innovation, capitalism, and global economic growth.

"A book that I think touches on a number of the topics we hit on today is Matt Ridley's new book, how innovation works. And if you're going to read that one, you might read the rational optimist, which he wrote before it."

  • The quote highlights Bill's recommendation of Matt Ridley's work as relevant literature that covers the themes discussed in their conversation.

The Role of SPACs in Venture Investing

  • Bill Gurley expresses concern that SPACs (Special Purpose Acquisition Companies) are making the market more risk-seeking and speculative, especially with companies that are less mature financially.

"It just makes things more risk seeking. It's just more capital, more ways to get public."

  • This quote reflects Bill's view that SPACs are contributing to increased speculation in the market by providing an alternative to traditional IPOs for companies, including those with uncertain financial futures.

Preparing for an Uncertain Future

  • Howard Marks emphasizes the importance of preparation over prediction, citing Mark Twain and discussing the role of understanding current conditions to prepare for future uncertainties.

"You can't predict. You can prepare."

  • The quote captures Howard's philosophy that while the future is unpredictable, individuals can still prepare for potential outcomes by understanding the present situation.

Concerns about Regulatory Capture and Political Division

  • Bill Gurley shares his worries about regulatory capture in the U.S., where both political and corporate interests can impede progress and reform.

"I really worry about regulatory capture, Harry, on both sides of the, you know..."

  • The quote reflects Bill's anxiety over the influence of special interest groups on government policy and the need for reform to address this issue.

  • Howard Marks discusses social and political concerns, including the deepening divide between political parties and the inability to enact bipartisan cooperation.

"I worry about the schism in the country, that the two sides, not only do they disagree, but they hate each other, and each side uses a totally different way of looking at life and talking about it."

  • This quote highlights Howard's concern about the increasing polarization in American politics and the challenges it poses to governance and social cohesion.

Optimism for the Future

  • Both Bill Gurley and Howard Marks express optimism for the future, citing the adaptability of America, technological advancements, and the potential for improved job matching through technology.

"Well, I think that eventually we find the solution in America, maybe after we've exhausted all the other possibilities, but we've always so called muddled through."

  • The quote reflects Howard's belief in America's resilience and eventual problem-solving, despite current challenges.

"I think in the future, we're going to have this massive ability to match whatever your comparative advantage is as an individual with way more financial opportunities and way more ways of means of making money than you had in the past."

  • Bill's quote conveys his positive outlook on the future of employment and the potential for technology to better align individuals' skills with job opportunities.

Closing Remarks and Acknowledgments

  • Harry Stebings expresses gratitude to Howard Marks and Bill Gurley for their participation in the show and shares his enthusiasm for the episode.

"I can't thank you enough for doing this. As I said, I've wanted to do this one for a very, very long time, since I both had you on the show independently."

  • The quote indicates Harry's appreciation for the opportunity to have both Howard and Bill on the show and the fulfillment of a long-standing goal.
  • Harry Stebings promotes Remote and Ramp, services that aim to simplify international labor law compliance and spend management, respectively.

"Remote handles payroll benefits, taxes, and compliance to help companies of all sizes to pay and manage full-time and contract workers all over the world." "Ramp is the only spend management platform and corporate card that can automate your accounting and lower your bills in under 15 minutes."

  • These quotes serve as endorsements for Remote and Ramp, highlighting their features and benefits for businesses managing international teams and spend management needs.

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