Howard Marks & Andrew Marks Something of Value

Abstract
Summary Notes

Abstract

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal engage in a rich dialogue with legendary value investor Howard Marks of Oaktree Capital Management and his son, Andrew Marks of TQ Ventures. They delve into the contrasting investment philosophies of traditional value investing and modern growth-oriented tech investing. Howard, known for his influential investment memos and books, and Andrew, a proponent of early-stage venture investing, discuss the nuances of knowing when to sell, the importance of founder judgment in startups, and the evolution of markets. Their conversation highlights the key to successful investing—understanding the intrinsic value and future potential of businesses, while also considering the timing and opportunity cost of investments. The episode also touches on the significance of crafting a firm culture that aligns with personal strengths and the dynamic of working within a family business in the investment world.

Summary Notes

Introduction to Acquired Podcast Episode

  • The episode features a special discussion on investment styles with two guests, Howard Marks and Andrew Marks.
  • Howard Marks is a legendary value investor and co-founder of Oaktree Capital Management.
  • Andrew Marks is the co-founder of TQ Ventures, an early-stage venture firm.
  • The episode explores the dichotomy between value investing and growth-oriented tech investing.

"Today we have two guests with very different investment styles, a value investor and a growth oriented tech investor, head to head."

This quote sets the stage for the episode's focus on contrasting investment philosophies and the dialogue between Howard and Andrew Marks.

Andrew Marks' Technological Aptitude and Investment Potential

  • Andrew Marks is recognized for his potential in technology and is humorously advised to invest in tech startups.
  • The conversation starts with a light-hearted exchange about technology and the truth.

"Andrew. I think you have a bright future in technology."

Ben Gilbert acknowledges Andrew's aptitude for technology, hinting at his future success in the field.

Overview of Acquired Podcast and Hosts' Backgrounds

  • Ben Gilbert is the co-founder and managing director of Pioneer Square Labs and PSL Ventures.
  • David Rosenthal is an angel investor based in San Francisco.
  • The hosts introduce the podcast's focus on technology companies and their stories.

"Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them."

Ben Gilbert introduces the podcast's theme, emphasizing the exploration of successful technology companies and the strategies behind their achievements.

Introduction of Guests and Their Investment Firms

  • Howard Marks is introduced as the co-founder of Oaktree Capital Management, a leading investment management firm.
  • Andrew Marks is introduced as the co-founder of TQ Ventures, an early-stage venture firm with impressive accomplishments.

"We are joined today by the legendary value investor Howard Marks, the co founder of Oaktree Capital Management, and his son, Andrew Marks, the cofounder of TQ Ventures."

The introduction highlights the guests' credentials and the significance of their presence on the podcast.

Discussion of Howard Marks' Investment Memos and Popularity

  • Howard Marks is known for his investment memos, which even Warren Buffett praises.
  • The most popular memo written by Howard, "Something of Value," was co-authored with his son Andrew during the COVID-19 pandemic.
  • The memo debates value investing versus growth investing and tech investing.

"Howard's memos and books are among the most coveted in the entire investing landscape. Even Warren Buffett is quoted in saying, when I see memos from Howard marks in my mail, they're the first thing I open and read."

This quote emphasizes the high regard in which Howard Marks' memos are held within the investment community.

The Role of Pilot as a Sponsor for the Podcast

  • Pilot is an accounting firm that offers services to startups and growth companies.
  • The company is backed by notable investors such as Sequoia, Index, Stripe, and Jeff Bezos.
  • Pilot's philosophy aligns with the axiom that startups should focus on their core product and outsource non-core functions like accounting.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

The quote introduces Pilot and its role as a comprehensive accounting service provider for startups, emphasizing its growth and importance.

The Collaboration between Howard and Andrew Marks on the "Something of Value" Memo

  • The "Something of Value" memo is a collaborative work between Howard and Andrew, sparked by discussions during the pandemic.
  • The memo reflects on the differences between value and growth investing, encapsulating personal perspectives and generational contrasts.

"Andrew and Howard co authored one of Howard's famous memos together in a departure for Howard, where they were debating over Covid together as a family, as father and son, value investing versus growth investing and tech investing and what was going on in the markets."

This quote explains the context in which the "Something of Value" memo was written, highlighting the unique father-son collaboration.

Andrew Marks' Investment Journey from Value to Growth

  • Andrew Marks began as a value investor, influenced by his father and Warren Buffett.
  • His investment focus gradually shifted towards growth companies, particularly in technology.
  • Andrew emphasizes the importance of understanding investments deeply rather than relying on superficial knowledge.

"I started off being a value investor, first parroting my dad, as all little kids do, and then I got, fortunately, into the Buffett letters really young, and so turned into a huge Buffett nerd and all the things that come with that."

Andrew Marks describes his early investment influences and the evolution of his investment philosophy from value to growth.

The Case Study of Amazon in the Context of Value and Growth Investing

  • Amazon is discussed as a prime example of a company that challenges traditional value investing principles.
  • The conversation touches on the importance of management teams and the potential for reinvestment in growth.
  • Amazon's favorable cash conversion cycle is highlighted, suggesting a more nuanced understanding of its financial health beyond the income statement.

"Amazon's a great example of the opposite, because you could have never dreamed that if you owned Amazon when the story was about growing as a retailer, you could have never dreamed of AWS."

Andrew Marks uses Amazon as an example to illustrate the unpredictability and potential of growth investing, especially when led by visionary founders.

Howard Marks' Transition from Equity to Credit Investing

  • Howard Marks recounts his transition from equity research to credit investing and the discovery of high-yield bonds.
  • He emphasizes the importance of open-mindedness and adaptability in investment strategies.
  • The discussion includes historical context, such as the Nifty 50 investment era and the emergence of high-yield bonds.

"I'm a recovered equity investor. I was in the equity research department of Citibank from 69 to 78. And then I left. And in the credit field, where I've spent the last 44 years, we historically have not had contact with what you would call a tech company."

Howard Marks reflects on his career shift from equity research to credit investing, highlighting the different investment focus and his long-term experience in the field.

Disruption and Company Durability

  • The idea of disruption and its impact on seemingly invulnerable companies was not always considered.
  • Companies like IBM and Xerox were once thought to be too strong to fail, yet they faced significant challenges.
  • Simplicity Patterns and Sears are examples of companies that struggled despite once being seen as secure.
  • Disruption often occurs when competitors can undercut established companies on price.
  • Wall Street Journal used to highlight significant losses in companies, showing that even strong companies could lose value drastically.

"The concept of disruption was never considered. The moats were considered inviolate." "If Xerox priced their copies at $0.30 apiece, somebody from abroad could produce it."

The quotes highlight that there was a time when the concept of disruption was not part of the business mindset, and companies with strong market positions ("moats") were considered safe. The example of Xerox shows how foreign competition could disrupt a market by offering lower prices.

Investing and Valuation

  • Investors need to assess future potential and compare it to current valuation.
  • All investments are essentially a bet on discounted future cash flows.
  • A company's future cash flows may be near-term or far off, but they all factor into valuation.
  • Disruption can affect even the most stable-seeming companies, so investors need to make judgments about future risks.
  • The nature of a DCF (Discounted Cash Flow) formula requires making assumptions about a company's future.

"You have to think about the future potential of the company." "All investments in equities are worth a discounted value of their future cash flows from here to eternity."

These quotes emphasize the importance of considering a company's future potential in investment decisions and the fundamental concept that equity investments are valued based on the present value of future cash flows.

The Fall of Newspapers

  • Newspapers were once considered to have great moats due to local monopolies and consistent consumer and advertiser demand.
  • The industry has since faced significant challenges, with many companies struggling to survive.
  • The shift in consumer behavior to digital media was not anticipated and led to a decline in newspaper value.

"The newspapers... because you had your newspaper, you didn't have to worry about competition from the newspaper in the town next door."

This quote reflects the past dominance of newspapers, which were seen as secure investments due to their local monopolies and the essential nature of their service to both readers and advertisers.

Technological Adoption and Market Evolution

  • Technological adoption has accelerated, making it less likely for companies to maintain their market position without adaptation.
  • Companies that leverage their advantages can create significant value.
  • The internet allows companies to reach global markets, unlike the past where markets were more localized.
  • Markets and the nature of competition have evolved, with information becoming more accessible and the pace of change accelerating.

"There are very few businesses that idiots can run these days." "With the Internet, you can address global markets."

These quotes highlight the complexity of modern business and the vast opportunities presented by the internet, which allows companies to expand their reach far beyond traditional geographic limitations.

Value Creation and Competitive Advantage

  • Companies must continuously innovate and use their competitive advantages to create value.
  • The ability to enter new markets and launch new products is crucial for success.
  • Companies must also avoid becoming complacent or bureaucratic to maintain their competitive edge.

"If you have competitive advantages and you continue to mine those advantages... there's much more value creation to be had."

The quote underscores the importance of leveraging competitive advantages for value creation and the potential for successful companies to expand and dominate in their markets.

The Nature of Disruption and Darwinism

  • Disruption is akin to Darwinism in the business world, with winners and losers determined at a faster pace.
  • The future is uncertain, and companies must adapt quickly to survive and thrive.

"Take Darwinism and turn up the knob a few clicks. It's what it is. It's winners and losers, maybe more dramatic than ever and happening faster than ever."

This quote draws a parallel between business disruption and Darwinism, suggesting that the pace of change and the consequences of failing to adapt are more severe than in the past.

Investment Strategy Evolution

  • Investment strategies must evolve with the market.
  • Information is more readily available, making it harder to find undervalued investments based on public data.
  • Investors must have a knowledge advantage or be better at making qualitative judgments about the future.

"You have to have an advantage, a knowledge advantage, a skill advantage, if you're going to be one of the people who ends up on the positive side of that equation."

The quote emphasizes the need for investors to have some form of advantage, whether in knowledge or skill, to succeed in a market where information is widely accessible.

Venture Capital and Personal Suitability

  • Venture capital investing requires making long-term qualitative judgments.
  • It is a probabilistic endeavor where the average occurrence might be a loss, but the high expected value of successful investments can lead to great returns.
  • Investors must find investment strategies that suit their skill sets and personalities.

"I like being an optimist, and I like thinking about, well, what could this be if it works?"

This quote reflects the speaker's personal investment philosophy and preference for venture capital, which aligns with an optimistic outlook and a focus on the potential success of a business.

Product Observability and Feature Impact with Statsig

  • Statsig provides tools for product teams to ship features rapidly, automate A/B testing, and monitor the impact of each feature on core business metrics.
  • The platform offers visualizations and a robust statistics engine for real-time product observability.
  • Statsig allows for data-driven decisions by linking new features to business metrics and assessing their impact on customer usage.

"roduct teams ship faster, automate a b testing, and see the impact every feature is having on the core business metrics. The tool gives visualizations backed by a powerful stats engine, unlocking real time product observability."

This quote explains the core functionality of Statsig, highlighting its ability to enhance productivity and decision-making for product teams.

Statsig's Customer Base and AI Feature Testing

  • Statsig is used by a diverse range of companies, including Notion, Brex, OpenAI, Flipkart, Figma, Microsoft, and Cruise Automation.
  • It is particularly effective for rolling out and testing AI product features, as seen with Notion's generative AI features.
  • The tool integrates with data warehouses, facilitating the use of company data regardless of where it is stored or the current feature flagging setup.

"Customers include notion, Brex, OpenAI, Flipkart, Figma, Microsoft and Cruise Automation."

This quote lists some of Statsig's prominent customers, indicating the platform's wide acceptance and versatility in the market.

Investment Firm Building and Management Philosophy

  • Howard Marks reflects on his experience at Citibank and the importance of culture and processes in building Oaktree.
  • The demand for alternative investments helped Oaktree succeed despite a lack of micro-management and a haphazard approach to compensation.
  • Oaktree's success was attributed to the right culture, exceptional people, and a favorable market climate.

"So we had a big tailwind. And what Bruce and I did for the most part, is create a culture."

Howard Marks emphasizes the impact of market conditions and firm culture on Oaktree's success.

Partner Dynamics and Complementary Skills

  • Oaktree's founders had a history of working together, which facilitated their partnership and division of responsibilities.
  • Howard Marks focused on client relationships and capital raising, while his partner Bruce handled money management.
  • Shared values and complementary skills among partners are crucial for a successful partnership.

"But the great news is we each accepted the truth of what I just said. And so that produces a lot of respect, mutual respect."

This quote from Howard Marks highlights the mutual respect and recognition of each partner's strengths as a foundation for their long-standing partnership.

Andrew Marks' Contrasting Approach to Firm Building

  • Andrew Marks and his partner prioritize world-class investment returns and maintain a narrow focus on their firm's strategy.
  • They emphasize reputation with founders and building a broad network of talented potential founders.
  • Andrew and his partner are motivated by being the best they can be, rather than competing with others.

"And it's not because other approaches aren't also extremely valid or work for other people. It's just that this is what motivates us."

Andrew Marks explains that their firm's approach is tailored to their personal motivations and strengths, rather than a reaction to other strategies.

Public Engagement and Investment Strategy

  • Andrew Marks does not engage in public-facing activities like writing memos or appearing on podcasts, unlike his father.
  • The nature of Oaktree's and TQ's investment businesses differ, leading to different core competencies and public engagement strategies.

"I think at some point you just sort of do what suits you."

Andrew Marks discusses the importance of aligning public engagement with personal preferences and the nature of the business.

Investment Philosophy and Judgment

  • Howard Marks and Andrew Marks discuss the importance of competitive spirit, learning from mistakes, and evolution in the investment business.
  • Investment success requires a balance between confidence and humility, concentration and diversification, and sticking to one's strengths while being open to change.
  • Judgment in investing is complex and cannot be reduced to an algorithm, relying on qualitative assessments and future predictions.

"But the few who can can really help their clients."

Howard Marks points out that only a select few investors are able to make accurate qualitative judgments about the future, which is critical for client success.

Recruiting and Founder Evaluation

  • Oaktree's recruiting focused on smart, team-oriented individuals with an intuitive grasp of important concepts.
  • Andrew Marks emphasizes understanding a founder's background and decision-making process as key to evaluating their judgment.
  • Both Howard and Andrew agree that unconventional thinkers are often the most successful in the startup space.

"But with startups, there's not much of a map."

Andrew Marks discusses the uniqueness of startups and the necessity for founders to think independently and have strong convictions.

The Need for Idiosyncratic Investment Strategies

  • Exceptional investment strategies require diverging from the norm and embracing idiosyncrasy.
  • Success in investment often involves doing things differently from the majority and requires a level of discomfort.

"The path to exceptionality cannot come through doing what everybody else does."

Howard Marks emphasizes the need for investors to be different and idiosyncratic to achieve exceptional results.

Building Successful Companies

  • Building a successful company requires exceptional people with exceptional judgment.
  • Great founders attract and retain other exceptional individuals.
  • The competitive landscape means outcompeting others is a necessity.

"And I just think it takes exceptional people who can exhibit exceptional judgment, who can attract and retain other exceptional people, and all the things that go into being a great founder to build those sorts of things."

This quote emphasizes the importance of having a team of outstanding individuals who can navigate the complexities of establishing and growing a successful company. It highlights the challenges of competition and the need for exceptional leadership.

Crusoe and Clean Compute Cloud

  • Crusoe is a clean compute cloud provider, partnering with Nvidia.
  • Crusoe's data centers are powered by wasted, stranded, or clean energy.
  • They offer better performance per dollar than traditional cloud providers.
  • Their environmental angle is significant, utilizing power that would otherwise be wasted.

"Crusoe's data centers are nothing but racks and racks of a. Because Crusoe's cloud is purpose built for AI and run on wasted, stranded, or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

This quote describes Crusoe's specialized infrastructure and its efficient use of energy, which not only provides cost benefits but also has a positive environmental impact.

The Concept of an Exit in Business

  • Exit strategies are crucial for liquidity in investments.
  • Oaktree's transaction with Brookfield was a dream scenario for Howard Marks.
  • Oaktree maintained independence and control post-transaction.
  • The deal allowed for gradual selling options for stakeholders.

"So they proposed to offer a fair price to take out the public. That's half, and to buy a fifth of our half. So they started with just over 60%."

Howard Marks explains the specifics of the transaction with Brookfield, which was structured to benefit both parties and maintain Oaktree's operational independence.

Perspectives on Selling Securities

  • Selling is as important as buying in investment.
  • Howard Marks comes from a conservative background, advocating for taking profits.
  • The decision to sell should be based on deep understanding and opportunity cost.
  • Holding onto rare, compounding investments can yield significant returns.
  • The selling decision should be as thoughtful as the buying decision.

"What I said in the memo, selling out half facetiously, but only half, is that there are two reasons people sell things. Because they're up and because they're down."

Howard Marks discusses the common, yet flawed, reasons behind selling investments, which often are driven by emotional reactions rather than strategic thinking.

The Importance of Understanding Investments

  • Understanding the nature of the investment is key to making selling decisions.
  • Price action should not be the sole determinant for selling.
  • Recognizing rare compounding opportunities is crucial.
  • Investors often act based on a desire to do something, which can lead to premature selling.

"You shouldn't just let price action alone determine what you should do."

Andrew Marks advises that selling decisions should not be solely influenced by price fluctuations but should be based on a comprehensive understanding of the investment's intrinsic value and potential.

Consistency in Investment Strategy

  • Consistency and avoiding rash decisions can lead to long-term success.
  • The willingness to accept fluctuations is part of a sound investment strategy.
  • Howard Marks' memos are a testament to his consistent approach and philosophy.

"I don't care if I'm in the top 5% in any given year. I'm absolutely unwilling to be in the bottom 5%."

Howard Marks expresses his investment philosophy, emphasizing the importance of consistency and risk aversion over chasing top performance at the expense of potential significant losses.

The Evolution of Howard Marks' Memos

  • Howard Marks' memos have been published since 1990 and are available for free.
  • The memos gained recognition after accurate predictions about market events.
  • They are also available in podcast form for those who prefer listening.

"But this one, of course, the tech bubble crapped out in mid 2000. And so I like to say that after ten years, I became an overnight success."

This quote recounts how Howard Marks' memo on the tech bubble garnered attention due to its timely and accurate analysis, leading to increased recognition of his work.

Venture Capital Insights

  • The most successful venture firms often owe their reputation to a few key investments.
  • Selling early in generational companies can be a colossal mistake.
  • The rarity of truly exceptional companies makes holding onto them even more valuable.

"The truly generational companies, the truly monstrous companies are extremely few and far between. But when you have them, selling them early is just a colossal mistake."

Andrew Marks highlights the importance of recognizing and retaining investments in companies that have the potential to be transformative and generational, as their value can be immense over time.

Final Thoughts and Resources

  • Howard Marks and Andrew Marks discuss the importance of understanding and strategy in investment decisions.
  • They emphasize the value of consistency and long-term thinking.
  • Howard Marks reflects on the early days of his memos and their eventual impact.
  • Resources for learning more about their work and insights are provided.

"These things are also available in podcast form under something called the memo. Originally enough, in any podcast player."

Howard Marks provides information on where listeners can access his memos in both written and audio formats, emphasizing the accessibility and value of his insights.

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