I'm 80 and I wasted 25 years of my life. Don't make my mistake. - Howard Marks

Well, the story is very simple. I have this son named Andrew. He's a VC. He's dealing with AI every day. His companies use AI, some of them create AI. I had written the first memo around December 9th as I recall. And then in early February, he said, 'Dad, so much has happened. You have to update the memo.' And so I rewrote the memo entirely.

It depends on your definition of emotional. I upgraded my opinion of AI and its potential because its ability to talk about its own strengths and weaknesses, to use humor, to put information in the context of me, to use what it knows about me. And this is really exceptional stuff. There's a quality to AI or more than one quality which are unprecedented in my opinion. The first, the obvious one, is autonomy. All the other technological innovations from the railroad to computers to the internet etc. were all tools or things to speed up and increase productivity. There's never been anything with the quality of autonomy. The idea that you can give it a job and not tell it how to do it and it'll figure it out is really unique. And what comes with that of course is this nagging concern that it may take over. So that's really important. The other thing, and this is not quantifiable, is there's never been anything in my opinion so unpredictable. I don't think anybody knows the shape of the future. So I have never had that sense before. I never thought that the internet, for example, was beyond comprehension or beyond prediction.

And I got to be honest, when I read it, I almost felt like, you know, you read stories about Warren Buffett reading the Moody's manual page by page, 800 companies, and trying to digest that information. Well, AI can do that in a heartbeat. A lot of the things that go into making investment decisions it can do very well, very fast. And also it's advancing so fast, so whatever we thought it could do 3 years ago is laughable compared to what it can do today, and as you pointed out, even 3 months ago. So I guess in your heart of hearts, do you think the next Howard Marks is not a human, but maybe a human with AI or just AI?

Well, in my first book, The Most Important Thing, Columbia, which published the book, we were talking about the book. They said, 'Write us a sample chapter.' So I sat down and I wrote a chapter that I had never even thought about. And it turned out to be the first chapter in the book. The most important thing is second level thinking. Second level thinking basically says if you don't see anything different from everybody else, you can't possibly be superior. So to be superior, you have to at some point see something different from other people. It's called a variant perception. You have to either think that the consensus of investors overstates the quality of the company, the growth rate of the company, the earning power of the company, or maybe the multiple it deserves. And you have to have this variant perception, you have to bet on your perception, and you have to be right. So that's second level thinking. I say in the book, and when people ask me, 'Can you teach me to be a second level thinker?' the answer is no. I don't know. But I think it's more no than yes because what I say is I can teach you the importance of being a second level thinker like I just have in this chapter. But I can't tell you how to have perceptions that are at odds with the consensus of investors and correct. In basketball there's a saying, you can't coach height. And I think there's something called insight. And I think some people have it. And I don't know if AI can have it because when you talk about artificial general intelligence, AGI is when a computer or AI can do everything that a human can do. Can it do that? Don't know. And that's a big one of the mysteries of AI. Are there things it can't do even when it reaches full flower?

Great. I think in our last episode we talked about the day Lehman went under, September 15th of '08. We had thought that there was going to be a mess and we had raised in the distressed debt world the biggest fund in history prior to '07 was our O2 fund which was 2.5 billion, and in '07-'08 we raised 11 billion for a distressed debt fund because we thought that there was a lot of distress coming. We had it on the shelf for deployment when the stuff hit the fan. Lehman goes under, which qualifies as saying the stuff has hit the fan, but people are talking about the end of the world. All the financial institutions are going to melt down and everything having to do with money is going to atomize. So we were faced with the question: do you invest the money? There's no pattern recognition for the end of the world. A Harvard epidemiologist said, when we make decisions we have data, analogies to past experience, and supposition. At the time of the Lehman bankruptcy, we had no data and no prior experience. We only had supposition. So this is an interesting question: can AI have engaged in this kind of thinking? What we said is that if the financial world melts down and we invest, it doesn't matter. But if we don't invest and the financial world doesn't melt down, then we didn't do our job. So we have to do it. And we invested on that basis. Bruce, who runs those funds, invested an average of $450 million a week for 15 weeks. $7 billion in a quarter on that. Well, we also on quantitative measures, assuming the world doesn't melt down, we were getting great bargains. We were buying the debt of companies where we would break even if companies that had been bought out by private equity guys 2, 3, 4 years earlier ended up being worth a fifth or a fourth of what they had paid. We would still be okay. So that was pretty easy quantitatively. But we were absolutely not confident.

No. I thought you were going to say the opposite of that.

So there's a list of things. Number one, certainly prior experience, relationships. People have known us. We started this business in 1988. So 20 years later, in those 20 years we managed a lot of money and had very good results for a lot of people. So you can work on that reservoir of goodwill. Number two, this strategy is particularly well suited for crisis. We had managed money through a few crises: 1991 and 2001-02, and done exceptionally well. So we were able to convince people that, number one, so many of your investments are set up for prosperity. This is a good way to hedge it by making an investment that will do particularly well if the stuff hits the fan. But we were also able to call attention to flaws in the environment. The things that gave rise to the global financial crisis we could talk about. The market was not acting as a disciplinarian, which is its main job. People come in and say, 'I want money for this,' and the market's job is to say, 'No, that doesn't make any sense, that's a stupid idea, we're not going to invest in that.' Sometimes the market doesn't do that job. When the market doesn't do that job, dumb ideas get financed. And when they turn out to be dumb, people lose money. So I think we were able to convince people that some dumb things were happening. And of course, there's great respect for Bruce for the investing he's done over the years. I think those are the main reasons we were able to do it. And by the way, you hit the nail on the head. We did it in advance of the crisis. The best time to invest is in a crisis. You can't raise money during the crisis because the news is so terrible. My wife and I have a favorite movie we watched called 'Spy Game' with Robert Redford. He says, 'When did Noah build the ark? Before the flood.' You got to build the ark before the flood. You have to have some sense that there may be a flood. One other point: in the prior 20 years, there had been these occasions when we thought there was going to be a great investment opportunity. We were generally right because we took the temperature of the market accurately. We raised a large fund, we invested in it, and we made a lot of money. But then our next fund was smaller because we thought the opportunities weren't as good. Most people in the investment business, if they have a fund that does great, the next fund is bigger because they can sell on the back of those results. But we make it smaller because we think those results mean that things have appreciated and are not so attractive. And I think that having done that for 20 years, we gained a lot of credibility. People tend to say, 'When Howard and Bruce say there's a great opportunity, they're not just trying to raise money. They really believe it and they tend to be right.' Sometimes you have to speak against your own interest and admit your limitations and admit your uncertainties. In 1998, we had the meltdown of Long-Term Capital Management. We had a Russian ruble crisis. We had a panic in Southeast Asia. With Long-Term going under, one of the skilled portfolio managers, a young portfolio manager at Oaktree came to me. He said, 'I think this is it. I think we're melting down. It's all over.' I said, 'Tell me your concerns.' He laid out his concerns. I said, 'Okay, I understand it. Now go back to your desk and do your job.' A battle hero is not somebody who's unafraid. It's somebody who's afraid but does it anyway. If you're running into a hail of bullets and you're not afraid, there's something wrong with you. But you do it anyway because it's what you have to do. And by the way, if you wait until you have nothing to be afraid about, probably the opportunity has passed.

Well, it's a great question, John. It's very important. Bruce and I have been partners for 39 years this month, and it's one of the greatest things in our lives. After family and maybe some good friendships, it's really the best thing we've had. We've worked together closely for all that period. We've obviously produced a lot of success, had a lot of fun. We have intellectual disagreements but we've never had a fight. Probably because neither of us is really a financial maximizer, and a lot of fights are probably about money. The bedrock of our relationship is mutual respect. I think it would be very hard to have a successful long-term relationship with a partner if you didn't have respect for each other. In 'The Most Important Thing,' I wrote a memo called 'The Most Important Thing' and there was a section which talked about having a successful partnership. I said the key to a successful partnership is shared values and complimentary skills. If you don't share values, I don't think you can have a successful partnership. Let's say one person is super aggressive and the other is a chicken. One person is super ethical and the other one likes to cut corners. I don't think you can have a successful partnership. I've seen many. A friend of mine when I was a kid, AT&T went public. It was the biggest deal in history. They had a full page tombstone ad in the newspaper listing all the investment firms that were the investment bankers. There were probably 40. A friend of mine, Ed Ramdell, used to carry that ad around. Every time one went out of business, he would mark it off. Eventually, I think they almost all disappeared except for Goldman Sachs. But why do they go under? You have some cowboys and some chickens. In bad times, the chickens say the cowboys are getting us killed. In good times, the cowboys say the chickens are holding us back. They disparage each other. So you have to share values in my opinion. The other thing is you have to have complimentary skills. The beauty of a partnership is when your partner can do things you can't. That means that you are both additive to each other, synergistic. If I can do everything you can do, what do I need you for? It's not going to last very long. Eventually, I'm going to say you're overpaid. The beauty of my relationship with Bruce is that we both recognize that there are things that the other is good at that we're not, and that the other is willing to do that we don't want to do. For example, from the very beginning, Bruce approached me in '87 with the idea of a distressed debt fund. I went into the high yield bond business in '78, and he had a background in law and got into some distressed investments which went well. He came to me and said we should do a distressed debt fund. It was quite a novel idea. But from the beginning, I go on the road and talk to people, and Bruce stays back and manages the money. I go on podcasts with people like you, and Bruce doesn't. The third element is you got to be appreciative. You have to thank your lucky stars that you have a partner who will do the stuff you don't want to do.

Well, Forbes 30 or 40 years ago had an article about so-and-so who was the only shrink with an office on Wall Street. They asked this guy about his patients' problems. He said that his patients' problems were inversely proportional to the support they got from their fathers. We had people over for dinner last night. One of the guys, we were talking about so-and-so who was a character of some kind. One of the guys said, 'Well, you know what? His father treated him like hell. I just never wanted to be that father.' It's amazing how many men, especially successful men, have to assert their superiority over their sons. Maybe daughters too, but I think it's more with sons. I guess it's Freudian or something else. But it's a terrible thing that you've had this kid and you have to prove you're smarter. I always let Andrew be smarter than me in some things. I always gave him full support in the things he wanted to do. If your kids want to do something and it's not going to be injurious, let them do it. When my daughter was getting out of lower school and had to choose an upper school, she applied to the two good schools in LA, got in, and we let her choose. My wife and I had a sense for which one we wanted her to go to, but we concluded that we could be wrong. Her choice could be the wrong choice. Of the two choices, one might be better than the other, but neither was a bad choice. If that's true, let the kid make the choice. They get experience with making choices, and maybe they get experience with making incorrect choices, which is very important.

First, I want to say upfront, John, that the thing you describe, I did a terrible job of. I was unconscious. The decisions I made in my first 20 years, I did not apply intention. I let other people make the decision. I made decisions haphazardly. I didn't think about it a lot. I'm embarrassed at how terrible my decision-making process was. It's a misnomer to apply that term. Having said that, I think it's desirable to make your choices with intention, well reasoned, etc. What I tell kids is my favorite quote is from a writer named Christopher Morley who said, 'There is only one success: to live your life your own way.' I think it's a beautiful quote. I go to Wharton and Harvard and all these places and Columbia. I say, 'The fact that you're in this room probably means that you can live your life your own way. You probably have what it takes to live your life your own way intellectually and work ethic and so forth. But you have to figure out what it is. That's the hard part. Who are you?' I say to them, 'Try to find something that will play to your strengths, avoid your weaknesses, and make you happy.' That sounds obvious. Who wouldn't follow that instruction? What it means is you can't let your friends decide what you should do. You can't do things because your friends are doing them. You can't let society decide what you should do. You can't let your parents decide what you should do. You have to think it out for yourself. Having said that, it's very difficult because it's hard to know yourself. We know that in 20 years you'll be a different person. How can you make a decision today on what will make that person happy? Very difficult. But you got to try. That's my advice, which I didn't take when I was a kid. I was derelict. But I got lucky.