A Very Special Evening with HOWARD MARKS

Thank you. Thank you, Sheri. Thank you for being here. Thank you for giving me an opportunity to talk. I'm a great believer in the church. I'm affiliated with it, support it, board member. I'm glad you're all here, and I hope you'll all do the same. Two things before I start. Number one, I'm not going to tell you what's going to happen in the world next week, month, and year. And I'm not going to tell you what to buy or sell because I don't know. And secondly, I normally don't give speeches. I engage in Q&A sessions, but in deference to this audience, I'll talk for a little while and then I hope you'll be preparing your questions as we go along.

My goal is that you won't hear anything tonight that you ever heard before or thought before. And if you end up saying, 'Oh, yes, I agree with him. That agrees with everything I always thought,' then I failed. Because the people on TV who want to do business with you try to make investing sound very simple, that anybody can do it and anybody can succeed at it. But that's far from the case. And so I'm going to tell you how I view it. As part of the introduction that Sheri didn't give, I'll just say that I went to the Wharton School, undergraduate degree in finance, then the University of Chicago Graduate School of Business for a degree in accounting, and I came out in 1969 and joined Citibank. I spent seven years as a security analyst. Then I switched to the bond department in '78 just in time for the bank to ask me to start up a fund in high yield bonds, which became a hot area, and so that was just my good luck. And then I stayed there until '85. Went to a place called TCW in LA. Moved to LA because I was intoxicated with it as a young man. And then we started a company called Oaktree Capital Management in '85. So it's been 31 years. And on August 1st, we sold it to a company called Brookfield in Canada. So I'm out of a job. Actually, they gave me a contract. So I still have a job, but I want to talk about what I consider to be five key concepts in investing. And if you have a really compelling question, you can raise your hand while I'm talking, but there'll be plenty of time at the end. But you know, if you're anything like me, don't forget your question.

Okay. So, number one, what is investing? And the answer is investing is positioning your capital to benefit from future events. And you have to be some degree of an optimist to be an investor because what you're doing is you're giving up your money today in the hope that you'll get more money back in the future. If you're not optimistic, then you shouldn't engage in that. But optimism causes people to do it. Excessive optimism causes people to do too much of it or do it too aggressively and get in trouble. But it is giving up money today in the hope of having more tomorrow. And it works very well on average over long periods of time. Anybody who put money into the market 20 years ago, 50 years ago, 100 years ago has done extremely well. It does not have to work in short periods of time. And you must be braced for short periods of time when it doesn't work. If you put money in which you need a year from now, adverse developments could make you sorry. If you don't need it until 10 or 20 years from now, the chance is overwhelming that you'll do okay.

So that's investing. Now the next concept is that I don't believe in macro forecasting. Macro means big. The big picture elements in investing are the economy, interest rates, currency exchange rates, commodity prices, and the ups and downs of the market. That's the big picture. And we don't know too much about the future. And we especially most of the time don't know anything that everybody else doesn't know. And so my goal as a professional investor is to have superior performance. Investing is a funny area. It's really easy to be average. It's really hard to be above average. But the rewards appropriately should be for being above average. If it's easy to be average, then you can't expect to get paid much for producing average performance. And in fact, if you want average performance, there are vehicles that are established for the sole purpose of delivering average performance. And in the stock market, they're called index funds. And you put your money in an S&P index fund, you are guaranteed to have the same performance as the S&P. And it costs almost nothing. And so if your grandson wants to go into the investment management business, start an office, and his goal is to deliver S&P performance and he expects to get rich, you should disabuse him of the notion. There should not be a high payoff for delivering average performance which is so easy to get.

Jack Bogle at Vanguard was the inventor — well, the inventor of the index fund around 1974.

Well, they may not be congenital optimists, but they have to have a degree of optimism because why else would you give up your money today in the hope of more tomorrow?

Thank you. So, if you watch CNBC or Bloomberg, a huge percentage of what you'll see is people telling you what's going to happen next week, month, and year. But number one, they don't know. And number two, if they knew, that would be extremely valuable. Why are they giving it away? So anytime somebody says, 'Oh, I have a stock that's going to double,' the first thing you should ask yourself is, 'Well, why are you telling me that? Why are you giving me that for free? That's extremely valuable information.' So I am an agnostic with regard to macro forecasting. One of my heroes was John Kenneth Galbraith, the Harvard economist, and he said, 'There are two kinds of forecasters: the ones who don't know, and the ones who don't know they don't know.' And I believe very strongly in that. And most of the people you see on TV don't know they don't know. And when I was a kid, we used to have a saying that an economist is an investment manager who never marks to market. That is to say, he never computes his performance. And if you don't compute your performance, you can be very happy and you can think you're doing well. But if you compute it and you see it's not much of a record, then that's a reawakening. But the point is there's nobody today who got famous or rich for predicting macro events.

And in fact, the most famous investor in the world, Warren Buffett, expressly ignores it and doesn't try to think about whether the market's going to go up or down this year or next. He just invests in what he considers good companies. And I share that agnosticism. And in fact, one of my favorite sayings is from Mark Twain, who is alleged to have said, 'It ain't what you don't know that gets you into trouble. It's what you know for certain that just ain't right.' And this is extremely important to bear in mind. Extremely important. I mean, it's funny, but it's really important. If you think about it, no sentence that starts with 'I could be wrong, but' or 'I'm not sure, but' ever got anybody into trouble. The sentences that get people into trouble are the ones that start with 'I'm certain that such and such is going to happen.' Because if you have certainty that something's going to happen and you bet on it happening heavily and you're wrong, you can go broke. So I think that's a very, very important consideration. And my firm, when we started it in '95, the founders had worked together for nine years on average, and we knew what we believed in. So we wrote it down, and we have a very simple six-point investment philosophy. One of which is that our investment decisions are not driven by macro forecasts. And another one is that we are not market timers. The market timer will get in when he thinks it's good and out when he thinks it's going to be bad, but nobody knows. And that can be a big mistake — to try to be a market timer. So we don't try. And again, where are the rich market timers? So that's number two.

Number three is an extremely important concept. So I mentioned that I went to the University of Chicago in 1967. Between '62 and '64, the Chicago school of investment thinking had been developed. Now this is not how to make money. This is an academic theoretical framework for thinking about investing. It's not going to make you rich, but it should inform your thinking. And of all the things I learned at Chicago, the most important single thing was about something called market efficiency. And they developed at Chicago something called the efficient market hypothesis. And if you get one thing out of tonight, I hope it's going to be an appreciation for what I'm going to tell you now. Market efficiency. Basically what the efficient market hypothesis says is that there are thousands of people exploring the market every day. They are to a large extent intelligent, educated, motivated, hardworking, numerate, computer savvy, rational, and objective. So because of all these people trying to find the bargains, it has the effect of driving the bargains out of existence. They find something, they conclude it's too cheap, they bid it up — it's not cheap anymore. They find something they think is overpriced, it should be avoided, they ditch it, their selling drives the price down — it's not overpriced anymore. So the essence of the efficient market hypothesis is that everything is priced right. Everything is priced to give a fair return relative to its risk.

And because everything is priced right, there are no bargains to find. There are no overpricings to avoid. And taken to the extreme, what's called the strong form of the hypothesis: you can't beat the market. And it was the belief that you can't beat the market, plus the experience of so many people who tried and failed — as this lady said, when I was at Chicago the professors would say, on average mutual funds don't do as well as the S&P 500 index, and they charge a high fee for their efforts. So why don't they just buy one share of each stock in the S&P? And that became index funds in 1974. Bogle at Vanguard popularized the index fund. Today the majority of equity — equity means stocks — the majority of equity mutual fund capital is managed by indexation or some other passive form of investing, rather than say buying General Motors and selling Ford. And so because of the relevance of the efficient market hypothesis, because of the scarcity of finding bargains and the difficulty of identifying them, it just doesn't work for almost anybody. And so most people who are what are called active investors, who do sit around and say 'buy General Motors, sell Ford,' many have been driven out of business. And certainly the fees for that activity have contracted.

So, are markets efficient? And the answer is I don't think any market is fully efficient. And I'm in this business to try to make a living, and I think we've beaten the markets in our fields. So I think it's possible. But it's not easy, and certainly not everybody can do it. And as markets have become — you know, the market was a pretty stupid place when I joined it in 1969. People were naive and uninformed. We didn't have computers. Nobody had the data we have today. And so it was relatively possible to find a bargain. The market has become more intelligent. Everybody knows everything today. You want to know a fact, you pick up your phone, you punch it in, you ask Claude, and you know it. Everybody knows everything. There's no such thing today as not knowing something. So it can't be easy to do a better job than your competitors. And if my goal is to outperform my competitors, by definition it can't be easy and not many people can do it. So no markets are completely efficient, but the concept of efficiency is relevant. And basically what the concept of efficiency says is that the other people aren't idiots. You know, you get up in the morning, you have breakfast, and then you walk into the New York Stock Exchange. You look at the list of the stocks. General Motors 52 — oh, that's underpriced. Ford 48 — that's cheap. Microsoft 108 — that's overpriced. Everybody else has cast their votes on what things are worth. That's why General Motors is 52 and Ford is 48 and Microsoft is 108. Because the consensus of opinion is that that's what they're worth. Who are you to walk in there and say, 'No, that one's too high and that one's too low'? The other people aren't idiots, and the other people collectively are just as smart as you are. And that's why most people can't beat the market. Most people either leave investing to the pros or buy an index fund. That makes more sense than sitting there staring at the newspaper trying to figure out whether General Motors is expensive or cheap. So that's the concept of efficient market, and it's relevant. It's not right, but it's relevant, and it should inform your thinking. And the main way it should inform your thinking is the realization that it's hard to tell which are the bargains and which are the overpricings.

That's concept number three. It's not going to get any easier. Concept number four is risk. What is risk? When you give up your money today in the hope of getting more in the future, what you do is you take risk. You put your money at risk. You hope you'll get more; there's a chance you'll get less. So there is risk. And basically it's very hard to make any substantial return on your money without taking risk. If you don't want to take risk, buy treasuries. And if you buy treasuries, you get a return of 4%, and change, of which half goes in taxes. So you net 2% a year. And at 2% a year, if you want to double your money, it takes 35 years. So that's what you can get if you don't want to take any risk. And if you want to make more than 2% a year after tax, you have to take risk. It's as simple as that. If a totally safe investment in treasuries pays 4% before taxes, then the market has to be set up so that the opportunities to make more involve risk. If a totally safe investment pays 8%, everybody would buy it. Nobody would own treasuries. The price of that investment would go up, which means the prospective return would go down, and it wouldn't offer 8% anymore. That's efficiency. So the point is, when I say 'what is investing,' what it is is accepting risk today in the hope of making more money tomorrow.

Risk. Now, let me ask you a question: who here is familiar with the concept — this is just for my own information, a slanted discussion — who here is familiar with the concept of a probability distribution? Okay, two-thirds. Okay, so for the one-third who don't know, I'll just spend one minute. So, we're here, we are in Sag Harbor. Tomorrow's August 21st. What is the high temperature going to be tomorrow? Somebody tell me the high temperature?

Okay, I like 78. So, we want to predict the temperature tomorrow. And here's a graph. Here's a chart. It goes from 60 to 90. Right in the middle, we have 75, 76. And we all agree that the most likely temperature tomorrow, the high, is 76. Everything else is less likely. So on this — this is the temperature on this axis, and on this axis it's the probability. So we have come to an agreement that the most likely temperature tomorrow is 76. And we estimate that it is 40% likely that that'll be the case. The probability is 40% that tomorrow's high will be 76. So what about the probability of 70? 70 is here — less likely. What about 81? Here. What about the probability of 65 tomorrow? Very low. Really low probability, read on this scale, right? What about the probability of 105 tomorrow? Very low. So that's out here, and that's again improbable, read on this scale. So what we have when we get done is what's called a probability distribution, and it looks like that. 76 is the most likely. 70 and 81 are quite possible but less so. And 65 and 105 conceivably could happen, but almost no chance of it. And so this is the distribution of what everybody thinks the high temperature will be tomorrow. Now this happens to be what's called the bell-shaped curve, for obvious reasons. And the ideal vision of a bell-shaped curve is something called the normal distribution. And a statistician will tell you that such and such a phenomenon is normally distributed. And it's a special case of the bell-shaped curve with certain set properties. These are all just ways of thinking about life and the world. But anyway, I just wanted to introduce to you the concept of the probability distribution because I'm going to use it in my discussion of risk. So, while I'm erasing the board, would anybody like to venture a definition of risk?

No, that's an example of a risk. But what is the definition of risk? What is risk, Gregor?

The probability of something happening, not the norm. So tomorrow we think it's going to be 76 here, and we dress the way I'm dressed. But it turns out that it's 55 — I better have a parka — or 105 — I better wear a bathing suit and carry around an ice bag. So risk is the possibility that something unexpected will happen. Most of us would say it's the probability that a bad thing will happen. We don't usually talk about the risk of a good thing happening, although academics do. But anyway, so again, going back to the nature of investing: we take money, we put it out in an investment today in the hope of getting more tomorrow. Risk is the possibility that we don't achieve the return we had hoped for, and in fact maybe we lose money — we get less money in 10 years than we put in today.

So I started by saying, what is investing? Investing is taking risk in the hope of making money. That's what it is — taking risk in the hope of making money. And when I went to Chicago — and if what I say now is hard to follow, please let me know, raise your hands — but there's a graph that we saw all the time at Chicago, and it looked like this. This is return on this axis. This is risk on this axis. And there's a line that looks like this. So basically what it says is if you take no risk, you get something called the risk-free rate of return. And today the thing that has no risk is treasuries, and the risk-free rate is the return on treasuries, which is 4%. And then something that's riskier may have this return. And something that's quite risky may have this return. And something that's maximum risk, however that's defined, may have this return. So, and this is a graph, as I say, I saw every day in grad school. What does it say? And if you say to most people, what is the meaning of this graph, this graphic, what they say is: riskier assets have higher returns. So you go out this way on risk, you take more risk, you go this way, and you have higher return. The line slopes — we call this, we say it slopes up and to the right. And if a line slopes up and to the right between two axes, we say it's positively correlated. Now, this is scientific-type terminology, but what it means is: positive correlation means if one goes up, the other goes up. Negative correlation means if one goes up, the other goes down. But this is a line that slopes up and to the right. And what it says is that as you progress to the right and you take more risk, your return goes up. And that's why the line slopes up like that. Okay. So people say riskier...

Oh my God. How could you? You got my punchline. You should be here. Here — you want — you know what you're talking about. That's the right reaction. So, you see, people say — the layman says, the unthinking person says — 'riskier assets have higher returns.' So, if you want to make more money, the way to do it is to take more risk. Can't be right. Can't be right. Why not? Because if risky assets could be relied on to produce higher returns, then they're not risky. Can't be right. So, what this lady says is right. Risky assets have the promise of a higher return, but they may not keep the promise. And that's where the risk comes in. And the other thing — the way I describe what this means is: think about this, this is important. Investments that appear to be riskier have to appear to promise higher returns, or nobody will buy them. But they don't have to deliver. And it's from the possibility that they won't deliver that the risk comes in. So obviously, if I came in here and I said, 'You know, I have two products, two Oaktree products to sell you. I have a Treasury bond fund that'll pay 7%, and I have a venture capital fund — we're going to invest in AI startups, and if we're successful, I think we can produce 7%.' Everybody would say, 'I'll take the sure 7% in treasuries, then the shot at 7% in AI companies.' And so in order to attract capital, riskier assets have to appear to offer higher return. So you're absolutely right. You get a gold star.

However, so I was very unhappy with this representation. And as I say, I graduated from Chicago in '69, and it took me only 37 years to try to do better. And in '06 I published a memo. By the way, I publish these memos. I've been doing it for almost six years now. And if you want to read any of this stuff, you go to oaktreecapital.com, under the heading of Insights, Howard Marks Memos. You can read them all, and the price is right. They're free. But I figured out how to represent this to my satisfaction. And you see, what I believe is that when you look at this, the linearity of the relationship is deceiving, because it looks reliable. It looks like, 'Oh yes, well, if I take more risk, I'll have a higher return.' Great. Except that that's like believing in the tooth fairy. So, what I figured out after 37 years of thinking about it was that I took some little bell-shaped probability distributions and I turned them on their side and I put them on the line like this. So, there's one. There's one. There's one. I'm not drawing so great. And then I'm out of room. And there's one. So, and these probability distributions — again, remember the bell-shaped curve. This is the most likely, or the mean, turned on its side. And each red one is a distribution of the possible returns at that level of risk. So now remember, on the old graph which I left up here, the blue line — as you move from left to right, the risk increased and the return increased, and it felt like free money. But now, as you move from left to right, the risk increases, the expected return increases, but the range of possible outcomes becomes wider, and the bad outcomes become worse. That's risk.

Risk is additional uncertainty, additional possible outcomes, some of which are undesirable. That's risk. And so you can make 4% for certain, and if you want more than that, you have to take some risk. And the S&P 500, the main stock index, has been around for about a hundred years. And if you invested in it a hundred years ago and you held on, you've made about 10% on average. 10% on average for a hundred years is enough to turn a dollar into about $14,000, if you don't disturb the process. However, there was a decade — the '70s — when you made no money. There was a decade — the '90s — when you made 20% a year. It averaged out to 10, but you know, it's hard to live by averages. And there have been — you know, '73–'74, which came shortly after I joined the business. You lost half your money in '73–'74. So you might say, 'Oh, I'll go into the S&P because I'm patient and I like the idea of making 10% a year.' But how are you going to feel if you have a two-year period in which you lose half your money? Probably not so good. But in order to have a shot at making 10 a year on average, you have to accept the possibility of losing 50% in a terrible period. Now, the market has always come back. And if you can live through that and not chicken out and not sell at the bottom, you'll probably recover, but you're not going to have a good time.

So that's the possibility of risk. And so, when we put this thing on the board that looked like this — and if this is return and this is risk — and I said to you, Gregor, where do you want to be? Most people would say, well, around here. I'm not a pig, so I'm not going to go out here. But why not have a higher return rather than a lower return? But if you superimpose the red lines as a way of thinking, and say, you know, you can go out on the curve and you can have a higher expected return, but you're going to have a wide range of possible outcomes in any given year or two-year period, or maybe even decade, and you could have some really bad outcomes once in a while — now, where do you want to be? That's right. And so most people would say, well, I'd like to be around here. Moderate. Moderate. So you have to think that investing is nothing

but bearing risk in the pursuit of profit. And you have to now the important thing is to think about how much risk is there in the things I'm doing. And it's hard for the anybody to know, especially the layman. But this is the important consideration. If I said to you, would you rather make 10% or 20? That's an easy answer. Everybody would rather have 20 than 10.

Yes, it's a moving target. Well, it's a moving target, but the other thing is as one advances in age, you have less time to recover. See, so you know, yeah, I mean, if you're 20 and you hit a rough patch, chances are overwhelming that 20 years later, you'll be ahead. But if you're 90, 20 years later introduces other uncertainties. But anyway, so and that's why that's one reason why the right a given portfolio is not right for everybody and everybody should think about not whether 20 is better than 10 but whether they can bear the risk associated with trying to make 20 or should they settle for 10 or should they settle for four or six. So, so risk is inseparable from investing and all investing involves some degree of risk and the pursuit of increased return necessarily involves the acceptance of increased risk. And if somebody says to you, I have a superior investment which offers a superior return without incremental risk. Run for the hills. And then Okay. So I'm going to stop there because I'm almost exhausted my time and yours and we'll leave for next summer. We'll leave the subject of cycles, market cycles, economic cycles, and how they impact investment returns and risk. But now I'd like to take your questions.

Well, so everybody heard that the national debt of 40 trillion was passed recently. What does it mean? What does it imply? I personally think that one of the worst things going on today is the profligacy of the federal government. And the, you know, coming out of World War II, the US was the greatest country in the world. And we saw, we were, our infrastructure was intact because the war never came to the US. We saw great strides in managerial techniques and in technology. And we had this strong capital markets and we had the rule of law and we had a spirit of innovation and entrepreneurship and business thrived in the United States and we were the leader and protector of the world. And in response to all those things the world gave the United States a golden credit card. And when you have a golden credit card, there's no credit limit. You never get a bill and the interest rate is low. And that has been us. We've had unlimited credit. We've never been expected to pay down our debt. It just grows all the time. And the Treasury rate of interest is one of the lowest rates of interest in the world. So we have had the benefit of a golden credit card and the question is will they ever take it away. So you know everybody in Washington acts as if we'll always have it and everyone in Washington spends more money every year than they take in. That's called the deficit and they finance the deficit by borrowing and that's called national debt. And that's why the debt grows every year. And you know if you went back 30 years you would hear talk of about balanced budgets and 30 years ago I think Congress thought it was their job to produce a balanced budget. Now nobody talks about balanced budgets and I don't think they even talk about budgets and nobody you know if these people worked for me I'd fire them all. But they keep getting reelected because in Congress in the House of Representatives for example something like 96% of the seats can only go one way. There are 96 out of a 100 seats where either a Republican has to win or a Democrat has to win. So all you have to do is get the nomination and you're not at jeopardy of being kicked out and replaced by the other party. So, so it used to be 30 years ago that the Democrats were called the party of tax and spend and the Republicans were the party of financial responsibility. And then the Republicans figured out that you get more votes if you give stuff away. So now nobody is the party of financial responsibility and we run a deficit every year. Now deficit I hope I don't bore you with this explanation but deficit spending at the federal level is what's called Keynesian economics. You may have heard that expression and there was an economist a hundred years ago called Lord Keynes John Maynard Keynes in England and he was the father of Keynesian economics and his position was that if an economy is running too slow and not growing and thereby not preventing jobs for all the people who producing jobs for all the people who want jobs, you should stimulate to make it grow faster. And the way you stimulate an economy, one way to do it is deficit spending. So you collect a billion dollars in taxes and you spend $2 billion and your the government spending in the communities stimulates the local economies and the economy grows faster. But then Keynes said once the economy is growing well and we have prosperity and it's creating all the jobs we need. Then you run a surplus, the government takes in two billion and spends 1 billion and you use the extra billion to pay down the debt that you created in the period of sluggishness. And it's a healthy thing except that everybody in Washington has now forgotten the second part. And nobody ever talks about reducing our debt or not running a deficit. And in fact, in the recent years, we've run deficits of about two trillion a year in prosperity. And so, you know, you start with 30 trillion debt. You add two trillion a year plus there's interest to pay on the 30 and you borrow that, too. And it only takes about four years to go from 30 to 40. And this is what we're in today. And it's a disaster. Now, exactly to exactly what's it implies, nobody knows. So, we've never seen it because we've never seen a country lose the golden credit card and we don't know if we ever will or what would make it happen or what the consequence would be. But you know there was an economist called Herb Stein and he said something brilliant. He said if something cannot continue it will stop. And I think we would all agree with that. But it seems unlikely that you can run the deficits we do and run up the debts we do and never get into trouble. But we don't know what would cause the trouble. And Buffett at the Berkshire Hathaway annual meeting in May of 25 said this is going to be a big problem. I can't tell you if it's two years or 20 and nobody can and I think there's almost nothing you can do about it. The only thing you could do about it is have it's a problem for the dollar if it's a problem. And the only thing you can do about it is have some investments that are denominated in non-dollar terms. But that means rather than invest in the S&P 500, you have to invest in European companies which are not run as well and slower growing and strangled by regulation. So I'm not sure that's smart either. So I think there's nothing you can do about it. Yes.

I haven't read Ray Dalio's analysis. He's a smart guy and studied a lot of economic history.

And I would say that's a definite maybe. Okay. There was one over here, Lloyd. Okay.

Well, obviously the most interesting thing is AI today, although the most impenetrable and the most unpredictable. I've never seen anything as incomprehensible or unpredictable as AI. So I mean it's hard to think you wouldn't invest in it because it's clearly going to be an important factor ahead but I don't know how you invest in it or how you invest in it intelligently have no idea other than that technology is very interested if you are good at that. You know credit investing is which is what Oaktree does making loans primarily is interested if you're not as imaginative as the techies and I think there's still a scope for doing a good job at that. But you know, investing is a great field because it expands your mind and you've never solved the problem. It's always evolving and you're never sure to be right. But that makes life interesting. How about Bonnie?

Well, we don't know how important it is. That's the thing. Is it important? I think it's important, but I can't tell you why or when. I can't tell you if we'll ever lose the golden credit card, but meaning does it make sense to think that we can all continue to spend more than we bring in every year year after year and run up the national debt and finance it by selling people our Treasury securities and that they'll continue to take an unlimited number of Treasury securities at low interest rates. And if the interest rate starts to go up, then the interest component of the national spending goes up and the deficit grows faster. So, this is a conundrum. Nobody has the answer. But it just you know, if we had a relative who spent more than they made every year, we would probably say poo poo poo, right? So, I can't tell you why, but I just don't think it's a good idea. Yeah. Right behind.

Well, I think you know most people diversify. You might have heard the word diversify. It's a very important word. Not too many people know what it means. Most people think it means having a lot of different things, but it's not. It means having things that will respond differently to a given environment.

Well, no. Some low risk and some high risk overall. Well, a diversified portfolio has less risk. And what we do as investors, especially professionals, we concentrate our portfolios to take advantage of what we know, but we diversify to protect against what we don't know. And like I said before, anybody who thinks he knows everything and has no exposure is riding for trouble. So even the smart investors diversify. How do we know? What they used to say in Chicago is how do we know? The answer is nobody has a portfolio with only one asset. We all have, let's say, for example, one stock that we think is the best. But nobody has a portfolio with one stock. So they buy what they think is the second best stock and the third best stock and the fourth best stock. Why? because they're not so sure that the thing they think is the best is the best and so you must diversify. So I have a bunch of money in the stock market and I think the stock market is a little on the high side. So I don't think it's a bargain. So and if it became a bargain I think I'd have more but not right now. And I but I have a lot of money in what are called credit instruments that have a promised rate of return much more moderate than the average 10 that the stock market makes and taxed unfavorably. Credit when you get interest payments you have to pay if you're a New Yorker 50% in taxes. If you buy a stock and have a capital gain you pay about a 33% tax. So you know interest is penalized by taxes but much more dependable. So I think I would recommend a mix of both. Who else?

No.

Well, we don't we're not stock market investors, so we don't have stocks and we don't have hedges and we don't have gold and I should respond on gold because you asked about gold. But go ahead with your question.

Well ChatGPT is wrong and you know see we are what are called institutional money managers which means we mostly almost exclusively run money for pension funds, insurance companies, university endowments, sovereign wealth funds and for the most part nobody gives us money and says here do something smart. What they do is they say tell me about your strategies and we have high yield bonds, convertible bonds, senior loans, private credit, distressed debt, etc. And they say okay here's 100 million for that. So we are not asset allocators. We don't decide where to put the money. People hire us to do this or to do that or to do that. So we don't for the most part deal with that question. And the question is more relevant to my personal portfolio and I was answering in that context. I want to but I don't want to miss the opportunity to answer on gold because it's important. I believe very strongly that there are two kinds of assets in the world. The ones that produce cash flow and the ones that don't. What kind of assets produce cash flow? Think about it. What kind of things can you buy and own that produce cash flow?