That investing is a loser's game. The secret for success in investing is buying things for less than they're worth. Because what determines the success of an investor is not what he buys, but what he pays for it. It's not sufficient to survive on average. We have to survive on the bad days. So when we started Oaktree, April the 10th of 1995, almost exactly 20 years ago, we wrote down our philosophy. We published it. We've never changed a word since, and the clients like knowing what our road map is. So these were the six tenets of the investment philosophy. So the first one says that the most important thing is risk control, and we tell the clients we think that for excellence in investing, the most important thing is not be making a lot of money. It's not beating the market. It's not being in the top decile. The most important thing is controlling risk. That's our job. That's what we'll do for you. And the clients come to us who want to invest in our asset classes with the risks under control because this is really important. How do you make money as an investor? The people who don't know think the way you do it is by buying good assets, a good building, stock in a good company or something like that. That is not the secret for success.
The secret for success in investing is buying things for less than they're worth. Because what determines the success of an investor is not what he buys, but what he pays for it. And if you buy a high quality asset, but you overpay for it, you're in big trouble. And you can buy a very low quality asset, but if you pay less than it's worth, chances are you're going to make money. The most important thing is value. Figuring out what the value of an asset is. But the most important thing is the relationship between price and value. So let's assume that you're able to figure out the value. If you pay more than that, you're in trouble. If you can get it for less, the wind is at your back. Now, I drove here from the airport in my car. And if I take you outside to look at my car, and I offer it to you for sale, because I don't need that car anymore. When I'm done here, I'm not coming back. If I say to you, 'Would you like to buy my car?' What is the one question you must ask me before saying yes or no?
Price. You get an A. You get an A. So in other words, it's a good buy at a certain price, it's a bad buy at another price. Number two, we have an emphasis on consistency. If we can make a large number of investments and just weed out the problems, then we'll have, just think of the bell-shaped curve, we'll have a lot that do okay and an occasional one which is exceptional if we can weed these out. So, a lot of money managers go into the clients and say, 'We will get you in the top quartile into the great right-hand tail.' I think it's hard to do on a consistent basis. And if you aim for the right-hand tail and you miss, you end up in the left-hand tail. What we say is we'll just lop off the left-hand tail. And if we can do that successfully, and we pretty much have, then what'll you have? Okay, good, very good, great, terrific, but no terrible. The average will be very good. And that's basically what we've had. So then macro forecasting is not critical to investing. We do not make our decisions based on macro forecasts. As I explained to you, we all have opinions. Our official dictum is that it's okay to have an opinion. You just shouldn't act as if it's right. And I think this is very important. You know, Mark Twain said, 'It's not what you don't know that gets you into trouble. It's what you know for certain that just ain't true.' And so, we try to avoid holding strongly to those macro opinions. And finally, we don't do a lot of market timing, which is very, very hard to do. We do long-term investing in assets that we think are underpriced.
So, lastly, I'll just leave you with what I consider my three greatest adages. Not mine, but the ones I've encountered over my career and that have been the most helpful. First of all, what the wise man does in the beginning, the fool does in the end. In every trend in investing, it eventually becomes overdone. If you find an asset which is cheap and buy it, that's great. If everybody else figures it out that it's cheap, then it'll go up. Then people see that it's rising and more people jump on the bandwagon, goes up, up, and the last person to buy it is a fool. And the first person to buy it is a wise man. It's the same asset just at different prices. And as people say, first the innovator, then the imitator, then the idiot. So that's another way to look at this adage. Number two, never forget the six-foot tall man who drowned crossing the stream that was five feet deep on average. It's not sufficient, depending on how you want to live your life, to survive on average. We have to survive on the bad days. So, we have to be able to survive the low spots in the stream. Your portfolio has to be set up to survive on the bad days so you won't be shaken out of your investments. And then finally, being too far ahead of your time is indistinguishable from being wrong. And yet, that's a great challenge. The things that are supposed to happen will not necessarily happen and they absolutely will not happen on time. So you have to be able to live until the wisdom of your decisions is proved, if at all. So all of these things I think say something about modesty and humility of belief rather than cockiness, which I think is the greatest risk.
This is very interesting. Anybody here know the name of the company TRW? Few people. TRW used to be a big conglomerate. And now it's known primarily for credit scores. And there was a guy named Simon Ramo. He was the R. It was Thompson Ramo Woolridge. And he was the R in TRW and very smart. And Simon Ramo wrote a book and it was about winning at tennis. What Ramo said is that there are two kinds of winning tennis players. If you look at Pete Sampras or Nadal or Djokovic, how do they win? The winning champion tennis player wins by hitting winning shots. Hits shots that the opponent can't return. They're either so well-placed or so strategic or so fast and hard that the opponent can't return them. So the championship tennis player wins by hitting winners. The amateur tennis player like him and me, we win not by hitting winners, but by avoiding hitting losers. So championship tennis is a winners game. It's won by winners. He thought amateur tennis is a losers game. It's won by the people who avoid being losers. He thought that Charlie thinks or thought that investing is a losers game. And so the best way to win at investing is by not hitting losers. So the point is if you're going to be an investor, you have to decide, am I good enough to go for winners or should I emphasize the avoidance of losers in my approach? It's all, you know, all this, by the way, all this stuff is judgment. You know, there are no rules, there are no algorithms, there are no formulas that always work. None of this is any good unless the person making the decision has superior judgment.
When I went to Wharton 1963, the first book I remember learning was called Decision-Making Under Uncertainty. And I learned a couple of important things from that book. Number one, that you can't tell from an outcome whether a decision was good or bad. It's very important. Most people don't understand this. Totally counterintuitive. But the truth is in the real world where there's randomness at work. I mean if you build the bridge and it falls down then you must assume that the engineer made a mistake, that it was a bad decision to build the bridge that way. But in the real world where there's randomness, good decisions fail to work all the time. Bad decisions work all the time. The investment business is full of people who are quote right for the wrong reason. Made a bad decision. It didn't work out the way they thought, but they got lucky and they were bailed out by events. So this is very important. But one very important lesson for you to learn is that you should not act as if the things that should happen are the things that will happen. Again, in the world of the physical sciences, you can probably bet that that's true. And the electrical engineer knows that if he turns on a light switch over here, the light will go on there every time because it's subject to physics, not in the world of investing. And so, for every possible phenomenon, there is a range of things that can happen. There may be one where it's possible to discern which one is the most likely. And if we draw a probability distribution, that may be the highest point on the distribution, the most likely single outcome. But that doesn't mean it's going to happen. And the reason we don't have many probability distributions that look like this, but rather that look like this, is because a range of things can happen. And it's very, very important to notice that number one, there are lots of things that can happen. So you have to allow for them. And number two, the thing that is most likely to happen is far from sure to happen. There's a professor at the London Business School who put it succinctly. He said, 'Risk means more things can happen than will happen.'
And this is again, this is profound in my opinion. In the economic world, people generally make their decisions based on something called expected value. First of all, of course, you don't think in terms of a single outcome. You think in terms of a range of outcomes. So you take every possible outcome, you multiply it by the likelihood that it will happen, you sum the results, and then you get something called the expected value from that course of action, and you choose your course of action based on the highest expected value. And that sounds like a totally rational thing. But what if the course of action that you're considering has some outcomes that you absolutely can't withstand? Then you may not do it. You may not do the highest expected value course of action because it has some you can't live with. So the point is as I lived my life from learning about Dimson, learning about TRW, from learning from my own experience, I realized that should does not equal will. Lots of things that should happen fail to happen. And even if they don't fail to happen, they fail to happen on schedule. So the thing that the economist or the financier thinks should happen this year may happen in three years. You got to live three years to see it happen. We can't live by the averages. We can't say, 'Well, I'm happy to survive on average.' We got to survive on the bad days. You got to survive and if you're a decision maker, you have to survive long enough for the correctness of your decision to become evidence. And you can't count on it happening right
