You have to accept the likelihood that what you're doing is closer to speculating. And I don't say that word pejoratively than analytical investing. There's a spectrum which goes from what I'll call analytical investing in prosaic understandable companies to speculative investing in futuristic companies that can't be described at all. You should calibrate your activities based on where you are on that spectrum. That's the whole thing. And it's very hard to do. This is the hardest thing I think I've ever seen in the investment world because of this enormous degree of uncertainty.
Welcome to Profy Markets. This could be one of the most consequential weeks for the markets in years. Today, SpaceX is expected to complete the largest IPO in history, and it may be just the beginning. Anthropic and OpenAI have both filed to go public, setting the stage for a wave of blockbuster offerings. Meanwhile, some of the richest companies on the planet are competing for investor capital before the IPO pipeline fully opens. As we've discussed last week, Google announced the biggest stock sale in history, and Meta signaled that it too is exploring a major equity raise. So, how should investors think about this moment? What happens when an unprecedented amount of equity hits the market? What are the opportunities and what are the risks? To help us make sense of it all, we're joined by someone who spent more than 35 years writing some of Wall Street's most influential memos and has earned a reputation as the king of common sense. His memos inform investors across finance, even Warren Buffett himself. This is our conversation with Howard Marks, the co-founder and co-chairman of Oaktree Capital Management. Howard, thank you so much for joining us. I want to start with a quote that you said in one of your earliest memos. You said, quote, "In the late stages of the great bull markets, people become willing to pay prices for stocks that assume the good times will go on ad infinitum. We're about to see this SpaceX IPO. This company is about to be priced at more than 100 times sales. We have a feeling that this is a little bit of investor spirits, animal spirits, people thinking it's the good times. What do you make of this IPO and the other IPOs that we're seeing? Is this a frothy market?"
There's no question about the fact to use Alan Greenspan's saying from about 30 years ago that we have exuberance. That's the only thing we know for sure. He pioneered the phrase irrational exuberance. The question is, is today's exuberance irrational? Number one, I don't think anybody can definitively say so. And the reason I say that is that I don't think I've ever heard anybody tell me exactly what AI will be able to do or when or for whom or how much profit it'll produce and for whom. There's an arms race going on between what you described as some of the greatest companies on the planet. I would describe what we call the hyperscalers as mostly the greatest companies I've ever seen. And they're engaged in an arms race. Can only one win? Is it winner take all? Can several win? Nobody can tell me these things. So I don't think there's an analytical or what we call a value-based way to decide whether or not to participate in these IPOs and if so at what price wherein the AI, as far as I think virtually all of us are concerned, is a concept we can't define its parameters. And it's a great concept. It's likely to be the most powerful force any of us have ever seen. But that's all we know. And a decision to participate or not participate and what price to participate at is really what my South African friends call a thumbsuck. You can't put numbers on a pad and figure out what these things are worth, which is what value investors like me historically have done.
I guess the question then is because I agree with you that you ask these questions and investors say don't worry about it. It's not really about the fundamentals right now. It's about the future. It's about the technology. It's about what's going to happen at some point in the timeline. That sounds a lot like the irrational exuberance that we have seen in previous cycles. And you've been around to see many of them and you've invested and made a lot of money trading and figuring out an investment strategy to profit off of those cycles and to time it correctly. Or you could correct me on what your strategy was. But does it not seem like those previous cycles? Does it not feel to you like the dot-com era?
It does feel like that. We have a technological innovation. I've seen several. I've read about many more over the last 150 years. This may be the greatest. This may be the most powerful. It's also in many ways the least specifiable. The technological innovations I'm talking about, let's just for a starting point let's say the railroads back in the 1860s, and then radio in the 1920s, the automobile, computers in the 1950s and 60s, internet in 2000. It may be revisionist history but I think we had a much better view of what all of those could do. They didn't have this unimaginable, unlimitable upside that AI has or the, in my opinion, degree of uncertainty. We knew that the railroad would carry goods and people from coast to coast. We knew that radio would carry messages. We may not have known exactly how they would produce profits or how they would become television, but anyway, all the things I mentioned were accompanied by what we call bubbles. People got excited about developments which were unprecedented. They threw vast amounts of money about building the infrastructure for it. There was a winner take all race. There was excitement. There was exuberance. The capital flowed in like water. In every case, too much capital flowed in. I think it's fair to say too much infrastructure was built and prices were paid that were too high and a lot of the people who provided the capital for these bubbles lost their money. I think it's fair to say that those comments have been true in every case that I enumerated. So I wrote in a memo recently this year and I think it's true that if this technological innovation with its exuberance doesn't produce a money-losing bubble, it'll be the first. And now it could happen. You can't rule these things out. And maybe this is a good time for me to introduce the rejoinder of the optimist. What do they say? This time it's different. Okay, that was true about the railroads. It was true about radio. It was true about computers and the internet. But this time it's different. And this time we have a development of incalculable, unlimitable value. So this time it's really true that there's no price too high. That's what they say.
But the problem with that ad is they always say that this time it's different is never different. And they've said it in each of those bubbles that I mentioned. I think so nobody including me should say definitively that this is a bubble, that the people who invest in these early stages of AI will lose their money, that the people who invest in the companies you named will pay prices that they'll never see again, but you must be alert to the possibility. The way people get into trouble is by not being alert to the possibility.
And this all seems incredibly relevant today on the day when SpaceX is set to go public at close to a $2 trillion valuation. We'll see how it trades. But if you're looking for signals of everything you just described, it seems like that's it.
My favorite fortune cookie says that the cautious hold them or write great poetry. So investing in these companies today could be a huge error, but it could be great poetry and the people who resist because it could be an error could miss out on the greatest thing in history. And that's what makes these decisions so hard. The people who invest today in traditional industries in transportation, in distribution, in retailing, in real estate, they don't have for the most part the risk of committing grievous error, but they also don't have access to the possibly best thing in history. So you just have when you sit here with something that's so young and where the future is so unestimable, you just have to deal with it as a concept or not deal.
How does an investor deal with it, so to speak? I like the fact that you said, you know, sort of like, what could go right. The upside is sort of unimaginable. The downside, I mean, it sounds like you recognize that both scenarios are feasible here. The bulls could be right, the bears could be right, but in terms of how do you actually invest around it? Because I look at these companies and at a $4 trillion valuation if it is in fact the upside scenario, I don't see how any other company survives. We end up with five companies. If these companies actually become worth 50 or 100 trillion dollars if they have the same type of returns we're used to getting from Amazon or Apple or Google and they went public. That means there's going to be three or four companies controlling all of the market cap globally, which my mind blows trying to think about what that would mean for society. What if you're a 25 or 35-year-old trying to think about building wealth and you got your 401k, how do you invest around the kind of the unknowable here?
In dealing with the future, the way most people deal with the future is by coming up with a forecast. I argue strenuously that if you want to deal with the future, you need two things, not one. You need a forecast and you need a judgment regarding the probability that your forecast is right. So you can make a forecast about the future of AI. You can make a forecast which is optimistic. But I just think if you say this is my judgment about the future of AI, and by the way, I'm highly confident that I'm right, I think you're probably making a big mistake. I've never met anybody who thinks they can tell me what this world is going to look like five or 10 years from now. And so why should any young person you described who's laying the foundation for his investment portfolio, why should he conclude that he's probably right when all these other people are? We know it could be great. I bet it's probably going to be great. I said in my last memo that in terms of its basic capabilities, my guess is that it's more likely to be underestimated today than overestimated today. But what we're talking about is how much capital should it receive and what is a piece of a company that engages in this activity worth? And the value investor, the old-fashioned investor like me and my fellow travelers, what we do is we figure out what a company's like, we look at what it makes today and what potential earning power it's building. We try to figure out what its earnings will be in five or 10 years. We put a what we think is a reasonable valuation on those earnings largely related to the earnings potential in the subsequent decades and then we look at the price today and we try to figure out whether today's price is fair relative to that earnings power. And I don't think I've ever seen an industry or companies where that is less feasible. If somebody will tell me what they think Anthropic's net earnings will be in 2036, I'll bet them that they're not within 50% of the truth. Of course, we'd have to wait 10 years to find out. But if I'm right, how then you make an investment in Anthropic stock in the IPO, you have to accept the likelihood that what you're doing is closer to speculating, and I don't say that word pejoratively, than analytical investing. And there's a spectrum which goes from what I'll call analytical investing in prosaic understandable companies to speculative investing in futuristic companies that can't be described at all. And you should calibrate your activities based on where you are on that spectrum. That's the whole thing. And it's very hard to do. This is the hardest thing I think I've ever seen in the investment world because of this enormous degree of uncertainty.
Are there other sectors where you feel more confident, other asset classes or other business sectors where you think you're more comfortable making a forecast and saying this appears to be overvalued or undervalued? Well, that's what we do for a living and historically we have made those judgments and you know pretty well. But then since the internet came along roughly 30 years ago we have a new concept which is extremely important today and that's disruption. You take what I call a prosaic company in a prosaic industry and you say well that it's not so futuristic. We can probably anticipate what it's going to look like in five or 10 years from now and it doesn't have these technological things that are going to make it or break it. But then you think a little further and you say well let me think about whether that's right. 30 years ago we have this word in the value investing business or the investment business called a moat, things that surround a company that are protective that make it less attackable. And historically the value investor, the cautious analytical investor, has preferred to invest in companies with moats. So if you go back 30 years ago, what was an example of a company with a great moat? And a great example is a newspaper. And if you owned the newspaper in a given city, it would be hard for a competitor to start up from scratch, the newspaper from another city couldn't compete against you because the used car ads and the help wanted ads and the movie times would all be irrelevant in your city. And it cost a quarter, let's say, so anybody could afford it. And if people bought one today, they'd still have to buy it tomorrow because yesterday's newspaper is already obsolete. So it's a small amount of money that people are going to spend regularly and they're never done buying it. And it can't be, there are reasons why radio couldn't compete and why the newspaper from the next town couldn't compete. That was a strong set of moats and a lot of smart people invested in the newspapers and made a lot of money. Now it's true of the movie industry and other in particular communications industries. But now the newspapers, a lot of them are out of business and they're under profit pressure. So what happened to the moat? And the answer is that the internet and digital communications came along and put a lot of them out of business and gave them competition that nobody thought was possible 30 years ago. So I'm sorry for the length of this discussion but what can't be disrupted now by AI? Who can't lose their job to AI? I used to say, "Well, how about everybody says plumbers?"
Well, maybe a robot can come into your house and with a camera and assess your situation and make the needed repairs. Then I said, "Sure. Why can't somebody build a robot that can give you a good massage?" And so the world has become a much more uncertain place. The probabilities that can be assigned to the future are much broader today than ever. I think that's an important change. When I was a kid, the world didn't change. A comic book was always a dime. New technologies didn't come along that often. We were pretty confident that the world would look the same 10 years later and for the most part it did. But today I think you have to accept that much more change is possible. So the investor has to recognize that he or she is living in and dealing in a much less predictable world.
We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts.
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We're back with Profy Markets. Given that you are a fiduciary for other people's capital, you do have to make forecasts and develop thesis and invest people's capital. So at some point I can't imagine. So let's acknowledge that there's more known unknowables or unknown unknown unknowables than ever before. Given that you are charged with deploying capital and developing forecasts and thesis, what are some of those forecasts? Where do you find value right now?
I still think there is a more predictable part of the economy. It'll probably be a while before the energy business gets disrupted to the point where we use something in lieu of oil and gas. That's probably largely true of the food industry, probably the timber industry and the home building industry, transportation. It's probably going to be a while before we walk into a station, become dematerialized, and show up in another city. Retail has been disrupted but it looks like we're maybe at a baseline level of in-person shopping that's not going to go further. I don't know. But so you can identify areas, metals and mining, paper, chemicals. I guess I would say for the most part that things that have less intellectual content are less likely to be disrupted by AI, which is basically an intellectual problem solver and productivity tool. So I think we can make a list of things that we think are less likely to be disrupted by AI. We just shouldn't be too cocksure about it. But that's what we do for a living, Scott. We're still investing. We're investing according to the same investment philosophy and in many of the same industries. But we have to constantly renew our thinking. The worst, it seems that the most laughable thing to do today would be to say you know I found some companies in industries that'll never change.
