Howard Marks & Andrew Marks: Something of Value
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Alright, think we figured that out.

Andrew. I think you have a bright future .

and technology. I appreciate IT, especially windows technology.

and you should invest in some tech startups. Who got? true. Who got? Easy you isolde of acquired podcast about great technology companies .

and the stories and playbooks behind them. And then gilbert, I am the cofounder, managing director of seattle based pieter square labs and our .

venture fund, psl ventures. David l. Investor based in secret to go.

And we are your hosts today. We have two guests with very different investment styles, a value investor and a growth oriented tech investor head ahead, but not just any investors. We are joined today by the legendary value investor Howard Marks, the cofounder of oak tree capital management, and his son, and reMarks, the cofounder of T Q ventures. Oak tree, for those who don't know, is one of the leading investment management firms in the world specializing in alternative investments with a hundred and fifty nine billion dollars in assets under management as of the end of june twenty, twenty two.

Probably far a fewer of you know, Andrew and his firm, T Q ventures. But what theyve accomplish so far is pretty equally impressive in a very different field. So we'll talk about T Q is an early stage venture firm that Andrew and his partners started about five years ago.

They have a billion dollars under management now, including, I think, five hundred million dollars third fund that they just closed just a couple months ago. I can say I do know that their returns so far have been top dassie across all, all venture funds. Raise ed during that time period in all of those vitiges.

We get to know Andrew over the years as A A quiet community member and listener. And i've gotten to know him in the context of kindergarten ventures, my Angela st. Fun that I manage with that mating and a bit over a year ago, Andrew and Howard coa author, one of Howard famous memo O S.

Together in a departure for Howard, where they were debating overcoated together as a family ability as father and son. Value investing for this growth, investing in tech investing. And what was going on in the markets. And they turned IT into a memo and IT ended up becoming, you will talk about IT on the episode Howards most popular memo ever, which is incredible at a career expanding many, many decades as one of the most popular authors of investment members.

Oh, Howard memo s 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 male of the first thing I open and read, I always learned something well. If you want to discuss these topics with us after you listen, you should come join the acquired community at acquired data m flash slack.

Our new merch store is available at a quire data m slash store. You can listen to the lp show by searching acquired lp show in the podcast player of your choice, or get new episodes two weeks early at acquired data m slash L P. okay. Listeners, now is a great time to tell you about long time. A friend of the show service now.

yes, as you know, service now is the A I platform for business transformation, and they have some new news to share. Service now is introducing A I agents. So only the service now platform puts A I agents to work across every corner .

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Yeah so learn how you can put A I agents to work for your people by clicking the link in the show notes or going to service now doc m slash A I dash agents. Now onto our interview with Howard and and reMarks and remember, the show is not investment advice. Dave and I may have investments in the companies we discuss, and the show is for informational and entertainment purposes only.

Well, it's such a treat to have you both here. So the memo, you are together something of value. How would I believe this is the most popular memo that you've written across your entire illustrious st careers that correct.

Let's right, David. Previously, that was held by a mona road. I think he was in january of fourteen, fifteen thing called luck in which I talked about how lucky i've been and that i'm a big believer in luck and it's going to be on the right side of IT. And I listed about a dozen ways that I think i've been lucky and people like that because he showed the personal side has did something of value.

Well, you write in the memo about how this came to be of the two of you collaborating over the pandemic. But maybe here to recap on the cap, how did this amazing thing happen of a father's writing this incredible piece of work together?

Well, Nancy uni came to california on march the sixth of twenty twenty. He was scheduled to have a conference for its clients on the elements. Although we cancelled the conference, we did record IT at the conference venue for live streaming.

And so we were in L. A, which, of course, OCR y's headquarters. Andrew and his family came out on the thirteen th and moved in with this, and we stayed that way for, I think, I told june.

So we were incarcerated together. And all first, all we have fun talking about what we do and kidding each other. And we have a lot of differences.

We're not the same person. Andrews businesses different from mine, and his general mindset is different. What he learned forty years after I learned what I learned is initially helpful. Ly still learning both of us. So there were a lot of instances of differences, and that made for a very spirit period, and I hope a spirit memo.

And how many memo s had you written before this first one that you go rode together?

I've never actually counter them, but I think it's about one hundred and sixty.

Just trying to frame for listeners Howard Marks, this memo is a thing in the investment community, and it's crazy to see one come out with both your names on I mean, I remember for seeing anything. All this is going to be cool. And I am curious if you had, even before we get into the content, enough debate that you had in creating attention with IT. Did you yourself have any reservation of, oh my gosh, am I changing the nature of what the memo is by coauthor ing IT with Andrew?

No, because first of hidden, get near the keyboard. But we communicate really well the ideas that he express, many the ideas came from him as counterpoint to mine. And when he expressed them, IT was clear that we'd have a really good talk. yeah.

And I think what's also interesting is that I have been in investing nerds, ince. I was really little, but only evolved into investing more in what you would call growth companies, or what would generally be called growth companies. I started off being a value investor.

First parting, my dad is all little do. And then I got, fortunately, into the buffett letters, really Young. And so turned into huge buffet nerd and all the things that come with that.

And so my sort of trajectory was across the value and of the spectrum to the sort of growth under the spectrum. And I had to make that journey myself and understand how the two relate and why I thought spending time in one area was Better than spending time in another area or whatever. And so I was sort of able to talk my dad in his language. And so I wouldn't say IT was a IT definitely wasn't a debate. He was just more of a discussion of how things have evolved in trying to examine IT a little bit.

And and do you a call in your journey over the course of your life the first time where you saw what you felt was a really attractive investment opportunity in what people would consider growth investing or high growth investing or tech investing, that felt counter to some principles that you had internalized from your dad, from reading the buffett letters, from your style of investing earlier in life?

You know, I can't remember a specific one, but I think the sort of evolution happened a little bit gradually. So a value investor, you would sort of look at what the current cash flows of the business are and kind of valuing IT on that and not making much assumption for growth. And then there is a cohort of growth companies that weren't exactly tech companies in the way the tech companies look today.

But you could look at things like where rolling out stores is a big thing, starbuck or the auto parts companies or walmart or costco or that type of stuff. And then also things were really attractive. Acquisitions and synergies were attractive or were a huge part of the story of john moons, cable roll ups and things like that.

And what's interesting is you sort of learn that stead of looking at cash flows, there's this concept of sort of maintenance cash flow and then you could think about where to reinvest that. And if you can reinvest that really high rates, really attractive rates, that's a Better thing to do than just sort of holding the cash or whatever. And by the way, and buffet talks about this when he talks about the concept of owner earnings and things like that.

And then it's not too far. And then say, well, those same sorts of investments, you can make them out of the cash for statement, but you can also make them out of the income statement, things like high return sales or talented engineering teams and R N D and things like that. So I think I just got exposure incremental to different sorts of things that reverse that spectrum and that sort where I found what made sense to me. I have to ask both .

because it's fresh out our minds given recent acquired activity, but also you write about IT in the memo. I can think of no Better example company of the amazon. What is the two of your journey been with amazon? Did you discuss that? Was that part of this thinking about value and growth, perhaps not being two different things?

I think it's also really interesting because a typical value investor, you sort of work just at the fundamentals of the business and you look at the economics of the business. And buffet is very famous for saying that you want a business that an idiot can run.

Because eventually someone will.

Yeah, exactly. And so he thought of talks about the primacy of business model over management. But I think 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 A W S. That shows what happens when you bet on an amazing founder who can leverage their business to create value and really compelling other ways. And so I think it's a great business case study, but is also a case study of putting faith management team and recognizing the optionality that comes with that.

How IT did epos on ever intersect with your investing career?

No, i'm a recovered equity investor. I was in the equity research to prime the city bank from sixty nine to seventy eight, and then I left. And in the credit field where i've spent the last forty four years, we historical have not had contact with what you would call A A tech company.

although they had some distressed det at one point time after the tech bubble.

Yeah, but again, remember, we put very heavy emphasis on predictability. And I think that for the most part, all three does what warn and charlie do they put IT on the two hard pile.

I think, by the way, one other thing that I would add about amazon that maybe too monkey but also may be interesting as I think it's also an example of one of the things we sort to talk about in the memo, which is, is hard to just take a sort of new jc thirty thousand food view and you really have to sort of dive in and and understanding. So what people said for the longest time was that amazon was losing money and could never be profitable.

A charity run for the benefit of the american consumer.

exactly. And that came from looking a lot at the income statement and recognizing that they were losing money, partially because they were continuing the lower Price to achieve scale. But I think what's interesting is they actually had a very favorable cash conversion cycle. So the business was much more sound from a free cash low perspective much earlier than that was from an income state perspective.

Michael movs in the research note that was not as popular as amazon bomb and amazon d toast, but he called a cash flow dot com and that's what I was yeah. And so I think .

it's just another sign of the fact that you probably shouldn't come to conclusion about something without really trying to understand that for yourself.

Well, this captures two of our earliest points of discussion. Number one, that the companies were talking about are more complex than the simple profit owners of the method value era. And so you can't, as Andrews says, have a medic reaction to some superficial knowledge.

You have to really get deep. And then the other concept was this idea of optional profitability. The value investor wants to maximize cash flow and profits, A, P.

S. But the growth investor says losses sometimes as the right thing in the interest of the future. So that's in a very, very important divergence.

but also very often not. And so you can just be in one campaign can say, well, I shouted care ever about losses or I should just take for granted that all reinvestment and growth are good. But you also can take the point of view that none of them are good.

right? Wasn't a mark twin who said all generalizations are flawed, including this one? And by the way, when I say the value investor does this and the growth investor does that, probably the biggest single theme of the memo was that that dichotomy should not be so hardwired.

Yeah, which is so great. You make the point in the memo, which we talked about a lot in our picture series. Then gram made the lion share of his money on geo, which was not a value investment.

right? Well, I think one of the great enemies of profitability is rigidity because I am lucky when I switch to managing money by switching to the bond department at city back, and there couldn't be a bigger backwater at the time. They said, could you figure out what high o bonds means and start a fund? And I found this area where everybody said, no, no, no, we don't do that.

Everybody, most investment organizations had a rule against buying bonds that are rated below a or below triple b. And i'm buying single bay bars. And everybody says, no, we don't do that. Well, guess what, when you go to when the auction and you sit down, take your seat and you see there are no other bitters, that's usually a good thing. So the point is open mindless was really the most important single theme of the memo, I think along with continuing to evolve your thinking as you get older.

Can you take us back a little bit to that moment when you are starting to do high yield investing and nobody else was everyday. Assume milking wasn't active at this .

point in time. No milk. No, I had been interested in lowering bonds. I think all along he got out of warn the same year, I got out of chicago sixty nine.

And I think that he immediately found, among other things, he wasn't dedicated to an area. But I think he found no read a dead. And there's a famous book called tigon, which talks about bond experience from the one thousand hundred and fifty, I think forty three.

And supposedly mike found that book. And he read in IT that the lower of bonds rating was the higher its actual rate of return was not as promised yelled, but it's realized totally return because, yes, there had been some the false and bankrupcy. And just remember that, that period included the great depression.

But nevertheless, the access yield you got as an inducement was more than sufficient to offset the credit losses. And that was like an aha moment for him. And at that point in time, IT was impossible to issue a located bond. They were called non investment. Grade speco of grade IT could not issue.

Uh, so the big banks we're doing IT.

right? And the big investment banks, which is in those days were separate, the big under writers. And let's remember that in moody's manual are defined A B rated bond as follows, fails to possess the characteristic of a desirable investment.

And when I teach glasses about this, I say to them, let's go down to the street. I have a car there. I don't need anymore, and you have money and you need a car. But hopefully, before you say whether you'll take IT or not, hopefully you going to ask me one question. What is that question?

I'm debating whether the question is, what's the value of the car, what's the Price of the car, but I want to know both.

But the value, you can ask me because i'm a seller.

right? okay. I want to know what the Price is.

but you can ask me the Price hopefully before you say i'll take IT or I won't take IT, you know the Price. But you know, in one thousand hundred and seventy eight motives said these bonds are not proper for investment regards a Price.

how be? Well, the other thing that you say sometimes is how can life insurance companies make money knowing that every single persons?

That was one of my real activities, around eighty one or two, one of the first financial cable shows, interviewed me. And the reporter said to me, how can you invite these bones? You know, somewhere we're gonna default. And this is one of those times when you know, you just get the answer that pops into your mind. I'd never thought of that before.

And I said, the most conservative companies in amErica of the life insurance companies, how can they ensure people's lies when they know they're onna die? And the answer is, number one is risk they are aware of IT doesn't come as a shock when somebody dies. You know nobody breaks into the board meeting is, hey, one of the people died.

Number two, it's risky. Can analyze. And so they sent a doctor to your house to see if you're in good, no shape to get a policy.

Number three, it's risk. You can diversify. So nobody ensures just sky divers or just people who live on the same and enjoy his fault or just smokers, but they diversify their book.

Number four, is risk, their well paid to take. So they look at me, they say, this guy is gonna die at ninety. And they pressed the policy on the, i'm die seventy five.

There's emergent safety.

exactly. And I said, this is exactly what we do in high your bones. So we started doing IT, and we made money steadily and safely investing in the worst public companies in america.

Now remember my background. I joined the investment business september of sixty nine. I'd had a summer job in sixty eight. So i've got to look at IT. But sixty nine, I went to work permanently of city banks, national research part, and the bank was what was called the nifty fifty investor. The sixty fifty were considered to be the best and fastest growing companies in america, companies that were so good that, a, nothing bad could ever happen, and b, there was no Price too high.

This was the polar opposite of the not appropriate for investment.

exactly. For the nifty fifty was no Price too high. And for the high or bonds, there was no Price low enough. And of course, both stances are wrong.

And if you bought the fifty fifty, the day I got to work, and if you held IT tenaciously for five years, you lost almost all your money in the best companies in america, for the main reason that they had been Price too high. The Normal P E ratio for the S. M P is sixteen postwar. These things a lot often we're selling between .

sixty and ninety. I don't like today.

Yeah, was IT the case that they were not the best companies in america? Or was that the case that they were the best companies in america, but they were just Priced too high to make sense investments?

Some of each, they were all Priced too high, but some, in addition, IT was illusory. Let's go down the list. The granddaddy was IBM the saying where you can't be fired for buying IBM that IBM go bankrupt.

Maybe I don't remember close. Jiaji was number two. They completely lost their market to imports. They had to find a new business model.

The consumer companies and the tobacco companies were part of that too.

And for the most part, they did Better. But i'll tell you, one consumer company that didn't do well and that simplicity patterns that was in the fifty, you see a lot of people showing their own clothes today, if saw you travelling in different circles for me, but that was considered a company that could never be heard. Maybe series was in there, I forget, but the conceptive disruption was never considered.

The moats were considered in violent. The thinking was really simple. Nobody thought about the fact of ziogoon Price their copies at thirty cents of peace. Somebody from abroad could produce IT in that presentative Price umbrella that somebody else could get on their neath. So in those days, the wall street journal used to run a box on the first page whenever something would crap out, showing the losses in a certain category. And we had lots of companies when you lost more than ninety percent from the high to the low.

To go back to your question, I think if you're an investor, you have to have a couple of different skills. One is you have to think about the future potential, the company. And that's what my dad was talking about, about motes and disruption and things like that.

And the second thing is you have to think about what what's that worth verses? What is that selling for? And if you come back to the fundamental ideas in the memo, one of them is that all investments in equities are worth the discounted value of their future cash alles from here to eternity.

And for some companies, those cash lows are more in the here and now. And for some companies, those cash lows are very far away. But they all go into the formula.

And by the way, if you think about the nature of A D C F formula, every company requires judgments about the future. IT can be a seemingly starward company that has immense consistency and whatever. But those can be disrupted.

Well, I think the greatest example, one of the industries that all the value people thought were impregnable, great modes, was the newspapers. Because you had your newspaper, you didn't have to worry about competition from the newspaper. In the town next door, you were entrenched. IT only cost fifteen incense, so nobody would start buying IT in tough times.

And if you wanted to advertise, you wanted to advertise in the paper with the most circulation.

and the local movies had to be in the local paper. The local one adds the local car. And the great thing was that if the consumer bought today, guess what? They had to buy IT again tomorrow, because they had a one day shelf life. What could be a Better business? And to twenty years later, most of the countries had an industry of fighting for their lives.

If I could just make an observation, you sound like a crazy person. When you assert that and mass very quickly, consumer behavior is going to change.

If you would have told me when I was reading the paper, and this was the most important thing in america, well, newspaper values are mostly going to go to zero because all of the consumer attention is going to be shifting to consuming everything on their computers in an interconnected of servers that doesn't really exist yet. So therefore, that the newspapers won't have value. You would be like, what more economy ten years ago, and facebook thought instagram, and they're demonstrating their ability to constantly keep all the consumer attention.

But eventually, actually this chinese company is going to start and it's going to be short form. Yeah facebook won't figure IT out this time. And so all the consumer attention is gonna shift.

And I just be like you're wrong. I just don't believe you. Yeah.

that's of course true. But I think the other thing that's really interesting to note, and there are these very widely circulated charts of the speeding up of technological adoption. And so IT was very possible for companies to be much more durable back then than IT is today, in my opinion. I mean, if you transport yourself back to one hundred and fifty and you think about, well, how many businesses are there where I think I can say with high conviction that we'll be the same in ten years says they are today, I think that number would probably be much, much higher than you could say today without understanding what management is doing to further entrench their modes or find off competition or continuously evolve or whatever, it's very, very hard to say. Well, with no minding of the ship, this business will just stay consistent.

The very few businesses that idiots can run these days is.

But i'll tell you to second what Andrew saying. If you go back to my youth in the fifties, or when I was a Young man in the sixties and seventies, do you just didn't have the feeling that the world was changing? My thought model for the world at that time, looking back at IT, is kind of a consistent backdrop, like on a stage, and the actors do their thing in front of the backdrop, but the backdrop doesn't change.

And so there are cycles up and downs, excesses and corrections and all these things. But the world didn't change much, and comic book was a dime for my whole youth. But today, everything changes every minute.

So here's a question then, should companies be worthless? Because if the future is more uncertain and it's more likely that things get disrupted and modes are less permanent than they've ever been, shouldn't we consider less future years of cash flows?

Well, like everything is a double ed sort. I mean, on the one hand, you just made the point that without minding the ship, companies more potentially disruptive able. But on the other hand, that means if you have competitive advantages and you continue to mind those advantages and you use them to encourage some markets or launch new products or going after other markets, geographics leader, whatever, there's much more value creation to be had.

And I think the ability to leverage your advantages and build more for the companies that are really doing so is probably never been higher. And by the way, with the internet, you can address global markets. We just talk about newspapers where you can address the town next door. One of my favorite writings on investing, it's not actually about investing, but it's the sky. Bryan Arthur, and he wrote something called increasing returns in the new world of business, and that was in the midnight ties.

And he made the observation that with the new world, with the new distribution models of things like the internet and whatever the best companies could continue to get bigger and bigger, whether you were sort of kept out more in the old world, and so you would have diminishing returns to scale over time. And by the way, that couldn't have been more right. You look at markets over the subsequent couple decades and you have companies like apple and amazon and google and microsoft that just continue to get bigger and bigger. And I think a lot of that comes from the fact that they're just continue to dominate more and more .

of various markets. This is one of my favorite pieces of tribe of all time about that paper. Brian Arthur was friends with cormac mouthy, the author who wrote all the party courses in no country for old men and correc helped shape the process in that peace.

Oh, very interesting.

One of the reasons why is very successful.

Well, yeah, I guess for an economist that was extremely well written before .

I lose the opportunity, I just want to add one thing to Andrews list of criteria for success in this continued expansion mode. And that is companies that are able to avoid the negative effects of success. You have to stay lean and flexible and unbutton craft and future looking enter.

you're pointing out this really interesting thing where you have two opposing forces that have budding heads. One is now we have globally addressable markets. So times are bigger.

Therefore, market caps can be bigger. And at the same time, you have competition happens faster than ever because paradise change faster than ever. And so therefore, the future is less certain than it's ever been despite the fact that the opportunity for any given business is the largest it's ever.

yeah. And by the way, I wouldn't just say global markets. I would say strategically a Jason markets as well. Again, look at the big companies and how they continue to step out and do more and more in things that are ten gentle to their existing businesses. I mean, amazon, a great example that they started in books, then they went to media and then continued on and on and on. And eventually they leverage their scale and the cloud .

computing and whatever and that into database.

And also.

yeah exactly been Andrew mentioned that he'd never heard your voice at real speed because he listens to podcast accelerated. I think the way to think about IT is take Darwin ism and turn up the nob a few clicks. It's what IT is. Its winners and losers may be more dramatic than ever and happening faster than ever.

And then this all, I think, dove tales into one other point that we made from the memo that I think is really important, which is that markets evolve and games evolve. I was an obsessive poker player. I've always been an obsessive games player.

Generally, in my dad night, we sit around and or play back again and for forever and whatever and night I got IT obsessed with poker, right when the poker boom happened, which was Chris money maker on the world series of poker, and they started online poker. Kr a, ah, well done. It's a very impressive poker trivia.

So when online poker first launched, and everyone got into the poker boom because no one knew had to play, and IT was so new, you just SAT around. You played aces and kings and nothing else. You could win money.

And IT was very easy. And then over time, people figured that out and they sort of figured out the next level of the game and whatever. And the winning strategy turned into the very exploitable strategy.

And that evolution has happened a lot more times to the point that i'm probably terrible poker now. But anyway, I think the same thing has happened in markets. And so back in the times when buffet was starting information about companies and the ability to transacting companies and actually even finding out about companies was extremely hard. I mean, you had to go to the library. You have to take out the moody manual .

he was driving around by stock certificates from farmers.

Yeah, I don't know if you've ever looked at a mood's manual, but there's not that much there. And so if you were interested in something to mail away for the annual report and so on and so forth, and then you had to call your broker, and they had to figure out how to buy in a liquid stock. And because there were so much friction to getting information and transacting, IT was much more possible for value to be hidden in plain site.

And I wasn't there, but I know this because buffer t says that this is exactly what he did. You could look at something and just plainly see that the company just continued to march ahead and just plainly understand that IT was undervalued relative to those prospects if you had conservative assumptions about the future continuing. And nowadays, information is totally ubiquitous.

Anyone can buy a stock. There's tunes and tons and tones of smart people investing in the stock market. But there are also algorithms and machine learning and all this type of stuff. And so it's very hard to believe that you can just have some sort of new york surface level understanding of something and just look at financials and have some very elementary view on something and have to be some sort of insight. That's profitable.

Well, the phrase I took away from that and it's in the memo, is readily available quantitative information about the present. And Andrew pointed out the evolution of markets. And you know, I was taught at chicago in the mid sixties the efficient market hypothesis that everything is Price right, because that is working so hard to find the bargains in the overpricing.

And of course, that's a framework. And IT was not true that everything was Prices right. But certainly over time, things are Priced right .

to become more true.

right? Inefficiencies, which I prefer to say, mistakes, things. The markets, this Prices, where do they come from? They come from ignorance and prejudice.

So moodie had a prejudice against the single be bond. IT had a prejuges in favor of the nifty fifty, as did most investors. And I was lucky to find some things that either others didn't know about or didn't understand.

But human knowledge is commuting. And lately, it's been rushing forward at an incredibl Epace. So it's hard to imagine that there's a piece of information that I can get off the internet that's gonna make me any money for the simple reason that everybody else can get IT off the internet.

This is a zero sum game for a fixed amount profit. And it'll go to the people who do Better at the expensive of the people who do worse. So you have to have an advantage, a acknowledge advantage, a skill advantage if you're gonna be one of the people who ends up on the positive side of that equation.

And so to bring this back to what we're talking about earlier, it's very dangerous to just make qualities judgments about a company that seemingly everyone has, oh, this is a great company, whatever, and will just continue winning without also saying, well, to what extent is this reflected in the Price? And so that's the whole point of investing, whether it's value investing or growth investing and that sort of the point we make in the memo. I mean, you have to be able to make judgments about the future prospects of the company and then you have to be able to say, well, to what extension this already reflected in the Price.

If you're talking about public equities or any public market, that dynamic is so strong that we were just talking about, there's so much information out there. Yes, maybe you can have some advantage, but it's very hard if you're instead Operating in a private market that is at least relatively to the public markets, much more at liquid, you can have more advantages. So you've shifted your career at doing mostly early stage private market investing. Is that a big reason for that?

Well, so what I say is, first of all, I think you'd be hard pressed to say that venture is super inefficient. It's not a market where everyone can transact, and it's actually hard to get in the place where you can invest in seemingly great companies, but the competition to invest in those things is very fierce.

So I wouldn't say that I came to the realization adventure was the super inefficient market I wanted to capsize on that insider, whatever. And by the way, and leaving aside the fact that I love hunting for founders, I love working with founders, I love so much that goes into the whole business of venture investing. But if you wanted to talk about the proposition, the reason why I went into IT is a, number one IT sort of suits my skill set more to make long term quality of judgments about the future.

And I think venture so much of what you're doing is your finding huge gaps between what your pain today and what this could be worth if it's right. So you have to really imagine in ten years if this is successful or what could that business look like. And much more so than the sort of analysis that goes into being a public market investor that really suits my skulls that much more.

And then the other thing is it's a much more probably stic endeavor. I mean, what you're doing is you're trying to find extremely high expected value investments where the average occurrence is that you're going to lose your money but make enough of those bets. And so IT works out to be a great return.

And then, by the way, I try to help the companies in whatever way you can and follow them closely so you can add more capital to the ones that are doing well and whatever. And so that whole endear really suit my makeup much more. Oh, bit, we were telling.

Before we started recording, I went back through my notes from business school room. How are your book the most important thing eliminated? And every other page on there is like, risk equals permanent capital loss. Do everything you can to avoid permanent capital loss and venture is not that.

It's not that. And I also don't think that I would be particularly graded that I mean, if you told me I had to have a portfolio of ten companies where not only was the portfolio return be twenty percent, but they're all be roughly twenty percent or they go somewhere between ten and thirty or something like that. I mean, I just don't know if that would be as suit with my skills set.

And in nine hundred and seventy eight, when I left the equity area, IT was really because of the terrible performance of the entire ty, which I S. Director of research was associated with.

So they said to be what you want to do next and I said, i'll do anything except spend the rest of my life choose between marking lilly because you can take the best drug analyst in the world and sit him down on the first day every year and asking, which is gonna perform Better marker, lily, and I guess is you'll get IT right after the time. But the good news is my boss said, I want to go into the band department, and IT played to my quantitative skills and to my conservative personality. And if they would have said, I want you to start a venture capital fund and be ready to invest in amazon when IT starts, I would have been disaster. Because i'm not an optimist, i'm not a futurist, and financially, i'm something of a chicken. So the point is, so far, andreoni have gravitated things that are right for us, and that's a hell, hold lot easier then doing something which is wrong for you and trying to put a square pig in around hole.

One of the things that really interest me is a playing some of the more traditional investing lenses or buffet investing lenses or whatever. The venture is really interesting because I think you have to think about, well, what can this be worth if IT works? And what's the potential probability that IT works? And in order to do that, in my opinion, I think it's very helpful to be able to visualize what the business could look like.

And if the company ibs in ten years, what's that person can be looking at when they are thinking about investing in the company? So if you have to sort of visualize, well, what could the financials of this business look like down the road even though it's totally nason? And what could the motes in that business look like? And how much capital might to take to get there? And what's the likelihood of competition? What could they evolve into after they establish themselves in that market? And it's Better.

It's Better. And I think it's really interesting. And to me, I I find IT to be yeah really, really thought provoking.

Remember what I said that Andrew said readily available quantitative information about the present is not gonna give you the key to the castle. He said a couple of minutes ago, however, that he is good at making quality ative judgments about the future.

And so if everybody has all the company data about today, then the means to msg IT, how do you get acknowledged advantage? And the answer is you have to either somehow do a Better job of massage in the current data, which is chAllenging, or you have to be Better at making quality ative judgments, or you have to be Better at figuring out what the future holds. So he's had to evolve from the old value. People who, you know, buffer talks about buying dollars for fifty cents, which is not such a terrible idea, but to doing more like he does, dealing with these chAllenging aspects of quality, ative and future.

Yeah, I mean, I think you just have to find the type of thing that suits you. And I like being an optimist and I like thinking about what what could this be if IT works? And there are other people that like saying, well, this companies clearly socks, but IT doesn't suck as much as everyone thinks or people think this business is going to die. But I think it's only gna be mame there something .

IT will die slowly over more years. You know.

that's an incredibly valuable skill to have and you can make incredible returns. Doing that is just not in my nature.

Well, oak trees, I think the thing we're known vest for is investing in distress. That and when we started that native eight, my partner, Bruce cartin, I had this idea that was actually Bruce's idea, but he joined me and i'd been in high abban business for ten years. At that point, people would say, well, that's crazy.

You going to buy the debt of companies that are bankrupt. They're not gonna repay the debt and answers, they are gona repay IT full, but they're gonna pay part. That may be enough or if the creditors are unpaid, they get the company that may have value.

But that was good for me, was great for Bruce. Car ship wasn't the right thing for Andrew. So fortunately, we gravitated in the right direction.

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We wanted to ask both of you about the firm building aspect of the investment business. One thing i've certainly learned in my career is that being a great investor is a very chAllenging proposition and an activity that can easily be one's life work. Building a great investment firm is a very different chAllenge. It's very rare that people can be great at both of those, and it's also not a second chAllenge to take on likely. How did each of you think of this?

Well, having spent my first seventeen years at city bank, which is a management intensive bureaucracy, I was pretty good at those things. I was not a guy started in a garage, you know? And so processes and deliberately, ness, or right up my ali.

But on the other hand, we started outre at a time when the quest for alternative investments, who was extremely strong, the demand, I think our trip to supply, most people kind of gave up on getting the returns they need from stocks and bonds. So we had a big tail wind. And what Bruce and I did, for the most part, is create a culture.

We didn't ever have a micro managing, micro managing mentality. We were too visit. He was not our day job to run the company.

We did that as a sideline, and IT wasn't management intensive. So we weren't great on the profit margins, but they kind of take care of themselves and we were haphazard about compensation. You know, we kind of respond to the last person walk in the door. But the right culture at the right time with, I think, some exceptional people was enough to make the company is success, even though IT was largely an unguided missile. In terms of management.

how did you think about splitting up? The responsibility lies of the core competence of the business. Investing reverses the necessary lifeblood of the business of finding capital to manage and recruiting .

and everything. Well, the great .

advantage we had is that the people who started out, three, there were five of us, three others, in addition of Bruce of me, had worked together on average, for nine years at the time we did IT. So we weren't dealing with strangers and trying to figure out an mo. All we had to do is what we had been doing A T C W before autre.

And for the most part, that meant I was out raising the money and visiting with the clients and representing us to the greater community and clients and prospects. And Bruce and the others were back managing money. And David, you mention my book, the most important thing that actually evolved from a memo of that title that I wrote around or two.

And i'd had a section on how to run a company, which I spared the readers of the book because I had nothing to do with investing. But I said in there that the key among partners is to have shared values and complementary skills. And we absolutely shared values were all family men and conservative people, and somewhat risk averse and so forth.

Andrew points out, we probably could use one founder in the mix. I wasn't quite as risk averse, but we did okay, but we had complimentary skills. And I could do things in the outside community.

The Bruce maybe couldn't do, although he's Better added than he seeks but had no interest in doing. And he could do things in terms of managing money that I couldn't do. But the great noses, we each accept the truth of what I just said. And so that produces a lot of respect, mutual respect. And that's why we've had such a great partnership for thirty five years.

And then for us, I mean, well, i'm incredibly proud of and impressed by what my dad and his partners have built. Our approach is sort of totally opposite just because IT suits us.

That sounds like a theme between five.

Yeah I mean, it's not for the sake of being opposite, but my partner shoes and I, who we both since we started and have run the investment program and the sourcing and investment decisions and IT helps that we've been long time extremely close friends and we talk all the time and we just feel like we have to really pinch ourselves, that we get to do this day, that we just love, love the investing into us. What motivates all of us is having absolutely world class returns over a long period time.

You seem to share that competitive streak with your dad, even though you have different ideas in any other ways.

You know what? Then if you're not competitive, you shouldn't be in the investing business.

yeah. But I would say it's not competitive with others. It's competition with ourselves. I mean, we just want to be the best that we possibly can be. So everything we do add our firm as in service of that.

And it's not because other approaches aren't also extremely valid or work for other people. It's just this is what motivates us. And so we have no ambition to broader firm in terms of strategies or turn our firm into some big asset manager. And if our jobs turn from investing into management, we'd be extremely unhappy and that trade office and worth that. So everything we do is in service of trying to do what we love and maximized our time, doing that and have the best returns that we possible can.

And so do the things that we think enable at which an opinion in this business is really all about your reputation with founders and having as brought of a network of as many incredibly talented potential founders as you can and then being able to do whatever we can to build the best relationships we can with them. And I think that comes from helping them, but I think that also comes from being gray partners and also friends. That's how we build the firm. And it's very different.

You point out that the nature of opti and T Q investment businesses is very different and that the core competence cities are you know, very different too. And you don't write public facing memo s, you don't go on too many bug guests. Thank you for journeyings us here. But finally, just not as important as IT was a tree.

Look, there are other people in venture who do that stuff extremely well.

Other people in venture go on podcast.

I think those podcasts are great. And I think people who do IT probably do IT because they enjoy IT, but also because IT really helps them, I mean, builds great brands with founders and increases their network and adds a lot of credibility and all that type of stuff. I think at some point, you just sort to do what's you to you. And we have certain things that suit us and other people have things that suit them. It's not really a strategic question about if going on podcast help us or heard us or being public facing or whatever, it's just hard to do what you think is right for you.

which is funny. That's the echo of Howard, something i've heard you say in the past, which is that you just have to make sure that you investment strategy suits your demining as an investor, which is almost saying the same thing. I mean, David, I talk about this a lot in the podcasting business. We say, should we change the content to match what the demand seems to be? Or should we just say, you know what, let's find a way to do what's natural to us because that's what we're going to have the most fun doing that we're going to have competitive advantage and that's we're going to have the ability and I think that same concept applies in all three of those things just discussed.

When I asked for career advice, when I speak to students nowadays, I say something very, very much in line with what you just said, ban. I say, look for something that place to your strength and avoid your weaknesses and that you'll enjoy doing. And that sounds like that's what you've done and turn IT around.

We are so lucky to have the ability to do something we enjoy and take that out of the equation. What do you left with? We only have one life.

We should make the most of IT. We can. I think anybody who has a choice and does something he doesn't enjoy just to make more money is making a world class mistake.

I think learning and evolution are really important. Learning at our firm is really important to us, and it's just important to who we are as people and continuing to try and expand our competencies and robot knows in the many mistakes we make and all that type of stuff. And so I think you have to find something that suits you, but you also can't get to hung up in your comfort zone and just say, well, this doesn't fit my comfort zone.

So just going to to ignore that. And you guys talked about this on your bircher episode. I mean, one critical, you could make a buffet. I just totally ignored technology.

And technology not only became much more pervasive, but I also think that mean, he's an incredibly smart guy and he understands lots of different elements of business. And when he talked about technology, I think he was referring to science projects. You know where your technical advantage is, what will allow your business to succeed for time.

But there are lots and lots of technology companies where what they do is not so incredibly cutting edge. And really what powers their business is most that are very similar to other sorts of things. You also had hamilton hammer on here and a lot of those sort of motes traverse both technology and on technology businesses. So I have no doubt that buffett could have totally nailed IT, but I was just not in his comfort.

You know, this points out a economy in investing or maybe a cannon room of which there are so many, because what we just talked about was it's important to stick to your last and do what you're good at and face with you. But it's also essential to be open minded and willing to .

change getting way plash.

Yeah, but look, to be a good investor, you have to be confident because you have to bad things that are easy and stay with them if they go bad. And if you're in the public securities market, you have maybe by more of them when they decline, but not so confident that you're they headed and keep throwing bad money after good, you have to concentrate your holdings enough so that.

The few good ideas you get, your lifetime really make a big difference, but you have to diversify to protect against the unforeseen. e. So this is really the number of IT is such a fascinating field because in my opinion, the things were talking about can be reduced to an algorithm. And this is where our humanity pays off, because anger talks about making Better quality, ative judgments about the future. I like to believe that computers will not be doing that well for some time, so that we all still have some scope for success.

Or if they do, then IT will cease to become a competitive advantage.

right? Well, but we need to have some competitive advantages left IT, you know. But I think IT comes from quality, native and future.

I always say that I don't think that a computer can sit down with five business plans and figure out which one is amazon in advance or meet five CEO and know which wants to Steve jobs. And not many people can do IT either. That's the important thing.

But the few who can, can really help their clients. And if the person who finds amazon can also find google and find facebook. And to the point where you can conclude, okay, it's skill, not lock, then you really have something.

So here's a philosophical question. If there's a very credible trobe to be made on either side of an argument and you can always make both of them and then be stuck in the middle, ultimately, everything always comes down to judgment. So where does judgment come from? Well.

that's a great question. I was having lunch with chilly monger back in twenty eleven when most important thing was about to come out, because he worked downtown right next to me in the building next door. And when I got up to go, he said, just remember, none of this is meant to be easy.

Anybody thinks this easy as stupid? And so I wrote a memo, I think IT was september fifteen, if i'm not mistaken, and I talked about that I called that is not easy, uh, friend, the mine wrote a book on investing in the U. K.

And the title is simple, but not easy. That things were supposed to do are simple to describe. It's just not easy to do them a Better than other people and be consistently and see over time IT all comes down to judgment.

Now that's not your question, but your questions. Where does this come from? And you remember that the first chapter of the most important thing talks about second level thinking, thinking at a higher level than others differently, but also Better.

That is to say, more correct. It's easy to diverge from the thinking of the consensus. Not always easy to diverge correctly, but that's what a superior investor has to do.

You might call second level thinking very in perception, knowledge, advantage inside context, judgment. But it's an intangible. People say to me, can you teach somebody to be a second level thinker? And I said, I don't know. It's kind of like asking the best wall coach to coach hide all his efforts will make his players any taller. Some people get IT some down.

yeah. I mean, I would say IT comes from probably comes from a lot of different places, but some ideas would be some combination of sort of deep knowledge and understanding of what you're doing and the real framework for what matters and what doesn't.

Then why I would say rationality, which is the ability to think logically and not emotionally, which sort of details with knowing yourself and being able to know where your biases will, in fact, the decision making process. And then I think there's intellectual humility that comes with that, knowing that there is a good chance that you can be wrong, even if all those things are true, and also knowing what you don't know. So knowing where you can open and where you have to learn and where you should and things like that and try.

I imagine this is less for you. But certainly at a oti, you recruit a lot of .

people over a thousand employees, right?

So you had to make judgment about other people's judgment.

How did you do that? You know, back when I was an analyst in the early seventies by follow, xiao x and one of the portfolio manager said to me, who's the best wall street analysts on xix cell side, and I said, well, the one who agrees with me most is so. And so isn't that our definition of who is the smartest? No, but the truth is we look for smart people.

We look for what Nancy, my wife, cost, smart eyes, exceptional people who get things may be a little Better than others, who understand what's important and what's not, who can go beyond the writers available quantitative information. And look is very simple, like with the oil, the cure for low oil Prices is low oil Prices. Some people get that into actively ly.

Some people don't understand that you have to get the people who get IT intuitively. But I think also very importantly, we look for team players. We look for people who can work and exchange ideas and can do well with ideas from their peers, from their lessons, from their superiors, managers, subordinate, you know, and throw IT all together. We don't want the lone wolf. We don't want to you eat what you kill kind of person, and we don't pay people on the basis of their one years quantitate or performance as an individual, and we don't want people to work that way.

I definitely can attest to having nearly as much experience in recruiting. We've vada whole three people to our team now, but I do think that the vast majority of the venture and investment decision make is about understanding founders and having a sense for founders. I mean, again, after talking about all this business analysis stuff, we firmly believe that the vast, fast majority of the investment consideration is backing the right people.

And so what you're doing, I think every day, every week, is evaluating people. And so you have to do that in the same way. And so I think, first of all, when you hear a venture pitch, so many of them that we all hear are like you, the person gets on and it's like, here's where I went to school, here's where I work, and then I worked here.

And now i'm doing this and let me tell you what i'm doing. And I sort of say, no, no, let's stop. I want to spend a lot of time understanding you, and I think the real way to suss out judgment is by going through the person, story and background and understanding why they made decisions because you can sort of fake your way through prospective things. And when I am, am sure you guys we're recruiting at a school, you know, there is the vall guide for finance interviews. You memorize every single answer about how you would do this and how you would do that, whatever.

In C. S, there was a but called programing interviews exposed, written by three x microsoft ys. And IT was truly the way to with through any of these .

yeah but you can't fake what you've done. And so if you really dive into what people i've done and why and if they've made decisions based on their own judgment and if they've learned and evolved and if they've made decisions based on first principles and we're willing to go against the heart and we're willing to do things because they're passionate, and if their idea comes from specific knowledge of a real problem in a real deep understanding, I think you can evaluate judgment very well based on that.

And so I think that translate tes into hire ing, too. You know, really understanding what people have done in the past and why. And then I think you can also test for specific skills in the hiring process. I mean, I think you want to understand why you want to hire someone, and then I think you can test against those things in real ways.

It's funny on the founders thing. I having a conversation with my dad about a potential Angel investment recently, and he was like, I know people always say the founders is the most important, but what is your view of what that actually means? And I sort of just barfed out this answer. Howard, sounds like you're earlier story IT just came to. And I was like, are they a weird w and in particular, are they a weirdo at something where their four standard deviations from the mean at that thing and that could cannot be anything, but if this person can't be in the middle of the distribution at everything or else the start up will never be successful.

Yeah well, I think what's interesting also is that there are so many ways to succeed by being amazingly good at the conventional thing, by being the best that going through the map, following the map, whatever, and through a hacking, whatever the process is that everyone's done before you. But with startups, there's not much for a map.

I mean, there might be some general principles, but in any given area, you're doing what you're doing for the first time. Or if someone else is doing IT, you're trying to do IT differently and Better and whatever. So you have to be able to think for yourself and you have to have real conviction in yourself. And so I think to your point, the people who are more unconventional are people who are willing to do things done, what they think is right for them and their own views versus just being the best at what's conventional.

You know, my last memo came out a couple weeks ago, was called I big to differ. And IT was all about the need to be different. And it's exactly what you're saying.

The path to exceptionality cannot come through doing what everybody else does and the advantage of the things we do, especially Andrew does, that we've been discussing is the fact that there is no clear road map, there is no simple algorithm, which will produce a consistently correct outcome. But we are dealing with chAllenging concepts here, and the person who seize differently and Better is the one who is gona win. And David, one son who ran the in dominant yl, used to talk about the need to do things that are uncomfortably idiosyncratic.

Tic, you have to be idiotic, try to split tax and to win. And for many people will be uncomfortable because they'll be out of step with so called common sense. But you've got to do IT anyway.

One way that I sort of into IT for myself about this point about why founders are everything sort of the question, I guess here, dad asked us, think of the best start up idea you could possibly imagine. I don't know someone gave you google pay, drink algo them as .

little ally what I was like you have .

to and then imagine someone from your life that's mediocre, or maybe Better than mediocre, or a name minus, or A B plus or even .

talented that conventional things.

yeah. What are the odds that that person would have built google?

Zero.

zero, right? And that's because, number one, it's hard to build a company even if you have a great idea and execute on all the things have to execute. But number two, if you're doing something well.

Other smart people are going to be like k, there's a lot of value to capture here. I'm going to go compete. So not only you can have to build your company, but you're going to have to outcompete everyone else. 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 going to being a great founder to build those sorts of .

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We talk about IT all the time with startups. This become taboo to put what's the exit strategy in the deck. But you know, everyone wants to understand, how can I get liquidity on this investment at some point, poke tree had H. I don't know if you would categorize IT as a acquisition or a merger or potentially a majority interest investment, but however, I wonder if you would be willing to share with us how you thought about that and what that means for you going forward.

Well, IT was really a dream transaction for us. Brookfield approached us and said the credit was the obvious old mission in their list of alternative investment categories that they were providing and they could build IT, but they might take ten years and they might end up with less than we had. So they wanted to invest in oci at that time.

This was twenty eighteen. We were having phone by the public and hair phoned by the founders, current and former employees. So they proposed to offer a fair Price to take out the public that half and to buy a fifth of our half. So they started with just over sixty percent, but we had criteria for a transaction that we would contemplate. We've had him for twenty years, and they were never fulfilled before.

And brookfield hit him all, which is that actually would continue to exist, would continue to be an independent entity that we would run IT, that brookfield ouldn't tell us what to do and that brookfield wouldn't try to interpose itself between us and our clients. They would be oci clients tended by autre. So IT was really ideal for us.

And also, as I said, they bought twenty percent of mistake. Bruce and stake at sea and the former employees will sell and eighth of a year until they're done starting this year. IT happened already.

The current employees have the option to sell in eighth, but they don't have to. And Bruce and eye and the other founders and senior managers had the option to sell a fifth year, but we don't have to right now. We can keep IT as long as we want or sell IT when we want. And you know, you reach a certain age. When is a good thing to have an exit?

When did you start a tree?

Ninety five. So it's twenty seven years old. I've worked there half my career.

So let's see if you can do the math. So we have an exit at our option. We still run the place.

They consult us, they help us, they provide resources. I mean, I just couldn't be Better and bother talks about skipping to work in the morning. And I skip inwardly well .

and other big topic I wanted to cover from the memo is just that this perfect transition selling, you each brought very different perspectives to the topic of selling.

That was our most lively interchange. I would say .

i'd love to hear from each of you what your thoughts were on selling before coming together and then how they changed.

So as you probably know, I wrote a memo in january of this year, I think he was called selling out. And I observe that a lot is written about went to buy securities. It's a little bit about marketmen, but not much about went to sell securities.

And of course, I have the equation. And yes, my tendency coming from the conservative background that I came from was to what would you say? Take some money off the table, take some of the profits. I had this terrible, misguided feeling that if you sell half, you can be all wrong. But of course, I wasn't dealing with securities with the potential of what andre deals with.

But anyway, for people whose parents were adults during the depression who were brought up with, don't put all your eggs in one basket safe for any day, that kind of thing, you take some profits, you know, if you're more optimistic, bent, the timing of your birth is more fatalities. You never heard those things, and some ability are to hold for the long run. You know, I wrote a memo on and liquidity about eight years ago.

And Andrew game, a great work for that memo, the greatest quote, and he said, if you see a chart of a stock that's been up for twenty five years and you say, man, I wish I own that stock, think of all the day you would have to talk yourself out of selling. So in selling out, I told the story of amazon that I think he was eighty nine in ninety nine, and then he felt the six in a one. And let's say, you were fortunately enough to buy at six.

Would you start selling at twelve? Or most people start selling? Well, it's a double. Would you sell at sixty ten x?

Ten x?

What about six hundred hundred x, you know? And then I went up to thirty three hundred. So this idea that as soon as there's a profit, you should take some of IT off the table seems like a huge mistake.

Charlie monger says, you only get four good ideas in your life, and you've got ta get the most out of him. What I said in the memo, selling out half physical ously, but only half, is that there are two reasons. People sell things because they're up and because they're down. If something goes up, they say, i'd Better sell some before the prophet evaporates, and I feel like a jerk. If IT goes down, they say, i'd Better sell some before IT goes down more and i'll feel like a jerk, in other words.

and that has nothing to do with the business.

right, or the thing you're selling. And a huge amount of people's preoccupation, in my opinion, is with avoiding regret, embarrassment in front of others regret themselves. My view on selling .

is consistent with the general way that we talked about, the value of growth, the economy, which is that what matters and investing is really deeply understanding what you own and why you are making the investment and what you're playing for. And when IT comes down to making a decision about selling or not, what matters is understanding those sorts of things and then also understanding your opportunity cost.

I mean, your money has to go somewhere, and so you have to think about decisions relative each other. But the point of the memo was that, first of, most people don't think about opportunity costs and most conversation selling our sort of academic, you know, thinking about should you sell this in a vacuum or whatever. But outside of that, most people make selling decisions based on Price action, if its upper, if it's down, or whatever.

And most people confuse Price action with fundamentals of this company has been up into the right for years. And so I must be a compounder must be compounding value in transit clear. So I think you should make your selling decision based on why you made the investment and how things have evolved in what you could be playing for.

Take a simple example, let's say you can buy a dollar for fifty cents. Well, that's obviously a good thing to do. But if IT reprises a dollar, you should probably sell IT because there's no more in the investment.

However, let's say there's a contract where you can get a dollar, but then every year the value of what you can claim compounds by twenty percent and you can buy that contract for fifty cents. Well, you can buy IT for fifty cents. Let's say IT goes to dollar.

You doubled your money, but you shouldn't sell IT next year old compound value to a dollar twenty. So if IT goes up to a dollar twenty, you're up twenty percent. You still shouldn't sell IT. The next year, i'll go to one forty four.

Let's say instead of one forty four goes to one sixty, you probably still didn't sell IT even though it's quote, quote, overvalued because the right to compound that almost twenty percent in perpetuity is extremely valuable and so on and so forth. So you shouldn't just let Price action alone determine what you should do. And then I think the other thing to note is, number one, things that can do that these sort of compounding certificates, you know, in the form of companies are extremely rare, but extremely, extremely valuable.

I mean, if you just look at A D, C, F, if you really have something that can compound cash flows for twenty five years, you're up one hundred x. So if you can do that for fifty years, you're up ten thousand x. So it's really, really hard to Price that in in the near term.

And so number one, if you can really believe you found something like that, something crazy has to happen for you to sell. And I mean, the Price can, of course, says my dad said anything can be Price too high. But I mean, really recognizing what you have is really important and also recognizing that we have a huge tendency to want to act.

And so sitting idle on something for decades and decades is really hard. But then contrary, those things are extremely rare. So most things are not that. And if something appears where the Price appears to be compounding and you get comfortable that IT is one of those things, you Better be sure that IT is and you Better know why you own IT.

I just think it's a nuances conversation that comes back to why do you know what you own? What are you playing for? You know, what's your confidence in the future? And then if I saw this work, could I put the money.

you know, IT all comes down to maybe we can think Better about the selling decision if we rebrand IT, and we call IT, the decision to unite the thought process should be the opposite of the buying decision, and not some chicken stuff about being afraid to lose.

But, you know, I think Andrew points out of a very important thing that in the olden days, you look at the classic value investments, and I did some of this, you get this chance to buy the dollars for fifty cents, and that's a great thing. But once IT hits a dollar, you have got to sell IT. You got to find another dollar for fifty cents.

The concept of the u. bia. Dollar of fifty fifty cents and then IT goes on to be over two and four and eight and sixteen .

cigar that don't go to eight box.

Yeah right. And remember, I was a credit investor and the bond investor generally does not think in terms of getting more than one hundred cents on the dollar. So when the upside is capped or not existent, then obviously taking profit maybe somewhat more responsible.

And by the way, I mean, ventures and interesting lends to look at this, 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 cosa mistake.

uh, disastrous.

There are incredibly prolific firms where their reputation is built on a handful, all of fantastic investments. And I think if you probably looked at the P S. Of the most famous venture investors of all time, a huge majority of IT is made up of continuing to hold a few things.

Oh, I have a great story on this. I went out the firm. IT could be one of several firms, but I know that one of the earliest venture investors in facebook, after the IPO, they distributed out the shares.

And among the partnership, most of the general partners relatively quickly liquidated the facebook shares. But the partner who LED the investment was like, i'm onna, let this ride. And that was a very good decision.

Well, I want to start moving us to a close here. I always find that people tended mostly consume in whatever medium they're currently consuming in. And David, I have played around a lot with, actually, right, should do blog post, would do newsletters.

People we know for one hundred percent share are listening to this podcast. So when i'm pointing them to go check out your memo, I would like to do so in the podcast form. So where can listeners go read the memo that we've mentioned so many times .

or listen to IT memo? And all of my memo since nineteen ninety are available at oak tree capital dot com slash insights under the heading of chairman's memo. And you can read them all one of time in order. And the only thing I can promise you the Prices, right, because they're all free.

Where did you start reading them by .

us in nineteen ninety?

That's a good story. By the way. You should tell that.

tell that story. And there bears a little bit on what we're talking about here. But in one thousand nine hundred ninety, I went to visit a client in the midwest who told me that the pension fund he ran for fourteen years was between the twenty seventh percent and the forty seven percent of every year, fourteen years.

So if you say to somebody, well, for fifteen years, IT ranged each year between two thousand and forty seven. What do you think they did for the whole period? You would say, well, probably about thirty seven, right? The answer is, fourth, that pension fund was in the fourth percent time of all pension funds for the fourteen years.

why? Because some of the other people shoot themselves in the foot. So that was a lesson in consistency. And then right around the same time, there was a deep value firm in new york, and they were very heavily in the banks that year, and the banks did horribly.

So the president comes out and he says, well, obviously, if you want to be in the top five percent of money managers you have, be willing to be in the bottom percent. And the dichotomy between the implications of those two stories really caused me to right the first memo, the jack's opposition. My clients don't hire me to be in the top five percent.

I don't care of him in the top five percent in any given year. I'm absolutely unwilling to be in the bottom five percent. And I think so are they so that think about being willing to be in the band five percent sounds to me like a post justification, but anyway, that's not how I choose to Operate.

And so IT was a great up turn to write that up. And so I wrote that one and ninety nine. I think I wrote another one and ninety one.

Then I wrote one and ninety three. There was no regularity. And one of the things I like to magine, David, is that for the first ten years, I never had a response. wow. Not only did nobody say IT was good, nobody ever said I got IT.

And these were male. This was prefect.

This was the only days of mail. But they only went to our clients. So probably a few hundred now it's a few hundred thousand by the subscriptions. And by the way, you imagine podcast, these things are also available in podcast form under something called the memo .

originally enough in any part gas player will link to IT.

So if you like to listen, you can listen.

I'd like to read, uh, so IT was the sporadic.

There was no plan. All the other thing that .

I think is great, as, I mean, you wrote IT with a lot of consistency or with some consistency, but you ve got no feedback. What's ever but you kept right again? I was doing IT for myself, the damn broke one day. And that ultimately picked up steam.

Well, I wrote one on the first day of two thousand co. Bubble dot com. And that one had two advantages. Number one, IT was correct.

And number two, IT was correct quickly, because if you do something correct, but IT turns out to be correct, six years later, nobody remembers you but this one. Of course, the tech bubble crapped out in mid two thousand. And so i'd like to say that after ten years, I became an overnight success .

where you posting them publicly?

always? No, I think we probably started posting probably around two thousand, maybe when we got on the internet, which was, of course, a little earlier. But when we started out tree, they gave me a computer.

I said, I only want excel and word and that's all I had. But that was ninety five. Then I think we moved in ninety eight. I said, okay, i'll take that other stuff for the life of me. I couldn't figure out the difference between explorer and email, but I got there ever.

This explains why Andrews, the tech investor.

exactly, and why he had to fix my computer.

If you were to graph the committed capital from clients by year, is there a correlation with the distribution of how widely your letters go out once you started posting them publicly and committed capital from clients? Do that meaningfully help the for marketing? Well.

you never know one thing that's .

interesting to that point, those that you've dramatically limited your fun sizes and certain parents and then raised them .

a lot and other parents yeah we tend to increase our A U M. In bad times. And of course, that is the best time to put money to work.

Or when you think there's can be a bad time.

yes, that's right in advance of bad time here. Thank you. That job is to up for you.

Most firms.

if they have a very successful fund, we'll follow IT up with another fund, which is large on the back of that. But if you think about IT, if you had a success in a given area, the good performance of that fund is synonymous with appreciation. Another words, everything in that area is now more expensive.

So I would say you should raise less money, not more. And that's the way we Operate. And if you look at our funds, you know, we've been in business three or four cycles.

There were debt crisis or crisis in general in ninety ninety one or one or two o eight or nine. And then, of course, a brief one and twenty. And the biggest funds we've raised were the funds that invested in those years, usually because we had some foresight about what lay ahead.

And then having made a lot of money in those well time funds, the next fun is always smaller, and we're very proud of that. We don't always say I know this is the time for our strategy. What's the perfect time for authority? Oh, now sometimes IT is and sometimes it's not. And we take great pride and telling people which is which.

well, Andrew, we've talked a lot about where folks can find things that your dad has created over the years. Where can people find you? Or T Q ventures?

yeah. Well, you can find T Q at our website, T Q ventures 点 com。 Number one, we try to make IT fun, but number two, it's pretty sparse and we mostly focus on our companies. But you can also always email me, enter A T Q venture 点 com or link in or whatever。 I'm actually not on other social media.

U. S. studio. Social media voided.

Yeah so that's the best way to reach .

me and say congratulations on truly winning the social media game by opting out.

Well, I was on twitter for a little bit. Again, you just have to do what makes sense for you. Some people have the ability to be like i'm only going to do for fifteen minutes or whatever, and it's just really tough for me. And so I was just sort of an all or nothing and I think nothing things Better, especially if I want keep my marriage and be a good father.

My kids, my wife and I both quit instagram .

this summer.

And what you seem to be doing, okay, without.

Well, on that note, Andrew Howard, thank you so much. Thank you. Thank you guys.

There was a lot of fun and .

it's been a pleasure. And David and i've been looking forward to this and glad we did IT.

啊。

likely with that, a huge thank you to Andrew and Howard for coming on. Total blast to get to talk to them.

So fun to to talk to a family doing this, what are cool special experience to get to do something great professionally with your parent as a child and with your child as a parent, I can think of no more fulfilling experience in life is just so cool.

Well, listeners, if you are wanting to discuss these topics with us after listening, because there's some really media stuff in here, and I can't wait to chat about IT with everyone here, come to the acquired slack, acquired dota m slash slack. We will be talking about IT. We've got merge, available merge. Finally, at acquired D F M slash store, you can listen the L P show by searching acquired L P show in the podcast player of your choice, where you can get episodes early at a quired data. M slash lp, David.

anything else? No, alright with that listeners.

We'll see next time.

See next time.