Source: The Intelligent Investor
On September 20, Eastern Time, Howard Marks, co-founder of Oaktree Capital, who was attending the Qatar Economic Forum in New York, gave a live interview to Bloomberg.
Just four days ago, the Federal Reserve raised interest rates by 25 basis points, lifting the target range for the federal funds rate to 3.75%–4%. This was the first rate hike of 2023 and also the first since Kevin Warsh assumed the chairmanship of the Federal Reserve.
Inflation remains elevated, but the U.S. economy, employment, and capital spending have all proven remarkably resilient. Unsurprisingly, markets are closely scrutinizing every word from the Federal Reserve, seeking clues about the next move in both the Chair's remarks and the dot plot.
Max's response, however, was quite the opposite: "I actually think it's better to communicate a little less."
He does not want the Federal Reserve to dictate to investors what will happen next, and he prefers a central bank that "intervenes less aggressively." He believes the economy should neither overheat nor cool too much; let it run on its own, and allow interest rates to be determined by the market, as far as possible, for both borrowers and lenders.
This point is in strong agreement with Druckenmiller.
In Max's view, if everyone were certain about the Federal Reserve's next move and adjusted their investments and operations accordingly, the system would become even more vulnerable when events diverge from that expectation.
The same assessment also extends to the current market.
He believes that, since October 2022, the market has largely been driven by optimists. Good news tends to be amplified, while bad news is often brushed aside. This does not mean the market is about to run into trouble, but as prices increasingly reflect bullish expectations, "it may be prudent to add a bit of defensiveness."
As for AI, Max's fundamental stance has not changed significantly.
We previously shared a lengthy conversation he had on June 12.
At the time, he described AI as "the most difficult thing to assess" he had encountered in his investing career, because no one truly knew what it would ultimately be capable of or where its profits would end up.
Howard Marks maintains a very open-minded attitude toward AI.
He acknowledged that, for traditional value investors, pure AI companies have likely already fallen into the category Buffett calls "too hard." But as a value investor in a broader sense, he has not stopped observing or engaging. Admitting that he doesn't know, and then deciding how much to invest and in what, is the stance he has repeatedly emphasized this time.
Max still believes that what truly sets an investor apart is their ability to interpret and evaluate information. "True excellence lies in your capacity to discern, better than others, what these data really mean—and I don't think that edge can yet be replicated by AI."
Smart Investor promptly provides a refined translation and shares it with everyone.
01. On the Federal Reserve's Interest Rate Hike
Host: I'd love to talk with you about AI, but first, I'm curious—what's your take on the Federal Reserve Chair's recent remarks?
Especially after the Federal Reserve's interest-rate decision, his most recent speech. So far, he hasn't delivered many public remarks in his capacity as Fed chair. Are you satisfied with the current level of communication between the Fed and the markets? How would you characterize the uniqueness of his approach to engaging with the market?
Max: Actually, I think it's better to communicate a little less.
I don't need the Federal Reserve Chair to tell me what to do, nor do I even need him to tell me what he plans to do.
I believe that the less central bank governors tell people what they plan to do next, the more individuals and businesses will need to make their portfolios and operations "antifragile." And that, in turn, is better for society as a whole.
If everyone were certain of the Federal Reserve's next move and adjusted their plans accordingly, society as a whole would become dependent on that outcome.
Once the final outcome differs from what everyone had anticipated, problems may arise.
So I believe that, overall, less communication can actually make the entire environment safer.
Moderator: So you think there's some truth to what Warsh calls the "tail wagging the dog" scenario—where a secondary factor ends up steering the main course? In other words, we shouldn't let markets become overly reliant on the Fed's forward guidance, but rather allow them to make their own decisions.
Over the past month, I've learned so much about "dot matrices"—stuff I never would have imagined I'd need to know.
Max, personally, I prefer a central bank that is less aggressively interventionist.
In general, let the economy run its course—unless it's in real danger of derailing, either overheating or cooling down too much. If it's neither too hot nor too cold, leave it alone.
So on this point, I largely agree with this line of thinking.
We often discuss the so‑called "natural rate of interest," which is the interest rate that emerges through negotiation and strategic interaction between borrowers and lenders.
This is a very good concept—this is what we call the free market, allowing the market to function on its own.
02. On Market Optimism
Host: In today's environment, how do you feel as a value investor?
Over the past few years, we've been closely watching the Federal Reserve. Now that the Fed has stepped back somewhat and is no longer constantly in the spotlight, does that mean we can once again focus more on the fundamentals of individual stocks?
Max, I'm what you'd call a "value investor," though that "value" is spelled with a lowercase v, not an uppercase V.
In my view, this means that our approach is to first determine an asset's intrinsic value, and then assess whether we can acquire it at a price that is reasonable relative to that value.
That's all.
Today's challenge is that, in my view, since around October 1, 2022, the market has been overwhelmingly driven by optimists, and since then, the S&P 500 has more than doubled.
This is truly a phase of very strong market performance.
However, you must recognize that when optimists dominate the market, prices often tend to be relatively high compared to intrinsic value. This suggests that, at such times, a degree of caution is warranted.
Of course, this is far from the worst situation I've ever seen. I simply think it's worth noting that the market today is indeed in the hands of optimists.
Host: Why do you think this is happening? We often discuss this: whenever the market picks up even a faint signal—such as "Washington may be reaching an agreement" or news of a potential deal in Europe or the Middle East—the market reacts positively almost immediately.
But those of us who have been covering these issues for years know that, more often than not, things ultimately never come to pass.
But today's market seems to be gripped by an optimism that simply refuses to fade. Why is that?
Max, that's a great question.
I believe that certain fundamental facts are inherently positive, and these factors are currently gaining the upper hand.
Overall, the U.S. economy has performed quite well. In my view, it remains the best-performing among advanced economies.
There used to be a so‑called "TINA doctrine"—"There Is No Alternative"—and, on top of that, everyone's excitement about AI…
Host: So these are the sources of optimism?
Max, that's right.
Another point is that, since the stock market bottomed out during the global financial crisis in March 2009, we have, in fact, never experienced a truly severe downturn.
People grow accustomed to enjoying a good life and then carry that sense of well-being into their expectations for the future. This, too, can amplify optimism.
So, at the very least, it is safe to say that there is no widespread, pervasive pessimism in today's market.
Host: Except for me. Personally, I've been working hard to keep this deep sense of pessimism alive.
Max, of course, you absolutely have that right.
But the problem is that when optimists are in control of the market, they tend to brush off bad news. As soon as there's talk of a potential deal, they get excited; yet if the agreement ultimately falls apart, they don't become particularly discouraged.
Host: That's certainly true.
Max: So you have to recognize this and then tell yourself, "Alright, the market currently exhibits a positive bias."
Since this kind of positive bias exists, you should acknowledge it.
So what should you do then? Perhaps you could be a bit more defensive, or exercise greater caution when making decisions.
03. Reflections on AI
Host: You have two memoranda that discuss the potential societal impacts of AI and express concerns very clearly.
If AI truly develops as people expect, what will that mean for people across the United States? Perhaps not the major cities, but rather the American Midwest. And if a large number of jobs really do disappear, what will happen then?
Over the past week or so, we've also heard a great deal of discussion about how AI could pose far‑reaching risks—risks that might even threaten human survival. I'm curious: what's your take on these issues now?
Have these discussions further deepened the concerns you raised about six months ago?
Max, I think anyone with normal sensory awareness would have to ponder these issues. But at the same time, we must acknowledge that there's really not much we can do about them.
When my own thinking reaches this point, I usually set it aside.
My wife once defined "worry" this way: "You're bleeding before the bullet even hits you."
And in this matter, we really have no way to handle it—at least not personally.
So, you can only go with the flow.
That's it. Acknowledge it, reflect on it, and let others think about it too.
But in my view, it shouldn't be something that constantly weighs on your mind.
Host: Do you think people have thought about this issue enough? Or, to put it another way, are they thinking about it in the right direction?
Max, everyone really is thinking.
On the other hand, I have not observed any concrete actions at the government level. I believe a dedicated task force should be established to examine the implications that AI is poised to bring.
Not right now.
Of course, even if it were actually established, I still wouldn't know what they could do.
But at least giving it some serious thought is always a good thing.
If I were to ask them to tackle a very specific issue, I'd have one: if people lose their jobs, they stop paying taxes.
If AI replaces them as workers, will it also replace them as taxpayers?
If so, what should be done? In other words, if—or when—people truly lose their jobs due to AI, what will happen to government fiscal revenues?
Host: Do you personally use AI in your daily life? Do you use ChatGPT to look up information? Have you integrated AI into your company's operations?
Max: Of course, Oaktree Capital has undoubtedly already integrated AI into its operations.
We'll use it to organize data and conduct preliminary analyses, and it will also enable us to accomplish tasks that previously took a long time to complete.
But of course, we haven't entrusted our business decisions to AI, nor have we done so with our investment decisions.
I believe that if you aspire to become an outstanding investor, that "excellence" will not come from a computer or from any algorithm.
True excellence lies in your ability to discern, more effectively than others, what these data truly signify—and, in my view, that edge remains beyond the reach of AI for now.
Host: But when you're recruiting young talent, have you noticed that they're increasingly outsourcing this kind of critical thinking to AI? Or have you not encountered this trend yet?
Max, we don't encourage doing that.
Host: Some companies encourage it, so I'm quite curious.
Max: Of course, there's plenty of work that can be handed over to AI.
However, first, if you stop engaging in critical thinking, I believe that "muscle" will gradually atrophy; second, as I've repeatedly emphasized, what truly sets you apart and elevates you to excellence still comes from people.
I believe the impact of AI on active investing may be somewhat akin to the effect that indexing had on equity investing in its day.
It will drive many active investors out of the industry, but it won't weed out the very best.
04. On the AI Bubble and How to Invest
Host: If we could identify bubbles in real time, that would certainly be ideal. But as you've said before, we can't do that—bubbles are usually only confirmed in hindsight. Still, I'm curious: how much of a bubble do you think this environment smells like right now?
You've written before that, when assessing whether a bubble is forming, you look at both corporate behavior and investor behavior.
Right now, many people in the market are concerned about issues like revolving financing. If we look at the AI sector purely from a market perspective, is there anything that makes you pause and reflect, or that gives you cause for concern?
Max, as I noted in a recent memo on this topic, Alan Greenspan first coined the term "irrational exuberance" around 1997.
This is essentially the definition of a bubble.
Now, we certainly have "prosperity"; the question is whether it is "irrational."
In my view, no one can accurately predict what AI will ultimately accomplish, what impacts it will have, or how it will generate value.
So I don't think anyone can confidently assert that the current boom is irrational. But you have to take that possibility into account.
Therefore, when approaching AI from an investment perspective, you must carefully assess how confident you are in your own judgment.
There is another question.
In fact, it's no different from any other investment—except that with AI, the stakes are magnified manyfold: How much do we really care, and are we determined to capture every last penny that even the most aggressive investors might eventually earn?
And to achieve this, are we willing to shoulder the associated uncertainties?
Host: For a value investor, is it particularly challenging to invest in AI companies? Of course, many AI firms remain privately held for now.
Max is indeed very challenging.
If you're referring to the so‑called tech giants, such as Microsoft and Amazon, they have other lines of business that can help you make certain judgments, like estimating future earnings.
But if you're looking at a company that focuses exclusively on AI—where all its business is built around AI and its entire business model depends on it—it may still not be profitable, or it may have only just begun to turn a profit…
I simply believe that, under these circumstances, quantifying its future earnings potential and then proceeding to assess what we call "intrinsic value" would entail extraordinary uncertainty.
This will be very difficult.
Warren Buffett always says to put this in the "too difficult" pile. For value investors, it may indeed be too difficult.
For the traditional, "capital-V" value investor, this may indeed be too difficult.
And for a "lowercase v" value investor like me—understood in a broader sense—it poses just as much of a challenge.
Host: But based on what you just said, given how many uncertainties there still are, doesn't that make the current boom itself somewhat "irrational"? Why haven't you yet concluded that it's already an irrational boom?
Max — not necessarily.
Because the market may still be far from being that expensive. But you just don't know.
Host: Exactly—precisely because you don't know, in my view, that in itself is somewhat irrational.
Max, that's not it. Just because you don't know doesn't mean something is wrong.
Think about it: for a traditional company, you can estimate its future earnings today; for a tech company, you can do the same, though with less certainty.
But what if it's a pure‑play AI company that has never even disclosed its financial results? How much could it actually be earning five years from now?
All you can say is that there is extraordinary uncertainty here.
But the presence of uncertainty doesn't mean you can do nothing. What you need to do is acknowledge that uncertainty exists.
And it will shape how you act, influence the approach you take to investing in AI, and even determine how much risk you're willing to assume.
However, we must not refrain from taking action simply because uncertainty exists.
Editor/rice