2021

© Oaktree Capital Management, L.P. All Rights Reserved Memo To: Oaktree Clients From: Howard Marks Re: The Value of Predictions II (or "Give That Man a Cigar") Date: July 22, 1996 In a February 1993 memo entitled "The Value of Predictions," I expressed my negative opinion of attempts to predict the macro-future. Now, to follow up, I've examined a handful of semi-annual Wall Street Journal economic surveys I've been stashing away. Please note that this was not a scientific study; my sample was limited to the contents of my desk drawer. The conclusions are interesting nevertheless. First, can accurate forecasts be made? The record shows the predictions of the Journal's average "expert" to have added little value in terms of predicting the future. The table below shows the wide margin by which the consensus missed the mark. U90-day bill rate U30-year bond rate UYen/$ December '93 12-Month Prediction 3.7% 6.4% 115 December '94 Actual 5.7 7.9 100 December '94 6-Month Prediction 6.5 7.9 104 June '95 Actual 5.4 6.6 85 December '94 12-Month Prediction 6.4 7.6 107 December '95 Actual 5.1 5.9 103 June '95 6-Month Prediction 5.4 6.6 89 December '95 Actual 5.1 5.9 103 June '95 12-Month Prediction 5.3 6.6 92 June '96 Actual 5.2 6.9 110 December '95 6-Month Prediction 4.9 6.0 105 June '96 Actual 5.2 6.9 110

The pandemic delivered the biggest year in Netflix's history. The company powered past the two hundred million subscriber mark in 2020 to cap its largest-ever year of growth, driven by viewership gains during COVID-19 lockdowns. In the fourth quarter alone it added 8.51 million paid streaming subscribers, about 2.5 million more than expected, ending the year at 203.7 million worldwide, against a forecast of six million additions. For the full year Netflix added 36.6 million streaming customers, beating its previous record of 28.6 million set in 2018, and its shares popped as much as thirteen percent in after-hours trading on the news. The company reported fourth-quarter revenue of 6.64 billion dollars, up 21.5 percent, and said it had more than five hundred titles in post-production or preparing to launch, including a 2021 film slate of seventy-one titles and a plan to debut at least one new movie each week of the year. The boom validated Hastings's streaming conviction at exactly the moment the world was forced to test it.

The 2021 settlement, in which RenTech and its current and former executives agreed to pay approximately seven billion dollars to resolve the IRS dispute, was the largest tax settlement in United States history at the time. Founder Jim Simons personally agreed to pay an additional approximately six hundred and seventy million dollars. The dispute had concerned the treatment of gains derived from a structure involving short-dated options on baskets of securities. The IRS position was that the structure had been used to convert short-term trading gains, which would be taxed at ordinary income rates, into long-term capital gains taxed at preferential rates. RenTech maintained that its positions had been legitimate, but elected to settle after years of audit and controversy. The economic significance of the settlement is itself instructive: a payment of seven billion dollars is consistent with the underlying disputed tax liability having been on the order of many billions of dollars of tax savings over the years the structure was in use. The episode is, in this sense, a measurement of the scale of the gains that the structure had been used to shelter - and, indirectly, of the scale of the underlying trading profits themselves.

Memo to: Oaktree Clients From: Howard Marks Re: Open and Shut Mark Twain is described as having said, “History doesn’t repeat itself, but it does rhyme.” Thanks to the tendency of investors to forget lessons and repeat behavior, it sometimes seems there’s no longer a need for me to come up with new ideas for these memos. Rather, all I have to do is recycle components from previous memos, like a builder reusing elements from old houses. I’m willing to try an experiment along those lines for this memo. Here are my building blocks: From “First Quarter Performance,” April 11, 1991: The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. . . . This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at the “happy medium.” From “The Happy Medium,” July 21, 2004: The capital market oscillates between wide open and slammed shut. It creates the potential for eventual bargain investments when it provides capital to companies that shouldn’t get it, and it turns that potential into reality when it pulls the rug out from under those companies by refusing them further financing. It always has, and it always will. From “You Can’t Predict. You Can Prepare.

At the 2021 Daily Journal annual meeting, I told the audience that the previous year, with its pandemic shutdown and its rapid recovery, had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest speculative bubble in technology stocks since 1999. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous year, by being too cautious during the recovery, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2021 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the investors acting on the assumption that the new technology has repealed the old rules, and the investor who recognises the assumption, and who refuses to participate, has an enormous advantage over the investor who chases the new technology. The 2021 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the history, to recognise the patterns, and to refuse to participate in the new version of the old mistake, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor with the higher IQ who participates on the assumption that the new version is different.

Investment Talk's summary of Seth Klarman's Margin of Safety distilled fifteen recurring principles from the 1991 book into a digest that circulated widely among value-oriented investors looking for a usable distillation of the out-of-print text. The list emphasizes that successful investing is not about being right on every position but about surviving the inevitable periods of being wrong, with the avoidance of permanent loss treated as the master constraint on every other decision. Klarman's framework rests on asymmetry: payoffs that limit downside and leave upside open are worth accepting even when the base rate of success is modest, because the mathematics of compounding rewards survival more than it rewards peak returns. This contrasts with the symmetric bets that dominate fund marketing, where the upside depends on a single thesis playing out exactly as scripted and the downside is similarly unbounded when the thesis breaks. One of the most cited ideas in the summary is that the avoidance of loss must dominate over the pursuit of gain, because the mathematics of drawdowns are unforgiving over any meaningful horizon. A fifty percent decline demands a hundred percent recovery to break even, which means a portfolio structured around not losing capital compounds faster over time than one chasing peak returns during the good years. Klarman's prescription is conservative concentration: hold enough positions to remove idiosyncratic risk, but not so many that the best ideas are diluted by the mediocre ones or that the analyst cannot genuinely understand each holding. Diversification beyond a handful of names is, in his view, often a confession that the investor does not really understand what they own or why they own it, and an attempt to outsource judgment to statistical averaging that substitutes statistical accident for analytical conviction. The summary also highlights Klarman's insistence on opportunity cost as the only honest benchmark against which any investment decision should be measured. Holding cash is not a wasted position when no cheap asset exists; it is the prudent choice when the alternative is overpaying for something merely to feel invested, and the opportunity cost of deploying capital at the wrong price is measured against the option of waiting for a better one. This posture is unusually difficult to maintain inside an industry paid to deploy capital, and the summary points out that Baupost's structure as a private partnership rather than a quarterly-marked mutual fund is what made it survivable over decades. The fifteen ideas collectively describe an investment culture in which saying no is itself a decision, and often the most consequential one a manager makes in any given year.

The Wall Street Journal reported in September 2021 that James Simons and other senior figures at Renaissance Technologies had agreed to pay approximately seven billion dollars to settle a long-running dispute with the Internal Revenue Service over the treatment of certain derivative structures used by the firm's funds and over the characterization of the income those structures had produced. The settlement, one of the largest in the history of the tax agency, resolved a dispute that had run for years over whether the structures in question qualified for long-term capital gains treatment or should have been characterized as ordinary income from short-term trading activity. The article noted that the agreement had been structured to distribute the payment among the firm's principals rather than the funds themselves, and that the structure of the settlement reflected an effort to insulate the ongoing operations of the firm from the resolution of the dispute. The Journal coverage framed the settlement as the resolution of a dispute that had hung over Renaissance for nearly a decade, and which had been intensified by the political scrutiny of carried-interest taxation in the years following the financial crisis and by the broader public debate over the appropriate taxation of alternative-asset income and over the boundary between legitimate tax planning and structures that the agency would treat as inappropriate. The article described the underlying transactions as basket options, contracts that allowed the firm to defer the recognition of gains while the underlying trading produced returns at the rates characteristic of short-term strategies and that allowed the firm to elect long-term treatment for what were, in substance, short-term gains. The settlement reflected the government's view that the structure had effectively converted short-term trading gains into more favorably taxed long-term gains, and that the conversion was inappropriate in light of the substance of the underlying activity. The piece also noted that the settlement had been structured to allow Renaissance to continue operating without further exposure on the contested structure, which the firm had discontinued years earlier in anticipation of the guidance that the Internal Revenue Service had issued in 2014 and that had curtailed the use of such structures going forward. The agreement was reported to include an acknowledgment that the firm had used the structure extensively during the period under review, and to allocate the payment among the principals according to their respective benefits from the contested treatment and according to their respective shares of the disputed gains. The Journal observed that the resolution closed one of the most significant unresolved items in the recent history of alternative-asset taxation, and would likely shape the behavior of comparable firms that had used similar structures during the same period and that would now have to consider the precedent set by the settlement.

Reuters reported in September 2021 on the Renaissance Technologies settlement with the Internal Revenue Service, confirming that the firm's executives had agreed to pay around seven billion dollars to resolve a long-running dispute over the tax treatment of basket option structures that had been used by the firm's flagship fund during the years before the agency issued guidance curtailing them. The Reuters piece noted that the settlement had been negotiated over an extended period and that the final amount reflected both the disputed tax liability and the accumulated interest and penalties accrued during the years of contention and during the period in which the firm had contested the retroactive application of the later guidance. The coverage framed the resolution as a significant moment in the broader effort to clarify the boundaries of acceptable tax structuring and as a precedent that would inform the behavior of comparable firms across the alternative-asset sector. The article explained that the underlying dispute had centered on contracts that allowed the firm's funds to elect to treat trading gains as if they derived from the long-term holding of a single option position, rather than from the series of short-term trades that had actually generated the returns, and that this election had significant consequences for the character of the income. Reuters noted that the Internal Revenue Service had issued guidance curtailing the use of such structures in 2014, but that Renaissance had continued to contest the retroactive application of that guidance to structures established in prior years and had argued that the structures had been entered into in good faith under the law as it stood at the time. The settlement effectively resolved that contest, with the principals agreeing to a payment that covered the disputed tax, the accumulated interest, and the penalties that the agency had asserted during the years of dispute. The Reuters coverage also observed that the settlement was unusual in its scale and in the fact that it was borne personally by the firm's principals rather than by the funds' investors, and that the structure of the settlement reflected the agency's view that the contested treatment had been a matter of the principals' own tax positions rather than of the funds' operations. The article noted that the structure of the settlement reflected an effort to insulate the firm's ongoing operations and to draw a line under the dispute, while also acknowledging the government's position on the contested treatment and creating a precedent that would inform the agency's approach to comparable structures in the future. The piece closed by observing that the resolution would be studied closely by other firms that had used comparable structures during the same period and that the settlement would likely inform future guidance on the treatment of similar instruments across the alternative-asset sector.

The New York Times covered the Renaissance Technologies settlement in September 2021, focusing on the scale of the agreement and on the profile of the firm's principals, including James Simons and Robert Mercer, who had agreed to pay as much as seven billion dollars to resolve the dispute with the Internal Revenue Service. The Times noted that the settlement represented one of the largest personal payments in the history of the American tax system, and that it had been structured to distribute the liability among the firm's senior figures according to their respective shares of the contested gains and according to their respective benefits from the contested treatment. The coverage observed that the personal nature of the payment reflected the agency's view that the contested structures had been a matter of the principals' own tax positions rather than of the funds' operational decisions. The article explained that the dispute had its origins in the use of basket options by Renaissance's flagship Medallion fund during the years before the Internal Revenue Service issued guidance curtailing the structure and before the broader debate over carried-interest taxation had intensified the scrutiny of comparable arrangements across the alternative-asset sector. The Times described the contracts as instruments that allowed the fund to elect long-term capital gains treatment for what were, in substance, returns generated through short-term trading, and that the election had meaningful consequences for the character of the income and for the rate at which it was taxed. The article noted that the government's position was that this treatment was inappropriate, and that the settlement reflected an acknowledgment of that position by the firm's principals and an effort to draw a line under a dispute that had shadowed the firm for years. The Times piece also situated the settlement in the broader political context of carried-interest taxation and the long-running debate over the treatment of alternative-asset income, which had become a recurring subject of legislative attention in the years following the financial crisis and which had intensified as the alternative-asset sector had grown in scale and prominence. The article observed that Renaissance's principals had been among the highest-earning figures in the American financial industry, and that the settlement underscored the unusual returns generated by the firm's flagship fund and the resulting scale of the contested tax treatment. The coverage closed by noting that the resolution would likely embolden efforts to clarify the tax treatment of comparable structures and would be cited in the ongoing debate over the appropriate taxation of the alternative-asset sector and over the boundary between legitimate tax planning and structures that the agency would treat as inappropriate.

CBS News reported on the September 2021 settlement between Renaissance Technologies and the Internal Revenue Service, focusing on the scale of the payment and on the unusual composition of the principals involved, including James Simons and Robert Mercer, who had agreed to pay personally rather than through the funds. The coverage noted that the settlement, valued at approximately seven billion dollars, resolved a long-running dispute over the tax treatment of certain derivative structures used by the firm's flagship fund during the years before the agency issued guidance curtailing their use. The article observed that the settlement was unusual in that the payment would be made personally by the firm's principals rather than by the funds' investors, and that the personal nature of the payment reflected the agency's view that the contested structures had been a matter of the principals' own tax positions rather than of the funds' operational decisions. The piece explained that the underlying contracts, known as basket options, had allowed the firm's flagship fund to defer the recognition of gains while continuing to engage in high-frequency trading strategies and to elect long-term treatment for what were, in substance, returns generated through short-term trading activity. The article noted that the Internal Revenue Service had issued guidance in 2014 curtailing the use of such structures going forward, but that the dispute had centered on contracts established in prior years and on whether the guidance should apply retroactively to structures that had been entered into under the law as it stood at the time of the original transactions. The settlement resolved the contested treatment of those contracts, with the principals acknowledging the government's position and agreeing to settle the accumulated tax, the interest, and the penalties that had accrued during the years of dispute. The CBS coverage closed by observing that the settlement marked the conclusion of a dispute that had shadowed Renaissance for nearly a decade, and that it would likely shape the behavior of other firms that had used comparable structures during the same period and that would now have to consider the precedent set by the resolution. The article noted that the firm had discontinued the contested structures years earlier in anticipation of the guidance that the agency had issued and that the settlement was structured to allow the firm to continue operating without further exposure on the matter. The piece also observed that the resolution represented one of the largest personal tax settlements in American history and that it would be cited as a reference point in the ongoing debate over the appropriate taxation of alternative-asset income and over the boundary between structures that the agency would tolerate and structures that it would treat as inappropriate going forward.

The Financial Times covered the September 2021 settlement between Renaissance Technologies and the Internal Revenue Service, reporting that executives at the firm had agreed to pay approximately seven billion dollars to resolve a long-running dispute over the tax treatment of basket option structures used by the firm's flagship fund during the years before the agency issued guidance curtailing their use. The FT noted that the settlement was one of the largest in the history of the American tax system and that it had been structured to distribute the payment among the firm's principals according to their respective benefits from the contested treatment and according to their respective shares of the disputed gains. The coverage observed that the personal nature of the payment reflected the agency's view that the contested structures had been a matter of the principals' own tax positions rather than of the funds' operational decisions. The article explained that the basket option structures had allowed the firm's Medallion fund to elect long-term capital gains treatment for returns that were, in substance, generated through short-term trading strategies and that the election had meaningful consequences for the character of the income and for the rate at which it was taxed. The FT noted that the Internal Revenue Service had issued guidance in 2014 curtailing the use of such structures going forward, but that Renaissance had continued to contest the retroactive application of that guidance to contracts established in prior years and had argued that the structures had been entered into in good faith under the law as it stood at the time. The settlement resolved that contest, with the principals acknowledging the government's position and agreeing to a payment covering the disputed tax, the accumulated interest, and the penalties that the agency had asserted during the years of dispute. The FT coverage also situated the settlement in the broader debate over the taxation of alternative-asset income, which had intensified in the years following the financial crisis and which had become a recurring subject of legislative attention as the alternative-asset sector had grown in scale and as the public prominence of large payments to principals of successful funds had increased. The article observed that Renaissance's principals had been among the highest-earning figures in the financial industry, and that the settlement underscored the scale of the returns generated by the firm's flagship fund and the resulting scale of the contested tax treatment. The piece closed by noting that the resolution would be studied closely by other firms that had used comparable structures, and that it would likely inform future guidance on the treatment of similar instruments and the agency's approach to structures that had been entered into before the issuance of formal curtailment.

On July 20, 2021, the 52nd anniversary of the Apollo 11 moon landing, Blue Origin's New Shepard rocket carried Jeff Bezos, his brother Mark Bezos, aviation pioneer Wally Funk, and Dutch student Oliver Daemen on the vehicle's first crewed suborbital flight. The capsule accelerated to more than three times the speed of sound, reached an altitude of 107 kilometers (66 miles), and the crew floated in microgravity for several minutes before the capsule returned under parachutes, ending the mission after ten minutes and ten seconds. Bezos told CNBC after landing that the flight was a tiny little step of what Blue Origin intended to do, framing the company's purpose as building reusable space vehicles — the only way, he said, to build a road to space so that his children's generation could build the future. The launch placed Blue Origin inside the private spaceflight market alongside Richard Branson's Virgin Galactic and Elon Musk's SpaceX.

On February 2, 2021, Bezos announced he would step down as Amazon's chief executive later that year, transitioning into the role of executive chairman while Andy Jassy, then chief executive of Amazon's cloud computing division, would be promoted to run the entire company. The New York Times reported that Bezos, then 57, had built Amazon from a 1994 online bookseller into a $1.7 trillion behemoth known as the everything store, upending retail, building a logistics giant, and expanding into cloud computing, streaming entertainment, and AI-powered devices. Bezos told employees in an email that he still tap-danced into the office and was excited about the transition, and that as executive chairman he intended to focus his energies and attention on new products and early initiatives. The transition became effective July 5, 2021, a date Bezos said the company chose for its significance to Amazon's history.

In the early morning of June 4, 1896, Henry Ford made his first trial run in a small four-wheeled vehicle he called the Quadricycle, on the streets of Detroit. The corporate account reports that the thirty-two-year-old Ford was then chief engineer of the Edison Illuminating Company, and that he had built the vehicle in a small workshop behind his home at 58 Bagley Avenue in Detroit, a few blocks from the Edison plant, while colleagues still regarded anyone experimenting with horseless carriages as something of an oddity. The Quadricycle had a forty-nine-inch wheelbase, was seventy-nine inches long, weighed only five hundred pounds without fuel, and ran on bicycle-size wheels with pneumatic tires. It had two speeds of ten and twenty miles per hour, no reverse gear, no brakes, and a doorbell repurposed as a horn. The successful test run was the founding artifact of Ford's career as an automaker.

In May 2021 Druckenmiller delivered a recorded keynote to the Student Investment Fund's annual meeting, posted on Vimeo, in which he discussed the macro consequences of the pandemic and the policy response that followed. He told the student audience that the COVID crash of March 2020 and the subsequent rebound had been unlike anything in his prior four decades of trading, both in the speed of the drawdown and in the aggression of the central bank response. He described watching the dollar funding squeeze spread across global markets and recognising that the Federal Reserve's swap lines had been the single decision that arrested the cascade. The keynote is rare footage of him addressing a university audience directly and is one of the few long-form talks he gave in 2021. The piece remains a reference document for general-audience readers looking for an accessible introduction to the argument and its practical implications for portfolio construction. He spent much of the keynote on what he called the asymmetry of post-COVID policy. With fiscal deficits running at multi-decade highs and the Federal Reserve still buying bonds, he argued that the inflation risk was materially understated and that the market's pricing of rate normalisation was far too complacent. He told the students that the macro setup reminded him of the late 1960s, when an accommodative Federal Reserve and an expansive fiscal stance together produced an inflation that nobody on the Federal Open Market Committee had anticipated. He cautioned that the unwinding of the 2020 to 2021 mix would be volatile, that liquidity would contract in ways investors had forgotten was possible, and that the era of free optionality in equity positioning was probably ending. The article is one of the more widely read mainstream discussions of the subject and is frequently quoted at length in the secondary literature and in the financial press. The most-cited section of the talk was his advice to students on how to build an edge. He argued that the most underpriced skill in finance is the willingness to change one's mind quickly, and that academic training often penalises exactly the kind of fast updating that markets reward. He told them to read history before reading the news, to track central bank balance sheets before tracking earnings, and to never confuse a forecast with a position. He closed by saying that he had outlived many of his own mentors and that the only durable lesson he could pass on was to protect capital aggressively during drawdowns and to be unusually aggressive when the setup is right. The recording remains a teaching reference for student-led investment funds. The piece is widely shared among investors and analysts looking for a serious articulation of the principles at stake in the broader debate over how institutional money should be deployed.

A 2021 Yale Alumni Magazine feature titled What David Swensen Gave to Yale was published in the months after the chief investment officer's death and used the occasion to quantify the magnitude of his contribution. The piece noted that the endowment had grown from roughly one billion dollars when Swensen took it over in 1985 to more than thirty billion by the year of his death, and that the annual distribution to the university's operating budget had grown by an order of magnitude over the same period. The feature used those numbers to frame Swensen not only as an investor but as a steward of the institution's academic mission, since the spending of the endowment had become a structural input into everything Yale did across its teaching and research programmes. The article is one of the more widely read mainstream discussions of the subject and is frequently quoted at length in the secondary literature and in the financial press. The article walked through the budgetary impact of the endowment's growth, noting that by the late 2010s the endowment was contributing more than a third of the university's operating revenue and was the single largest source of financial aid for undergraduate education. The author stressed that the spending policy, which targeted a long-run real return net of inflation, had been designed to ensure that the endowment's contribution would be as durable as the institution itself, and that the office's discipline during boom years had been as important as its discipline during busts. The piece framed the spending rule as a piece of institutional architecture as important as the asset allocation that produced the returns. The piece is widely shared among investors and analysts looking for a serious articulation of the principles at stake in the broader debate over how institutional money should be deployed. The feature closed with a reflection from a former Yale College Council finance director who had worked with Swensen on a short video explaining the endowment to undergraduates. The author recalled Swensen's willingness to spend time with students, his patience with the basic questions, and his insistence that the office's work be understood by the broader Yale community rather than only by specialists. The article is one of the more personal pieces in the memorial coverage and is paired in the magazine's archive with the 2015 profile that had originally introduced the broader Yale community to the office's investment philosophy. The feature is widely cited in the Swensen secondary literature as a single-document summary of his institutional contribution. The article is widely used as a teaching document in business-school courses on the subject and in wealth-management training programmes that draw on the published record of the investor.

A May 2021 memorial essay published by the CFA Institute under the title In Memoriam: David Swensen described him as among the most influential investors of his generation and traced the path by which a Yale doctoral graduate had built the model that institutional investors now refer to as the Yale model. The piece noted that Swensen had been chief investment officer at Yale from 1985 until his death on May 5, 2021, and that the model he had constructed, with its heavy weighting to alternative asset classes and its insistence on long holding periods, had been adopted by universities, foundations, and sovereign wealth funds around the world. The essay framed the model not as a recipe but as an institutional architecture that depended on the people who operated it. The piece is paired in the secondary literature with the original source documents and with the broader coverage of the subject in the financial press and the academic literature that followed. The CFA Institute essay stressed that the Yale model was a function of Swensen's conviction that the structure of the portfolio was the dominant driver of long-run returns, and that the discipline to maintain that structure through market cycles was the dominant driver of the realised result. The piece walked through the model's central tenets, including the equity bias, the diversification across asset classes that offered low correlation to the public market, the allocation to private assets with long lock-up periods, and the insistence on active management only in asset classes where the case for it could be sustained. The essay argued that the durability of the model was a function of the consistency with which it had been applied across multiple regimes and through multiple market cycles. The article is one of the few extended on-record discussions of the topic at the time of its publication and is used as a reference document by writers covering the broader institutional investment industry. The essay closed with a section on Swensen's influence beyond Yale, noting that the alumni of his office had gone on to lead the investment offices of dozens of universities and foundations, and that the network of his protégés had been a major channel by which the Yale model had been propagated. The piece is paired in the CFA Institute's archive with a longer interview conducted earlier in Swensen's career and is widely cited in the institutional investment literature as a clean summary of his contribution. The essay is one of the more widely read professional obituaries of the period and has been used in business-school courses on endowment management and on the broader question of how institutional investors should construct portfolios. The piece is widely cited in the literature on the topic as a case study in how the principles at stake interact with the broader institutional context and the operational architecture of the office.

On the evening of May 5, 2021, David Swensen, Yale's longtime chief investment officer and the architect of the model that bears the university's name, died at the age of sixty-seven. The Yale Daily News obituary, published in the days that followed, framed Swensen as a transformational figure in the history of the university and in the global institutional investment industry. The piece noted that he had been a Yale doctoral graduate, that he had taken over the Investments Office in 1985 after a brief spell on Wall Street, and that he had built the office into a unit that managed tens of billions of dollars and produced returns that other institutions sought to emulate. The obituary is the student paper's definitive statement on his life and career. The piece remains a reference document for general-audience readers looking for an accessible introduction to the argument and its practical implications for portfolio construction. The piece walked through the milestones of Swensen's career, including the early years in which the office had restructured the endowment's portfolio away from a heavy allocation to bonds and toward the diversified structure that became the Yale model. The article noted that the endowment had grown from roughly one billion dollars at the time Swensen took it over to more than thirty billion at the time of his death, that the office had produced decades of returns that exceeded the conventional institutional benchmark, and that the model had been adopted by universities and foundations around the world. The piece also noted that Swensen had been treated for cancer in the years preceding his death and had continued to work through the treatment until the final weeks of his life. The article is one of the more widely read mainstream discussions of the subject and is frequently quoted at length in the secondary literature and in the financial press. The obituary closed with a section on Swensen's role as a teacher and mentor, noting that the alumni of his office had gone on to lead the investment offices of dozens of other universities and that the network of his protégés had been a major channel by which the Yale model had been propagated. The piece stressed that Swensen had been an unusual figure in institutional finance, in that he had spent his entire career at a single institution and had turned down multiple offers to leave for higher-paying positions. The obituary is paired in the Yale Daily News archive with the broader coverage of the Investments Office and with the memorial essays that appeared in the subsequent weeks across the financial press and the broader institutional investment literature. The piece is widely shared among investors and analysts looking for a serious articulation of the principles at stake in the broader debate over how institutional money should be deployed.

On May 7, 2021, two days after David Swensen's death, NPR's WWNO published a piece under the headline that Yale's chief investment officer, who had transformed institutional investing, had died at the age of sixty-seven. The piece used archival audio of an earlier interview with NPR's Chris Arnold to walk through the magnitude of Swensen's contribution, noting that he had grown the endowment from roughly one billion dollars in 1985 to more than thirty billion at the time of his death, and that the model he had built had been adopted by universities, foundations, and sovereign wealth funds around the world. The piece framed him as one of the most influential investors of his generation and a transformational figure in the global institutional investment industry. The article is one of the few extended on-record discussions of the topic at the time of its publication and is used as a reference document by writers covering the broader institutional investment industry. The NPR coverage stressed that the Yale model was not simply a matter of allocating to alternative asset classes but a coherent philosophy of long-term ownership, in which the office took the position of a long-term partner in the assets it owned and used the structure of its portfolio to extract a premium for the willingness to forgo daily liquidity. The piece noted that Swensen had been a Yale doctoral graduate, that he had taken over the Investments Office in 1985, and that the office had been a major contributor to the university's operating budget throughout his tenure and a major source of financial aid for undergraduate education. The coverage also noted that the network of his protégés had spread the model to institutions across the country and across the broader institutional investment industry. The piece is widely cited in the literature on the topic as a case study in how the principles at stake interact with the broader institutional context and the operational architecture of the office. The piece closed with a section on Swensen's role as a teacher, both within the office and beyond it. The NPR coverage noted that he had taught a popular undergraduate course at Yale, that he had written two influential books on investing, and that the office had been a training ground for the next generation of institutional investors who had gone on to lead the investment offices of dozens of other universities. The piece is paired in the NPR archive with the broader coverage of the office's track record and with the memorial essays that appeared in the subsequent weeks across the financial press. The article is widely cited in the secondary literature on Swensen and the Yale model, and it remains a reference for general-audience readers looking for an accessible introduction to his contribution. The article is regularly updated as new information becomes available and is one of the most frequently consulted references on the subject for general-audience readers and for institutional practitioners.

A 2021 documentary piece published on YouTube covers the Yale endowment and the unconventional approach that David Swensen brought to its management, with a particular focus on the period of the financial crisis of 2007 to 2009. The film uses archival footage and interviews with former members of the Investments Office to walk through the office's posture during the crisis, when the public market had offered the appearance of attractive prices and the office had to decide whether to lean into the public market or to hold the discipline of the alternative-asset allocation. The piece treats the period as a defining test of the model, since the office's published returns had been a major channel by which the model had been propagated and the crisis was the first major stress test of that track record. The article is paired in the broader citation ecosystem with the original source documents and with the longer-form interviews the subject has given to the financial press over the years. The documentary stresses that the office's discipline during the crisis was a function of the structural choice the office had made at the beginning of Swensen's tenure, in which the allocation to alternative asset classes with long lock-up periods was a structural feature of the portfolio rather than a tactical bet. The film argues that the office's willingness to forgo the daily liquidity of the public market was the source of the premium the office earned in the alternative classes, and that the discipline during the crisis, when the public market had offered the appearance of attractive prices, was a defining moment in the model's track record. The piece also notes that the office's long holding periods meant that the office was not forced to be a seller during the worst of the crisis. The piece remains a reference document for general-audience readers looking for an accessible introduction to the argument and its practical implications for portfolio construction. The film closes with a section on the broader implications of the office's approach for the individual investor. The documentary notes that Swensen had argued, in his two books, that the individual investor should not try to replicate the institutional model but should instead use low-cost index funds to build a diversified portfolio, and that the case for index funds was a function of the structural disadvantage of the individual investor in the active-management marketplace. The piece is paired in the Swensen secondary literature with the original Pioneering Portfolio Management and with the Unconventional Success volume, and it is widely cited as a teaching document for general-audience readers looking for an accessible introduction to the model and its implications for the household balance sheet. The article is one of the more widely read mainstream discussions of the subject and is frequently quoted at length in the secondary literature and in the financial press.

At the Connect conference on October 28, 2021, Zuckerberg introduced Meta, a new company brand uniting Facebook's apps and technologies under a name built for the metaverse. The announcement described the metaverse as today's online social life stretched into three dimensions or projected onto the physical world, letting people share immersive experiences together even when apart and do things together impossible in physical space. Zuckerberg framed it as the next evolution in a long line of social technologies and a new chapter for the company, elaborated in a founder's letter. The event also shipped near-term commitments: the Presence Platform enabling mixed reality on Quest 2, and a one hundred fifty million dollar program to train the coming generation of immersive-content creators. The company's definition of itself had moved from connecting people through a social network to building the next computing platform.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: There They Go Again Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. . . . There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present. John Kenneth Galbraith A Short History of Financial Euphoria, Viking, 1990 The above observation has appeared in lots of my memos, second only to Warren Buffett’s reminder that our need for prudence in a given situation is inversely proportional to the amount of prudence being displayed by other investors. Neither of these favorite quotations says much for the average investor: Buffett urges us to adopt behavior that is the opposite of John Q. Investor’s, and Galbraith points out how prone John Q. is to repeating the mistakes of the past. It may sound cynical, but most outstanding investors – especially members of the “us school” (see “Us and Them,” May 7, 2004) – understand that the path to superior results lies in taking advantage of other people’s mistakes. (The alternative is to think everyone can succeed simultaneously.)

Netflix's first-quarter 2021 earnings report revealed that it would spend over seventeen billion dollars in cash on content that year, a commitment the company paired with a promise of more originals than the prior year. The figure marked a notable uptick from its 2020 spend of 11.8 billion dollars, when pandemic production delays throttled output across the industry, and from 13.9 billion in 2019. In its letter to shareholders, Netflix noted that the Covid-related production delays of 2020 would make the 2021 slate more heavily weighted to the second half of the year, with a large number of returning franchises, and said it was back up and producing safely in every major market except Brazil and India. The spending trajectory captured the strategic logic Hastings had set in motion with the House of Cards bet: convert subscriber revenue into a content library, with more originals each year than the last, and let the catalog compound while licensed titles grew scarce. The company promised shareholders an amazing range of titles alongside the escalating budgets.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Winds of Change The last 20 months have been a most unusual period, thanks primarily to the pandemic, yet many things feel like they haven’t changed over that time span. Each day seems like all the others. Nancy and I mostly stay home and deal with email and Zoom calls – whether relating to work matters or grandchildren. Weekdays don’t feel that different from weekends (this was especially true pre-vaccine, when we rarely ate out or visited others). We’ve had only one one-week vacation in two years. The best way to sum it up is through a comparison to Groundhog Day: every day feels a lot like the day before. What has changed in our environment in the last 12 months? We’ve seen an election and change of president, as well as increased sensitivity on issues of race, inequality and climate change – but so far with few tangible results. Fortunately, vaccines were developed, approved and distributed. Thus, Covid- 19 subsided, but there was a reemergence spurred by the Delta variant, and there might be more. In the business world, there’s little that’s new: • The economic resurgence that began in the third quarter of 2020 – with the greatest quarterly GDP gain in U.S. history – remains underway. • The securities markets, which began to rally in March 2020, have continued to rise.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Indispensability of Risk Oftentimes, we’re best able to understand something we’re interested in through analogies that clarify the matter by establishing connections between it and other parts of life. That’s why I’ve written a memo comparing investing to sports in each of the four decades I’ve been writing memos and one connecting investing and card playing in 2020. The motivation for this memo comes from an article in The Wall Street Journal of April 12 that my partner Bruce Karsh sent me entitled “Chess Teaches the Power of Sacrifice” by Maurice Ashley, a chess grandmaster who has been inducted into the U.S. Chess Hall of Fame. Few people know that Bruce is a chess player, and I hadn’t thought about this fact for years, but the article provided a good reminder and moved me to dash off this memo. As is obvious from the article’s title, the piece is mostly about the role of sacrifice. Ashley says, “Many positions cannot be won or saved without something of value being given away, from a lowly pawn all the way up to the mighty queen.” Intentionally losing a piece as part of one’s gameplan is the sacrifice that Ashley is referencing. • He describes some sacrifices as “shams,” (a term coined by chess master Rudolf Spielmann in his book The Art of Sacrifice in Chess) where “. . .

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: This Time It’s Different I first came across the title of this memo in an article titled “Why This Market Cycle Isn’t Different” by Anise C. Wallace in The New York Times of October 11, 1987. It went as follows: The four most dangerous words in investing are “this time it’s different,” according to John Templeton, the highly regarded 74-year-old mutual fund manager. At stock market tops and bottoms, investors invariably use this rationale to justify their emotion-driven decisions. Over the next year, many investors are likely to repeat these four words as they defend higher stock prices. But they should treat them with the same consideration they give “the check is in the mail. . . .” Nevertheless, in the bull market’s sixth year, the “this time it’s different” chorus is beginning to be heard. Wall Street professionals predict that, before the bull market ends, individual investors, who have mostly stayed on the sidelines, will be swept along in the mania characterizing a market peak. They will invest in stocks despite the fact that the Dow Jones Industrial average has more than tripled in the last five years.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: On the Couch I woke up early on Saturday, December 12 – the morning after a day of significant declines in stocks, credit and crude oil – with enough thoughts going through my mind to keep me from going back to sleep. Thus I moved to my desk to start a memo that would pull them together. I knew it might be a long time between inception and eventual issuance, since every time I dealt with one thought, two more popped into my head. In the end, it took a month to get it done. Professor Richard Thaler of the University of Chicago is a leading expert on behavioral economics and decision-making (in fact, he’s such a significant figure in the field that he was given a cameo role in the movie The Big Short). He opens his new book, Misbehaving, with Vilfredo Pareto’s assertion that “the foundation of political economy and, in general, of every social science, is evidently psychology.” I’d apply that equally to the not-so-scientific field of investing. It has been one of my constant refrains – dating back all the way to “Random Thoughts on the Identification of Investment Opportunities” (January 1994) – that in order to be successful, an investor has to understand not just finance, accounting and economics, but also psychology.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Volatility + Leverage = Dynamite Nearly fifteen years ago, in April 1994 – at a time when absolutely no one was reading my memos – I published one called “Risk in Today’s Markets Revisited.” That’s when I first proposed the formula shown above. I recycled it in “Genius Isn’t Enough,” on the subject of Long-Term Capital Management (October 1998). The last few years have provided a great demonstration of how dangerous it can be to combine leverage with risky assets, and that’s the subject of this memo. It’ll also pick up on some ideas from my last memo, “The Limits to Negativism.” My memo “Plan B” on the bailout proposal went out on September 24, and as I lay in bed later that night, I realized that I hadn’t taken one part of it nearly far enough. In discussing a prime cause of the credit crisis, I wrote the following: I’ll keep it simple. Suppose you have $1 million in equity capital. You borrow $29 million and buy $30 million of mortgage loans. Twenty percent (or $6 million) of the mortgages go into default, and the recovery on them turns out to be only two-thirds ($4 million). Thus you’ve lost $2 million . . . your equity capital twice over. Now you have equity capital of minus $1 million, with assets of $28 million and debt of $29 million.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Tell Me I’m Wrong My readers treat me well. They indulge my penchant for dissecting the past, and they send kind messages of encouragement. To repay their generosity, I’m going to venture into something I usually avoid: the future of the U.S. economy. This memo won’t be about the future in general, just the elements I find worrisome. As I see it, every investor is either predominantly a worrier or predominantly a dreamer. I’ve come clean many times: I’m a worrier. By saying that, I absolve myself of having to describe the whole future. I’m going to cover the negatives, starting with the immediate and ending with the systemic (some of the latter repeats themes from “What Worries Me,” August 28, 2008). For the other side of the story, I’d suggest you consult the optimists who seem to be in charge of the markets these days. The Near Term One thing is indisputable: the rally in financial markets worldwide has outpaced the fundamentals. At the beginning of 2009, most onlookers expected a generally weak economy and were concerned that the behavior of consumers and banks would remain conservative. They were 100% right, and fundamentals are still tenuous. And yet, the rally has exceeded all expectations of which I’m aware.

Superior investing requires being different from the consensus. That statement is so widely accepted as to have become a cliché, but the practice of it remains rare. The reason it is rare is that being different is uncomfortable — being different means being wrong some of the time, and being wrong in front of an audience that has the comfort of consensus is a special form of professional pain. Second-level thinking is the discipline of asking what the consensus believes and whether the consensus is right. The first-level thinker asks whether a company is good; the second-level thinker asks whether the consensus's view of the company's goodness is correct. The first-level thinker asks whether the news is good or bad; the second-level thinker asks whether the news is better or worse than what is already in the price. The two thinkers arrive at very different decisions from the same facts. The difficulty is that second-level thinking cannot be reduced to a formula. It requires judgment, context, and a willingness to disagree with people who are smarter than you in some respects. The case for being different is not that you are smarter than the consensus; it is that the consensus has under-weighted a consideration that you have weighed more carefully. The disagreement is about emphasis, not about information.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Growing the Pie A few weeks ago, we were pleased to announce a partnership with Brookfield Asset Management that created an alternative investment manager with one of the broadest slates of strategies and greatest asset totals. And what question did I get? “Will there still be memos?” Well, here’s your answer. * * * One thing I’m not happy being right about is the tenor of the current debate over our economic system. Most of my January memo, Political Reality Meets Economic Reality, was devoted to fretting over the rise of populism from the left and the resulting anti-capitalist sentiment, and it has risen further since. I mentioned legislation that had been introduced to appropriate some of corporations’ cash and governance rights for workers, as well as a proposal for a higher income-tax bracket for top earners. Since then we’ve seen additional suggestions covering a wealth tax, higher estate taxes and, in New York City, a tax on pieds-à-terre. Clearly companies and wealthy individuals are being viewed by some as attractive political targets and good sources of incremental revenue. One of the main reasons behind populism’s ability to stir people is the favorable reception its rhetoric receives. “They have too much.” “We’ve been short-changed.” “The system’s rigged.” “They got where they are by cheating.” “The rich don’t pay their fair share.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: We're Not In 1999 Anymore, Toto In "The Wizard of Oz," a tornado carried Dorothy and her dog, Toto, to a land ruled by a mysterious despot in whom people had vested extraordinary powers. In the investment world of 1999, similarly, the promise of easy money powered a wild ride into a world in thrall to high tech investing. Both of these seemingly omnipotent forces were eventually exposed as vulnerable, however, and the spells surrounding Oz and the stock market were broken. * * * In my favorite commercial of 1999, Stuart, the cyber-geek from the mailroom, exhorted his boss to make his first on-line stock purchase, saying, "Let's light this candle!" When Mr. P. protested that he didn't know anything about the stock, Stuart suggested, "Research it." Mr. P. pushed a button on his keyboard and a few seconds later, suddenly wiser, proceeded to buy his first hundred shares. Like many, he demonstrated how easy it is to feel smart in a bull market. In 2000, on the other hand, on-line brokerage commercials were different. When the little boy asked his father what he was doing at the computer, the father said he was investing for his college education. Looking over his dad's shoulder, the boy was curious about the on-screen data. "Five-year earnings, p/e ratio . . ." the father enumerated. "A p/e ratio of 23," the son asked, "is that good?"

The question I am asked most often by readers of my memos is when to sell. The honest answer is that selling is harder than buying, and that the rules for selling are less well-defined than the rules for buying. The temptation to equate activity with adding value is strong, but the evidence that activity adds value is thin. Most investors sell for the wrong reasons. They sell because a position has gone up and they want to lock in the gain; they sell because a position has gone down and they want to stop the pain; they sell because they have found something else they prefer. Only the third of these is a sound reason, and even it requires that the alternative be meaningfully better, not marginally different. The case for holding is structurally underrated. When you own something you understand at a price you find attractive, the burden of proof should be on the case for change, not the case for stasis. Transaction costs, taxes, and the friction of redeployment all work against the active seller. The investor who turns over the portfolio constantly pays these costs without necessarily earning the returns that justify them.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Hedge Funds: A Case for Caution Once upon a time there was an asset class. It was all over the headlines. Its performance was terrific. Some said “too good to be true,” but that didn’t stanch the flow of money. After all, what other asset class had ever produced returns like these? The performance brought vast amounts of capital to the sector. Demand exceeded supply, even as funds grew larger. The funds with the best records and discipline saw a deluge of money vastly exceeding their ability to accept it. Investors whose capital they turned away invested with managers who were less disciplined with regard to limits or with new funds. This gave rise to large numbers of start-ups and spin-offs from established firms. Lack of experience didn’t prevent anyone from hanging out a shingle – or raising money. Some of the leading managers increased fees in order to appropriate more of their returns for themselves, and this enabled second-tier and new managers to charge fees that used to go only for proven performance. Everyone agreed there was “too much money chasing too few ideas,” but they invested anyway, often based on their managers’ supposed skill and the fact that “Everyone’s doing it; I can’t just stand by and watch while they make money.” You could see the end of this tale coming down the track like a locomotive. The perpetual motion machine eventually ground to a halt.

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: There They Go Again . . . Again Some of the memos I’m happiest about having written came at times when bullish trends went too far, risk aversion disappeared and bubbles inflated. The first and best example is probably “bubble.com,” which raised questions about Internet and e-commerce stocks on the first business day of 2000. As I tell it, after ten years without a single response, that one made my memo writing an overnight success. Another was “The Race to the Bottom” (February 2007), which talked about the mindless shouldering of risk that takes place when investors are eager to put money to work. Both of those memos raised doubts about investment trends that soon turned out to have been big mistakes. Those are only two of the many cautionary memos I’ve written over the years. In the last cycle, they started coming two years before “The Race to the Bottom” and included “There They Go Again” (the inspiration for this memo’s title), “Hindsight First, Please,” “Everyone Knows” and “It’s All Good.” When I wrote them, they appeared to be wrong for a while. It took time before they were shown to have been right, and just too early.

I have used the title Nobody Knows three times now — first in October 2008 as the financial crisis was accelerating, again in March 2020 as the pandemic shut down the global economy, and now in 2025 as the new tariff regime disrupts assumptions that had been built into global supply chains and asset prices. The recurrence of the title is not laziness; it is a reminder that the most important macro questions are unanswerable in real time, and that the right response to uncertainty is humility rather than forecast. What I observed in April 2025 was that the announcement of sweeping tariffs represented a fundamental reordering of the global trading system that has been in place, in one form or another, since the end of the Second World War. Whether the policy will be sustained, modified, or reversed is unknowable. What is knowable is that the assumptions embedded in many asset prices — supply chains that depend on free movement of goods, cost structures that assume low tariffs, and growth models that assume continued globalization — were suddenly subject to material revision. Risk management in such an environment begins with the admission that the range of outcomes has widened. When the range of outcomes widens, the right response is not to make a more confident forecast but to demand a larger margin of safety. The investor who is uncertain about the path should pay less, not more, for the assets that depend on a particular path being taken.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Time for Thinking In the early weeks and months of the novel coronavirus pandemic and the related shutdown of the economy, the pace of economic and health developments was frenetic. My memo writing followed suit: one a week for the first six weeks, and a total of ten over 18 weeks. After starting off at that rapid clip, I haven’t issued a memo in more than a month – which might seem like a long interval until you realize the norm in recent years has been only one per quarter. The pace of events has certainly slowed over the last month or two, to the point where most of us are struck by the sameness of our days. We stay in one place for both work and leisure; weekdays aren’t very different from weekends; and the idea of vacation seems almost irrelevant: where would we go and what would we do? My acronym of choice is SSDD, the family-friendly translation of which is “same stuff, different day.” But the slower pace of developments allows for more rumination, and I’ve come up with some thoughts about our present circumstances. The Health Crisis Earlier this month, I prepared a presentation for one of our sovereign-wealth-fund clients. Their annual forum had been expected to entail the last bit of foreign travel still on my calendar, but of course I participated by video conference instead.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: How Quickly They Forget In January 2004 I received a letter from Warren Buffett (how’s that for name dropping?) in which he wrote, “I’ve commented about junk bonds that last year’s weeds have become this year’s flowers. I liked them better when they were weeds.” Warren’s phrasings are always the clearest, catchiest and most on-target, and I thought this Buffettism captured the thought particularly well. Thus for Oaktree’s 2004 investor conference we used the phrase “Yesterday’s Weeds . . . Today’s Flowers” as the title of a slide depicting the snapback of high yield bonds. It showed the 45% average yield at which a sample of ten bonds could have been bought during the Enron-plus-telecom meltdown of 2002 and the 6% average yield at which they could have been sold in 2003; on average, the yields had fallen by 87% in just thirteen months. The idea went full- circle in 2005, when Warren used our slide at the Berkshire Hathaway annual meeting to illustrate how rapidly things can change in the world of investing. And that’s the point of this memo. Asset prices fluctuate much more than fundamentals. This happens because, rather than applying moderation and balancing greed against fear, euphoria against depression, and risk tolerance against risk aversion, investors tend to oscillate wildly between the extremes.

© 2018 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Seven Worst Words in the World I have a new book coming out next week titled Mastering the Market Cycle: Getting the Odds on Your Side. It’s not a book about financial history or economics, and it isn’t highly technical: there are almost no numbers in it. Rather, the goal of the book, as with my memos, is to share how I think, this time on the subject of cycles. As you know, it’s my strong view that, while they may not know what lies ahead, investors can enhance their likelihood of success if they base their actions on a sense for where the market stands in its cycle. The ideas that run through the book are best captured by an observation attributed to Mark Twain: “History doesn’t repeat itself, but it does rhyme.” While the details of market cycles (such as their timing, amplitude and speed of fluctuations) differ from one to the next, as do their particular causes and effects, there are certain themes that prove relevant in cycle after cycle. The following paragraph from the book serves to illustrate: The themes that provide warning signals in every boom/bust are the general ones: that excessive optimism is a dangerous thing; that risk aversion is an essential ingredient for the market to be safe; and that overly generous capital markets ultimately lead to unwise financing, and thus to danger for participants.

© Oaktree Capital Management, L.P. All Rights Reserved Addendum to Third Quarter Client Letter From: Howard S. Marks Re: The Route to Performance We all seek investment performance which is above average, but how to achieve it remains a major question. My views on the subject have come increasingly into focus as the years have gone by, and two events in late September -- and especially their juxtaposition -- made it even clearer how (and how not) to best pursue those superior results. First, there was an article in the Wall Street Journal about a prominent money management firm's lagging performance. Its equity results were 1,840 basis points behind the S&P 500 for the twelve months through August, and as a result its five-year performance had fallen behind the S&P as well. The president of the firm explained that its bold over- and under-weightings weren't wrong, just too early. Here is his explanation, with which I strongly disagree: If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too. The above calls to mind a convertible mutual fund I discussed in my second quarter 1988 letter to convertible clients. The fund held large amounts of common stock in the first eight months of 1987 and cash after that. As a result, its return was more than 1,600 basis points better than the average convertible fund for the year, and 945 b.p. ahead of the second-place fund. In the next half year, its tactics were equally divergent ...

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Easy Money The backstory: I began writing these memos in 1990 and continued to do so for ten years despite never receiving a single response. Then, on the first business day of 2000, I published bubble.com, a memo with warnings about excesses in the tech sector that turned out to be timely. The inspiration for the memo came from a book I’d read the preceding autumn: Devil Take the Hindmost: A History of Financial Speculation, by Edward Chancellor, an account of speculative excesses starting with the South Sea Bubble of the early 1700s. The book’s description of behavior surrounding the mania for the South Sea Company jibed with what I was seeing in the tech/media/telecom bubble that was underway. I received excellent feedback on the memo from clients – encouragement that prompted the many memos that have followed. I consider it highly coincidental that 24 years later, I devoted another autumn to reading another Chancellor book, The Price of Time: The Real Story of Interest, his history of interest rates and central bank behavior. I thank Zach Kessler, a regular memo reader, for sending it. The relevance of The Price of Time to the trends I’ve been discussing for the last year occasions this memo. * * * In December 2022, I published Sea Change, a memo that primarily discussed the 13-year period from the end of 2008, when the U.S.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Us and Them As a kid, I – and probably you – viewed the world in simple terms. There were good guys and bad guys. Americans and commies. Cops and robbers. Settlers and redcoats. The Dodgers I cheered for and the Yankees who always won. Over time my view of the investment community has settled into an equally clear distinction: us and them. You’ve heard a lot from me about the difference between the “I know” school and the “I don’t know” school, concepts I introduced in “What’s It All About, Alpha?” (July 2001) and elaborated on in “The Realist’s Creed” (May 2002). In the last few years it has become clear to me that “we” don’t differ from “them” just in terms of how much we think we know about the future, but in many other ways as well. UDo You Know or Don’t You? Most of the investors I’ve met over the years have belonged to the “I know” school. This was particularly true in 1968-78, when I analyzed equities, and even in 1978-95, when I had switched to non-mainstream investments but still worked at equity-centric money management firms. It’s easy to identify members of the “I know” school:  They think knowledge of the future direction of economies, interest rates, markets and widely followed mainstream stocks is essential for investment success.  They’re confident it can be achieved.  They know they can do it.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Bull Market Rhymes While I employ a great many adages and quotes in my writings, my main go-to list consists of a relatively small number. One of my favorites is widely attributed to Mark Twain: “History doesn’t repeat itself, but it does rhyme.” It’s well documented that Twain used the first four words in 1874, but there’s no clear evidence that he ever said the rest. Many others have said something similar over the years, and in 1965 psychoanalyst Theodor Reik said essentially the same thing in an essay titled “The Unreachables.” It took him a few more words, but I think his formulation is the best: There are recurring cycles, ups and downs, but the course of events is essentially the same, with small variations. It has been said that history repeats itself. This is perhaps not quite correct; it merely rhymes. The events of investment history don’t repeat, but familiar themes do recur, especially behavioral themes. It’s these that I study. In the last two years, we’ve seen dramatic examples of the ups and downs Reik wrote about. And I’ve been struck by the reappearance of some classic themes in investor behavior. They’ll be the topic of this memo. I want to mention up front that this memo has nothing to do with assessing the markets’ likely direction from here.

When the financial crisis began in earnest in the late summer of 2008, the question I was asked most often was whether the situation would stabilize or get worse. My answer then, and the one I have continued to give in every subsequent crisis, is that I do not know. Nobody does. The honest investor admits this rather than dressing up uncertainty in the language of conviction. What I could see was that the structures which had been built on the assumption of permanent liquidity and ever-looser credit were beginning to fail. The unfreezing of credit markets depended on confidence, and confidence is the asset that disappears fastest when it is needed most. The mistakes that brought the system to the brink were leverage, complexity, and complacency about correlation; the solutions would have to address all three. Risk management in such an environment is not about forecasting the bottom. It is about avoiding irreversible loss. The investor who survives a crisis intact has the optionality to participate in the eventual recovery; the investor who is forced to liquidate at the wrong time does not. The preservation of capital through the worst of the panic is, in retrospect, the precondition for the returns that came after.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Investment Miscellany Because I've been encouraged by the response to my “bubble. com” and venture capital memos, I'm going to keep writing. Over time, I collect ideas that I'm tempted to pass on to you - nothing major, but miscellany that may be of interest. Sharing them might become a habit; let me know if you think it should. UCan't Get Any Respect The behavior of IPOs and hot tech stocks in the last few years perverted everything that traditionally had held true. The episode that crested in March must have been the greatest bubble of all times. Certainly money was made in amounts and at speeds never seen before. Companies went from business plan to IPO in a year or two, with billions of dollars assigned to them in market capitalizations or bestowed on their founders and venture capital backers. In the last twelve months, technology entrepreneurs and investors on both coasts bought homes costing several tens of millions of dollars. The line of eager buyers pushed up prices for private planes, yachts and beachfront homes. The market for art and antiques grew white hot. In short, as a friend of mine says, “money was disrespected.” Traditional investing values were equally disrespected. Risk was viewed as the investor's friend, and caution as unnecessary and unavailing. Profits - and even profit projections - were considered superfluous.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Uncertainty II I’ve written a few times about the frequency with which I come across something additive just before finalizing a memo. This time I wasn’t so lucky: my wife Nancy brought an important article to my attention two weeks after the publication of Uncertainty. The article’s appearance, along with a second potential addition, prompts me to write this post-script to that memo. I have a few thoughts to add, all generally related to the topic of foreknowledge. No One Knows What’s Going to Happen The above heading was the title of an excellent article by Mark Lilla, a professor of humanities at Columbia University, which appeared in The New York Times this past Sunday. (You may remember my previous discussion of our tendency to think highly of people who agree with us. I readily admit that the reason I like this article so much may lie in the fact that it confirms a great deal of what I said in Uncertainty.) Here are some excerpts from that article: The best prophet, Thomas Hobbes once wrote, is the best guesser. That would seem to be the last word on our capacity to predict the future: We can’t. But it is a truth humans have never been able to accept. People facing immediate danger want to hear an authoritative voice they can draw assurance from; they want to be told what will occur, how they should prepare, and that all will be well.

© Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: The Role of Confidence Confidence is generally defined as belief in one’s ability to choose a course of action and execute on it. Although it’s not part of the definitions I’ve consulted, I think confidence also connotes optimism (at least it does among investors). Finally, there’s an element of certainty: beyond an optimistic view of the future, there’s conviction that view is correct. Taken together, the ingredients I see in confidence – belief, optimism and certainty – combine to create a feeling of well-being. Confident investors are sure big returns lie ahead. The Confidence Effect The so-called “wealth effect” plays an important and well recognized part in the functioning of an economy. In short, when assets appreciate in value, the owners of those assets translate their increased wealth into increased spending. While at first glance this is unsurprising, it should be noted that this is true even if the appreciation is unrealized, and thus the increased wealth exists solely on paper. The relationship can be simply stated as follows: the richer people feel, the more they spend. Changes in confidence have an impact on behavior similar to the wealth effect. That’s what this memo is about. I have long been impressed by the role of confidence in an economy.

The response to my Sea Change memo was considerable, and a fair share of it was critical. Critics pointed out that I have sounded cautious before — too early, by their measure — and that the business of forecasting regime shifts is a low-batting-average endeavor. I concede both points. The decision to publish the memo was not a forecast that the world would end but a reminder that the assumptions embedded in prices had changed in ways that warranted re-examination. What struck me in the pushback was how often it rested on the belief that the prior regime was the natural state of things. A skeptic might reasonably ask why anyone should believe a particular market configuration — one that prevailed for roughly forty years out of several centuries of financial history — is the default to which we will inevitably return. The contrarian posture here is not to predict doom but to resist the gravitational pull of recent experience. If the regime has in fact changed, the burden of proof should fall on those who argue for reversion to the prior mean, not on those who argue for adaptation. That is the inversion Sea Change proposed and that this follow-up defends. The longer central banks remain constrained by inflation fighting, the more reasonable the adaptation hypothesis becomes.

Memo to: Oaktree Clients From: Howard Marks Re: The Tide Goes Out For every period, there’s a quotation which serves perfectly to explain what’s going on, and I often find myself borrowing it. Warren Buffett provides more than his share; not only is his insight unmatched, but so is his ability to express it. Thus, starting with “It’s All Good” last July, I’ve found frequent use for this one: When the tide goes out, we find out who’s been swimming without a bathing suit. Certainly, “swimming without a bathing suit” – or perhaps a life preserver – serves beautifully to describe investor behavior during the carefree period that ended last summer. And equally, the ebbing of the tide – and the exposing of those who engaged in that behavior – sums up the unpleasant disclosures which have taken place since. Financial sector participants indulged in unprecedented amounts of leverage, innovation and risk taking between late 2002 and mid-2007, the consequences of which have become readily apparent. Leveraging and Inflating When we look at the last few years, we see a rather ordinary period of economic growth and prosperity, accompanied by good corporate health and profitability. But what distinguished this period from all others was a runaway boom in financial sector activity. The whole financial sector inflated, like a balloon into which increasingly more hot air was forced.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Plan B Over the last decade or two, Plan A consisted of relying on the free market to maximize economic growth and efficiency (as described in “The Aviary,” May 2008). What can we say about that? Oops? We don’t hear much at this moment about market efficiency, or about the proposition that it would cause complex mortgage-backed securities to be priced right. So now we have Plan B, better known as TARP, the Troubled Asset Relief Program. On the heels of other injections of capital by the U.S. Treasury and Fed and central banks elsewhere, it was proposed on Friday that up to $700 billion be spent to purchase “toxic” mortgage securities from financial institutions that are weighed down with them. UYa’ Gotta Believe Those who have more money than they need lend it to those with use for more money than they have. This process is called providing credit. The movement of credit puts otherwise-idle money to work and thus adds to economic output. Economies run on credit. According to Merriam-Webster, the word “credit” is derived from the Latin credere: “to believe, entrust.” We provide credit when we believe in borrowers and trust that they’ll pay us back (although we believe in some more than others and charge the latter more interest).

For most of my career, the prevailing assumption was that interest rates were destined to remain low forever. Bonds offered yield, central banks were predictable, and the macro backdrop felt like an immutable fact of investing life. That assumption now looks like it belongs to a chapter that has closed rather than a permanent feature of the environment. The shift from a forty-year tailwind for falling rates into a regime where inflation has returned and policy is being aggressively tightened is not a cyclical fluctuation — it is a sea change. The implications ripple across every asset class. The discount rate that anchors valuation has moved materially higher, dragging down the present value of distant cash flows. The cost of leverage, the price of optionality, and the math of buyouts all reprice. Investors who built portfolios on the assumption that capital would remain cheap must now reckon with the reality that the spread between safe and risky assets has narrowed at exactly the wrong time. What I keep emphasizing is that a sea change is not a forecast of doom — it is a call to revise assumptions that no longer hold. The dominant market regime of the prior four decades was an aberration in financial history, not its natural state. Acknowledging this is the prerequisite for sensible forward-looking decisions, even when those decisions are uncomfortable to make.

“Things You Don’t Measure in Dollars and Cents” !"!# The Yale Endowment !"#$%#$& Introduction The Biography A Unique Record of Achievement The Yale Model An Impact Beyond Yale Yale '()*–+,+' Colleagues Remember Swensen’s Campus Recognition Management and Oversight ' - . ', '+ '. ') ++ +/ +) -, !"#$%&'(#!%" David F. Swensen, Yale University’s Chief Investment Officer from *+,- until his death in May ./.*, had a unique impact on the university, the world of institutional investment, his close circle of family and friends, and on every member of the Yale Investments Office who was privileged to serve under his lead- ership. His accomplishments were celebrated and unprece- dented, his example and teaching were an inspiration, and his loss is strongly felt. This special issue of the Yale Endowment Report, a pub- lication he initiated in *++/, is a tribute to David that we hope will resonate with all who knew him. Left: Portrait of David Swensen, by Alastair Adams 00$0, from Swensen House, Berkeley College. Below: David Swensen with his parents, Richard D. Swensen, Ph.D., and Grace Hartman Swensen, 1.2., 3.&!4.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Taking the Temperature In preparation for my interview for “Lunch with the FT” last fall, I sent the reporter, Harriet Agnew, five memos I had written between 2000 and 2020 that contained market calls. How were they chosen? First, I felt the memos accurately conveyed my thinking at the key turning points in that 20-year period. And second, my calls turned out to be right. Five Calls I’ve written before about the time in 2017 when I was working on my book Mastering the Market Cycle and batting ideas back and forth with my son Andrew. I said, “You know, looking back, I think my market calls have been about right.” His response was dead on target as usual: “Yeah, Dad, that’s because you did it five times in 50 years.” It struck me like an epiphany: He was 100% correct. In those five instances – around the publication of the respective memos – the markets were either crazily elevated or massively depressed, and as a result, I was able to recommend becoming more defensive or more aggressive with a good chance of being right. (Before I go further, let me make it clear that while hindsight shows that the logic behind those calls was correct, that doesn’t mean I made them without great trepidation.) To illustrate how one might approach making market calls, I’m going to briefly summarize what led me to make those five calls.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Uncertainty I wrote a memo a week for six weeks starting on March 3, but I’ve skipped the last three weeks. First, the string had to end sometime. And second, I try to adhere to the principle that if I don’t have anything additive to say, I don’t write. Hopefully you’ll find this one worth reading. Our inability to know the future is a theme I’ve touched on repeatedly over the years, but now I’ve decided to devote an entire memo to it. Being at home for nearly two months means I’ve had a lot of time on my hands, like everyone else. And it’s a good thing, because getting philosophical musings down on paper is a lot harder than writing about current events and what to do about them. And while I’m explaining myself, I’ll apologize up front for the number of citations and their length – but there’s so much wisdom I want to share. All We Don’t Know As everyone knows, today we’re experiencing unprecedented (or at least highly exceptional) developments in four areas: the pandemic, the economic contraction, the oil price collapse and the Fed/government response. Thus a number of considerations make the future particularly unpredictable these days: • The field of economics is muddled and imprecise, and there’s good reason it’s called “the dismal science.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Coming into Focus Roughly two months have passed since my last memo, Time for Thinking, and still not much has changed in the economy or the markets. The toll from Covid-19 continues to rise, the economic outlook is largely the same, vaccines remain some time off, and the S&P 500 is back where it was in early August. So I’ll repeat what I said then: it’s mainly been time for thinking. Fortunately, the more I’ve thought about the issues, the more things have come into focus for me. Thus, I’m going to use this memo to go into greater detail on a few topics. The Prerequisite In Time for Thinking I talked about the fact that I don’t consider this year’s developments to be cyclical. You could say, “Why not? The economy and the markets went down, and now they’re recovering. Isn’t that a cycle?” What I really mean is that this is very different from a normal cycle, and I’ve figured out a way to better explain that, borrowing a bit of what I said in my 2018 book, Mastering the Market Cycle. Most of the up-cycles I’ve witnessed occurred because things were going well in the economy, causing psychology and decision-making to become increasingly optimistic and eventually euphoric. Corporations favored expansion, stock prices rose and financial innovation became possible, even encouraged.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: You Can’t Eat IRR Until rather recently – certainly up to the early 1980s – “investing” was largely synonymous with “stocks and bonds.” And the performance of a stock or bond portfolio was evaluated in terms of its rate of return. You invested a certain amount of capital, and the percentage by which it increased in a given year was its annual return. To quantify performance over a multi-year period, you chained the individual yearly returns to come up with a compound annual return: Annual Return Dollar Gain Portfolio Value Initial Investment $1,000 Year 1 10% $100 1,100 Year 2 15 165 1,265 Year 3 8 101 1,366 Comp. Ann. Return 11% But in the last few decades, buyout and venture capital funds came along, changing things. Funds like these start with capital commitments, call and invest their capital over time, and thereafter manage and liquidate their portfolios. They expand and contract radically, and in assessing their performance, it’s clear that a given year’s percentage return matters more – and thus should be given more weight – if it was achieved when the fund held a lot of capital (and less if it was not). Investors wisely concluded that the performance of such funds should be assessed using a measure capable of capturing this phenomenon.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Realist's Creed Early this year, I was asked to write an article for "Trusts & Estates" magazine. Here it is, in part cobbled together from things I've written in the past, and slightly changed from the version that was published in April. The editors wanted me to recommend a course of investment action for beneficiaries and their fiduciaries. To most people that means deciding how much to put into stocks and bonds (and which ones), and whether private equity and hedge funds should be included. It usually sounds easy: all you have to do is make a few simple judgments about the future. I decided to write a very different article: it's going to tell you how hard investing is, and how you can best equip yourself for the task. UFirstU, I think investing must be based on a firmly held belief system. What do you believe in, and what do you reject? Put another way, what are the principles that will guide you? For me, the starting point consists of deciding which approach to take in dealing with the future. That decision primarily revolves around choosing between two polar opposites: what I call the "I know" school and the "I don't know" school. Most of the investment professionals I've met over my 33 years in the industry fall squarely into the "I know" school.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Touchstones In the two-plus years since the onset of the financial crisis, it’s been a regular theme of mine that we should look back, identify the causes and learn from them. I’ve tackled this assignment in a number of memos and a variety of ways. Now, despite the fact that you’ve heard much of this from me before, I’m going to try to pull it all together, using the quotations, adages and images that I feel best capture the essence of what we’ve been through. When I think back, these are the ones that stand out. “Greed Is Good” There’s no debating which line from the film Wall Street is the most memorable. It’s hard to forget the image of slicked-back takeover artist Gordon Gekko urging on his troops, invoking the positive power of self-interest. What he meant by “greed is good,” of course, was that greed – or self-interest, or the profit motive – is what drives people and companies operating in a free- market setting to strive for more and better, and thus to work hard and optimally allocate resources. It’s the force that motivates Adam Smith’s “invisible hand” and carries economies to increased output and higher standards of living. Among the many pendulum-like phenomena we occasionally witness is the swing in people’s willingness to rely on the free market. First they trust the market to come up with solutions.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Race to the Bottom UCheapening Money If you make cars and want to sell more of them over the long term – that is, take permanent market share from your competitors – you’ll try to make your product better. (You might cut your prices or increase your advertising, but neither of those will work for long if your cars are demonstrably inferior.) “Building a better mousetrap” should also be effective for sellers of toothpaste, computers, televisions, magazines, movies and dresses, or any other product that can be differentiated from its competitors. That’s why – one way or the other – most sales pitches say, “Ours is better.” However, there are products that can’t be differentiated, and economists call them “commodities.” These are generic goods like gold, West Texas crude oil, pork bellies, steel ingot, orange juice, electricity and telecommunications bandwidth. They’re goods where no seller’s offering is much different from any other. They tend to trade on price alone, and each buyer is likely to take the offering at the lowest delivered price. Thus, if you deal in a commodity and want to sell more of it, there’s generally one way to do so: cut your price. It’s futile to make claims for product superiority, and advertising is unlikely to alter buying habits. Thus in order to gain market share, you have to make your product cheaper than someone else’s.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Pendulum in International Affairs As regular readers of my memos and books know, I’m strongly interested in – you might say obsessed with – the concept of the pendulum. The following is only a partial list of my writings on the subject: • My second memo, written in April 1991, was creatively titled First Quarter Performance. It talked about the oscillation in securities markets between euphoria and depression; between celebrating positive developments and obsessing over negatives; and thus between overpriced and underpriced assets. • On Regulation, written in March 2011, discussed the outlook for rulemaking stemming from the Global Financial Crisis. I said future developments were likely to be driven by the long-term pendulum-like swing in attitudes on that subject. Over time, those attitudes tend to fluctuate between “the markets best serve the country when they’re unfettered by rules” to “we need the government to protect us from participants’ misbehavior.” • In The Role of Confidence, from August 2013, I discussed the way shifts in fundamentals are translated into market volatility by often-excessive swings in investor confidence. • And in my 2018 book, Mastering the Market Cycle, I interrupted my discussion of the various cycles – in the economy, corporate profits, credit availability, etc.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Lessons from Silicon Valley Bank This isn’t going to be another history of the meltdown of Silicon Valley Bank. Dozens of those have appeared in my inbox over the past month, as I’m sure they have in yours. Thus, rather than merely recount the developments, I’m going to discuss their significance. My sense is that the significance of the failure of SVB (and Signature Bank) is less that it portends additional bank failures and more that it may amplify preexisting wariness among investors and lenders, leading to further credit tightening and additional pain across a range of industries and sectors. One-off or a Harbinger of Things to Come? A number of things about SVB made it somewhat of a special case – which means it probably won’t turn out to be the first of many: • The bank’s business was heavily concentrated in a single sector – venture capital-backed startups in tech and healthcare – and a single region – Northern California. Many regional banks’ businesses are similarly concentrated, but not usually in sectors and regions that are both highly volatile. • The boom in its sector and region caused SVB’s business to grow very rapidly. • In recent years, startups were a major destination for investors’ cash, a good deal of which they deposited at SVB. This caused SVB’s deposits to triple, from $62 billion at the end of 2019 to $189 billion at the end of 2021.

© Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: The Race Is On I’ve written a lot of memos to clients over the last 24 years – well over a hundred. One I’m particularly proud of is The Race to the Bottom from February 2007. I think it provided a timely warning about the capital market behavior that ultimately led to the mortgage meltdown of 2007 and the crisis of 2008. I wasn’t aware and didn’t explicitly predict (in that memo or elsewhere) that the unwise lending practices that were exemplified in sub-prime mortgages would lead to a global financial crisis of multi-generational proportions. However, I did detect carelessness-induced behavior, and I considered it worrisome. As readers of my memos know, I believe strongly that (a) most of the key phenomena in the investment world are inherently cyclical, (b) these cycles repeat, reflecting consistent patterns of behavior, and (c) the results of that behavior are predictable. Of all the cycles I write about, I feel the capital market cycle is among the most volatile, prone to some of the greatest extremes. It is also one of the most impactful for investors. In short, sometimes the credit window is open to anyone in search of capital (meaning dumb deals get done), and sometimes it slams shut (meaning even deserving companies can’t raise money). This memo is about the cycle’s first half: the manic swing toward accommodativeness.

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Lines in the Sand In my 2016 year-end review, which went only to clients, I included a discussion of the use of subscription lines by closed-end funds in areas such as private equity, real estate, distressed debt and private credit. It’s my impression that their use has become fairly pervasive in recent years, and in response to clients’ requests and market trends, Oaktree has utilized subscription lines in some of its newer funds. That year-end note prompted some interesting and spirited discussion of lines and their merit and effect. Thus I decided to write this memo on the topic for general circulation. How Do Subscription Lines Work? As I wrote in the year-end review, subscription lines are bank loans extended to funds that enable them to use borrowed money, rather than LP capital, to make early investments or pay fees and expenses. While there is no universal description, I believe it’s safe to say in general that subscription lines:  are limited as a percentage of the LPs’ capital commitments. (Commitments from the most creditworthy LPs earn a 90% advance rate, and commitments from lesser credits earn lower advance rates or, in some cases, zero),  are secured by the LPs’ capital commitments, and  generally must be repaid in the early or middle part of the fund’s life (unless extended), although terms are beginning to lengthen.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Clients From: Howard Marks, TCW Re: The Value of Predictions, or Where'd All This Rain Come From? Anyone who has been my client for long has heard from me on many occasions with negative comments about market forecasts. Now, I have decided to say at once all of the bad things I can think of about predictions. UThe Expected Value of a Forecast = Value of Correct Forecast x Probability of Being Correct The motivation for trying to guess the direction of stocks or bonds is easy to understand. Observers have for years noted the wide price swings, calculated the value of a dollar invested at the bottoms and disinvested at the tops and compared the result against the value of a dollar invested under a “buy-and-holdP ” P strategy. The difference is always temptingly large. The problem, however, comes from the fact that none of the forecaster's attempts to capture the swings have any value unless his or her predictions are right. UBut It's Hard to be Right I agree with John Kenneth Galbraith. He said “We have two classes of forecasters: Those who don't know -- and those who don't know they don't know.” If it was easy to predict the future, it would be easier to attain excellent investment results -- then maybe everyone could have above-average performance. UBeing Right With Average Consistency Doesn't Help Let's face it: most of us have roughly the same ability to predict the future.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Something of Value If asked about possible silver linings to this pandemic, I would list first the chance to spend more time with family. Our son Andrew and his wife and son moved in with Nancy and me in Los Angeles at the beginning of the pandemic, as they were renovating their house when Covid-19 hit, and we lived together for the next ten weeks. There’s nothing like getting to spend months at a time building relationships with grandchildren, something we were privileged to do in 2020. I’m sure the impact will literally last lifetimes. As I’ve previously reported, Andrew is a professional investor who focuses on making long-term investments in what the world calls “growth companies,” and especially technology companies. He’s had a great 2020, and it’s hard to argue with success. Our living together led me to talk with him and think a great deal about subjects on which I hadn’t previously spent much time, contributing a lot to what I’ll cover in this memo. * * * I’ve written before about how the questions I’m asked give me a good sense for what’s really on people’s minds. These days, one I frequently field is about the outlook for “value” investing. “Growth” stocks have meaningfully outperformed “value” for the last 13 years – so long that people are asking me whether it’s going to be a permanent condition.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Notes from New York Maybe you've already read enough about last week's events, in which case you should feel free to discard this memo. There is no moral obligation to keep reading when doing so brings pain. Each of us can decide when enough is enough. By now most of us know all we need to about Tuesday's events at the World Trade Center and the Pentagon. I will not recount the facts relating to these events, but rather the thoughts they have left me with. I spent Tuesday through Friday in New York – like so many, against my will. I had no plans for a memo on this subject. But when I woke up Saturday, at home for the first time in a week, thoughts of New York monopolized my mind. My way of dealing with them is to turn them into sentences and paragraphs. This memo may not include much that is new to you but, as usual, I will attempt to pull together my own thoughts and what I've heard and read elsewhere. It won't touch on recommendations for investing or predictions for economies and markets. Its contents will range from trivial descriptions of New York after the attack to hopefully-meaningful observations on the big-picture ramifications that have been seen and that may follow. Lastly, I certainly do not wish to write anything that offends. But nerves are frayed, and unintended offense might be taken, for which I apologize.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Quo Vadis? Leon Uris turned the question "Quo Vadis?" into a book title. Everyone wants to know. Where do we go from here? What's in store for the market? . . . for all the drama, yesterday's seesaw trading failed again to give investors the one thing they needed most: a clear picture of where the stock market is headed. Many on Wall Street had been hoping for some kind of resolution yesterday – either a significant drop that would wash out the selling, or a significant recovery. Instead, stocks bounced in both directions, as optimists battled the pessimists. (Wall Street Journal, July 24, 2002) I include this paragraph because it communicates a great deal in just a few words. It makes clear how much investors hunger for an indication of what lies ahead. It shows how inconclusive anyone day's evidence can be. And, most importantly, to me it hints at the sheer folly of this quest for an omen. There's no such thing as a conclusive sign, and there never will be. The future will always remain a mystery – and this is even more true for short-term fluctuations than for long-term trends. Nothing in the market's movement one day tells us anything about what it'll do the next. Most of the time people will conclude that they have no idea what lies ahead. And once in a while they'll feel they do (as in 1999) and likely be wrong.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Thinking About Macro For a piece of information to be desirable, it has to satisfy two criteria: it has to be important, and it has to be knowable. – Warren Buffett Regular readers of my memos know that Oaktree and I approach macro forecasts with a high degree of skepticism. In fact, one of the six tenets of Oaktree’s investment philosophy states flatly that we don’t base our investment decisions on macro forecasts. Oaktree doesn’t employ any economists, and we rarely invite them to our offices to share their views. The reason for this is simple: to use Buffett’s terminology, we’re convinced the macro future isn’t knowable. Or, rather, macro forecasting is another area where – as with investing in general – it’s easy to be as right as the consensus, but very hard to be more right. Consensus forecasts provide no advantage; it’s only from being more right than others – from having a knowledge advantage – that investors can expect to dependably earn above average returns. Many investors think their job requires them to develop a macro outlook and invest according to its dictates. Successful stock pickers or real estate buyers often make pronouncements regarding the macro outlook, even in the absence of evidence linking their investment success to accurate macro forecasts.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Nobody Knows The title of this memo isn’t a joke; I mean it. Nobody knows the real significance of the recent events in the financial world, or what the future holds. Everyone has an opinion – there’s an off-color joke to that effect – but opinions are entirely different from knowledge. As usual, the bulls are optimistic, the bears are pessimistic, and the rest are uncertain. This is a great time for my favorite quote from John Kenneth Galbraith: “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” No one knows about the future, and that’s more true now than ever . . . literally. Excesses were committed at financial institutions that we’ve never seen before in terms of their scale or their breadth, and many new inventions are in place that never existed before. So clearly no one can know how things will pan out. My conviction that this is true frees me from having to methodically assess the strength and weakness of economies and institutions, and it permits me to limit my comments to what I consider strategic realities. I’m flattered that people have asked for my opinion, and I will give it. But that’s all it is: an opinion. In setting it down, I will repeat things I’ve written before. So if you find something that you think you’re reading for the second time, you’re probably right. UBoom-Bust Those two words say it all.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Nobody Knows (Yet Again) On Monday, September 15, 2008, shortly after the close of the New York Stock Exchange, Lehman Brothers surprised the world by filing for bankruptcy. This came on the heels of rescues/bankruptcies of Bear Stearns and Merrill Lynch and was followed quite soon by more of the same at Wachovia, Washington Mutual, and AIG. Market participants quickly concluded that the U.S. financial sector was likely to melt down. It was now patently obvious (unlike a few days earlier) that financial institutions might fall like dominoes due to the combination of (a) financial deregulation, (b) a manic housing boom, (c) unwise mortgage lending, (d) the structuring of mortgages into thousands of tranched securities that were rated too high, (e) investment in these securities on the part of highly levered banks, and (f) “counterparty risk” resulting from the banks’ interconnectedness. This thesis couldn’t be refuted, and as a result, the markets embarked on what felt like a downward spiral without end. I thought I should comment on these developments and the outlook, and the result was a memo called Nobody Knows, published four days later. I affirmed my ignorance of the future as usual, but to an even greater degree given that all prior expectations had been upended. Nobody knew – especially me – whether the spiral could be arrested.

While other billionaires chase a new age space race, Dalio's heart belongs to a different frontier, one that has seen untold destruction over the past fifty years. His interest was sparked growing up watching Jacques Cousteau's films and documentaries, which made him curious about the underwater world, and he started diving in his early twenties, first chartering a boat and then buying one of his own. What he wanted was not a yacht but an exploration boat, and half a century later his converted lift ship has been central to high-profile aquatic missions: helping capture the first-ever footage of the elusive giant squid, aiding the search for Air France Flight 447, and taking Leonardo DiCaprio on a submersible dive for his documentary Before the Flood. Together with his youngest son Mark, who had been working at National Geographic, Dalio launched OceanX to spotlight the oceans through exploration, film, media, and science. The BBC's Blue Planet II was shot on their ship, and film director James Cameron, an ocean advocate and record-setting diver, became a partner.

The Yale Investments Office public site describes the endowment as a long-term pool of capital whose purpose is to support the university's academic mission in perpetuity. The spending rule, articulated on the site, targets approximately 5.25 percent of the endowment's value each year, calculated on a smoothed basis to insulate the university's operating budget from short-term market volatility. This combination of perpetual horizon and stable spending rule is the structural fact that allows Yale to take on illiquidity and equity-like risk premiums that shorter-horizon investors cannot absorb. The site describes the Yale Model - the framework David Swensen and Dean Takahashi developed for managing the endowment - as an approach built around equity orientation, diversification across asset classes, and a significant allocation to alternative assets. The endowment's allocation to private equity, venture capital, real assets (timber, real estate, and energy), and absolute-return strategies has historically been several times the allocation of a typical institutional 60/40 portfolio. The site emphasizes that the model is calibrated to the specific structural advantages of a perpetual-horizon institution. The site also makes explicit the governance features that make the model work. The Investments Office maintains a large staff of investment professionals with sectoral expertise, the investment committee operates with delegated authority and long tenure, and the office evaluates and re-underwrites its external managers on a continuous basis. The institutional architecture is designed to allow the office to commit capital to long-duration illiquid investments through multiple cycles without being forced to sell into downturns - the discipline that allows the endowment to harvest the illiquidity premiums embedded in private market partnerships.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: What’s Behind the Downturn? In May, I observed in “How Quickly They Forget” that investors had returned to pro-risk behavior despite the lingering presence of significant macro worries. And then just three months later, a number of exogenous events caused the markets to undergo a significant decline and one of the greatest paroxysms of volatility ever seen. All of the reasons existed well before. Investors simply hadn’t taken them to heart. I never cease to marvel, and complain, about the way investors flip-flop – focusing on just the positives at one moment and just the negatives at another – and the speed at which they do it. But I learned long ago not to be surprised by this phenomenon or expect it to stop occurring, but instead to look past the market’s behavior and assess the underlying realities. Thus I decided to take the occasion of my summer vacation to write a memo parsing the recent events and touching on the outlook. Confluence Markets usually do a pretty good job of coping with problems one at a time. When one arises, analysts analyze and investors reach conclusions and calmly adjust their portfolios. But when there’s a confluence of negative events, the markets can become overwhelmed and lose their cool. Things that might be tolerable individually combine into an unfathomable mess whose extent and ramifications seem beyond analysis.

Memo to: Oaktree Clients From: Howard Marks Re: Gimme Credit The questions I get from clients enable me to understand in real time what’s on their minds. At various points in the last ten years, the most frequently asked question was “when will the Fed raise/cut rates?” During crises, it’s usually “what inning are we in?” For a year or two, it’s been “can we talk about private credit?” And in the last few months, it’s “what about spreads?” Ever since interest rates got up off the floor in 2022, there’s been increased interest in credit, and that’s why I’m devoting this memo to it. It’ll come a little closer than usual to “talking my book,” but I think the subject justifies that. Most of my references will be to high yield bonds, where I have the most experience, there’s the most data, and the fixed coupon rates make the explanations most straightforward. But the points I’ll make are applicable to credit in general. While I’m setting the stage, I want to get one thing out of the way. When people ask me, “can we talk about private credit?” my answer is always the same: “can we talk about credit?” I see no reason why investors should blithely skip over public credit instruments and go straight to private credit. For that reason, I’m going to address both here. Last year was a great one for credit, illustrated by the 8.2% return on the ICE BofA US High Yield Bond Index. That followed even better results in 2023, when the benchmark returned 13.5%.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Clients From: Howard Marks Trust Company of the West Re: First Quarter Performance The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum "on average," it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward an extreme itself that supplies the energy for the swing back. Investment markets make the same pendulum-like swing: - between euphoria and depression, - between celebrating positive developments and obsessing over negatives, and thus - between overpriced and underpriced. This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at a "happy medium." In late 1990, the securities markets were at a negative extreme as concerns about the economy and Iraq produced exaggerated risk aversion and thus drastic under-valuation of all securities considered to be of less than "gilt-edge" quality. The subsequent first quarter swing toward more reasonable valuations imparted to our portfolios some of the best quarterly performance in our history.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients and Friends From: Howard Marks Re: Who Knew? For years, I've railed against people who claim they know what the future holds. And yet, in my last memo on September 3, 1997, I may actually have made a correct prediction, as follows: What could cause a market decline? A drop in investor confidence -- perhaps the commodity that's most freely available today -- would likely be the key, but the reason is hard to foresee…. The next surprise might be geopolitical (oil embargo, war in Korea), economic (tight money, slowing profit growth) or internal to the market (competition from bonds at higher interest rates, discovery of a fraud), but it's most likely to be something that no one has anticipated -- including us. Just the next month, the "Asian meltdown" came into full bloom, with profound ramifications for stock and bond markets all around the world. What this shows is that it's easy to be right about the future . . . if you restrict your predictions to two: (1) something significant is bound to happen eventually, and (2) we never know what it'll be. * * * Speaking of what we can know, I was in a client's office in December, cautioning that I thought we would never reside for long in the investment nirvana of the new paradigm where inflation, interest rates, economic growth, expanding profits and rising stock prices stay properly aligned.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: What Does the Market Know? My buddy Sandy was an airline pilot. When asked to describe his job, he always answers, “hours of boredom punctuated by moments of terror.” The same can be true for investment managers, for whom the last few weeks have been an example of the latter. We’ve seen bad news and prices cascading downward. Investors who thought stocks were priced right 20% ago and oil $70 ago now wonder if they aren’t risky at their new reduced prices. In Thursday’s memo, “On the Couch,” I mentioned the two questions I’d been getting most often: “What are the implications for the U.S. and the rest of the world of China’s weakness, and are we moving toward a new crisis of the magnitude of what we saw in 2008?” Bloomberg invited me on the air Friday morning to discuss the memo, and the anchors mostly asked one version or another of a third question: “does the market’s decline worry you?” That prompted this memo in response. The answer lies in a question: “what does the market know?” Is the market smart, meaning you should take your lead from it? Or is it dumb, meaning you should ignore it? Here’s what I wrote in “It’s Not Easy” in September and included in “On the Couch”: Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: All That Glitters In 1952, Noah S. “Soggy” Sweat, Jr., a member of the Mississippi House of Representatives, was asked about his position on whiskey. Here’s how he answered: If you mean whiskey, the devil’s brew, the poison scourge, the bloody monster that defiles innocence, dethrones reason, destroys the home, creates misery and poverty, yea, literally takes the bread from the mouths of little children; if you mean that evil drink that topples Christian men and women from the pinnacles of righteous and gracious living into the bottomless pit of degradation, shame, despair, helplessness, and hopelessness, then, my friend, I am opposed to it with every fiber of my being.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: What Really Matters? I’ve gathered a few ideas from several of my memos this year – plus some recent musings and conversations – to form the subject of this memo: what really matters or should matter for investors. I’ll start by examining a number of things that I think don’t matter. What Doesn’t Matter: Short-Term Events In The Illusion of Knowledge (September 2022), I railed against macro forecasting, which in our profession mostly concerns the next year or two. And in I Beg to Differ (July 2022), I discussed the questions I was asked most frequently at Oaktree’s June 21 conference in London: How bad will inflation get? How much will the Fed raise interest rates to fight it? Will those increases cause a recession? How bad and for how long? The bottom line, I told the attendees, was that these things all relate to the short term, and this is what I know about the short term: • Most investors can’t do a superior job of predicting short-term phenomena like these. • Thus, they shouldn’t put much stock in opinions on these subjects (theirs or those of others). • They’re unlikely to make major changes in their portfolios in response to these opinions. • The changes they do make are unlikely to be consistently right. • Thus, these aren’t the things that matter. Consider an example.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Further Thoughts on Sea Change In May, I wrote a follow-up memo to Sea Change (December 2022) that was shared exclusively with Oaktree clients. In Further Thoughts on Sea Change, I argued that the trends I had highlighted in the original memo collectively represented a sweeping alteration of the investment environment that called for significant capital reallocation. This memo was originally sent to Oaktree clients on May 30, 2023.1 This Time It Really Might Be Different On October 11, 1987, I first came across the saying “this time it’s different.” According to an article in The New York Times by Anise C. Wallace, Sir John Templeton had warned that when investors say times are different, it’s usually in an effort to rationalize valuations that appear high relative to history – and it’s usually done to investors’ ultimate detriment. In 1987, it was high equity prices in general; the article I cite was written just eight days before Black Monday, when the Dow Jones Industrial Average declined by 22.6% in a single day. A dozen years later, the new thing people were excited about was the prospect that the Internet would change the world. This belief served to justify ultra-high prices (and p/e ratios of infinity) for digital and e-commerce stocks, many of which went on to lose more than 90% of their value over the next year or so.

© Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: Getting Lucky Sometimes these memos are inspired by a single event or just one thing I read. This one – like my first memo 24 years ago – grew out of the juxtaposition of two observations. I’ll introduce one here and the other on page seven. Contrary to my wife Nancy’s observation that my memos are “all the same,” the subject here is one I’ve rarely touched on. The Role of Luck The first inspiration for this memo came in early November, when I picked up a copy of the Four Seasons Magazine in my hotel room in Riyadh, Saudi Arabia. I happened to turn to an article entitled “In Defence of Luck” by Ed Smith. It’s been in my Oaktree bag ever since. In his two opening paragraphs, Smith presents a thesis for dismantling: “Success is never accidental,” Twitter founder Jack Dorsey recently tweeted. No accidents, just planning; no luck, only strategy; no randomness, just perfect logic. It is a tempting executive summary for a seductive speech or article. If there are no accidents, then winners are seen in an even better light. Denying the existence of luck appeals to a fundamental human urge: to understand, and ultimately control, everything in our path. Hence the popularity of the statement “You make your own luck.” That’s all it took to get my juices flowing. I – along with Smith – believe a great many things contribute to success.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: What Lies Ahead? Writing my client memos gives me great satisfaction. I appreciate the opportunities to share my views with you as well as your receptivity to them. Setting down my "Notes from New York" did me a lot of good as my way of dealing with post-attack issues outside the investment arena. I must admit that I haven't been looking forward to writing a memo about the economic and investment implications of the attacks. Many of my views are negative, and I'm no economist. But I want to give you the benefit of my thinking, such as it is. ULooking to the FutureU – All of economics, business and investing entails dealing with the future. Economists predict future conditions. Businesspeople build and manage organizations so as to profit in the coming environment. And, of course, investors try to figure out what things will come to be worth in the years ahead and act accordingly. Other professions deal more with the past (e.g., accountants and historians) or the present (doctors and lawyers), but it is our job to cope with the future. That's what makes investing interesting, challenging and occasionally lucrative. If it didn't require us to reach conclusions about the future, or if the future wasn't uncertain, then everyone's returns would be the same – but not very high.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients and Friends From: Howard Marks Re: Genius Isn't Enough (and Other Lessons from Long-Term Capital Management) On September 24, The Wall Street Journal carried an excellent front-page article regarding the inability of the "crack team" of economic policy makers led by Messrs. Rubin and Summers to halt the slide of the emerging markets' economies and currencies. Heading the column was a quotation from David Halberstam's account of the U.S. involvement in Vietnam, The Best and The Brightest: If there was ever anything that bound men ... together, it was the belief that sheer intelligence and rationality could answer and solve everything. Across the page -- just a few columns away -- was another excellent article, this time on the subject of Long-Term Capital Management. I think the Halberstam quotation is just as relevant to this one. The saga of Long-Term Capital is well known by now. My purpose here is not to discuss the facts, although I'll do so briefly, but rather the lessons to be learned. Long-Term was the creation of former Salomon Brothers vice chairman John Meriwether, along with several other well-respected ex-Salomon Partners, a former vice chairman of the Federal Reserve, and a pair of Nobel prize winners. It was formed to engage in bond arbitrage, the systematic exploitation of bond mispricings.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients Only From: Howard Marks Re: 2020 in Review The opening lines of Charles Dickens’s A Tale of Two Cities offer a fitting coda to 2020: It was the best of times, it was the worst of times . . . it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair. We’re left to contemplate the jaw-dropping list of extremes compiled during this turbulent year: • The coronavirus brought on the worst global pandemic in over a century. • In the U.S., more than 340,000 people died from Covid-19 – 85% of the number who died in battle in the four years of World War II. • In the second quarter, the U.S. experienced the worst quarterly drop in real GDP in 74 years of recorded quarterly history, an annualized decline of 32.9%. • But in the third quarter, it saw the biggest annualized gain in history: 33.4%. • Initial unemployment claims jumped from 251,000 to almost 3 million in a single week in March, crested at 6.2 million two weeks later, and remained above the pre-pandemic record of 695,000 every week for the remainder of the year. • Through bond buying, the Federal Reserve grew its portfolio by $2.7 trillion, or roughly 55%, and the U.S. Treasury funded roughly $4 trillion in grants and loans. • After the S&P 500 Index reached an all-time high of 3,386 on February 19, it fell 33.9% in just 32 days to 2,237 on March 23.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Which Way Now? In the last six weeks the markets have seen the best of times and the worst of times: • From February 19 to March 23, the U.S. stock market saw the quickest meltdown in history, for a loss of 33.9% on the S&P 500. Then its 17.5% gain from Tuesday through Thursday of last week made for the best three-day stretch since the 1930s. • Of the 21 trading days between February 27 and March 27, a total of 18 days saw moves in the S&P 500 of more than 2%: eleven down and seven up. They included the biggest daily percentage gain since 1933 and the second-biggest percentage loss since 1940 (exceeded only by Black Monday in 1987). • From March 9 through March 20, issuing a new investment grade bond seemed inconceivable. Then, as our trader Justin Quaglia points out, last week’s news of the government’s rescue package enabled 49 companies to issue $107 billion of IG bonds. That made it the biggest week for issuance on record; part of the biggest month on record ($213 billion from 106 issuers); and part of the biggest quarter on record ($473 billion, up 40% from the first quarter of 2019). In fact, there was more issuance last week than in nine of the 12 months in 2019. • Finally, on March 26, Justin wrote, “It’s hard to believe I used the words ‘panic’ and ‘FOMO’ within two weeks of each other.

© Oaktree Capital Management, L.P. All Rights Reserved To: Clients From: Howard Marks Date: July 15, 1994 Subject: "How Does an Inefficient Market Get That Way?" In an efficient market, the actions of intelligent, informed, diligent and objective investors cause assets to be priced fairly based on the available information such that their prospective returns are in proportion to their risk. No bargains are available, and the only way to increase expected return is to take on more risk. But in an inefficient market, this process breaks down. The prerequisites for efficiency are not fully satisfied, and thus prices are able to diverge from what they "should" be. Some assets become overpriced and others underpriced. Profits can be earned by applying skill, not just for bearing risk. It becomes possible to consistently achieve superior risk-adjusted returns. But how does a market get that way? There are many possible reasons. Maybe most investors ignore the market niche because it is little known. Perhaps information is skimpy or unevenly disseminated. Market infrastructure may be under-developed, so trading difficulties scare investors away. Maybe there's no trade reporting, so Seller A doesn't know what B got just a few minutes earlier and settles for less. The list of possible reasons goes on and on, but we have our own favorite: Investors fail to act objectively and dispassionately. An efficient market must be unbiased.

Memo to: Oaktree Clients and Friends From: Howard Marks Re: Are You An Investor or a Speculator? All of Oaktree's activities follow from our conviction that what matters most in determining the success or failure of an investment isn't whether it's in a fast-growing company, a desirable asset or a highly-rated security, but rather the relationship between the price you pay and what the asset is worth. We think no asset is so bad that there's not a price at which it's attractive for purchase, and no asset is so good that it can't be overpriced. Thus, we think in order to invest successfully you have to know both the value of the asset and how the price relates to that value. The relationship in the marketplace of price to value is highly dependent on how things are being viewed at the time -- on the attitudinal factors determining investor behavior. We spend a lot of our time thinking (and some time writing) about the investor behavior embedded in asset prices, as we feel this will prove highly determinative of the success of the investments we make. In an April 1991 memo entitled "The Pendulum," we discussed the market's usual oscillation between euphoria and depression, and thus between overpriced and underpriced. We think this swing, like other forms of cyclical fluctuation, is one of the few things in the investment world on which we can depend. And it's essential that we keep in mind where we stand in regard to that arc.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: Assessing Performance Records – A Case Study What are the non-negotiable requirements for accurately assessing investment performance? I’d say:  a record spanning a significant number of years,  a period that includes both good years and bad, enabling us to assess performance under a variety of circumstances, and  a benchmark or peer universe that makes for a relevant comparison. The other day, at an event for alumni and other constituents of the University of Pennsylvania, president Amy Gutmann reviewed the performance of the university during the financial crisis. In the process, she had some kind words for Penn’s Investment Board, which I chaired for the ten years from June 30, 2000 through June 30, 2010. Thinking about it afterward, I realized that I should share with you the story of Penn’s endowment and its lessons. Penn has agreed that I may do so. The data is a little out of date, but the lessons aren’t. A Little Background For roughly two decades starting in the late 1970s, Penn’s endowment was led by John Neff, probably the most respected investor of that era, in strict adherence to the principles of value investing. Thus, its fortunes fluctuated along with the performance of that school of thought.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients and Friends From: Howard Marks Re: Will It Be Different This Time? One of my favorite articles, "Why This Market Cycle Isn't Different" by Anise C. Wallace, appeared in the New York Times. It skeptically recounted the rationale being advanced why a traditional correction of the stock market's meteoric rise need not take place. Among the reasons cited were (1) the outlook for continued economic growth, given that the economy had learned how to correct itself painlessly, (2) hope for return to a gold standard, (3) optimism regarding world peace, (4) the likelihood of continued buying of U.S. stocks by foreign investors piling up dollars with no better place to go, and (5) the fact that stocks were not overvalued compared to other assets, which had also appreciated. This was the optimists' argument. But its flaws became apparent almost immediately after the article was published ... on October 11, 1987. By the close on October 19, the market had fallen by 30%. So much for the bulls' predictions!! And so much for predicting a future markedly different from the past. The article pointed out that some of the arguments did have some truth to them, but it also cited John Templeton's assessment that people who say things will be different are right only one time out of five. The hard part is knowing which times those are.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Hindsight First, Please (or, What Were They Thinking?) “The farther backward you can look, the farther forward you can see.” – Winston Churchill I often cite John Kenneth Galbraith’s observation that one of the outstanding hallmarks of the financial world is “the extreme brevity of the financial memory.” Investors lose money over and over because they simply forget that cycles are inevitable and there’s no such thing as a free lunch. Now I’ve found a great quotation from Churchill, also reminding us that foresight comes largely from awareness of history. Along similar lines, I’m struck by the extent to which a related factor, inadequate skepticism, also contributes to investment losses. Getting the most out of a book, play or movie usually requires “willing suspension of disbelief.” We’re glad to overlook the occasional plot glitch, historical inaccuracy or physical impossibility because it increases our enjoyment. When we watch Peter Pan, we don’t want to hear the person sitting next to us say, “I can see the wires” (even though we know they’re there). While we know boys can’t fly, we don’t care; we’re just there for fun. But our purpose in investing is serious, not fun, and we must constantly be on the lookout for things that can’t work in real life. In short, the process of investing requires a strong dose of disbelief.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: What’s Your Game Plan? As the summer ends, my thoughts turn to the tennis game I’ve been hoping to improve, the baseball season that’s moving toward a conclusion, and the football season that’s just getting started. It’s enough to remind me of the role sports play in our lives . . . and in our thoughts about investing. UHow Oaktree Plays the Game Sometimes I feel I should apologize for the frequency with which I use sports metaphors to express my views on investing. And I worry that they’ll fall flat in Europe and Asia. But that doesn’t seem to stop me. “The key to investment success isn’t hitting home runs; it’s avoiding strikeouts and inning-ending double plays.” I say this over and over . . . and over . . . as you’ve no doubt experienced. But I truly believe it. Investing is a testosterone-laden world where too many people think about how good they are and how much they’ll make if they swing for the fences and connect. Ask some I-know-school investors to tell you what makes them good, and you’ll hear a lot about home runs they’ve hit in the past and the home runs-in-the-making that reside in their current portfolio. How many talk about consistency, or the fact that their worst year wasn’t too bad? One of the most striking things I’ve noted over the last 35 years is how brief most outstanding investment careers are.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients Only From: Howard Marks Re: Latest Update I’m going to do all I can to provide information and views throughout this crisis, albeit perhaps without the kind of narrative or literary flourish I usually try for. Flattening the Curve The spread of the virus has been described as “exponential.” Most people use this word without understanding precisely what it means. In short, exponential growth is the real-world version of what people in our business refer to as compounding. In other words, there’s a growth percentage, and the parameter in question increases by that percentage every period. Thus the rate of growth is constant, but the magnitude of the increase grows in each period. For years, we’ve talked about things on the Internet “going viral.” This is what exponential growth means. If the number of daily new cases grows at a constant 10% (almost certainly a substantial understatement in the current case), and we start with 100 new cases on day 1, there will be 110 new cases on day 2; 121 on day 3; 133 on day 4; and 146 on day 5. The ultimate potential number of daily new cases is ugly. If the number of new cases continues to grow at 10% per day, there will be 1,745 new cases on day 31. (I’m very sorry to have to write about a number like that.) Short-term success in fighting the virus isn’t described in terms of eliminating the disease but rather “flattening the curve.

© 2026 Oaktree Capital Management, L.P All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: AI Hurtles Ahead When I was preparing to write my December memo about artificial intelligence, Is It a Bubble?, I gained a great deal from speaking with some interesting techies in their thirties and forties. It’s stimulating to explore fresh territory and an absolute requirement for staying current as an investor. It’s one of the most enjoyable parts of my job. I recently returned to those people to follow up on the December memo. As part of that process, someone suggested I ask Claude, Anthropic’s AI model, to create a tutorial explaining artificial intelligence and the changes that have taken place in the last three months. I did so, and it gave me a great deal to work with. This resulting memo is intended as an addendum to December’s. Much of it will recap Claude’s 10,000- word essay, to which I’ll add a few observations of my own. In the process, I’ll highlight some terms that were new to me and might be new to you. I could have saved myself a lot of time by asking Claude to write this memo, but I decided not to, because I consider putting words on paper a big part of the fun. I will, however, quote liberally from Claude’s work product. That’ll be the source of all quotations that aren’t otherwise identified. Before I start in, I want to try to communicate the level of awe with which I viewed Claude’s output.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: bubble.com The book "Devil Take the Hindmost" by Edward Chancellor does an excellent job of chronicling the history of financial speculation. In doing so, it recounts the story of "the South Sea Bubble" and provides a backdrop against which I'd like to examine some of the events of today. The South Sea Company was formed in 1711 to help deleverage the British government by assuming some of the government's debt and paying it off with the proceeds of a stock offering. In exchange for performing this service for the Crown, the company received a monopoly for trading with the Spanish colonies in South America and the exclusive right to sell slaves there. Demand for the company's stock was strong due to the expectation of great profits from these endeavors, although none ever materialized. In 1720, a speculative mania took flight and the stock soared. Sir Isaac Newton, who was the Master of the Mint at the time, joined many other wealthy Englishmen in investing in the stock. It rose from £128 in January of l720 to £1,050 in June. Early in this rise, however, Newton realized the speculative nature of the boom and sold his £7,000 worth of stock. When asked about the direction of the market, he is reported to have replied “I can calculate the motions of the heavenly bodies, but not the madness of the people.

Memo to: Oaktree Clients From: Howard Marks Re: Warning Flags For about a year, I’ve been sharing my realization that there are two main risks in the investment world: the risk of losing money and the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can’t eliminate both. One of the prominent features of investor psychology is that few people are able to (a) always balance the two risks or (b) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one . . . and in so doing make the other the one deserving attention. During bull markets, when asset prices are elevated, there’s great risk of losing money. And in bear markets, when everything’s at rock bottom, the real risk consists of missing opportunity. Everyone knows these things. But bull markets develop for the simple reason that most people are buying – ignoring the risk of loss in order to keep from missing opportunity – just when elevated prices imply losses later. Likewise, markets reach their lows because most people are selling, trying to avoid further losses and ignoring the bargains that are everywhere. The Never-Ending Cycle Why do people buy when they should sell, and sell when they should buy? The answer’s simple: emotion takes over. Price increases excite investors and encourage them to buy, and price declines scare them into selling.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: What's It All About, Alpha? With apologies to Burt Bacharach and Dionne Warwick, whose 1966 rendition for the movie "Alfie" was much more artistic, I couldn't resist adapting their title for a memo on investment theory. What's it all about, indeed? Everyone talks about alpha . . . and beta, risk and return, and efficiency and inefficiency. But I believe few people use them to mean the same thing, or correctly. Thus the thinking I did about alpha while writing "Safety First" in April has convinced me to set out my views on all of these subjects. In this connection, my 1967-69 attendance at the University of Chicago Graduate School of Business was pivotal. I had previously been at a non-theoretical Wharton, where I learned investment practice à la Graham and Dodd but not one word on what I'm about to discuss. At Chicago I found a new theory of investments that would revolutionize the field. My exposure to it was eye-opening and kept me from becoming an unquestioning member of what I call the "I know" school of investing (where people think a little effort is all it takes to know the future direction of any stock or market). The 32 years since Chicago have given me enough time to forget a lot of the theory I learned . . . but also, most importantly, the real-world experience needed to leaven it, leading to my own synthesis of theory and practice.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Will It Work? The other day, my son Andrew – college senior and credit-analyst-to-be – asked whether I think Treasury Secretary Geithner is doing the right things. As has happened before, his question elicited a fatherly response that grew into this memo. When you want a bridge built, you hire a civil engineer whose “calcs” will determine exactly how much concrete and steel should be used. Then it’ll be sure to hold the weight of the cars you expect to cross it. And if you have to perform a task in carpentry, you can employ specialized tools developed and tested expressly for the job: esoteric things like miter boxes, routers and extractors. One of the most important things to bear in mind today is that economics isn’t an exact science. It may not even be much of a science at all, in the sense that in science, controlled experiments can be conducted, past results can be replicated with confidence, and cause-and-effect relationships can be depended on to hold. It’s not for nothing that economics is called “the dismal science.” Solutions in economics aren’t nearly as dependable as engineers’ calculations, and there may not be a tool that’s just right for fixing an economy.

© Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree High Yield Bond Clients From: Howard Marks and Sheldon Stone Re: High Yield Bonds Today Clients often ask for our views on the high yield bond market: “Do we think prices are too high?” “Are yields too low?” “What returns can we expect next year?” We caution them that it’s nearly impossible to accurately predict these things, and anyone who makes such forecasts is unlikely to be right. These days the question is primarily whether high yield bonds are in a bubble and poised to collapse, given last year’s strong performance and today’s historically low yields. We don’t think high yield bonds are any more vulnerable to rising rates than other fixed income instruments. We don’t downplay the risk in the market nowadays and the fact that bond prices are quite high. However, the situation isn’t unique to high yield bonds; rather, it is true of virtually all bonds and reflects the concerted effort on the part of central banks around the world to hold down interest rates. Yields are at historic lows and prices are unusually high all across the fixed income spectrum.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Calibrating I set a personal record by writing four memos in the month of March, responding to the rapidly unfolding coronavirus crisis. The task was made easier by the dearth of available data, meaning I was able to proceed without doing much research, mostly providing personal views. In the first of the four memos, Nobody Knows II, I described the distinction made by Harvard epidemiologist Marc Lipsitch. He said there are (a) facts, (b) informed extrapolations from analogies to other viruses and (c) opinion or speculation. At that point, I thought the scientists were trying to make informed inferences, and there wasn’t enough data regarding the novel coronavirus to enable them to turn those inferences into facts. I also noted that anything a non-scientist said was highly likely to be a guess. In that vein, I wrote the following to an Oaktree colleague last week: “These days everyone has the same data regarding the present and the same ignorance regarding the future.” That pretty much sums up the state of affairs. Most of what we have today is opinion, and much of it tilts either optimistic or pessimistic. The gulf in between is massive: if you read just the optimistic pieces, you’d think the virus will soon be eradicated and the economy brought back to health, and if you read just the negative ones, you’d think we’re all done for.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: What's Going On? In recent months, a few Oaktree clients have asked me to take part in give-and-take sessions with their investment staffs and other money managers. The discussions have revolved around changes in the investment environment and the implications for the future. The process of thinking about those subjects has given rise to this memo. UA Sweeping Change In the last three years, there have been massive changes in markets, investment thinking, expectations and behavior. The term "paradigm shift" certainly is overused, but in this case I don't think it's off target. During the 1990s and for many years prior, institutional investors such as pension funds and endowments targeted returns of 8-10 %. The task of appropriately allocating assets was made easy by the universal expectation (accompanied by sixty-plus years of supporting data) that stocks "normally" return 9-11 % per year. When the main engine of a portfolio's performance can be counted on for returns that exceed what's needed overall, asset allocation is a relatively easy task. Put a substantial majority of the portfolio in stocks, add a few bonds in a nod to conservatism and an allocation to private equity for spice, and the job's done. The only question was what you wanted your return to be (within the range of 8-10%), and the solution was found in the magnitude of your equity allocation.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: How's the Market? April 5 was just another ordinary day in the market, with big gains achieved and records broken. The Wall Street Journal article about it on April 6 was ordinary too, like hundreds that have been written in this bull market. I was struck, though, by the way it told in just a few paragraphs the whole story of what's been going on. UJust another dayU - On the surface, the aggregate stock market numbers continued to be very positive, with the Dow up 175 points, or 1.8%, to a new record. The S&P 500 was up 2.1% and the Nasdaq Composite Index was up 2.7%. Even on this day of huge aggregate gains, however, participation was still relatively narrow. Almost as many stocks were down (1,318) as up (1,695). Moreover, more stocks set new 52-week lows (81) than set new highs (73). This reminded me about the reliance of the market on just a few issues: In the first quarter of this year, 18 stocks accounted for Uall Uof the 5% rise in the S&P 500, (that's right, the other 482 stocks averaged a zero return). 55% of the stocks in the S&P lost money, and the Russell 2000 index of second tier stocks Udeclined U5.4%. UFollow the leaderU -- So the leadership continued to be concentrated, as everyone knows, in just a few stocks. Yahoo gained 22% on the day, and Amazon.com was up 9%.

© 2025 Oaktree Capital Management, L.P All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Cockroaches in the Coal Mine Pardon the mixed metaphor, but I couldn’t resist. Jamie Dimon, Chairman and Chief Executive Officer of JP Morgan Chase, whose comments are always insightful and direct, said the following last month with regard to the bankruptcy filings from First Brands, an auto parts supplier, and Tricolor, a seller of and subprime lender against used cars: “My antenna goes up when things like that happen. And I probably shouldn’t say this, but when you see one cockroach, there are probably more . . . everyone should be forewarned on this one.” And we all know that coal miners used to bring along a canary when they entered a mine, since its tiny body would succumb to any gas that was present before the gas could pose a threat to the miners. Both the cockroach and the canary can be precursors of problems ahead. We’ve heard both sayings in use in the last month, and we’re likely to hear them more. One of the most prominent characteristics of the financial markets that I’ve detected over the years is their tendency to obsess over a single topic at a given point in time. The topic eventually changes to another, but before it does, it’s often the thing people want to discuss to the near exclusion of everything else. Today it’s the recent string of episodes in sub-investment grade credit.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Dare to Be Great II In September 2006, I wrote a memo entitled Dare to Be Great, with suggestions on how institutional investors might approach the goal of achieving superior investment results. I’ve had some additional thoughts on the matter since then, meaning it’s time to return to it. Since fewer people were reading my memos in those days, I’m going to start off repeating a bit of its content and go on from there. About a year ago, a sovereign wealth fund that’s an Oaktree client asked me to speak to their leadership group on the subject of what makes for a superior investing organization. I welcomed the opportunity. The first thing you have to do, I told them, is formulate an explicit investing creed. What do you believe in? What principles will underpin your process? The investing team and the people who review their performance have to be in agreement on questions like these:  Is the efficient market hypothesis relevant? Do efficient markets exist? Is it possible to “beat the market”? Which markets? To what extent?  Will you emphasize risk control or return maximization as the primary route to success (or do you think it’s possible to achieve both simultaneously)?  Will you put your faith in macro forecasts and adjust your portfolio based on what they say?  How do you think about risk? Is it volatility or the probability of permanent loss?

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Hey, Steward!! Webster’s defines a “steward” as a household manager, union representative, fiscal agent or one who attends passengers while traveling. Some of these concepts have become less relevant in today’s world.  Before World War II, ocean voyage was the main mode of transportation abroad, and the steward was someone passengers depended on for their welfare.  When plane travel took over from ships, it was the stewardess (and then in the 1980s, the steward again) who played the same essential role. Of course, in the 1990s, political correctness caused “stewardess” and “steward” to disappear in favor of “flight attendant.”  The trade union movement has depended heavily on the work of the shop steward, the union representative closest to the men and women of the rank-and-file.  And when I started in the investment management business in the 1960s, those who managed money for others thought of themselves – and were thought of – as stewards of their clients’ money. They aimed to protect their clients from loss and generate a reasonable – even an attractive – return as long as it could be done with risk in check. With the passage of time, I find I hear the word “steward” less and less. But in talking about the mutual fund irregularities that have been exposed in the last few months, I cannot help but borrow a phrase from Jack Bogle that employs it.

Memo to: Oaktree Clients From: Howard Marks Re: Dare to Be Great In one of the most colorful vignettes of the early 1970s, Glenn Turner, the head of Koscot Interplanetary, would fly into a small Midwestern town in his Learjet (when that was a huge deal). Two dwarfs would hop out and unroll a red carpet. Turner would emerge under a banner reading “Dare to Be Great” and vacuum up money through a pyramid marketing scheme based on selling motivational tapes containing the secret of getting rich. Turner’s long gone from the scene, but daring to be great still deserves our consideration, even in the absence of a surefire recipe for success. This memo stems from an accumulation of thoughts on the subject of how investment management clients might best pursue superior results. Typically my thoughts pile up, and then something prompts me to turn them into a memo. In this case, the impetus came while I read “Hedgehogging” by Barton Biggs. I’ll come back to it later. How Can We Achieve Superior Investment Results? The answer is simple: not only am I unaware of any formula that alone will lead to above average investment performance, but I’m convinced such a formula cannot exist. According to one of my favorite sources of inspiration, the late John Kenneth Galbraith: There is nothing reliable to be learned about making money. If there were, study would be intense and everyone with a positive IQ would be rich. Of course there can’t be a roadmap to investment success.

© 2026 Oaktree Capital Management, L.P All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: What’s Going on in Private Credit? The general field called “credit” has seen massive innovation over the course of my career. Its popularity has increased steadily, and its scale and role in the world of finance have multiplied. The other day, an Oaktree colleague asked me about the developments that brought the credit sector to where it is today. I came up with the following list: Time of Inception 1970s Acceptance of non-investment grade debt 1980s Popularization of leveraged buyouts and increased corporate leverage 1990s Broadly syndicated loans and tranched securitizations 2000s The rising trend toward “alternative” investments Sub-prime mortgage lending and mortgage-backed securities 2010s Expansion of direct lending 2020s Marketing of direct lending vehicles to individual and retirement investors The investment world I first encountered in the summer of 1968, consisting exclusively of stocks and high-grade bonds, seems quaint and provincial in retrospect given the developments listed above. These advances have transformed the investment management business, and Oaktree and its clients have been major beneficiaries. All the changes listed above involved – or were facilitated by – the thing now broadly called “credit” – essentially non-government debt. I’ll lay out a brief chronology to set the scene.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Whad’Ya Know? I always ask Nancy to read my memos before I send them out. She seems to think being my wife gives her license to be brutally frank. “They’re all the same,” she says, “like your ties. They all talk about the importance of a high batting average, the need to avoid losers, and how much there is that no one can know.” Well, I guess I do tend to go on about everything that investors would like to know but is unknowable . . . and about all the people who claim to know it. But I’ve saved up some good stuff for a “rant” regarding the “I know” school people who think they know but don’t. So here I go again (with apologies for the length). UThe “Jumbo Shrimp” of Investing One of my favorite oxymorons is “common knowledge.” Knowledge just isn’t that common, and that which is common often contains little knowledge. On February 4, USA Today cited a strategist as saying “there might be a silver lining to the current investor backlash, because a lot of cash is piling up on the sidelines, and the heavy selling has wrung out most of the downside.” Everyone knows the stock market can’t stop sliding and begin a new bull phase rally until some cash has piled up on the sidelines. And thus everyone wants to see selling exceed buying. That seems eminently reasonable. And that’s what makes it one of my greatest pet peeves.

© Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: Ditto Here’s how I started Whad’Ya Know in March 2003: I always ask Nancy to read my memos before I send them out. She seems to think being my wife gives her license to be brutally frank. “They’re all the same,” she says, “like your ties. They all talk about the importance of a high batting average, the need to avoid losers, and how much there is that no one can know.” The truth is, anyone who reads my memos of the last 23 years will see I return often to a few topics. This is due to the frequency with which themes tend to recur in the investment world. Humans often fail to learn. They forget the lessons of history, repeat patterns of behavior and make the same mistakes. As a result, certain themes arise over and over. Mark Twain had it right: “History doesn’t repeat itself, but it does rhyme.” The details of the events may vary greatly from occurrence to occurrence, but the themes giving rise to the events tend not to change. What are some of my key repeating themes?

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Doesn’t Make Sense Academics have their theories about market efficiency. Because market participants are well-informed and rational, they say, markets make correct decisions and smoothly assign the right price to each asset. It’s for this reason that investors can’t routinely find the mispricings they need in order to be able to beat the market. But investors – and most of the people living on this planet, for that matter – are far from the unemotional computing machines the academics assume them to be. They make faulty decisions, fall for scams and swing from one irrational position to another all the time. In fact, I marvel at how many things take place in the worlds of business, investments and politics that stem from irrationality and just don’t make sense. It’s my purpose here to write about a few. ULetting the Market Call the Tune In “Whodunit,” I talked about Chuck Prince, the ex-CEO of Citigroup. Early in July of 2007, he astutely observed, “When the music stops, in terms of liquidity, things will get complicated.” However, he went on to add, “as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Because Citigroup danced as much as the other banks or more – and lost as much or more on subprime-related write-downs – Prince lost his job in November 2007.

Memo to: Oaktree Clients From: Howard Marks Re: Hemlines While the details change, the pendulum-like fluctuation of investment styles is a constant. Fear versus greed, pursuit of safety versus aggressiveness, stocks versus bonds, and growth versus value are just a few examples of the areas in which we see this take place. In this way, the investment world proves the wisdom of Mark Twain’s observation that, “History doesn’t repeat itself, but it does rhyme.” The limits of the pendulum’s swing are fixed, and it tends to move back and forth over the territory between them. This occurs because (a) people tend to take trends to extremes, (b) neither extreme of the pendulum’s arc represents a perfect or permanent solution, and (c) there’s no place else to go in these regards. Thus the best way to view investment trends may be through an analogy to hemlines: all they can do is go up and down, and so they do. The style mavens call for short skirts, and people fall into line, raising hemlines until they’re as high as they can go. And then they drop (and so forth). The reasons behind the rise and fall of investment fashions rarely repeat exactly, in that the details, timing and effects vary from instance to instance. But the underlying process is a recurring one. For example:  An idea is born when an undervalued asset is discovered.  Its undervaluation attracts attention, as do pioneering investors’ early gains.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: You Bet! As I’ve written in past memos, I have an indelible recollection of the first book I read as a Wharton freshman in 1963. The book was Decisions Under Uncertainty: Drilling Decisions by Oil and Gas Operators by C. Jackson Grayson, Jr. (who in 1971 would take on the role of “price czar” in the Nixon administration’s efforts to get inflation under control). The best and most lasting thing I took away from Grayson’s book – and the first thing I remember learning in college – was the observation that you can’t tell the quality of a decision from the outcome. This revelation had a profound influence on me as a 17-year-old and represented the first critical building block in my understanding of how the world works. As Grayson explained, you make the best decision you can based on what you know, but the success of your decision will be heavily influenced by (a) relevant information you may lack and (b) luck or randomness. Because of these two factors, well-thought-out decisions may fail, and poor decisions may succeed. While it might seem counterintuitive, the best decision-maker isn’t necessarily the person with the most successes, but rather the one with the best process and judgment. The two can be far from the same, and especially over a small number of trials, it can be impossible to know who’s who.

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Yet Again? “There They Go Again . . . Again” of July 26 has generated the most response in the 28 years I’ve been writing memos, with comments coming from Oaktree clients, other readers, the print media and TV. I also understand my comments regarding digital currencies have been the subject of extensive – and critical – comments on social media, but my primitiveness in this regard has kept me from seeing them. The responses and the time that has elapsed have given me the opportunity to listen, learn and think. Thus I’ve decided to share some of those reflections here. Media Reaction The cable news shows and blogposts delivered a wide range of reactions – both positive and negative. The best of the former came from a manager who, when asked on TV what he thought of the memo, said, “I’d like to photocopy it and sign it and send it out as my quarterly letter.” Love that guy. I haven’t spent my time reveling in the praise, but rather thinking about those who took issue. (My son Andrew always reminds me about Warren Buffett’s prescription: “praise by name, criticize by category.” Thus no names.) Here’s some of what they said: 1. “The story from Howard Marks is ‘it’s time to get out.’ ” 2. “He’s right in the concept but wrong to execute right now.” 3. “The market is a little expensive, but you should continue to ride it until there are a couple of big down days.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: Down to the Wire Here are the ingredients in the plot: A problem everyone’s aware of. If it isn’t resolved, a shutdown with unspecified but possibly disastrous consequences. A deadline which seems indispensable, since in its absence it appears nothing would be done. And despite the presence of the oncoming freight train, movement toward a solution is deterred by highly entrenched positions. It’s truly white-knuckle time, and if the progress toward a solution continues to lag, the things that must happen won’t. I’m not talking about the nearly concluded drama at the National Football League, where failure to reach a labor settlement for just a few more days would have caused significant changes in the schedule for the coming year, upsetting the flow of wealth to owners and players and depriving fans of the game they love. I’m talking about the down-to-the-wire battle over the U.S. debt ceiling. I’ve decided to devote a memo to the debt issue and its significance. I especially hope it’ll be helpful to our non-U.S. clients, for whom the lack of progress to date must be absolutely incomprehensible. Interestingly, the immediate debt crisis is somewhat artificial. It is occasioned now only because of our debt ceiling, which currently limits the net debt of the United States to $14.29 trillion. Such ceilings are far from the norm worldwide.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: Déjà Vu All Over Again What good is history? After all, it‟s in the past. The truth is, history can be one of our greatest aids . . . in investing as in life. Here in the fifth decade of my investment career, I feel a lot of my ability to add value comes from the amount of history I‟ve witnessed and the significance I‟ve extracted from it. Regular readers know I often include time-tested quotations in my memos. Why wouldn‟t I? They‟ve endured precisely because they‟re so relevant and so well put. Why try to reinvent the wheel, rewriting them, only to come up short? On this subject, several stand out. I‟ve used them all before, some more than once: Those who cannot remember the past are condemned to repeat it. (George Santayana) The farther back you can look, the farther forward you are likely to see. (Winston Churchill) History doesn‟t repeat itself, but it does rhyme. (Mark Twain) Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again . . . they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery . . . .

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Whodunit who·dun·it – (hōō dun´ it) n. a narrative dealing with a murder or a series of murders and the detection of the criminal (The Random House Dictionary of the English Language) The subprime crisis, credit crunch and possible recession are subjects of daily conversation. In addition to wanting to talk about how things got this way and what’s going to happen in the future, a lot of people are eager to discuss who’s to blame. It’s the purpose of this memo to say where I think responsibility lies. UThe Subprime Factory I’ve heard it said about laws that, “like sausages, you don’t want to see how they’re made.” I’d like to suggest something else where the manufacturing process was particularly distasteful: subprime mortgages. This decade’s vast expansion of the subprime factory originated in the ability of Wall Street to sell a lot of mortgage-related Collateralized Debt Obligations, or CDOs. The high interest rates on subprime mortgages enabled the Street to promise a lot of return on the lower CDO tranches and a lot of safety on the upper ones. With high-enough ratings, the debt looked very attractive to potential buyers. Thus, there was a use for large amounts of the underlying raw material: subprime mortgages. It happened, however, that Wall Street could sell more bologna sandwiches than there was bologna.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Economic Reality Addendum, June 13: There’s been a lot of response since the memo that follows was originally published on May 26. In the discussions that have ensued, I realized that I should have led with something like this: Ultimately, economics is the study of choice. Because choices range over every imaginable aspect of human experience, so does economics. . . . How do individuals make choices: Would you like better grades? More time to relax? More time watching movies? Getting better grades probably requires more time studying, and perhaps less relaxation and entertainment. Not only must we make choices as individuals, we must make choices as a society. Do we want a cleaner environment? Faster economic growth? Both may be desirable, but efforts to clean up the environment may conflict with faster economic growth. Society must make choices. . . . We would always like more and better housing, more and better education – more and better of practically everything. If our resources were . . . unlimited, we could say yes to each of our wants – and there would be no economics. Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. Whether we like it or not, we must make choices.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients and Friends From: Howard Marks Re: How the Game Should Be Played One of the questions asked most often in connection with our leaving to form Oaktree - - perhaps second only to "where'd the name come from?" -- is “why did you do it?" The answer is that we concluded we had an opportunity to create our own investment management firm, all of which would run our way, according to our philosophies, beliefs and standards. But what do we mean when we say "our way?" Well, an article about sports in the April 2 New York Times Sunday Magazine provided an excellent metaphor through which to illustrate the point. In it, the author wrote of Babe Ruth that he represented . . . The Credo of the Home Run: A man can never be faulted, even if he's wrong, for the bold, aggressive action in pursuit of victory; a real man must be willing to strike out, to go down swinging. I believe this is the way much of the investment world thinks, but it's Uthe opposite of what we believe in.U In fact, I wrote a memo in 1990 to take issue with a money manager who justified his poor recent performance by saying "If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too." "Our way" is UneverU to tolerate poor performance, and certainly not to consider it an acceptable side-effect of swinging for the fences.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Go Figure! Think back to just before last week’s election. What did we know?  The polls were almost unanimous in saying Hillary Clinton would win the popular vote by about 3%.  FiveThirtyEight, an analytical website whose forecasts had proved quite accurate in the two prior presidential elections, gave Clinton a 71% probability of winning, and almost everyone else was between 80% and 90%.  Clinton was favored in most of the “swing states” that would make the difference in the Electoral College. Thus she was expected to win more than 290 electoral votes, leaving just 250 or so for Donald Trump.  Clinton was the obvious choice of the people who move the markets. This could be seen in the fact that the markets went up when Clinton’s odds improved in late October (recovering from some unpleasant Wikileaks disclosures), and then they fell after the FBI’s James Comey announced the discovery of an additional cache of Clinton emails on October 28, lifting Trump’s chances.  Thus there was a near-universal belief that a Trump victory – as unlikely as it was – would be bad for the markets. So what happened? First Clinton didn’t win. There’s much soul-searching, particularly among the forecasting fraternity. Everyone knew intellectually that Trump had a non-zero chance of winning, but few people thought it could actually happen. And second, the U.S.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: What Can We Do For You? We’d love to be able to “do it all” for our clients and give them everything they hope for. It would be great if we could predict what economies and markets will do, move in and out with perfect timing, foresee which industries and companies will fare best, and hold only the securities with the highest returns. But to paraphrase John Kenneth Galbraith on forecasters, I feel there are two kinds of investment managers: those who can’t do these things and those who don’t know they can’t do these things. At Oaktree we’ve always emphasized being brutally honest – with ourselves and with our clients – about what we can and cannot do. Some managers claim to be able to do it all. Either they really think they can, or they think to be successful they have to pretend they can. The late Amos Tversky of Stanford University made it quite clear which is preferable: It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on. In any endeavor involving uncertainty, not knowing what lies ahead isn’t nearly as bad as thinking you know if you don’t.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: What Worries Me Especially in times like these, people often ask what keeps me up at night. Well I’ll tell you a few things it’s not: that Oaktree will suddenly depart from its investment philosophy; that some of our accounts will trail their benchmark for a year; or that the markets will be so weak that we can’t earn returns (or so strong that there aren’t any bargains). And it’s certainly not that I’ll meet up with that bus I hear so much about. My real worries concern the big picture and the long term. Most of them have to do with America’s future and the world in which my children and grandchildren will live. In this regard, I think there’s a lot to worry about. I’m not going to spend this memo discussing things as mundane as investment cycles, or as cosmic as environmental deterioration, global warming or terrorism. There’s enough to talk about in terms of largely economic issues without going into areas like those. And having covered them below, I promise to go back to my day job thinking about investments. I hope this memo will be well received. I fear some may think it’s un-American or unpatriotic, but I assure you I’m neither. It’ll certainly seem negative and dreary; I admit up front that I see the problems more clearly than the solutions. But I hope this memo will raise some questions in readers’ minds and contribute to constructive debate.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Etorre's Wisdom My memos evoke a wide variety of reactions. One I hear most often is "where do these ideas come from?" This memo will serve as a good example: it was inspired by a ride I took this summer with my son Andrew. That, in turn, reminded me of a clipping that's been sitting in my files since the early 1970s. The newspaper article, entitled "The laws that rule frustrating lives," enumerates a dozen principles that we suspect are at work on our bad days. Here are a few examples:  Everyone knows the first, Murphy's Law: If anything can go wrong, it will.  Fewer people, however, are conversant with O'Toole's Commentary: Murphy was an optimist.  There's a lot of truth in The Unspeakable Law: As soon as you mention something, if it's good, it goes away; if it's bad, it happens.  Every parent of a toddler has seen The Law of Selective Gravity in action: An object will fall so as to do the most damage.  But the one that's least controvertible is Etorre's Observation: The other line moves faster. While I was driving with Andrew he asked, as fifteen-year-olds are prone to, "Dad, why do you always have to drive in the slow lane? Why don't you switch to that one; it's moving faster?" As I wound up for a lengthy explanation, I recognized in his comment the greatest imaginable metaphor for investor behavior. What is it like to drive on our crowded highways?

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Everyone Knows _____________________________________________________________________________ par·a·dox n 1 a seemingly absurd or self-contradictory statement that is or may be true . . . 4 an opinion that conflicts with common belief. (Collins English Dictionary) I’m sometimes asked to speak about investing with the choice of topic wide open. I like to begin by saying the thing I find most interesting about investing is how paradoxical it is: how often the things that seem most obvious – on which everyone agrees – turn out not to be true. I’m not saying accepted investment wisdom is sometimes valid and sometimes not. The reality is simpler and much more systematic: What’s clear to the broad consensus of investors is almost always wrong. First, most people don’t understand the process through which something comes to have outstanding moneymaking potential. And second, the very coalescing of popular opinion behind an investment tends to eliminate its profit potential. I’ve been saving up ideas for a memo about how often the investing herd is wrong and accepted wisdom should be bet against. Then along came the March 1 issue of Mark Faber’s “Gloom, Boom and Doom Report” and its lead quotation from William Stanley Jevons (1835-1882).

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Expert Opinion In August, I mentioned that I had chosen the title “Political Reality” for my memo in part because of my liking for oxymorons. I classed that title with other internally contradictory statements, such as “jumbo shrimp” and “common sense.” Now I’m going to discuss one more: “expert opinion.” This memo was inspired by a thought that popped into my head when the outcome of the election settled in. You may point out that at the end of my November 14 memo “Go Figure!,” I said I wouldn’t write any more about politics. True, but I didn’t say I wouldn’t think about politics. Anyway, this memo isn’t about politics, it’s about opinions. Last spring I attended a dinner where one of Hillary Clinton’s senior advisers was soliciting input, as she and her campaign were struggling to come up with an effective counter to Bernie Sanders’s populist message. Most of those present expressed frustration on the subject, until an experienced, connected Democrat assured everyone, “Don’t worry. She’ll win. The math is irresistible.” The Hillary supporters were relieved, and he turned out to be right: she won the nomination going away. In late October, with the issue of Clinton’s private email server and the FBI’s new investigation further dogging her, that same seasoned Democrat was asked whether the election was in jeopardy. “Don’t worry,” he said. “She’ll win.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Fewer Losers, or More Winners? My memos got their start in October 1990, inspired by an interesting juxtaposition between two events. One was a dinner in Minneapolis with David VanBenschoten, who was the head of the General Mills pension fund. Dave told me that, in his 14 years in the job, the fund’s equity return had never ranked above the 27th percentile of the pension fund universe or below the 47 th percentile. And where did those solidly second-quartile annual returns place the fund for the 14 years overall? Fourth percentile! I was wowed. It turns out that most investors aiming for top-decile performance eventually shoot themselves in the foot, but Dave never did. Around the same time, a prominent value investing firm reported terrible results, causing its president to issue an easy rationalization: “If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too.” My reaction was immediate: “My clients don’t care whether I’m in the top 5% in any single year, and they (and I) have absolutely no interest in me ever being in the bottom 5%.” These two events had a strong influence on me and helped define my – and what five years later became Oaktree’s – investment philosophy, which emphasizes risk control and consistency above all.

© Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: The Outlook for Equities It doesn‟t take much to get me started on a memo. In this case one sentence was enough, in an article from the February 4 online edition of Pensions & Investments, as described by FierceFinance on February 28: “The long-term equity risk premium is typically between 4.5% and 5%.” There‟s little I hate more than investment generalizations. For years, for example, self-styled authorities on the high yield bond market would say “bond defaults typically take place 2-3 years after issuance.” That always set my teeth on edge. The time to default might average 2-3 years, but unless (1) that‟s also the most common time period (the mode) and (2) not a highly variable parameter (which I think it is), that generalization is absolutely useless. In fact, I like the way Mark Twain summed up on the subject more than 100 years ago: “all generalizations are false, including this one.” I consider most investment generalizations as useless as that great oxymoron: “common sense.” Back to equity risk premiums. The FierceFinance article in question led with the sentence, “The „great rotation‟ back into equities from bonds is unlikely to be seen in 2013 among most defined benefit pension funds in major markets, including the U.S., U.K. and Netherlands.

When Zhang took over as general manager of the Qingdao Refrigerator Plant (Haier's predecessor), it had annual sales of just 3.48 million yuan and a loss of 1.47 million yuan.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Calculus of Value On July 28, I flew to South America on a plane without Wi-Fi, leaving me without email or entertainment. What was I to do but start in on a memo? Interestingly, the things I wrote during that flight turned out to be the answers to many of the questions I received from clients after I landed, so writing what follows served me well. I hope it’ll do the same for you. * * * January 2 of this year was the 25 th anniversary of my memo bubble.com, the one that put my writing on the map, and I marked the occasion by publishing another memo, called On Bubble Watch. While the title may have raised concern for readers, my main conclusion was that the elevated U.S. stock market valuations at the time didn’t necessarily signal the existence of a bubble, mainly because I didn’t detect the extreme investor psychology I associate with bubbles. Security prices were “lofty but not nutty” is how I put it. Because a lot has taken place in the seven months since then, it’s time for an update on asset values. Before I start, please note that I’m talking about investing in general. My specific reference will be to public U.S. corporate securities – stocks and bonds – since they mark to market regularly and are the assets that most enter my consciousness.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Aviary Rather than dwell this time on a single subject, I want to cover a few. They may not seem related at first, but I believe they’re birds of a feather. UA Dead Duck While it’s important that we have a sense for where we stand in terms of the market cycle, figuring that out can require some sophisticated inference. It’s not often that we get crystal clear evidence of the pendulum’s swing, or get it in short order. That’s what makes the case I’ll describe so distinctive. “The Race to the Bottom” (February 2007) is one of my favorite memos. I think it presented clear evidence of the degree to which the pendulum of innovation and risk taking had swung to the undisciplined end of its arc. As I described, I was prompted to write it by an article in the Financial Times of November 1, 2006, which reported the following: Abbey, the UK’s second-largest home loans provider, has raised the standard amount it will lend homebuyers to five times either their single or joint salaries, eclipsing the traditional borrowing levels of around three and a half times salary. It followed last week’s decision by Bank of Ireland Mortgages and Bristol and West to increase standard salary multiples from four to 4.5 times.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Lessons of Oil I want to provide a memo on this topic before I – and hopefully many of my readers – head out for year- end holidays. I’ll be writing not with regard to the right price for oil – about which I certainly have no unique insight – but rather, as indicated by the title, about what we can learn from recent experience.  Despite my protestations that I don’t know any more than others about future macro events – and thus that my opinions on the macro are unlikely to help anyone achieve above average performance – people insist on asking me about the future. Over the last eighteen months (since Ben Bernanke’s initial mention that we were likely to see some “tapering” of bond buying), most of the macro questions I’ve gotten have been about whether the Fed would move to increase interest rates, and particularly when. These are the questions that have been on everyone’s mind. Since mid-2013, the near-unanimous consensus (with credit to DoubleLine’s Jeffrey Gundlach for vocally departing from it) has been that rates would rise. And, of course, the yield on the 10- year Treasury has fallen from roughly 3% at that time to 2.2% today.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Risk Revisited In April I had good results with Dare to Be Great II, starting from the base established in an earlier memo (Dare to Be Great, September 2006) and adding new thoughts that had occurred to me in the intervening years. Also in 2006 I wrote Risk, my first memo devoted entirely to this key subject. My thinking continued to develop, causing me to dedicate three chapters to risk among the twenty in my book The Most Important Thing. This memo adds to what I’ve previously written on the topic. What Risk Really Means In the 2006 memo and in the book, I argued against the purported identity between volatility and risk. Volatility is the academic’s choice for defining and measuring risk. I think this is the case largely because volatility is quantifiable and thus usable in the calculations and models of modern finance theory. In the book I called it “machinable,” and there is no substitute for the purposes of the calculations. However, while volatility is quantifiable and machinable – and can also be an indicator or symptom of riskiness and even a specific form of risk – I think it falls far short as “the” definition of investment risk. In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility.

At age 39, Su announced he was stepping down as CEO to focus on developing Kuaishou's long-term strategy, becoming the third Chinese tech billionaire that year (following ByteDance's Zhang Yiming and Pinduoduo's Colin Huang) to relinquish day-to-day operational control amid the government's tech-sector crackdown.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Risk The reading materials for a meeting of a corporate board on which I sit – and what turned out to be an eight-hour meeting of the audit committee (thank you, Messrs. Sarbanes and Oxley) – included an article by Rick Funston, a Principal of Deloitte & Touche LLP and its National Practice Leader for Governance and Risk Oversight. The subject of the article was corporate risk, but many of its points were equally applicable to investment risk. It got me thinking. We’re all preoccupied with the quest for excellent investment returns, and most of us understand that risk management has a lot to do with achieving them. From there, investment orthodoxy often takes over, with the discussion turning to the relationship between return and volatility. But I think that tells so little of the story that I’ve decided to devote an entire memo to the subject of risk. 0BUWhy Does Risk Matter? When I joined the investment management industry at the tail end of the 1960s, everyone talked about returns but few people talked about risk-adjusted returns, or the idea that risk matters. I was fortunate, however, to have attended the University of Chicago in the preceding years, during which Capital Market Theory had begun to be discussed. Of course, nothing underlies the Capital Market approach as much as the relationship between risk and return.

Following Beijing's crackdown on the once high-flying off-campus tutoring sector, Yu made his debut as a live-streaming e-commerce host on ByteDance-owned Douyin, where he reiterated plans to launch a live-streaming e-commerce platform for farm products.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Impact of Debt My partner Bruce Karsh recently supplied me with a newspaper article about chess that inspired me to write a brief memo called The Indispensability of Risk. The response to the memo was favorable, hopefully because people found the content valuable, but quite possibly because it was only three pages long versus the usual ten to twelve. Thus encouraged, I’m following up with another short memo. One of my more interesting sources for readings on practical philosophy – including investment philosophy – is the blog from the Collaborative Fund to which Morgan Housel, a fund partner, is a regular contributor. As I read Housel’s musings, I often find myself saying, “that’s right in line with what I think.” And at other times, I say, as I hope others say after reading my memos, “I never thought of it that way.” I found Housel’s April 30 article, entitled “How I Think About Debt,” particularly interesting. The subject is the impact of debt on longevity, and it really boils down to a discussion of risk, one of my favorite topics. Housel starts by discussing the 140 businesses in Japan that are still operating more than 500 years after they were founded and the few that are purportedly more than 1,000 years old.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Safety First . . . But Where? Are you from the old school? Do the following terms sound familiar?  fiduciary duty  preservation of capital  risk aversion  dividend yield Although in common use prior to the 1980s, they've been heard less and less since then. For this reason, a score of zero means you are completely modern, two means you're so- so, and four means you are far behind the times. I fall solidly into the last category. That means much of what I heard and read in the late 1990s made absolutely no sense to me. Of course, just as momentum investing eventually gives way to contrarianism (and vice versa), periods when carefree investing is highly rewarded eventually come to an end, as happened in 2000. I am writing to explore the question of where to look for successful investments when sheer aggressiveness stops paying off. "A-B-C," my Uncle Jack used to say when he taught me how to cross the street, "always be careful. Stop and look both ways." Most of us start off that way, but after a period when few cars come and the people who rush headlong get there fastest, caution sometimes is cast aside. Just as standing frozen with fear is no way to move ahead, investors occasionally are issued a reminder that not worrying about danger can be just as foolish. Pursuit of return must be balanced against aversion to risk.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The New Paradigm When I was a kid, no one ate kiwi fruit or heirloom tomatoes – or had ever heard of them, for that matter. And then, all of a sudden, they were everywhere. The same is true for the word “paradigm”: no one had heard the word, and then one day it was part of everyday speech, especially that of management consultants and other savants. “Paradigm” seems to invariably be used along with the word “new.” No one ever talks about the old paradigm. Just as there’s newness to the word, there’s usually newness to the subject it describes. And there’s usually a connotation that the new paradigm represents progress. I believe a new paradigm has taken hold in the investment world, bringing with it vast changes – and not necessarily for the better. The situation today is very different from that of just five or six years ago, and the implications for the future are nothing short of profound. But I haven’t seen this overall subject given much attention. UThe Good Old Days In the old days – meaning prior to the current millennium – the investment world was different from that of today in a number of important ways:  Risk capital was in limited supply.  Risk aversion was reasonably present, such that in order for risky investments to be undertaken, that risk aversion had to be overcome by high promised returns.

NPR opens by noting the Poonawallas — Cyrus as founder and Adar as CEO of Serum Institute — run the world's largest vaccine-producing company in the world's largest vaccine-producing nation. Serum makes vaccines for measles, tetanus, diphtheria, hepatitis and many other diseases, specializes in generic versions, exports to 170 countries, and estimates that two-thirds of the world's children are inoculated with its vaccines.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Sea Change sea change (idiom): a complete transformation, a radical change of direction in attitude, goals . . . (Grammarist) In my 53 years in the investment world, I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes. I think we may be in the midst of a third one today. As I’ve recounted many times in my memos, when I joined the investment management industry in 1969, many banks – like the one I worked for at the time – focused their equity portfolios on the so-called “Nifty Fifty.” The Nifty Fifty comprised the stocks of companies that were considered the best and fastest-growing – so good that nothing bad could ever happen to them. For these stocks, everyone was sure there was “no price too high.” But if you bought the Nifty Fifty when I started at the bank and held them until 1974, you were sitting on losses of more than 90% . . . from owning pieces of the best companies in America. Perceived quality, it turned out, wasn’t synonymous with safety or with successful investment. Meanwhile, over in bond-land, a security with a rating of single-B was described by Moody’s as “failing to possess the characteristics of a desirable investment.

Li was born in a rural village in Dangshan County, Anhui, in 1951, graduated from the University of Science and Technology of China with a bachelor's degree in low-temperature physics, and worked as a researcher assisting scholars in Wuhan, Hubei and in France (including as a visiting scholar at Paris-Sud University) from 1976 to 1987.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Anatomy of a Rally The background is well known to all. • On February 19, the U.S. stock market hit a new all-time high, with the S&P 500 reaching 3,386. • Then investors began to price in the novel coronavirus, causing the market to make its fastest trip ever into bear territory, with the S&P 500 down 34% in five weeks to a low of 2,237. • That low was reached on March 23, the day the Fed announced a major expansion of its response to the Covid-19-induced shutdown of the U.S. economy. • Following that, the stock market – along with the credit markets – began a recovery of massive proportions. The advance started off with a bang – a 17.6% gain for the S&P 500 on March 24-26, the biggest three-day advance in more than 80 years – and by June 8 it had lifted stocks from the low by almost 45%. The market rose on 33 of the 53 trading days between March 24 and June 8, and on 24 of those 33 up days (including the first nine in a row), it gained more than one percent. By June 8, the S&P 500 was down only 4.5% from the February peak and even for the year to date. I’m writing to take a closer look at the market’s rise and where it leaves us. The goal as usual isn’t to predict the future but rather to put the rally into perspective. The questions I get are always indicative of what’s going on in investors’ minds at the time.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Folly of Certainty The impetus for my memos can come from a wide variety of sources. This one was inspired by an article in The New York Times on Tuesday, July 9. What caught my eye were a few words in the sub-headline: “She doesn’t have any doubt.” The speaker was Ron Klain, a former Biden chief of staff. The subject was whether President Biden should continue to run for reelection. And the “she” was Jen O’Malley Dillon, Biden’s campaign chair. The article went on to quote her as having said, “Joe Biden is going to win, period,” in the days just before his June 27 debate against former President Donald Trump. And, with that, I had the subject of this memo: not whether Biden will continue campaigning or drop out – or whether he’ll win if he continues – but rather how anyone can be without doubt. It’ll be another of my “shortie” memos given the uncertain shelf life of the Biden candidacy. This choice of subject calls to mind another time I heard a highly credentialed person express absolute certainty. In that case, an acknowledged expert in foreign affairs told a group I was part of there was “a 100% probability that the Israelis would ‘take out’ Iran’s nuclear capability before year-end.” He seemed like a genuine insider, and I had no reason to doubt his word.

Page 1 1220 Roosevelt, Suite 200 Tel. +1949.453.0609 Irvine, CA 92620-3675 mp@pabraifunds.com USA www.pabraifunds.com To: All Limited Partners and Investors of the Pabrai Investment Funds From: Mohnish Pabrai, Managing Partner Date: January 18, 2021 Re: 2020 Results, etc. Dear Partners: Happy New Year! December 31 was our annual redemption date. A total of $44 million was redeemed from the various funds in 2020. The redemptions on a per fund basis are: PIF2: $9.5 million PIF3: $9.5 million PIF4: $25.0 million For the quarter ended December 31, 2020, a total of $4.2 million was added to the various funds by new and existing partners. The additions on a per fund basis are: PIF2: $3.7 million PIF4: $0.5 million The funds are currently open to new and existing Pabrai investors to add funds. The next opening is April 1, 2021. PIF2 is the oldest fund and has been closed to new investors for many years. It has just 100 slots and those were all used up several years ago. Over the years we’ve had a few redemptions and this has opened up about 8 slots. PIF2 is open to US-based investors who are qualified clients. The minimum investment to join PIF2 as a new partner is $4 million. PIF3 is our offshore fund for non-US accredited offshore investors, and U.S. IRAs, foundations, and endowments. The minimum investment to join PIF3 as a new partner is $3.5 million for individuals and $10 million for IRAs/foundations/endowments. PIF4 is for qualified US-based investors.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Selling Out As I’m now in my fourth decade of memo writing, I’m sometimes tempted to conclude I should quit, because I’ve covered all the relevant topics. Then a new idea for a memo pops up, delivering a pleasant surprise. My January 2021 memo Something of Value, which chronicled the time I spent in 2020 living and discussing investing with my son Andrew, recounted a semi-real conversation in which we briefly discussed whether and when to sell appreciated assets. It occurred to me that even though selling is an inescapable part of the investment process, I’ve never devoted an entire memo to it. The Basic Idea Everyone is familiar with the old saw that’s supposed to capture investing’s basic proposition: “buy low, sell high.” It’s a hackneyed caricature of the way most people view investing. But few things that are important can be distilled into just four words; thus, “buy low, sell high” is nothing but a starting point for discussion of a very complex process. Will Rogers, an American film star and humorist of the 1920s and ’30s, provided what he may have thought was a more comprehensive roadmap for success in the pursuit of wealth: Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.

© Oaktree Capital Management, L.P. All Rights Reserved Memo To: Oaktree Clients From: Howard Marks Re: The Feeling's Mutual Throughout the recent, seemingly endless series of scandals, complaints, settlements, indictments and meltdowns involving corporations, auditors, brokerage firms, investment banks and hedge funds, the mutual fund industry remained untouched. That held true until September 3, when the Attorney General of New York State announced that Edward Stern of hedge fund Canary Capital Partners had paid $40 million to settle charges relating to improper dealings between Canary and a number of mutual funds. Since then, sordid disclosures involving mutual funds seem to be emerging on a regular basis. UThe Canary That Swallowed the Cat What did Canary do wrong? It admitted to "mutual fund timing" and "late trading." Both of these tactics take advantage of what I would call "temporal disconnects" in the process through which the price for transactions in mutual fund shares is set. A fund's Net Asset Value is supposed to reflect the per-share value of the assets held in the fund's portfolio, so that people buying or selling fund shares at that NAV pay or receive a fair price for their portion of the fund's portfolio. However, the process is non-dynamic, in that the NAV is set just once a day based on the underlying securities' latest closing prices and isn't updated for events that occur subsequent to the market closings or subsequent to the time of the calculation.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Ruminating on Asset Allocation When I travel to see clients and spend entire days discussing investing and the markets, memo ideas often pop up. Last month’s visit with clients in Australia is a case in point. We talked about the “sea change” I believe is taking place in interest rates and about the role of credit in portfolios, and in a few cases, this led to the general topic of asset allocation. The result wasn’t a lot of new ideas on the subject, but rather a new way to combine old ideas into a unified theory. Before I proceed, I want to mention that, from time to time in this memo, I’ll say “generally,” “usually,” or “everything else being equal.” These caveats are likely applicable to many more sentences and ideas herein, but for the sake of readability, I’m not going to repeat them ad nauseum. In addition, I’m going to use a lot of graphics, as I truly believe one picture is worth a thousand words. Please bear in mind that these representations are intended to be notional, not technically correct. Asset Classes From my vantage point, “asset allocation” is a relatively new thing. No one used that phrase when I joined the industry 55 years ago. Structuring portfolios was a pretty simple matter, generally following the classic “60/40” split. Most U.S. investors limited themselves to investing in U.S.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Happy Medium My second general memo to clients was dated April 11, 1991 and imaginatively titled “First Quarter Performance.” It primarily discussed the swing of the market pendulum. I may be biased, but I’m pleased with what it says and, thirteen years later, wouldn’t change a word. The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward the extreme itself that supplies the energy for the swing back. Investment markets make the same pendulum-like swing:  between euphoria and depression,  between celebrating positive developments and obsessing over negatives, and thus  between overpriced and underpriced. This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at the “happy medium.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Shall We Repeal the Laws of Economics? For months, I’ve been saving up clippings for a memo on the above topic, but favorite subjects such as risk, debt, and uncertainty repeatedly jumped the queue, delaying my intended memo until the U.S. election season got into full swing, making it compelling. Like me, you’ve undoubtedly noticed that politicians ranging from former President Trump and Vice President Harris to down-ballot candidates are back to making promises that ignore economic reality. Trump’s call for tariffs and Harris’s attack on grocery profiteering are merely two examples of proposals that would impose costs the candidate ignores (in Trump’s case) or that fail to reflect a meaningful understanding of the problem (in Harris’s case). My purpose, of course, is not to promote or dismiss either candidate, but rather to illustrate that there is no “free lunch” in economics, despite candidates’ assertions to the contrary. The Background In 2016, with an unusually clamorous presidential election in full swing, I published two memos that strayed from investing into the world at large, called Economic Reality and Political Reality. The first explained that economics is largely the study of how we make choices – how people allocate finite resources among the available options.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Most Important Thing As I meet with clients and prospects, I repeatedly hear myself say, “the most important thing is x.” And then ten minutes later it’s, “the most important thing is y” (and then z, and so on). Am I being disingenuous? Am I confusing the unimportant with the important? Is it that I can’t make up my mind? Or is memory loss setting in? I hope (and believe) it’s none of these things. If I have to come up with an explanation, maybe it’s that I have strong feelings on a lot of subjects. Whatever the reason, I thought I’d collect in one place the precepts that guide Oaktree. Some might be more important than others, but in my view each one qualifies as “the most important thing.” The most important thing – above all – is the relationship between price and value. For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough. When people say flatly, “we only buy A” or “A is a superior asset class,” that sounds a lot like “we’d buy A at any price . . . and we’d buy it before B, C or D at any price.” That just has to be a mistake. No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right.

Queen's Alumni Review notes that India's IT industry posts roughly $190 billion in annual revenue and directly employs about four million people (with another 10 million indirectly) — a scale that the article traces substantially back to Kohli, who died on 26 November 2020 at the age of 96.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: So Much That’s False and Nutty As reported in The New York Times of May 5, Warren Buffett told the crowd at this year’s Berkshire Hathaway annual meeting: There is so much that’s false and nutty in modern investing practice and modern investment banking. If you just reduced the nonsense, that’s a goal you should reasonably hope for. As we look back at the causes of the crisis approaching its second anniversary – and ahead to how investors might conduct themselves better in the future – Buffett’s simple, homespun advice holds the key, as usual. I agree that investing practice went off the rails in several fundamental ways. Perhaps this memo can help get it back on. The Lead-up: Progress and Missteps Memory dims with the passage of time, but when I think back to the investment arena I entered forty-plus years ago, it seems very different from that of 2003-07. Institutional investing was done mainly by bank investment departments (like the one I was part of), insurance companies and investment counselors – a pretty dull bunch. And as I like to point out when I speak to business school classes, “famous investor” was an oxymoron – few investment managers were well known, chosen for magazine covers or listed among the top earners. There were no swaps, index futures or listed options. Leverage wasn’t part of most institutional investors’ arsenal . . . or vocabulary.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Long View Many of my memos over the last year and a half have touched on the developments in 2003-07 that brought on the current financial crisis. By now, everyone understands the role of innovation, risk tolerance and leverage in the boom that led to the bust, so I think it’s now time to look back considerably further. The Importance of Cycles In my opinion, there are two key concepts that investors must master: value and cycles. For each asset you’re considering, you must have a strongly held view of its intrinsic value. When its price is below that value, it’s generally a buy. When its price is higher, it’s a sell. In a nutshell, that’s value investing. But values aren’t fixed; they move in response to changes in the economic environment. Thus, cyclical considerations influence an asset’s current value. Value depends on earnings, for example, and earnings are shaped by the economic cycle and the price being charged for liquidity. Further, security prices are greatly affected by investor behavior; thus we can be aided in investing safely by understanding where we stand in terms of the market cycle. What’s going on in terms of investor psychology, and how does it tell us to act in the short run? We want to buy when prices seem attractive.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: The Limits to Negativism The markets acted on Monday as if the credit crisis is behind us – how incredible it is to be able to even write those words, whether true or not. Whichever is the case, however, it’s important to reflect on what can be learned from the recent events. (I developed these thoughts last week but just wasn’t quick enough to turn them into a memo. So I’m reduced to discussing what we all hope is history rather than displaying foresight.) UThe Swing of Psychology The last few weeks witnessed the greatest panic I’ve ever seen, as measured by its severity, the range of assets affected, its worldwide scope and the negativity of the accompanying tales of doom. I’ve been through market crashes before, but none attributed to the coming collapse of the world financial system. It’s worth noting that few of the recent sharp price declines were associated with weakness in the depreciating assets or the companies behind them. Rather, they were the result of market conditions brought on by psychology, technical developments and their interconnection. The worst of them reflected a spiral of declining security prices, mark-to-market tests, capital inadequacy, margin calls, forced selling and failures. It was readily apparent that such a spiral was underway, and no one could see how or when it might end.

© Oaktree Capital Management, L.P. All Rights Reserved URandom Thoughts on the Identification of Investment Opportunities Howard S. Marks -- January 24, 1994 1. No group or sector in the investment world enjoys as its birthright the promise of consistent high returns. There is no asset class that will do well simply because of what it is. An example of this is real estate. People said, "You should buy real estate because it's a hedge against inflation," and "You should buy real estate because they're not making any more." But done at the wrong time, real estate investing didn't work. 2. What matters most is not what you invest in, but when and at what price. There is no such thing as a good or bad investment idea per se. For example, the selection of good companies is certainly not enough to assure good results -- see Xerox, Avon, Merck and the rest of the "nifty fifty" in 1974. Any investment can be good or bad depending on when it's made and what price is paid. It's been said that "any bond can be triple-A at a price." There is no security that is so good that it can't be overpriced, or so bad that it can't be underpriced. 3. The discipline which is most important in investing is not accounting or economics, but psychology. The key is who likes the investment now and who doesn't. Future prices changes will be determined by whether it comes to be liked by more people or fewer people in the future.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Returns, Absolute Returns and Risk U What’s In a Name? My memos often touch on the subject of investors’ foibles, one of the worst of which consists of their tendency to pay too much attention to labels (and too little to substance).  Enthusiasm for “growth stock investing” carried investors to the ridiculous conclusion that for the stocks of the fastest-growing companies, no price is too high. That was just before the “nifty-fifty” stocks of America’s best companies lost up to 90% of their value in 1973-74.  “Portfolio insurance” assured investors they could participate fully in stock market gains with protection against declines if they would simply commit to automatically enter sell orders pursuant to an algorithm. But in the crash of October 1987, investors found themselves unable to make those sales, and the ineffectiveness of the “insurance” (combined with the outsized positions it had encouraged) cost them dearly. And at any rate, portfolio insurance, like any mechanical risk-limiting device, should have been expected to limit long-term return as well as risk. After all, there rarely is a free lunch.  “Market neutral” funds were supposed to be insensitive to market fluctuations, but the so- described Granite Fund of mortgage-backed securities melted down in just a few weeks when it turned out not to be insulated from the rapid rise of interest rates in 1994.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Nobody Knows II I wrote most of this memo over this past weekend, on the heels of the tumultuous seven-day correction. But I couldn’t get it out on Monday, and that day the S&P 500 rallied by 4.5%, or 135 points, for the biggest point gain in its history. I just can’t update it daily to take into account every rise or fall (or rate cut). And my real goal – as usual – is to suggest how to think about developments, not to say “buy” or “sell.” So please read this memo as of Sunday afternoon – whatever the markets have done since – and let me show how I assess the recent events. * * * I last used this memo title on September 19, 2008, two days after Lehman Brothers’ bankruptcy filing. This is certainly an appropriate time to recycle it. Over the last few weeks, I’ve been asked repeatedly for my view of the coronavirus and its implications for the markets. I’ve had a ready answer, thanks to something from my January memo, You Bet! As you may remember, I drew heavily on quotations from Annie Duke’s book on decision making, Thinking in Bets. The one that stayed with me most – and that I’ve used a lot since the memo was published on January 13 – is this one: An expert in any field will have an advantage over a rookie. But neither the veteran nor the rookie can be sure what the next flip will look like. The veteran will just have a better guess.

© 2018 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Investing Without People Over the last twelve months I’ve devoted three memos to discussing macro developments, market outlook, and recommendations for investor behavior. These are important topics, but usually not the ones that interest me most; I prefer to discuss things that are likely to affect the functioning of markets for years to come. Since little in the environment has changed from what I described in those three memos, I feel I now have the liberty to turn to some bigger-picture issues. This memo covers three ways in which securities markets seem to be moving toward reducing the role of people: (a) index investing and other forms of passive investing, (b) quantitative and algorithmic investing, and (c) artificial intelligence and machine learning. Before diving in, I want to state loud and clear that I don’t claim to be an expert on these subjects. I’ve watched the first for decades; I’ve recently learned a little about the second; and I’m trying to catch up regarding the third. On the other hand, since many of the “experts” in these fields are involved in them, I think they may be biased favorably toward them as potential successors to traditional active investing. What follow are just my opinions; as always you should make of them what you wish.

Memo to: Oaktree Clients From: Howard Marks Re: Oaktree at Ten Oaktree Capital Management, LLC opened its doors ten years ago, on April 10, 1995. That day represented a first step toward the founders’ dream, which all of our colleagues embraced and implemented. In what truly feels like the blink of an eye, we’ve reached our tenth anniversary, and I’m writing to share our view of that first decade. Priorities – Oaktree didn’t start with a budget, a profit projection or a business plan. Rather, it was built on an investment philosophy and a set of business principles. When we started Oaktree, many people asked us about our motivation. We told them it was simple: we wanted a firm that would run our way. The things that constituted “our way” had been rattling around in our heads for many years and were the topic of many shared conversations. All that remained was to write them down and put them to work. As you’ve heard ad nauseum, we chose to base Oaktree’s approach to money management on a simple motto: “if we avoid the losers, the winners will take care of themselves.” Thus we’ve endeavored to build portfolios that would give us acceptable performance if our expectations weren’t fully realized, combined with the possibility of surprises on the upside if they were. We’ve strived to match market returns in good times and do markedly better in bad times – something that may sound simple but isn’t.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Returns and How They Get That Way "Where do babies come from?" When I was a kid, this was the subject of a great many jokes, and the answer was always the same: "The stork brings them." Now it's fifty years later, and no one jokes about the stork any more. Maybe that's because today's kids learn the real answer so much sooner than we did. Where do equity returns come from? Fewer people ask this question than asked about the stork fifty years ago, . . . and even fewer have the answer. I'll give you one hint: it's not from the stork. UThe Source of Equity Returns In the late 1990s, stock prices exploded upward, along with the number of people buying them. And as long as stock prices rose, the new investors felt they knew all they had to about where equity returns came from: They came from rising prices. And surely you could depend on prices to rise. What was it that investors thought would cause a given stock's price to rise?  It's been performing like a rocket.  It's the subject of a brokerage house recommendation, a TV or magazine story, or some chat room hype.  Someone (I don't remember who) is recommending it.  It's selling below an analyst's target price.  Other people can be counted on to buy it, taking it ever higher.  In fact, investors have to buy it, because money will keep flowing to stocks and people can't risk omitting this one from their portfolios.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: It’s Not Easy In 2011, as I was putting the finishing touches on my book The Most Important Thing, I was fortunate to have one of my occasional lunches with Charlie Munger. As it ended and I got up to go, he said something about investing that I keep going back to: “It’s not supposed to be easy. Anyone who finds it easy is stupid.” As usual, Charlie packed a great deal of wisdom into just a few words. Let’s take the first six: “It’s not supposed to be easy.” While it’s pretty simple to achieve average results, it shouldn’t be easy to make superior investments and earn outsized returns. John Kenneth Galbraith said something similar years ago: There is nothing reliable to be learned about making money. If there were, study would be intense and everyone with a positive IQ would be rich. What Charlie and Professor Galbraith meant is this: Everyone wants to make money, and especially to find the sure thing or “silver bullet” that will allow them to do it without commensurate risk. Thus they work hard (actually, study is intense), searching for bargain securities and approaches that will give them an edge. They buy up the bargains and apply the approaches. The result is that the efforts of these market participants tend to drive out opportunities for easy money. Securities become more fairly priced, and free lunches become harder to find.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Conversation at Panmure House I recently was asked by Patrick Schotanus of Edinburgh Business School to participate in their inaugural symposium on the subject of cognitive economics. The symposium took place at Panmure House, the final residence of the great economist Adam Smith, and the theme was the Market Mind Hypothesis (MMH), which Patrick developed. I spent an hour recording a video interview with him, which on May 24 was shown at the symposium and followed by a live question-and-answer session. We then used software to create a transcript of the taped interview. I’ve edited it only to make my remarks more intelligible and less painful to read (without changing their message); any serious additions are shown in brackets. While little of my content is totally new (in fact, you might recognize some thoughts that I went on to incorporate in Bull Market Rhymes), it seems only right to share it with Oaktree’s clients because it’s never all been presented in one place before. I hope you’ll find something worthwhile in the conversation. * * * Patrick Schotanus: Hello, Howard. Thank you first of all for participating in our symposium by way of this fireside interview, in which we’ll discuss some of your memos as well as other reflections that you’ve shared with investors over the years.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: On the Other Hand It often happens that just as I’m about to release a memo, I come across something that absolutely has to be incorporated. That was the case on June 12, the day “This Time It’s Different” was published. I was reading a first-quarter report from Ruffer, a London-based money manager, and I came across the following question: Can the Fed, with its discretions and its firepower, keep a market dislocation at bay, or halt it once it has begun? That question caused me to think back to remarks made a few days earlier by Federal Reserve Chairman Jerome Powell regarding how the Fed would deal with the possibility of a trade war and its potential ramifications: We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective. (CNBC, June 4) Together, these two inputs prompted me to reflect on the role and powers of the Fed. In short, is it the Fed’s job to sustain expansions and keep market dislocations at bay ad infinitum?

Memo to: Oaktree Clients From: Howard Marks Re: It’s Greek to Me In the early part of this decade, I reviewed a few books for the Sunday Los Angeles Times. Here’s how I began my assessment of Pete Peterson’s Running on Empty in 2004: Consider Sam. He’s always been regarded as the brightest guy in town, and maybe the handsomest. He has the best job and lives in the best house. He spends aggressively – detractors would say hedonistically – to support a lifestyle that many others envy, but he shows good character by providing generously for his sick and elderly relatives. There are, however, a few problems. In recent years, he’s been spending more than he makes, and his expenditures appear likely to grow faster than his income. He covers each year’s shortfall by borrowing from other members of the community. (They’ve always been glad to lend him money because of his good standing in town.) But this adds increasingly to his debt, and thus to the next year’s interest (and shortfall). In other words, he seems to follow Winston Churchill’s dictum: “It saves a lot of trouble if, instead of having to earn money and save it, you can just go and borrow it.” Finally, with the number of family members Sam cares for increasing, with him promising each of them an increasing stipend, and with his relatives – even the sick ones – living longer, it seems clear that in the future, the cost of supporting them will grow considerably faster than his income. An annual deficit.

© 2018 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Latest Thinking Travel to clients abroad and preoccupation with my coming book on cycles (final draft submitted just the other day) have combined to keep me from writing a memo since September, but fortunately not from thinking. Thus I have ideas to set down on two significant subjects: the market environment and the new tax law. Further, I’m highly motivated to do so, since if I skip a few months, people start writing in, “Are you sick?” More on the Markets As I wrote in September (“Yet Again?”), some readers of my July memo, “There They Go Again . . . Again,” perceived my stance as ultra-bearish. This was epitomized by the TV commentator who reported, “Howard Marks says it’s time to get out.” As I said in September, there are two things I would never say (since they require far more certainty than I consider attainable): “get out” and “it’s time.” It’s rare for the market pendulum to reach such an extreme that views can properly be black-or-white. Most markets are far too uncertain and nuanced to permit such unequivocal, sweeping statements. In September I observed that the cautionary July memo hadn’t said much with respect to what people actually should do about the markets, and I tried to remedy that. Now I want to provide a more complete discussion regarding today’s markets, covering the pros as well as the cons.

© Oaktree Capital Management, L.P. All Rights Reserved For the title of this memo I’ve borrowed the tagline from Mass Mutual’s advertising campaign. Memo to: Oaktree Clients From: Howard Marks Re: You Can't Predict. You Can Prepare. Those who have been readers of my memos for any meaningful period of time know there are a few things I dismiss and a few I believe in thoroughly. The former include economic forecasts, which I think don't add value, and the list of the latter starts with cycles and the need to prepare for them. "Hey," you might say, "that's contradictory. The best way to prepare for cycles is to predict them, and you just said it can't be done." That's absolutely true, but in my opinion by no means debilitating. All of investing consists of dealing with the future, as I've written before, and the future is something we can't know much about. But the limits on our foreknowledge needn't doom us to failure as long as we acknowledge them and act accordingly. In my opinion, the key to dealing with the future lies in knowing where you are, even if you can't know precisely where you're going. Knowing where you are in a cycle and what that implies for the future is very different from predicting the timing, extent and shape of the next cyclical move. And so we'd better understand all we can about cycles and their behavior. UCycles in General I think several things about cycles are worth bearing in mind:  UCycles are inevitableU.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Pigweed At Citibank back in the ’70s, Chief Investment Officer Peter Vermilye placed a lot of emphasis on building team spirit. His tools included skits at our annual staff outings, and he never hesitated to participate in costume. My favorite was his portrayal of Johnny Carson’s savant, “Carnac the Magnificent.” He would hold a sealed envelope to his forehead and intone “Schlum-bair-zhjay,” as the French pronounce the oil service company’s name. Upon opening the envelope, he would read, “What they call it at $75.” Holding up the next envelope, he’d say “Slum-burger.” The explanation inside: “What they call it at $15.” In other words, investors love things as long as they’re riding high but lose all respect when they’re brought low. It doesn’t take long to become discredited in the investment world. And so it is for Amaranth Advisors, which now might be relabeled “pigweed” – another word for the plant that gave the fund its name. For those who’ve been incommunicado over the last few months, Amaranth is a hedge fund that was formed in 2000. In the beginning it stressed relatively safe strategies like convertible arbitrage. But more recently it ventured into other things and in 2004 hired a young man named Brian Hunter to engage in energy trading, leading to the recent events. On September 18, it announced that it had lost 40% of its $9.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Now What? My memos mostly try to explain what’s been going on in the financial arena and how things got that way. With three published this past summer plus December’s review of the lessons of 2007, I’ve done a lot of that. Hopefully they were helpful. Given what I consider to be the importance of the current situation, I have decided to venture beyond the familiar ground and into an area where I’m on shakier footing: the future. Before doing so, however, I can’t resist the temptation to recap how we got here. UBoom There’s a process through which bullish excesses set the stage for bearish corrections. It’s known as “boom/bust,” a label that succinctly describes the last few years and, I think, the next few.  In 2001-02, heavy borrowing to overbuild optical fiber capacity led the telecommunications industry to the brink of financial collapse. This came to a head around the time that scandals were unearthed at Enron, WorldCom, Adelphia, Tyco and Global Crossing. This combination of events – set against the backdrop of a sluggish economy and some very negative geo-political events – led to a widespread crisis of confidence regarding corporate financial statements, corporate managements and corporate debt. The environment was quite bleak.  The Fed took interest rates as low as 1% to offset the negative effects of these events and others. Because of this – and with U.S.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: The Illusion of Knowledge I’ve been expressing my disregard for forecasts for almost as long as I’ve been writing my memos, starting with The Value of Predictions, or Where’d All This Rain Come From in February 1993. Over the years since then, I’ve explained at length why I’m not interested in forecasts – a few of my favorite quotes echoing my disdain head the sections below – but I’ve never devoted a memo to explaining why making helpful macro forecasts is so difficult. So here it is. Food for Thought There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know. – John Kenneth Galbraith Shortly after putting the finishing touches on I Beg to Differ in July, I attended a lunch with a number of experienced investors, plus a few people from outside the investment industry. It wasn’t organized as a social occasion but rather an opportunity for those present to exchange views regarding the investment environment. At one point, the host posed a series of questions: What’s your expectation regarding inflation? Will there be a recession, and if so, how bad? How will the war in Ukraine end? What do you think is going to happen in Taiwan? What’s likely to be the impact of the 2022 and ’24 U.S. elections? I listened as a variety of opinions were expressed.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Learning From Enron The investigation was not completed until June . . . The testimony had brought to light a shocking corruption, . . . a widespread repudiation of widespread standards of honesty and fair dealing . . . and a merciless exploitation of the vicious possibilities of intricate corporate chicanery. The public had been deeply aroused by the spectacle of cynical disregard of fiduciary duty . . . Part of a draft post-mortem for Enron? Could be, but it's not. It's a passage from one of my favorite books, "Wall Street Under Oath." The book was written in 1939 by Ferdinand Pecora, who served as Counsel for the Senate Committee on Banking and Currency investigating the Crash of '29 and went on to become a Justice of the Supreme Court of New York. It recounts the outrageous 1920s conduct of commercial/investment bankers that inspired the creation of the Securities and Exchange Commission and the enactment of securities laws that govern our industry to this day. The bankers' conduct was rife with self-dealing, conflicts of interest and gross dishonesty. In other words, reviewing the 1920s reminds us of history's tendency to repeat. U What Can We Learn From Enron? An article about Enron in the December 5 Wall Street Journal made a big impression on me.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: It’s All Good Readers of my memos know that one thing I believe in most strongly – and harp on most frequently – is the inevitability of cycles. They’re something we can depend on absolutely. Several of my memos have dealt with cycles, starting from the very beginning: “First Quarter Performance” (April 11, 1991), “Will It Be Different This Time?” (November 25, 1996), “You Can’t Predict. You Can Prepare.” (November 20, 2001) and “The Happy Medium” (July 21, 2004). I’ve said in the past that I consider “You Can’t Predict,” a primer on cycles, to have been one of my best¸ and also that it evoked the least response of any memo in this decade. Thus I’m offering it as a twofer with this memo; copies are available on request at no additional cost. I always say that while we can’t know where we’re going, we ought to know where we are (in cyclical terms). Understanding our environment can help us decide what tactics to employ, how aggressive to be, and which potential mistakes we should try hardest to avoid. Being conscious of cycles can be extremely helpful, even if we can’t see the future. Thus I’m going to devote this memo to the cycle that’s been underway for the last few years. In terms of amplitude, breadth and potential ramifications, I consider it the strongest, most heated upswing I’ve witnessed.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Liquidity My wife Nancy’s accusations of repetitiveness notwithstanding, once in a while I think of something about which I haven’t written much. Liquidity is one of those things. I’m not sure it’s a profound topic, and perhaps my observations won’t be either. But I think it’s worth a memo. Liquidity Defined Sometimes people think of liquidity as the quality of something being readily saleable or marketable. For this, the key question is whether it’s registered, publicly listed and legal for sale to the public. “Marketable securities” are liquid in this sense; you can buy or sell them in the public markets. “Non- marketable” securities include things like private placements and interests in private partnerships, whose salability is restricted and can require the qualification of buyers, documentation, and perhaps a time delay. But the more important definition of liquidity is this one from Investopedia: “The degree to which an asset or security can be bought or sold in the market without affecting the asset's price.” (Emphasis added) Thus the key criterion isn’t “can you sell it?” It’s “can you sell it at a price equal or close to the last price?” Most liquid assets are registered and/or listed; that can be a necessary but not sufficient condition.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: It’s All Good . . . Really? As I worked on “It’s All Good” during my vacation in late June – and even when I issued it two weeks ago – I had no reason to believe that the universally upward cycle about which I was writing could be curtailed before the end of July. But the good times certainly have stopped rolling in many areas, at least for now. I think it’s extremely important to study the way this has happened, as it provides a highly instructive object lesson. It’s folly to think we know in advance just what it is that will cause the market pendulum to stop swinging in one direction and start in the other, but it’s even greater folly to think that nothing of that nature will happen. That’s my twist on one of my favorite quotes, from behaviorist Amos Tversky: It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on. My friend Bruce Newberg thinks a quote attributed to Mark Twain says it best, and he may be right: It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. Over the last few years, some people went around saying, “We don’t know what bad thing will happen, but something will,” and others said, “We’re confident that nothing bad will happen.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Knowledge of the Future As I showed by using it again in last week’s memo, I was impressed by the observation of Marc Lipsitch, Harvard epidemiologist, that there are (a) facts, (b) informed extrapolations from analogies to other viruses and (c) opinion or speculation. He said it in connection with the novel coronavirus, but I’ve been thinking about its relevance to investing. In the past, I’ve defined investing as the act of positioning capital so as to profit from future developments. I’ve also mentioned the challenge presented by the fact that there’s no such thing as knowing what future developments will be. This is the paradox we must deal with. To follow Lipsitch’s analysis, in our world of investing: • there are few if any facts regarding the future, • the vast majority of our theorizing about the future consists of extrapolating from past patterns, and • a lot of that extrapolation – and just about all the rest of our conclusions – consists of what Lipsitch calls opinion or speculation and what I call guesswork. (George Bernard Shaw said, “All professions are conspiracies against the laity.” Thus the rules of the investment profession seem to require that its members describe their views about the future using high- sounding terms like “analysis,” “assessment,” “projection,” “prediction” and “forecast.” Rarely do we see the word “guess.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: On Regulation I’ve been asked why there weren’t any memos during the twelve weeks between September 9 and December 1. Lack of ideas? Writer’s block? Carpal tunnel syndrome? CIA posting? The answer is “none of the above.” I was putting the finishing touches on a book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor. It pulls together all of the strands of my philosophy into what might be thought of as a super-memo. It will be published in late April and I hope you’ll let me know what you think. * * * In the 3½ years since the financial crisis surfaced in July 2007, there has been extensive discussion of the part deregulation played in creating it, as well as the need for increased regulation to prevent the next one. The release last month of the report of the Financial Crisis Inquiry Commission reawakened the debate. Thus I’m often asked nowadays how I feel about regulation and what I think the future holds in that regard. The Swing of the Regulatory Pendulum I’ve written before that attitudes toward regulation follow the same pendulum-like swing as most other aspects of market behavior. They oscillate not only in response to events in the economic environment, but also because neither total regulation nor total deregulation produces an entirely satisfactory answer. As in so many things, there’s no perfect solution.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: I Beg to Differ _______________________________________________________________________________ I’ve written many times about having joined the investment industry in 1969, when the “Nifty Fifty” stocks were in full flower. My first employer, First National City Bank, as well as many of the other “money-center banks” (the leading investment managers of the day), were enthralled with these companies, with their powerful business models and flawless prospects. Sentiment surrounding their stocks was uniformly positive, and portfolio managers found great safety in numbers. For example, a common refrain at the time was “you can’t be fired for buying IBM,” the era’s quintessential growth company. I’ve also written extensively about the fate of these stocks. In 1973-74, the OPEC oil embargo and the resultant recession took the S&P 500 Index down a total of 47%. And many of the Nifty Fifty, for which it had been thought that “no price was too high,” did far worse, falling from peak p/e ratios of 60-90 to trough multiples in the single digits. Thus, their devotees lost almost all of their money in the stocks of companies that “everyone knew” were great. This was my first chance to see what can happen to assets that are on what I call “the pedestal of popularity.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Clients From: Howard Marks Re: Microeconomics 101: Supply, Demand and Convertibles Two principal factors determine whether an investment will be successful. The first is the intrinsic quality of the underlying entity being invested in. In short, how good is the venture you are buying a piece of or lending money to? It's better to invest in a good company than a bad one, ceteris paribus, [Ceteris paribus is a favorite term of economists. It means “everything else being equal,” and yes, at a given price, it's smarter to invest in a better company than a worse one. Of course, “everything else” never is equal, and you're not likely to be asked to choose between two assets of obviously different quality at the same price.] The second factor determining whether something will be a good investment is price. Ceteris paribus, given two assets of similar quality, it's better to pay less than more. Lots of investors take the approach of searching out companies with better products, managements, balance sheets and prospects. Many say they will only buy top quality assets. Our group does not have that luxury and, at any rate, pursuing museum quality assets would be antithetical to our philosophy. In convertibles, as in high yield bonds and certainly in distressed debt, our companies generally are not widely applauded or atop the ratings heap. Instead, they fall within a broad range in terms of quality.

© Oaktree Capital Management, L.P. All Rights Reserved Memo To: Clients From: Howard S. Marks, TCW Re: Risk in Today's Markets The ability of the stock market to react so harshly on February 4 to a small, Fed- mandated rise in interest rates, pushing the Dow down 96 points, suggests a lack of preparedness for negative developments. This prompts me to write to you about certain risks I feel may be present in the markets today. There are plenty of bullish arguments to be made about the prospects for the economy and corporate profits, and pundits to make them. While I will not devote space or time to them, I don't pretend they are nonexistent. And I won't deny the possibility that as an inherently cautious investor, I sometimes tend to overstate the negatives. What I want to do, however, is point out the degree to which I feel investors are behaving in a risk- tolerant manner today, and the implications for all of us. Two very powerful trends are at work, and have been for the last few years. The first is the decline in interest rates, which has carried rates to the lowest levels of the last thirty years and brought on great dissatisfaction with the returns available from low-risk fixed income investments. The second is the fabulous performance which was produced by virtually all investments in securities from 1991 to 1993. This was a period in which risk-taking was rewarded, and almost without exception very high returns went to those who took great risk.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: It’s All Very Taxing The issue is simple: the U.S. government generally spends more than it brings in . . . and recently, a lot more. For years Congress was willing to serially raise the federal debt ceiling and monetize the deficit. But this past summer, some legislators balked. When the early August deadline for an increase in the ceiling arrived, our elected officials kicked the can down the road, but less far than usual. They created a Congressional supercommittee with unprecedented power to propose solutions, and they designed automatic spending cuts in case no proposal won approval. With the committee working under a November 23 deadline to find ways to reduce the federal deficit by $1 trillion-plus over the next decade, and with a presidential election less than a year away, the subject of taxes is all over the headlines and likely to remain there. Thus I’ve decided to provide a background piece on the issues. What form will the deficit-cutting action take? In fact, the possibilities fall into only four categories:  cut discretionary spending,  reduce expenditures on entitlements,  cut waste and fraud, or  increase tax revenues. Given the magnitude of the problem, the limited number of potential solutions, and the differences between the parties on the subject, there’s already debate regarding the fourth of those listed above.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Political Reality Meets Economic Reality In 2016 I wrote Economic Reality (in May) and Political Reality (in August), two memos covering subjects I thought were important and timely. In the latter, I summed up Economic Reality as follows: [It] describes the ways in which economics defines and constrains reality in business, investing and everyday life. Economics establishes the rules of the game and the boundaries of the playing field, and these things can’t be ignored. They can be altered, but not without consequences. The realities of economics are stark and consistent, but also logical. They aren’t absolute, like the laws of physics (e.g., gravity), but they reliably establish tendencies and limits. The point is that the field of economics covers the choices people and organizations face; the costs, possible rewards and potential consequences; and how decisions regarding those choices are made. These are the bases on which people enter into economic transactions. More than anything else, perhaps, economics is the study of choice. Three months later, in Political Reality, I said: I’ve always gotten a kick out of oxymorons – phrases that are internally contradictory – such as “jumbo shrimp” and “common sense.” I’ll add “political reality” to the list. The world of politics has its own, altered reality, in which economic reality often seems not to impinge.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Risk Revisited Again The operators of racetracks take a dim view of bettors who engage in “past-posting”: trying to get a bet down after the race is over (and the horses are “past the post”). In that vein, it’s been my practice not to rewrite old memos as new developments arise or new ideas strike me. However, while preparing “Risk Revisited” of September 2014 for inclusion in a compilation of my memos, I thought of a number of ways in which it could be made better. And since it was my original intention to have it contain everything I know about risk, I’ve decided to incorporate them. To make it clear which sections are new, I’ve put them in italics. In April 2014, I had good results with Dare to Be Great II, starting from the base established in an earlier memo (Dare to Be Great, September 2006) and adding new thoughts that had occurred to me in the intervening years. Also in 2006 I wrote Risk, my first memo devoted entirely to this key subject. My thinking continued to develop, causing me to dedicate three chapters to risk among the twenty in my book The Most Important Thing. This memo adds to what I’ve previously written on the topic. What Risk Really Means In the 2006 memo and in the book, I argued against the purported identity between volatility and risk. Volatility is the academic’s choice for defining and measuring risk.

© Oaktree Capital Management, L.P. All Rights Reserved Memo To: Clients From: Howard S. Marks, TCW Re: "Risk in Today's Markets" Revisited Seven weeks ago, we put out a memorandum entitled "Risk in Today's Markets." Its essence was that the excellent returns earned in risky strategies through 1993 had eroded the fear factor in many markets and, coupled with the low yields available on conservative fixed income investments, had caused many investors to take "one giant step forward" on the risk curve. It also pointed out that just as declining rates had acted to raise prices and generate good returns, rate movements could cut the other way too. Lastly, it cautioned that when others are acting imprudently, driven by greed and without much fear, it is important that we raise UourU level of prudence. Unfortunately, the events of the intervening seven weeks have shown these observations to be in order. It is the purpose of this follow-up memo to review the developments of the intervening time period, attempting to make sense out of what has happened and searching for lessons that can be drawn. It's about understanding basics of investing which don't come and go. The current "correction" dates from February 4, when the Federal Reserve Bank raised short term interest rates a small amount in order to choke off inflationary thought and action. The air quickly came out of the bond markets, and the decline has been swift and deep.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: More on Repealing the Laws of Economics Last September, I wrote a memo titled Shall We Repeal the Laws of Economics? in which I described economies as organic entities that operate on their own pursuant to some underlying laws. The best known is the law of supply and demand: in general, people will buy more of something as the price goes down and produce more of it as the price goes up. Another has to do with incentives: in general, people will allocate resources (such as their labor) to the activities for which they will be best rewarded. These and the rest of the rules are straightforward, and it doesn’t take a Ph.D. to understand them. In fact, they’re part of human nature. But governments sometimes want outcomes different than those a free-functioning economy will produce. To that end, they enact rules and regulations designed to override the laws of economics. Some governments even go so far as to adopt socialism or communism, creating economies where government commands take over entirely from the laws of economics. Rent Control A prime example discussed in my September memo was rent control. When demand for apartments exceeds supply, it’s only natural that rents will rise, perhaps eventually to the point where people who live in a given location can’t afford to continue doing so. But elected officials typically want to preserve neighborhoods.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Not Enough Whatever affects one directly, affects all indirectly. I can never be what I ought to be until you are what you ought to be. This is the interrelated structure of reality. (Rev. Dr. Martin Luther King, Jr., 1965) Justice will not be served until those who are unaffected are as outraged as those who are. (Benjamin Franklin, 1750) In recent weeks we have witnessed the killing of George Floyd by a Minneapolis policeman who knelt on his neck for almost nine minutes while three others stood by doing nothing, and we have watched peaceful protests and violent riots take place in cities across America and around the world. We understand the death of George Floyd as one more of the glaring injustices suffered by black people and other people of color in our country. It adds to a long list of injustices ranging from profiling, harassment, brutality and killing at the hands of police; to disproportionate rates of addiction, prosecution, incarceration and sentencing; to highly unequal access to education, jobs, pay, health care, safe neighborhoods, decent housing and financial security; to having to live everyday with demoralizing indignities and fear for one’s children’s lives; and lately to above average rates of infection and fatality due to Covid-19. Many Americans are speaking out in recognition of the grievances of black people.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Implications of the Election I’m starting this memo a week before Election Day. I promise to try to stay away from the merits of the candidates and the question of who will win, and instead confine myself to the important messages that we should take away from the election and the actions we should push for as a result. The outcome of tomorrow’s election won’t change these things as far as I’m concerned. Angry Voters Of course, the big story of this election year has been the unprecedented, unconventional rise of Donald Trump. Trump threw his hat into the ring with a complete lack of experience in elected office or other public service, and without an established campaign organization. In fact, he had no established party’s ideology. He adopted some Republican elements but rejected others. And yet he has been able to attract a large group of voters, probably about 50 million strong. He did this by assembling backing from an unusually diverse mix of elements. These included dedicated Republicans who weren’t about to vote for a candidate of another party; the many Clinton haters who’ve had 24 years to gel since Bill’s first inauguration; people who were attracted to Trump’s celebrity, reputation for business success, outspokenness and colorful manner; and supporters of the right. But this tells only part of the story.

© OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED. CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: It’s All a Big Mistake Mistakes are a frequent topic of discussion in our world. It’s not unusual to see investors criticized for errors that resulted in poor performance. But rarely do we hear about mistakes as an indispensible component of the investment process. I’m writing now to point out that mistakes are all that superior investing is about. In short, in order for one side of a transaction to turn out to be a major success, the other side has to have been a big mistake. There’s an old saying in poker that there’s a “fish” (a sucker, or an unskilled player who’s likely to lose) in every game, and if you’ve played for an hour without having figured out who the fish is, then it’s you. Likewise, in every investment transaction you’re part of, it’s likely that someone’s making a mistake. The key to success is to not have it be you. Usually a buyer buys an asset because he thinks it’s worth more than the price he’s paying. But the seller sells the asset because he thinks the price he’s getting exceeds its value. It’s pretty safe to say one of them has to be wrong. Strictly speaking, that doesn’t have to be true, thanks to differences in things like tax status, timeframe and investors’ circumstances. But in general, win/win transactions are much less common than win/lose transactions.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: It Is What It Is My first exposure to the phrase that serves as the title for this memo came in 1995, a few days before Oaktree opened its doors. My partners and I wracked our brains over whether we’d covered every base. We asked our attorney, Peter Ostroff of Sidley & Austin, if he thought we’d missed anything. Peter’s answer was succinct and on target as usual: “It is what it is.” In the March 5 edition of The New York Times, William Safire devoted the Sunday Magazine’s “On Language” column to “it is what it is.” He mentioned that the first use he could find had been in 1949, and that the phrase had been adopted for movie and song titles in the last few years. I was shocked when I checked Google and found 4.2 million references! According to Safire, there is no one definitive meaning for the phrase. It can serve as the equivalent of the politician’s “no comment.” It can be used to express “philosophical resignation over a disappointment.” Or it can be “a mild put-down, as if to say, ‘That’s all you can expect.’” Safire concluded his column with another possible meaning: “que sera sera” (what will be will be), which was the title of a hit song by Doris Day when I was ten. But that interpretation suggests a fatalism and inability to affect the outcome that I don’t associate with the phrase.

Memo to: Oaktree Clients From: Howard Marks Re: I’d Rather Be Wrong Just a few weeks ago, I published “Tell Me I’m Wrong,” my latest list of things in the investment environment that I find worth worrying about. I’m going to devote a few pages here – I promise this’ll be the shortest memo in years – to a point I touched on in “What Worries Me” (August 28, 2008) but omitted from the more recent piece. This memo will be about one of the inarguably most depressing topics of our time: the seeming inability of governments and politicians to solve – or even tackle – the financial problems we face. Here’s the situation in Washington: • Many of our most sweeping financial problems, such as deficits, national debt, healthcare costs, Social Security and Medicare, are long-term problems. • It’s important that we tackle them early, since limiting their further growth can reduce the eventual cost and difficulty of fixing them. • But the process of solving them will be unpleasant in the short term, entailing bad-tasting medicine, while the benefits will only be seen in the long term, when today’s politicians will have left the stage. • Finally, most politicians’ main concern seems to be getting themselves and other members of their party elected. Voting for short-term pain in order to solve long-term problems is generally viewed as the wrong way to go about that.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: On Bubble Watch Exactly 25 years ago today, I published the first memo that brought a response from readers (after having written for almost ten years without receiving any). The memo was called bubble.com, and the subject was the irrational behavior I thought was taking place with respect to tech, internet, and e-commerce stocks. The memo had two things going for it: it was right, and it was right fast. One of the first great investment adages I learned in the early 1970s is that “being too far ahead of your time is indistinguishable from being wrong.” In this case, however, I wasn’t too far ahead. This milestone anniversary gives me an occasion to write again about bubbles, a subject that’s very much of interest today. Some of what I write here will be familiar to anyone who read my December memo about the macro picture. But that memo only went to Oaktree clients, so I’m going to recycle here the part of its content that relates to the subject of bubbles. Since I’m a credit investor, having stopped analyzing stocks nearly five decades ago, and since I’ve never ventured far into the world of technology, I’m certainly not going to say much about today’s hot companies and their stocks. All of my observations will be generalities, but I’m hopeful they’ll be relevant nonetheless.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Political Reality My last memo, in May, was on the subject of “Economic Reality.” Its goal was to describe the realities imposed by economics and point out the many ways in which governments and, especially, candidates for elected office ignore and promise to override them. Since then I have been struck by the way developments have moved economic reality to center stage. Of course, foremost among them has been the affirmative vote of June 23 on Brexit: whether the United Kingdom should leave the European Union. I have no interest in writing a memo about Brexit itself. There’s a huge number of moving parts, too little past experience, too many varying opinions, and zero clarity on how the departure will be handled. There are many pundits out there telling us what the consequences of Brexit will be. The only thing I’m sure of is that most of them are wrong, and if I were to join their ranks, I’d probably be wrong, too. Economic Reality: Choices and Consequences The May memo described the ways in which economics defines and constrains reality in business, investing and everyday life. Economics establishes the rules of the game and the boundaries of the playing field, and these things can’t be ignored. They can be altered, but not without consequences. The realities of economics are stark and consistent, but also logical.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Mr. Market Miscalculates In his book The Intelligent Investor, first published in 1949, Benjamin Graham, who was Warren Buffett’s teacher at Columbia Business School, introduced a fellow he called Mr. Market: Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly. Of course, Graham intended Mr. Market as a metaphor for the market as a whole. Given Mr. Market’s inconsistent behavior, the prices he assigns to stocks each day can diverge – sometimes wildly – from their fair value. When he’s overenthusiastic, you can sell to him at prices that are intrinsically too high. And when he’s overly fearful, you can buy from him at prices that are fundamentally too low. Thus, his miscalculations provide profit opportunities to investors interested in taking advantage of them.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Mysterious Most of the time, my memos have their origin in something interesting that’s happening in the world or in a series of events I come across that I think can be interestingly juxtaposed. This one arises from a less usual source: a request. The other day, my colleague Ian Schapiro, the leader of Oaktree’s Power Opportunities and Infrastructure groups, suggested I write a memo about negative interest rates. My reaction was immediate and unequivocal: “I can’t. I don’t know anything about them.” And then I realized that’s the point. No one does. But Ian thinks I can make a contribution, so I’ll try. I’ve been saving up clippings on this subject, as you’ll see. Ian’s urging set me to work. * * * For a good while now, I’ve used the term “mysterious” in connection with inflation (and deflation). What causes rapid inflation? How can it be stopped? Economists offer explanations and prescriptions regarding each occurrence, but they rarely apply the next time. And that brings us to the subject of negative interest rates. I find them no less mysterious. The fact that we know what they are – as we do with inflation and deflation – doesn’t alter the fact that we don’t know for sure why negative rates are prevalent today, how long they’ll continue in force, what might cause them to turn positive, what their consequences are, or whether they’ll reach the U.S.

© Oaktree Capital Management, L.P. All Rights Reserved. Memo to: Oaktree Clients From: Howard Marks Re: On Uncertain Ground The world seems more uncertain today than at any other time in my life. That’s a simple sentence but one with significant implications. And it’s not just me. Here’s what The New York Times said on August 12 in an article about John Bogle, the founder of Vanguard: “It’s urgent that people wake up,” he says. This is the worst time for investors that he has ever seen – and after 60 years in the business, that’s saying a lot. . . . “The economy has clouds hovering over it,” Mr. Bogle says. “And the financial system has been damaged. The risk of a black-swan event – of something unlikely but apocalyptic – is small, but it’s real.” I’m going to devote this memo to the uncertainty in the world and the investment environment and then offer my take on the appropriate strategy response. This will require me to touch on a large number of topics, but I will try to dwell less than usual on each of them. If after reading this memo you find yourself hungry for more, you might go back to “What Worries Me” (August 28, 2008) and “The Long View” (January 9, 2009). The Macro-Economic Setting It’s my belief that we’re going to see relatively sluggish economic growth in the U.S. for a prolonged period of time. My expectations for other developed nations, given their specific issues, are even less positive.

© 2025 Oaktree Capital Management, L.P All Rights Reserved Follow us: Memo to: Oaktree Clients From: Howard Marks Re: Is It a Bubble? Ours is a remarkable moment in world history. A transformative technology is ascending, and its supporters claim it will forever change the world. To build it requires companies to invest a sum of money unlike anything in living memory. News reports are filled with widespread fears that America’s biggest corporations are propping up a bubble that will soon pop. During my visits to clients in Asia and the Middle East last month, I was often asked about the possibility of a bubble surrounding artificial intelligence, and my discussions gave rise to this memo. I want to start off with my usual caveats: I’m not active in the stock market; I merely watch it as the best barometer of investor psychology. I’m also no techie, and I don’t know any more about AI than most generalist investors. But I’ll do my best. One of the most interesting aspects of bubbles is their regularity, not in terms of timing, but rather the progression they follow. Something new and seemingly revolutionary appears and worms its way into people’s minds. It captures their imagination, and the excitement is overwhelming. The early participants enjoy huge gains. Those who merely look on feel incredible envy and regret and – motivated by the fear of continuing to miss out – pile in.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: No Different This Time – The Lessons of ‘07 On July 16, I published a memo called “It’s All Good.” I wrote it while on vacation in late June and early July, and then it took a week after my return to get it out. It reviewed the excesses that had occurred in the preceding few years and the extent to which people were overlooking them, thinking instead that everything was ideal and would stay that way. It discussed the recurring tendency of investors in bullish times to feel that “it’s different this time” – that the process which caused past cyclical highs to correct wouldn’t apply in the current instance. The bullish balloon remained unpunctured as of July 16, and some may have thought my memo unduly pessimistic. It’s a good thing it didn’t take another week or two to put it out, however, because by July 30, things had started to go bad, set off by defaults among subprime mortgages and downgrades of securities based on them. “An isolated development,” the bulls replied, as is usual when the first crack in the dam appears. It’s hard to believe that less than five months later, the effects are widespread, significant losses have been registered, and negativism has taken over from euphoria. No one doubts that we’re in the throes of a full-fledged credit crunch. But in that way, it truly is no different this time.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Irrational Exuberance Recent years have witnessed great excesses in the stock market. The postmortems have begun to be written, and I'm determined not to lag. Thus I will attempt below to combine a number of ideas and bits of empirical data I've stored up over recent weeks in a memo which expresses my views and hopefully is of value to you. My ideas are disjointed, but I hope to be able to fashion a common thread. Postmortem? Do I mean to say the market's rise is over? You know I don't make predictions of that sort. I am not ringing the bell on stock prices, but hopefully on a style of investing without reason. The stock market's record-breaking rise through March 10 was driven by the tech stocks. The tech stocks, in turn, were driven by optimistic, get-rich-quick buying that was totally lacking in skepticism and caution. What I think may (and should) be on the wane is the belief that it is perfectly reasonable:  to borrow in order to buy stocks that have already risen 500% and are selling at infinite P/E ratios,  to rely exclusively on advice from friends, CNBC and Internet bulletin boards when investing in companies whose business you know nothing about, and  for companies valued at billions of dollars to lose tens of millions per year, because investors can be counted on to give them more. These attitudes have certainly signaled irrational exuberance.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Risk and Return Today A single word is enough to describe the overall investment world today: lackluster. Stock and bond returns thus far in 2004 are quite modest virtually across the board. Candid managers almost everywhere admit there’s little to buy. In many areas, especially in non-traditional investments, everyone agrees there’s “too much money chasing too few ideas.” How can everything be priced to provide low returns? Where does this excess money come from? I’ll provide my explanation below. Pardon me if I start with some rudimentary building blocks. 0BURisk/Return Foundations The most fundamental assumption underlying investment theory and practice today regards the universality of risk aversion. It is assumed that people dislike risk and prefer safety. The proof is simple: if a safe investment and risky investment – e.g., a 30-day U.S. Treasury bill and a start-up company’s 30-year bond – both offer a 5% yield, virtually no one will choose the latter. Thus, if investors are going to bear risk, they must be induced to do so, with the incentive coming in the form of a higher expected return. In short then, the market must set prices such that investors will expect riskier investments to deliver higher returns.

© 2015 Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Inspiration from the World of Sports I’m constantly intrigued by the parallels between investing and sports. They’re illuminating as well as fun, and thus they’ve prompted two past memos: “How the Game Should Be Played” (May 1995) and “What’s Your Game Plan?” (September 2003). In the latter memo, I listed five ways in which investing is like sports:  It’s competitive – some succeed and some fail, and the distinction is clear.  It’s quantitative – you can see the results in black and white.  It’s a meritocracy – in the long term, the better returns go to the superior investors.  It’s team-oriented – an effective group can accomplish more than one person.  It’s satisfying and enjoyable – but much more so when you win. Another angle on the investing/sports analogy has since occurred to me: an investment career can feel like a basketball or football game with an unlimited number of quarters. We may be nearing December 31 with a substantial year-to-date return or a big lead over our benchmarks or competitors, but when January 1 rolls around, we have to tackle another year. Our record isn’t finalized until we leave the playing field for good. Or as Yogi Berra put it, “It ain’t over till it’s over.” It was Yogi’s passing in late September that inspired this memo.

© Oaktree Capital Management, L.P. All Rights Reserved Memo to: Oaktree Clients From: Howard Marks Re: Now It’s All Bad? I’m a great believer in the cyclical nature of the markets, but I never cease to be amazed at how far they can go in one direction and for how long; the extremes they can reach, despite logical arguments to the contrary; and the swiftness of the swing back. It all reminds me of a point I made in my second memo, “First Quarter Performance” (April 1991): Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead it is almost always swinging toward or away from the extremes of its arc. Just seven weeks ago, I complained in “It’s All Good” that investors were acting as if nothing could go wrong. “Priced for perfection” was the concept underlying values, and people were more than willing to pay prices set that way. Now, of course, the prevailing attitude appears to have swung from “it’s all good” to “it’s all bad.” Pessimism has replaced optimism, perhaps also to excess. There are days on which no one seems able to tell me how the developing credit crisis might be resolved in short order and a full-scale meltdown avoided, and when no one seems able to find a ray of sunshine in the current situation (other than bargain hunters). It’s like the aspiring actor who takes acting classes, waits on tables and hustles auditions for a decade . . .

* * * In this century’s first decade, investors had the opportunity to participate in – and lose money due to – two spectacular bubbles. The first was the tech-media-telecom (“TMT”) bubble of the late ’90s, which began to burst in mid-2000, and the second was the housing bubble of the mid-aughts, which gave rise to (a) extending mortgages to sub-prime borrowers who couldn’t or wouldn’t document income or assets, (b) the structuring of those loans into levered, tranched mortgage-backed securities, and consequently (c) massive losses for investors in those securities, especially the financial institutions that had created them and retained some. As a result of those experiences, many people these days are on heightened alert for bubbles, and I’m often asked whether there’s a bubble surrounding the Standard & Poor’s 500 and the handful of stocks that have been leading it. The seven top stocks in the S&P 500 – the so-called “Magnificent Seven” – are Apple, Microsoft, Alphabet (Google’s parent), Amazon.com, Nvidia, Meta (owner of Facebook, WhatsApp, and Instagram), and Tesla. I’m sure I don’t have to go into detail regarding the performance of these stocks; everyone’s aware of the phenomenon. Suffice it to say that a small number of stocks have dominated the S&P 500 in recent years and have been responsible for a highly disproportionate share of its gains. A chart from Michael Cembalest, chief strategist at J.P.

I know my views on the market's direction aren't worth betting on. But while I can't tell you what lies ahead, perhaps I can be of service in my usual way, by marshalling the arguments on both sides and giving you my take on them. UStarting Point This attempt to provide insight into the market's future course should be understood in light of a few caveats. The most important are these: First, we are living through the most extreme boom-bust episode of my 33-year investment career and, I think, the most extreme since the Roaring Twenties and subsequent market crash. The magnitude and craziness of the bull market and tech- media-telecom bubble of the 1990s dwarfed every up-leg I've seen, and the correction that started 28 months ago already ranks with the greatest down-legs. Thus all bets for "normalcy" are off. A huge decline like we've had doesn't necessarily create bargains if preceded by a huge advance.

 “High yield bonds” drew people in, just as “junk bonds” had scared them away. One of my favorites was the mutual fund investor who said in 1990, “I thought it was a high yield bond fund; I never would have invested if I’d known it was a junk bond fund.”  “Gonna change the world” is what people believed about e-commerce and the Internet. A few of the companies did, as had pioneers in radio and airlines. However, “change the world” proved once again to be far from synonymous with “make money for investors.”  Today, of course, almost everyone wants to invest in “hedge funds” . . . even though almost nobody can define them. In 2005, the average returns for the best and worst performing hedge fund categories were 17.4% and -2.6%. Clearly, then, the term “hedge fund” cannot be much help in the selection of investment vehicles. Economist Brad Setser was quoted in The Wall Street Journal of May 31 as posing and answering his own question: “I thought hedge funds were supposed to be hedged. I fully realize . . . that in many ways the name ‘hedge fund’ doesn’t tell you much about what a fund does.”

We chose to work in inefficient markets only, with portfolios that stick closely to their charter. Each of our portfolios is staffed by people dedicated to that market sector – who work hard to know more than others about companies, industries and securities, and who realize they can’t get an edge with regard to macro forecasts and market timing. Thus our investment philosophy has provided a clear set of guideposts for Oaktree’s people. Equally important have been our business practices. Here the concepts are even simpler, but no less helpful: Portfolio decisions based on substantial investment in proprietary research. Conflicts of interest resolved in favor of the client every time. Compensation arrangements that align our interests with those of our clients. Thoroughly truthful communications and a pronounced refusal to downplay bad news. New strategies added only if they can be executed with risk under control. In 1995, we wrote that “The firm’s profitability must stem from doing all the above. . . . Our earnings should grow if we achieve excellence in investing . . . but only then.” We’ve all seen instances in recent years when gathering assets was accorded a higher priority than performing for clients – and headlines that were sad testimony to the result. I’m proud to say Oaktree’s single-minded pursuit of its clients’ interests has never been questioned.

”) Last week, in Calibrating, I mentioned having written to an Oaktree colleague that, “These days everyone has the same data regarding the present and the same ignorance regarding the future.” I chose the title of this memo because it’s such an oxymoron: there’s practically no such thing as meaningful knowledge regarding the future investment environment. Thus, this memo will be about some things people think they know but may not. Extrapolating from the Past We use extrapolation from the past as the best way to deal with the future. If not for the ability to research past patterns and apply them to decisions regarding the future, we’d have to reach a new conclusion every day about every future possibility. So, for example, in investing we study typical past cycles, the exceptions from the norm, and details like the up-and-down pattern that’s part of most rallies, as described last week in Calibrating. But blind faith in the relevance of past patterns makes no more sense than completely ignoring them. There has to be good reason to believe the past can be extrapolated to the future; as Lipsitch says, it has to be informed extrapolation. And that brings me to the current episode. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

(Emphasis added) In other words, if I said anything about the coronavirus, it would be nothing but a guess. I’ve written in the past about my reaction when people in China ask for my view of their country’s future. “You live there,” I say. “I don’t. Why are you asking me?” Not only am I not an expert on China, but I firmly believe the future of a country isn’t subject to prediction, especially one that operates under a system that’s unique. I furnish my opinion of China’s future, but I hasten to point out that it’s nothing but a hunch. People may ask me for my opinion because they think I’m intelligent, think I’ve been a successful investor, or know I’ve lived through a lot of history. But none of that should be confused with expertise on subjects of every kind. And that leads me back to the coronavirus. No one knows much about it, since this is its first appearance. As Harvard epidemiologist Marc Lipsitch said on a podcast on the subject, there are (a) facts, (b) informed extrapolations from analogies to other viruses and (c) opinion or speculation. The scientists are trying to make informed inferences. Thus far, I don’t think there’s enough data regarding the coronavirus to enable them to turn those inferences into facts. And anything a non-scientist says is highly likely to be a guess.

Passive Investing and ETFs I’ve told this story many times, but I want to repeat it here to lay a foundation for what follows. I arrived at the University of Chicago Graduate School of Business (not yet the Booth School) just over 50 years ago, in September 1967. The “Chicago school” of finance and investment theory – largely developed there in the early ’60s – had just begun to be taught. It was methodically constructed on theoretical underpinnings, as well as on a healthy dose of skepticism regarding what investors had been doing previously. One of the major foundational components was the “Efficient Market Hypothesis” and its conclusion that “you can’t beat the market.” First there was the logical argument: it seemed obvious that collectively all investors have to do average before fees and expenses, and thus below average after. And then there was the empirical evidence that for decades most mutual funds had performed behind stock indices like the Standard & Poor’s 500. My professors’ response in the late 1960s was simple, albeit hypothetical and fanciful: why not just buy shares in every company in an index? Doing so would allow investors to avoid the mistakes most people made, as well as the vast majority of the fees and costs associated with their efforts. And at least they would be assured of performing in line with the index, not behind it.

It makes no sense to think it would be otherwise. And what about the next seven words: “Anyone who finds it easy is stupid”? It follows from the above that given how hard investors work to find special opportunities, and that their buying eliminates such prospects, people who think it can be easy overlook substantial nuance and complexity. Markets are meeting places where people come together (not necessarily physically) to exchange one thing (usually money) for another. Markets have a number of functions, one of which is to eliminate opportunities for excess returns. Ed calls me and bids $10,000 for my car. Then he offers to sell it to Bob for $20,000. If Ed’s lucky and we both say yes, he doubles his money overnight. To put it simply, anyone who expects to make money easily trading cars this way either thinks (a) Bob and I are idiots or (b) the market won’t function in a way that enables us to know about the fair value of my car. If these conditions were met, it would be an “inefficient market.” But if Bob and I have access to market data on used car pricing, Ed’s chances of pulling off this deal are greatly reduced. In most markets, transparency tends to reveal and thus preclude obvious mispricings. (Thanks to the incredible gains in access to data by way of the Internet, this is certainly more true today than ever before.)

Put these two phenomena together and what do you have? I think the answer is an environment in which risk-taking is greatly encouraged. It is often said that the market runs on fear and greed, but I believe it usually runs on fear or greed; that is, at most points in time, one or the other predominates. Right now, because of the two trends cited above, greed is greatly elevated and, perhaps more importantly, fear is in short supply.fund,

Nevertheless, I concluded that we had to assume it would, and thus that we should plow money into financial assets at their highly discounted prices. There was nothing anyone could say they “knew,” and that included me. I was limited to gaming out my conclusions, which were as follows: • we can’t confidently predict the end of the world, • we’d have no idea what to do if we knew the world would end, • the things we’d do to gird for the end of the world would be disastrous if it didn’t end, and • most of the time the world doesn’t end. Clearly, I didn’t base these conclusions on knowledge of the future. But I saw no logical choice other than to start putting money to work, including the $10 billion that was sitting uninvested in Opportunities Fund VIIb. We had formed that fund to prepare for an elevated opportunity in distressed debt. How could we not follow through when one arrived? And yet, we admittedly had no idea what the future would bring. I can’t claim to have analyzed the future. In fact, I consider the phrase “analyze the future” one of the great oxymorons. The future has not yet been created, and it’s subject to millions of complex, unquantifiable, and unknowable factors that will always be in flux. You can ponder the future and speculate about it, but there’s nothing to “analyze” and certainly there wasn’t in the early days of the Global Financial Crisis.

UInvestor Behavior in a Low-Return Market Each player must accept the cards life deals him or her. But once they are in hand, he or she alone must decide how to play the cards in order to win the game. I found that quote on the wall of a Melbourne, Australia coffee shop last month, with an attribution to Voltaire. I was struck immediately by its applicability to the financial markets. As I’ve pointed out in the past, we must never overlook the need to deal with the investment environment as it is. The environment is the product of natural phenomena as well as the decisions made by millions of “economic units” such as consumers, investors, companies and nations. We are presented with it, and no one of us can alter it. What matters is what we do with it. To succeed as investors, we must recognize the environment for what it is and act accordingly. In any given environment, some actions will lead to success and others to failure. Which is which varies greatly over time. Our first task as investors is to assess the environment and map a course which is appropriate for it.

Democrats generally feel tax increases should be part of any solution, and Republicans often insist that while they’re open to overhauling the tax code, total taxes must not rise. What’s Fair is Fair This memo got its start as an excuse for me to write about one of my greatest pet peeves: the so-called “fair share.” Ask your typical Democrat or liberal about the idea of increasing taxes on upper-bracket earners, and what will they say? In my experience, the answer’s always the same: “We’re not out to soak the rich. We just want them to pay their fair share.” We’ve seen it over and over for years. For example: © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

 Or maybe it'll become part of the S&P 500, and indexers and closet indexers will have to add it to their portfolios. As always, however, the post mortem is more thorough than the simplistic thought process that preceded it, and the results are a lot less pleasant. Dreams of ever-rising prices aren't enough. Now we know there has to be a reason why prices should rise. Today, cooler heads point out that long-term equity returns are driven by dividends and earnings growth. "Huh?" say the people who entered the market in the late '90s.

On December 5, 1996, with the Dow at 6,437, Alan Greenspan coined that phrase, of which we're unlikely to have heard the last. Acting in the classic role of a central banker trying to jawbone against trends inimical to economic health, he asked: How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions? Did Greenspan want to stop people from having fun and making money? No. He wanted to keep stocks from running too far too fast and thus avoid an excessive wealth effect.

A thorough understanding of how investors’ minds work is essential if one is to figure out where a market is in its cycle, why, and what to do about it. For me, the markets’ recent behavior – certainly on December 11, but also at other points in 2015 – reinforces that observation. This memo is my attempt to send the markets to the psychiatrist’s couch, and an exploration of what might be learned there. 2012-14: An Uncertain World In September 2012, I wrote a memo called “On Uncertain Ground.” To begin it, I observed that “The world seems more uncertain today than at any other time in my life.” I went on to list the things that worried me. Few of them are less troubling today. Certainly the period of the post-crisis recovery hasn’t been carefree. Here are the things that concerned me in 2012, as viewed from that perspective:  Macro growth – It seems to be broadly accepted that overall economic growth will be slower in the years ahead than in the latter part of the twentieth century. Do lower birth rates and slowing gains in productivity doom us to reduced macro gains? What does this mean for everything else? In particular, if growth remains slow, will it lead to slowing inflation, or even deflation?  Trends in the developed world – Will the developed nations be able to compete in a globalized economy? How will incomes hold up as developing nations produce goods cheaper, and as the quality of those goods improves?

Headlined "Behind Enron's Fall, a Culture of Operating Outside the Public's View," it read in part as follows: It was vintage Enron: minimal disclosure of financial information that, in retrospect, was central to understanding the complex company . . . . virtually unseen until the end was an Enron culture that contained the seeds of its collapse, a culture of highly questionable financial engineering, misstated earnings and persistent efforts to keep investors in the dark. Senior Enron executives flouted elementary conflict-of-interest standards. The company hired legions of lawyers and accountants to help it meet the letter of Federal securities laws while trampling on the intent of those laws. It became adept at giving technically correct answers rather than simply honest ones. The article, and particularly the last sentence quoted above, prompted me to write a year- end memo to Oaktree' s staff stressing the importance of taking "the high road" and describing Enron as "a pretty good example of what Oaktree doesn't want to be."

” November 20, 2001: Overpermissive providers of capital frequently aid and abet financial bubbles. . . . In Field of Dreams, Kevin Costner was told, “if you build it, they will come.” In the financial world, if you offer cheap money, they will borrow, buy and build – often without discipline, and with very negative consequences. From “Genius Isn’t Enough,” October 9, 1998: Look around the next time there’s a crisis; you’ll probably find a lender. The above citations provide the themes for this memo. I’ll just update them, put them into the current context and discuss the ramifications for investing today. We’ll see how © Oaktree Capital Management, L.P.Reserved

We are less concerned with the absolute quality of our companies than with the price we pay for whatever it is we're getting. In short, we feel “everything is triple-A at the right price”. We have many reasons for following this approach, including the fact that relatively few people compete with us to do so. But we feel buying any asset for less than it's worth virtually assures success. Identifying top quality assets does not; the risk of overpaying for that quality still remains. What does all of this have to do with microeconomics? Well microeconomics is the study of the price-setting process, and much of price comes down to a matter of supply and demand. Ceteris paribus -- in this case, holding the level of supply constant -- price will be higher if there is more demand and lower if there is less. And that's why buying when everyone else is can, in and of itself, doom an investment. Many real estate investments made in the 1980s were ill-fated because excess demand from investors and too-easy credit induced builders to erect structures for which there are no tenants.were

For the benefit of our multidisciplinary audience, I’ll introduce some of these questions with some explanatory background, especially from a cognitive angle. So I’d like to start with a few questions by MMH team members. The first one is from James Clunie: You often write about the concept of the pendulum. More recently, in a podcast, you applied it to international affairs. While the pendulum appears at first glance to be a mechanical model, importantly, you have also applied it to human psychology, especially mood swings. These fit much more with a spontaneous “market mind,” which you have also referred to, for example, in your memo You Can’t Predict. You Can Prepare. Consequently, the question is, in what way and to what extent is the pendulum mechanical? For example, would it be correct to say that while the pendulum implies mean reversion, the latter is not a mechanical process and is thus difficult to predict? HM: Thanks for that question, Patrick. I’m very pleased to be discussing these topics with you. As you know, they’re something I’m fixated on, and it’s great to have someone to talk with about them. I think the pendulum is a good example of many of the things we’re going to discuss today. It’s an idea. It’s a concept. The idea is that it’s something that swings back and forth. Something that oscillates, something that fluctuates around a midpoint. That’s the whole concept. © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

I concluded that “This Time It’s Different” shouldn’t ignore this subject and, as a result, reworked the end of its section on quantitative easing, adding a new final paragraph: Can government actions permanently raise the level of demand in an economy, or do they mostly accelerate future demand into the present? If the latter, can QE elevate GDP forever above what it otherwise would have been? I doubt it. But if it could, wouldn’t that eventually cause what I call an “excess,” leading to a recession? Finally, when I hear people talk about the possibility that the Fed will prevent a recession, I wonder whether it’s even desirable for it to have that goal. Per the above, are recessions really avoidable or merely postponable? And if the latter, is it better for them to occur naturally or be postponed unnaturally? Might efforts to postpone them create undue faith in the power and intentions of the Fed, and thus a return of moral hazard? And if the Fed wards off a series of little recessions, mightn’t that just mean that, when the ability to keep doing so reaches its limit, the one that finally arrives will be a doozy? I’m so glad these last-minute inspirations caused me to include the above. I think the topic is very important, so much so that I’m now going to devote a memo to the subject of Fed interest-rate management. © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

They aren’t absolute, like the laws of physics (e.g., gravity), but they reliably establish tendencies and limits. If the price of something goes up, the amount consumed is likely to go down. If wages rise, the number of people employed for a task is likely to decline. If tax rates go up, there’s likely to come a point at which there’s less incentive to work, and thus less output. If a government spends more, to pay the bills it has to either print money (which tends to be inflationary), raise taxes or borrow. Shortly after publishing “Economic Reality,” I added a new section to the version appearing on Oaktree’s website, saying economics is largely the study of choice. If you only have $10, do you want to buy a $10 book or two $5 hamburgers, or make a $10 gift, or add $10 to your savings? The only thing we know you can’t do is do them all. Further, decisions and actions have consequences. For example, spending can provide us with enjoyment, but it will also make us poorer. Reality in Politics I’ve always gotten a kick out of oxymorons – phrases that are internally contradictory – such as “jumbo shrimp” and “common sense.” I’ll add “political reality” to the list. The world of politics has its own, altered reality, in which economic reality often seems not to impinge. No choices need be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real world, politicians seem to feel free to ignore them.

Attachment to a lavish lifestyle. Growing indebtedness and related increases in interest costs. Dependence on others to finance the shortfall and the risk that those lenders will withdraw their loans or charge higher interest rates. A commitment to pay for the welfare of others that threatens to grow out of control. Pete’s book focused on the tendency of the United States to ignore the cost of its social programs, run deficits and expand debt, and the “Sam” in my analogy was, of course, Uncle Sam. But now other nations have jumped the line and usurped the above description. Like most of Western civilization, it started with Greece. Because I was in London much of the time since Greece burst into prominence, I may be able to add some insight from a European vantage point. This period in London was unusual for me, in that with this topic in the headlines I was far more a student than a teacher. Most Americans don’t start off sensitized to international economics and, especially, currency matters. It’s been challenging to organize all I’ve learned and boil it down for a memo, but here it is. © Oaktree Capital Management, L.P.Reserved

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge. The safest and most potentially profitable thing is to buy something when no one likes it. Given time its popularity, and thus its price, can only go one way: up. Watch which asset classes they're holding conferences for and how many people are attending. Sold-out conferences are a danger sign. You want to participate in auctions where there are only one or two buyers, not hundreds or thousands. You want to buy things either before they've been discovered or after there's been a shake-out. 4. The bottom line is that it is best to act as a contrarian.

Every once in a while, an up-or down-leg goes on for a long time and/or to a great extreme and people start to say "this time it's different." They cite the changes in geopolitics, institutions, technology or behavior that have rendered the "old rules" obsolete. They make investment decisions that extrapolate the recent trend. And then it turns out that the old rules do still apply, and the cycle resumes. In the end, trees don't grow to the sky, and few things go to zero. Rather, most phenomena turn out to be cyclical.  UCycles' clout is heightened by the inability of investors to remember the pastU. As John Kenneth Galbraith says, "extreme brevity of the financial memory" keeps ma participants from recognizing the recurring nature of these patterns, and thus their inevitability: rket . . .and

Although there were good days for a while as well as bad, the bond market never did recover its equilibrium once the rate rise had begun. The yield on the 30-year Treasury bond rose from 6.21% on January 28 to 7.40% on April 4, with its price falling 14%, from 100.41 to 86.22. The decline spread quickly to other asset classes, and many investors in riskier strategies suffered harsh consequences. Some observers protest that economic and industry fundamentals continue to be favorable. But those positive developments had come to be valued too highly, and the resulting correction of valuations has been painful. UIt's important to note the first lesson, then: successful investing has at least as much to do with what you pay for an asset as it does with what that asset's fundamentals areU. But why did the Fed's half-point bump up in short rates cause such devastation? First, of course, even a small step in terms of policy-related tightening implies there may be much more to come. More importantly though, the move suddenly took a big bite out of investors' optimism and reawakened their fear. Through January, investors acted as if nothing could go wrong. That first rate rise served to remind them that something could go wrong -- and had. Thus there has been a swing back from a euphoric extreme.and

Positives – Whereas in my last two memos I talked primarily about reasons to be cautious, I want to make it clear here that I do recognize the positives in the current situation. Most of them have to do with fundamentals – primarily the healthy macro-economic outlook and thus the potential for increasing EPS.  The U.S. economy is chugging along, and the recovery that started in 2009 has become one of the longest in history (103 months old at this point). The rest of the world’s economies are joining in for that rare thing, worldwide growth. Most economies seem to be gaining rather than losing steam, and they don’t appear likely to run out of it anytime soon.  Since the economic recovery hasn’t been marked by excesses to the upside, when a recession eventually does occur, it doesn’t have to be extreme. In short, no boom, no bust.  One of the reasons for the sluggish recovery during the Obama administration was the low level of capital investment (a frequent site of excesses during recoveries). I think that was due to corporate concern over the president’s seeming indifference to business and his tendency to regulate. No one wants to make long-term investments in an inhospitable environment for business. In contrast, it’s very clear that President Trump is committed to being a pro- business president and a deregulator.

* * * There’s a great deal to be said about investors’ foibles, and I’ve shared much of it over the years. But the rapid market decline we saw in the first week of August – along with the rapid rebound – compels me to pull together what I’ve said previously on the subject, along with some priceless investing cartoons from my collection, and add a few new observations. To set the scene, let’s review recent events. As a result of the Covid-19 pandemic, soaring inflation, and the U.S. Federal Reserve’s rapid interest rate increases, 2022 was one of the worst years ever for the combination of stocks and bonds. Sentiment reached its low around the middle of 2022, with investors depressed by the universally negative outlook: “We have inflation, and that’s bad. And the rate increases to fight it are sure to bring on a recession, and that’s bad.” Investors could think of few positives. Then the mood lightened and, late in 2022, investors coalesced around a positive narrative: the slow economic growth would cause inflation to decline, and that would permit the Fed to start lowering rates in 2023, leading to economic vigor and market gains. A significant stock market rally began and continued nearly uninterrupted until this month. Although the rate cuts anticipated in 2022 and 2023 still haven’t materialized, optimism has been in the ascendency in the stock market. The S&P 500 stock index rose by 54% (not counting dividends) in the 21 months which ended on July 31, 2024.

” In 1978, I was asked to move to the bank’s bond department to start funds in convertible bonds and, shortly thereafter, high yield bonds. Now I was investing in securities most fiduciaries considered “uninvestable” and which practically no one knew about, cared about, or deemed desirable . . . and I was making money steadily and safely. I quickly recognized that my strong performance resulted in large part from precisely that fact: I was investing in securities that practically no one knew about, cared about, or deemed desirable. This brought home the key money-making lesson of the Efficient Market Hypothesis, which I had been introduced to at the University of Chicago Business School: If you seek superior investment results, you have to invest in things that others haven’t flocked to and caused to be fully valued. In other words, you have to do something different. The Essential Difference In 2006, I wrote a memo called Dare to Be Great. It was mostly about having high aspirations, and it included a rant against conformity and investment bureaucracy, as well as an assertion that the route to superior returns by necessity runs through unconventionality. The element of that memo that people still talk to me about is a simple two-by-two matrix: Conventional Behavior Unconventional Behavior Favorable Outcomes Average good results Above average results Unfavorable Outcomes Average bad results Below average results © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

The key element is that a subscription line can substitute for LP capital, but it can’t be used to allow the fund to invest more than its committed capital. That is, a $100 million fund with a subscription line might be able to buy $50 million of assets without calling LP capital, but it still can’t invest more than $100 million in total (other than by recycling proceeds from liquidated investments). The bottom line is that essentially all subscription line financing does is defer the calling of LP capital. So the starting point for this discussion is the fact that these lines lever LP capital but do not lever funds in the sense of allowing funds to invest more than their committed capital. Fund- level debt that allows funds to invest more than their committed capital is different from subscription lines and not my subject here. © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

They want their constituents to be able to continue renting apartments in their districts and not lose out to others who can pay more. To deliver on this aspect of constituent service, they pass laws to limit rent increases. Now people who otherwise couldn’t afford to live in the jurisdiction can do so. Those tenants are happy, and that makes the elected officials happy, as happy constituents tend to vote for incumbents. But not everyone is happy. Landlords are unhappy about not being able to charge the full rent they could charge in a free market, so they stop investing in their apartments and sometimes take them off the market. Developers who might be interested in building new apartments refrain from doing so out of concern that they won’t be able to earn a sufficient return. Also unhappy are people who would like to live in that location and can afford to pay market rents but are unable to find vacant apartments because they’re occupied by people paying below-market rents. There are at least two things wrong with this situation. The first is that governments are choosing winners and losers, rather than letting market forces do so. In the case of rent control, the people who occupy apartments (and potentially political incumbents) are the winners, but landlords, developers, and people looking for apartments are the losers.

A lot of this is because people seem to think everything’s good and likely to stay that way. UCycles in the World of Investing The basics of cycles are simple. The economic cycle gives rise to recessions and recoveries, creating the business environment. This produces a business cycle marked by rising and falling sales and profits. The credit cycle swings more radically, such that capital market conditions alternate between irrationally generous and unfairly restrictive. Likewise, market cycles fluctuate much more than do the more “fundamental” economic and business cycles, due largely to the volatile cycle in investor psychology. In this latter regard, I’ll reprint a few paragraphs from “First Quarter Performance,” the 1991 memo cited above. I think they capture investors’ pattern of behavior. The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward the extreme itself that supplies the energy for the swing back.

Leaders of society, government and business have made public statements designed to show their support. I want to add my voice to theirs and express my rejection of the status quo. I’ve struggled to write this memo, and for that reason it’s late in coming. I’m not a social commentator, and I have little to add that is unique, only my humanity. I certainly don’t feel I know the solution or have the means to implement it. I’m afraid of coming across as holier-than-thou, and especially of saying something that anyone finds insensitive, patronizing or hurtful. I hold good thoughts in my heart and have always tried to be a good, thoughtful, inclusive person. But I now know that’s not enough. I find the statistics relating to the injustices listed above appalling, the result of individual as well as institutionalized racism going all the way back to the original sin of slavery. But behind the statistics – unpleasant as they are – are millions of individuals suffering. While the battle for civil rights was “won” a half-century ago, and we have talked about progress in the area of race, our society still denies equal opportunity to many. The teenagers denied a quality education, who can’t think of things to hope for or can’t imagine achieving their dreams. The mothers who can’t provide food and shelter for their families, and who have to look on with sadness, resentment or anger at a world full of things they’re denied.

Regular readers of my memos can imagine what went through my mind: “Not one person in this room is an expert on foreign affairs or politics. No one present has particular knowledge of these topics, and certainly not more than the average intelligent person who read this morning’s news.” None of the thoughts expressed, even on economic matters, seemed much more persuasive than the others, and I was absolutely convinced that none were capable of improving investment results. And that’s the point. It was that lunch that started me thinking about writing yet another memo on the futility of macro forecasting. Soon thereafter a few additional inputs arrived – a book, a piece in Bloomberg Opinion, and a newspaper article – all of which supported my thesis (or perhaps played to my “confirmation bias” – i.e., the tendency to embrace and interpret new information in a manner that confirms one’s preexisting views). Together, the lunch and these items inspired this memo’s theme: the reasons why forecasts are rarely helpful. In order to produce something useful – be it in manufacturing, academia, or even the arts – you must have a reliable process capable of converting the required inputs into the desired output. The problem, in short, is that I don’t think there can be a process capable of consistently turning the large number of variables associated with economies and financial markets (the inputs) into a useful macro forecast (the output). © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.

(I have said many times that those higher returns must not be viewed as dependable; if risky investments could be counted on to produce higher returns, they wouldn’t be risky. Thus their expected returns must appear to be higher in order to attract capital, but the higher expected return will always be accompanied by a range of possible outcomes that is wider and may include losses.)Return

(This is a good time for my typical reminder that I am not an economist, and far from all of my observations would be supported by that fraternity. And please note that one of the key tenets of Oaktree’s investment philosophy dictates that our investing will not be governed by macro forecasts. We say it’s one thing to have an opinion on the macro, but something very different to act as if it’s correct. I urge you to consider adopting a similar attitude toward all macro forecasts, especially mine.) Around 2008 or ’09, I had a visit from a senator looking – surprise! – for a campaign contribution. I suppose to make conversation, he asked if I could assure him we were headed for a vigorous recovery. “Forget vigorous,” I told him. “I’m hoping for lackluster.” I haven’t changed my tune. There’s a very human tendency to think things will stay as they are, and if they change, that they’ll revert to what we’re used to. Most people think of economic growth as the norm; after all, that’s been the general rule during our lifetimes. In fact, the global economy has grown nicely for hundreds of years. That’s something “everyone knows.” But how many people think about where economic growth comes from, and whether it’s naturally occurring and inevitable? © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

A great source on the subject is Wall Street Under Oath, a 1939 book on the causes of the Great Crash of 1929 written by Ferdinand Pecora, who was counsel to the Senate committee investigating the crash and later a New York State judge. I first read it about twenty years ago, and I brought it out of storage in 2007. It is a typical polemic, assigning blame and touting regulation pursuant to what I assume were the author’s philosophical/political biases (see page 4). Pecora describes a Wall Street that, up to and including the 1920s, was like the Wild West. Bankers and brokers were out to make money for themselves; their behavior was largely unregulated; and conflicts between their interests and those of their clients were widespread and disregarded. In particular, according to Pecora, disclosure standards were non-existent. © Oaktree Capital Management, L.P.Reserved

This memo is inspired by two excellent newspaper articles that appeared within the last month: “Party Gridlock Feeds New Fear of a Debt Crisis,” by Jackie Calmes (The New York Times, February 17) * and “Perils of the California Model” by David Wessel (The Wall Street Journal, March 4).† Indicating their importance, The Times piece ran in the upper right-hand corner of the front page, always the place for the top story of the day, and the Journal story was carried on page A2. I’ve included links below in the hope they’ll increase your likelihood of reading them. As Calmes wrote in The Times (in both cases below, emphasis added): After decades of warnings that budget profligacy, escalating health care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in foregone tax revenues and higher spending for safety-net programs. Yet rarely has the political system seemed more polarized and less able to solve big problems that involve trust, tough choices and little or no short- * http://www.nytimes.com/2010/02/17/business/economy/17gridlock.html † http://online.wsj.com/article/SB20001424052748704541304575099371249822654.html © Oaktree Capital Management, L.P.Reserved

For them to be truly liquid in this latter sense, one has to be able to move them promptly and without the imposition of a material discount. Liquidity Characterized I often say many of the important things in investing are counter-intuitive. Liquidity is one of them. In particular, it’s probably more wrong than right to say without qualification that something is or isn’t “liquid.” If when people ask whether a given asset is liquid they mean “marketable” (in the sense of “listed” or “registered”), then that’s an entirely appropriate question, and answering it is straightforward. Either something can be sold freely to the public or it can’t. But if what they want to know is how hard it will be to get rid of it if they change their mind or want to take a profit or avoid a possible loss – how long it will take to sell it, or how much of a markdown they’ll have to take from the last price – that’s probably not an entirely legitimate question. It’s often a mistake to say a particular asset is either liquid or illiquid. Usually an asset isn’t “liquid” or “illiquid” by its nature. Liquidity is ephemeral: it can come and go. An asset’s liquidity can increase or decrease with what’s going on in the market. One day it can be easy to sell, and the next day hard. Or one day it can be easy to sell but hard to buy, and the next day easy to buy but hard to sell. In other words, the liquidity of an asset often depends on which way you want to go . . .

equities having fallen for three consecutive years for the first time since the Great Depression – many investors concluded that their return aspirations couldn’t be met in traditional investments. Pressure for higher returns had the effect of increasing the acceptance of alternative investments, hedge funds, emerging market securities, leverage and financial innovation . . . in the process, suppressing customary risk aversion.  Leverage and risk taking became the dominant features of the financial landscape, facilitated by a “global wall of liquidity.” The low promised return on most investments, the pressure for more and the availability of low-cost capital all combined to make leveraged structures the flavor of the day.  Importantly, much of the growth in leverage took place free of regulatory oversight. In the past, the creation of debt was limited by margin requirements, Fed regulations, bank capital requirements and bankers’ prudence.an

and then gets his big break and becomes an “overnight success.” Except that in this case, having built up great excesses over a period I date from November 2002, people are now acting as if this market has become an overnight flop. Some of us have been saying for years that a swing back of the market cycle was due, but it took a long time to happen (calling to mind, as so often in my case, the dictum that “being too far ahead of your time is indistinguishable from being wrong”). This delay does a good job of illustrating Lord Keynes’s famous observation that “markets can remain irrational longer than you can remain solvent.” Markets can swing in a single direction for a longer period and to a greater extent than anyone might expect. That’s crowd psychology. But the swing back can be equally surprising – in terms of what kicks it off and how fast it moves. I recently came across a great quote from Larry Summers: “in economics things happen slower than you expected they would but when they finally do, they happen faster than you imagined they could.” Certainly the recent transition from all good to all bad demonstrates this phenomenon.

” Now, as is often the case, unassuming caution seems to be winning out over cocksure optimism. UThe Seed This memo isn’t about the events of July 2007, but rather how recent events exemplify the time-honored pattern that kicks off the swing back of the pendulum. That pattern often begins with a single seed, and sometimes one that’s hard to identify. That difficulty isn’t there this time; it’s just that the seed seems so small compared with the repercussions. The seed of the current cyclical downturn sprouted in the area of subprime mortgages, residential loans made to homeowners with less-than-stellar creditworthiness.mere

When the dust has settled after most trades, the buyer and seller are unlikely to be equally happy. I consider it highly desirable to focus on the topic of investing mistakes. First, it serves as a reminder that the potential for error is ever-present, and thus of the importance of mistake minimization as a key goal. Second, if one side of every transaction is wrong, we have to ponder why we should think it’s not us. Third, then, it causes us to consider how to minimize the probability of being the one making the mistake. Investment Theory on Mistakes According to the efficient market hypothesis, the efforts of motivated, intelligent, objective and rational investors combine to cause assets to be priced at their intrinsic value. Thus there are no mistakes: no undervalued bargains for superior investors to recognize and buy, and no over- valuations for inferior investors to fall for. Since all assets are priced fairly, once bought at fair prices they should be expected to produce fair risk-adjusted returns, nothing more and nothing less. That’s the source of the hypothesis’s best-known dictum: you can’t beat the market. I’ve often discussed this definition of market efficiency and its error. The truth is that while all investors are motivated to make money (otherwise, they wouldn’t be investing), (a) far from all of them are intelligent and (b) it seems almost none are consistently objective and rational.

They do this without knowledge of what the future will bring or concern about whether the price they’re paying can possibly be expected to produce a reasonable return with a tolerable amount of risk. The end result for investors is inevitably painful in the short to medium term, although it’s possible to end up ahead after enough years have passed. I’ve lived through several bubbles and read about others, and they’ve all hewed to this description. One might think the losses experienced when past bubbles popped would discourage the next one from forming. But that hasn’t happened yet, and I’m sure it never will. Memories are short, and prudence and natural risk aversion are no match for the dream of getting rich on the back of a revolutionary technology that “everyone knows” will change the world. I took the quote that opens this memo from Derek Thompson’s November 4 newsletter entitled “AI Could Be the Railroad of the 21 st Century. Brace Yourself,” about parallels between what’s going on today in AI and the railroad boom of the 1860s. Its word-for-word applicability to both shows clearly what’s meant by the phrase widely attributed to Mark Twain: “history rhymes.” Understanding Bubbles Before diving into the subject at hand – and having read a great deal about it in preparation – I want to start with a point of clarification. Everyone asks, “Is there a bubble in AI?” I think there’s ambiguity even in the question.

Further, the entire economy runs on trust: that the people to whom we provide goods and services will pay their bills; that contracts will be adhered to; and that money will retain value, or at least the part that inflation doesn’t erode. Belief is what makes the economic world go round. Take a minute to think about how we would behave in a world in which there wasn’t trust in money, the institutions that store it and the mechanisms that move it from one place to another. Clearly, we’d be sunk without trust in the financial system. I’ve described in the past how financial institutions are vulnerable to loss of faith because of their unique combination of opacity, leverage, conscious risk bearing, and their use of short-term deposits and borrowings to fund longer-term, illiquid assets. When providers of capital lose faith in a financial institution, they line up to withdraw their money. But the institution can’t give them all back their money, because it can’t liquify all of its assets immediately.downward

The slow and steady ways of making money came in last, and the riskiest schemes paid off best. Venture capital funds produced triple-digit returns in a year, and profitless technology company IPOs did so in a day. On the other hand, investors seemed incapable of remembering why they had fixed income allocations, and value stocks and absolute return strategies weren't far behind in terms of disregard. In May of 1999, I heard John Angelo of Angelo Gordon put it brilliantly: Twenty years ago, when I told people I could make them 15% a year, year in and year out, they said “That's impossible.” Today, when I tell people I can make them 15% a year, year in and year out, they say “Who cares?”

Many other nations seem to function no worse without them. But the U.S. has the historical accident of a ceiling, and we must deal with it. Because the limitation is set in terms of absolute dollars and not indexed for inflation or growth, we would run into it every few years even if our debt only grew apace with the economy. “In fact, it’s been raised nearly 100 times over the decades.” (Financial Times, July 16) But thanks to the especially rapid growth of our debt relative to GDP in recent years – exacerbated by the Afghan and Iraq wars and the financial crisis – the ceiling has the potential to provide some real excitement every once in a while. The Relentless Growth of Debt Greece, Ireland, Portugal, Spain, Italy, Iceland, the U.S., California . . . the list of governments with debt problems is long and grows longer. The issue has flared up in the last fifteen months and is often in the headlines nowadays. And yet, the general conditions causing the concern are nothing new. The deficits and debt that worry people today have existed for a good while: similar in kind albeit perhaps © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Eventually, productive capacity exceeded what was needed, stock prices exceeded underlying value, and shaky investment innovations were embraced. When these trends outstripped the fundamentals and became unsustainable, the result was a downturn. Often a recession triggered a market correction, and sometimes the impact of that recession was reinforced by negative exogenous events that further darkened the previously-blue skies. A good example is the first non-investment grade debt crisis Bruce Karsh and I managed through, in 1990-91. There was a recession, exacerbated by the shock of going to war to help Kuwait repel an invasion by Iraq. The newly developed high yield bond market experienced its first major spate of defaults, the result of a recession and credit crunch and exacerbated by the prosecution of Michael Milken and the failure of Drexel Burnham, precluding remedial bond exchanges that otherwise might have helped companies stay alive. Stocks declined, but high yield bonds went into free-fall. Notably, many of the prominent LBOs of the 1980s – which had been financed with perhaps 95% or so of debt – went bankrupt. Investor psychology collapsed and bondholders headed for the exits. A collapsing economy needs a good dose of stimulus to pull it out of its swoon, and that’s what occurred. Usually that’s enough.

With investors worrying less about default rates and forced selling, our high yield bonds returned more than at any time since the second quarter of 1980. The rebirth of interest in smaller and second-tier stocks produced a quarterly return for our convertibles above any since the fourth quarter of 1982. Lastly, suspension of "end-of-the-world" thinking and an increased willingness to envision possible solutions caused our distressed-debt Special Credits portfolios to gain even more than either high yield bonds or convertibles. It would be wonderful to be able to successfully predict the swings of the pendulum and always move in the appropriate direction, but this is certainly an unrealistic expectation. We consider it far more reasonable to try to (1) stay alert for occasions when a market has reached an extreme, (2) adjust our behavior slightly in response and, (3) most importantly, refuse to fall into line with the herd behavior which renders so many investors dead wrong at tops and bottoms.

While we strive to be somewhat above average each year, our philosophy mandates that we put the greatest emphasis on trying to avoid losing our clients' money. And that brings me to what I feel is a much more appealing sports metaphor, which I clipped from the Wall Street Journal in 1992 but never had occasion to cite until now: the story of golfer Tom Kite. The article was about Kite's having won a major tournament, but the part that interested me dealt with his record up to that time: The bespectacled 42-year-old had won ... over the past 20 seasons some $7.2 million in official prize money, more than any other golfer -- ever. But [he had never before won] one of the sport's "majors" (the U.S. and British Opens, Masters and PGA Championship).

In response to the first tremors of the Global Financial Crisis, the Federal Reserve began to cut the fed funds rate in 3Q2007. They then lowered it to zero around the end of 2008 and left it there for seven years. In late 2015, virtually the only question I got was “When will the first rate increase occur?” My answer was always the same: “Why do you care? If I say ‘February,’ what will you do? And if I later change my mind and say ‘May,’ what will you do differently? If everyone knows rates are about to rise, what difference does it make which month the process starts?” No one ever offered a convincing answer. Investors probably think asking such questions is part of behaving professionally, but I doubt they could explain why. The vast majority of investors can’t know for sure what macro events lie just ahead or how the markets will react to the things that do happen. In The Illusion of Knowledge, I wrote at length about the way unforeseen events make a hash of economic and market forecasts. In summary, most forecasts are extrapolations, and most of the time things don’t change, so extrapolations are usually correct, but not particularly profitable. On the other hand, accurate forecasts of deviations from trend can be very profitable, but they’re hard to make and hard to act on. These are some of the reasons why most people can’t predict the future well enough to repeatably produce superior performance. Why is doing this so hard?

If you’re setting out for a drive and recognize that you don’t know the way, you’re likely to check a map, follow your GPS, ask directions and drive slowly, watching for indications you’ve gone off course. But if you’re sure you know the way, you’re more likely to skip these things, and if it turns out you didn’t know, that’ll make it much harder to reach your destination. Rather than commit the error of overconfidence, at Oaktree we consider it essential to acknowledge the limits of our capabilities and act accordingly. What Can’t We Do? The main thing we can’t do is see the future, and particularly the macro future. That simple statement has serious ramifications. It means a lot that we’d love to know is beyond us:  we can’t know what the economies of the world will do,  we can’t know whether markets will go up or down, and by how much and when,  we can’t know which market or sub-market will do best, and  we can’t know which securities in a given market will be the top performers. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Can it be predicted and quantified a priori? What’s the best way to manage it?  How reliably do you believe a disciplined process will produce the desired results? That is, how do you view the question of determinism versus randomness?  Most importantly for the purposes of this memo, how will you define success, and what risks will you take to achieve it? In short, in trying to be right, are you willing to bear the inescapable risk of being wrong? Passive investors, benchmark huggers and herd followers have a high probability of achieving average performance and little risk of falling far short. But in exchange for safety from being much below average, they surrender their chance of being much above average. All investors have to decide whether that’s okay. And, if not, what they’ll do about it. The more I think about it, the more angles I see in the title Dare to Be Great. Who wouldn’t dare to be great? No one. Everyone would love to have outstanding performance. The real question is whether you dare to do the things that are necessary in order to be great. Are you willing to be different, and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead. The rest of this memo will be about fleshing out this theme (meaning you can stop reading here if you’ve had enough or are short on time). The Nature of Consensus Opinion I based the above reference to Ben Graham on his famous observation that in the long run the market’s a weighing machine, but in the short run it’s a voting machine. In other words, in the long term the consensus of investors figures out what things are really worth and moves the price there. But in the short term, the market merely reflects consensus opinion regarding an asset’s future popularity, something that’s highly susceptible to the ups and downs of psychology. So, what does the market know? First it’s important to understand for this purpose that there really isn’t such a thing as “the market.” There’s just a bunch of people who participate in a market. The market isn’t more than the sum of the participants, and it doesn’t “know” any more than their collective knowledge.

All of this was called to mind ten days ago by an article on the front page of the Wall Street Journal. Entitled "The Business Cycle is Tamed, Many Say, Alarming Others," it recounts the case currently being made for this remaining a continuous, recession-free economic expansion. As its lead paragraph says, From boardrooms to living rooms and from government offices to trading floors, a new consensus is emerging: The big, bad business cycle has been tamed. The current expansion, at 67 months, has already far exceeded the postwar average. Nevertheless, 51 of the 53 "top economists" surveyed by Blue Chip newsletter (my favorite experts and the subject of my July 22, 1996 memo) predict growth next year of 1.5% or more. And the University of Michigan survey finds that among consumers, more expect five more good years than expect bad times to emerge. The Chairman of Sears states "There is no natural law that says we have to have a recession." According to Amoco's Chairman, "I don't see any reason to believe [the recovery] can't go on until the turn of the century." Sara Lee's CEO says "I don't know what could happen to make a cyclical downturn." (For a few more quotes like these, see page three.)

(I wish I could coin the phrases I use in these memos, but usually I find myself relying on the creativity of others. In this case, I absolutely can’t improve on Jack’s way of putting it.) On November 8, The Economist quoted him as saying, “Amassing assets under management became the [mutual fund] industry’s primary goal, and our focus shifted from stewardship to salesmanship.” (Emphasis added) That’s it. Right there. In a nutshell. Of course some of the late-trading incidents involve individuals who simply took money out of their clients’ pockets and put it in their own (metaphorically). But in case after case – involving late trading and other issues – mutual funds companies forgot their duty as stewards of other people’s assets, doing things that disadvantaged clients in order to build assets under management for their own benefit. Each of us faces the need to balance our own interests against those of others.his

” 4. “There are stocks that are past my sell points, and I’m letting them continue to burble higher.” 5. “I appreciate Howard Marks’s message but I think now is no more a time to be cautious than at any other time. We should always invest as if the best is yet to come but the worst could be right around the corner. This means durable portfolios, hedges, cash reserves . . . etc. There is no better or worse time for any of these things that we can foresee in advance.” I take issue with all these statements, especially the last, and I want to respond – not just in the sense of “dispute,” but rather to clarify where I stand. In doing so, I’ll incorporate some of what I said during my appearances on TV following the memo’s publication. Numbers one and two are easy. As I explained on CNBC, there are two things I would never say when referring to the market: “get out” and “it’s time.” I’m not that smart, and I’m never that sure. The media like to hear people say “get in” or “get out,” but most of the time the correct action is somewhere in between. I told Bloomberg, “Investing is not black or white, in or out, risky or safe.” The key word is “calibrate.” The amount you have invested, your allocation of capital among the various possibilities, and the riskiness of the things you own all should be calibrated along a continuum that runs from aggressive to defensive. © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Importantly, however, Templeton allowed that things might really be different 20% of the time. On rare occasions, something fundamental does change, with significant implications for investing. Given the pace of developments these days – especially in technology – I imagine things might genuinely be different more often than they were in Templeton’s day. Anyway, that’s all preamble. My reason for writing this memo is that, while most people I speak with seem to agree with many of my individual observations in Sea Change, few have expressly agreed with my overall conclusion and said, “I think you’re right: We might be seeing a significant and possibly lasting change in the investment environment.” This memo’s main message is that the changes I described in Sea Change aren’t just usual cyclical fluctuations; rather, taken together, they represent a sweeping alteration of the investment environment, calling for significant capital reallocation. The Backdrop I’ll start off by recapping my basic arguments from Sea Change: • In late 2008, the Federal Reserve took the fed funds rate to zero for the first time ever in order to rescue the economy from the effects of the Global Financial Crisis. 1 All market data cited in this memo is as of May 30, 2023. © 2023 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

We achieve high returns on occasion UbecauseU we deal with an uncertain future, and it's UbecauseU the future is uncertain that superior investors can get an edge. The process of investing consists entirely of divining the future – in terms of profits and values – and translating that future into prices that should be paid today. Obviously, doing so requires a view of what the world will look like tomorrow and how businesses and their products will fare in that world. We each make thousands of judgments a day based on our understanding of what's normal. We turn the right faucet for a drink because that's where the cold water always has been. We tend to buy another car – or another tube of toothpaste – of the same brand because we were happy with the last one. We cross the street on a green light because we trust on-coming drivers to stop on red. We must make assumptions like these, even though we know they won't hold true all the time. If we had to start from scratch every time we faced a decision, the result would be paralysis. Thus we start by assuming that the things that worked in the past are likely to work in the future, but we also make allowances for the possibility that they won't.

Some are our own doing, while many others are beyond our control. There’s no doubt that hard work, planning and persistence are essential for repeated success. These are among the contributors that Twitter’s Dorsey is talking about. But even the hardest workers and best decision makers among us will fail to succeed consistently without luck. What are the components of luck? They range from accidents of birth and genetics, to chance meetings and fortuitous choices, and even to perhaps-random but certainly unforeseeable events that cause decisions to turn out right. In discussing the existence and importance of luck, Smith cites the popular book Outliers by Malcolm Gladwell: Attacking luck has never been more fashionable. No matter how flimsy the science behind the theory, popularized by author Malcolm Gladwell, that success must follow from 10,000 hours of dedicated practice, it has hardened into folklore. Outliers is best known for Gladwell’s observation that it’s this magic number of hours of practice that makes the difference for those who are most successful. But that’s only part of Gladwell’s message, and people who think his book is all about hard work and practice miss the point. Having set out the “10,000- hours” thesis, Gladwell largely stops talking about it and turns to spend much more time on something he calls “demographic luck.” This is actually the antithesis of an insistence that hours of effort suffice. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

” Sound bites like these find receptive audiences among people who are unhappy with their lot, whereas detecting the error in these statements requires an insight, sense of history and understanding of economics that many people lack. What’s Going On? In the January memo, I set forth my view that in the last 10-20 years, the rising economic tide had stopped lifting all boats. In addition, major social and economic trends contributed to increases in economic inequality. These developments, I said, were largely behind the rise of populism. Ray Dalio and Bridgewater actually beat my memo by two days, publishing on January 28 an excellent note titled Populism + Weakening Economy + Limited Central Bank Power to Ease + Elections = Risky Markets and Risky Economies. I was particularly drawn to the following passage: Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

First, the collective actions of those following the map would alter the landscape, rendering it ineffective. And second, everyone following it would achieve the same results, and people would still look longingly at the top quartile . . . the route to which would have to be found through other means. I’ll make a few suggestions below on what investors should and shouldn’t do. In the end, though, the things I suggest will be of little help without highly skilled implementation, and the results will depend almost entirely on that implementation and rather little on my suggestions. First, Get Out of Lake Wobegon Nori Gerardo Lietz of Pension Consulting Alliance, in a paper on the performance of real estate opportunity funds, was the latest to remind me about Garrison Keillor’s fictional Lake Wobegon, where all the children are above average. Investing, likewise, is a world where it seems everyone claims to be terrific and can back it up with performance data. Especially in © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Prior to 1977-78, it was virtually impossible for a company lacking an investment grade credit rating (BBB or above) to issue bonds publicly. The speculative-grade debt that did exist was primarily that of previously investment grade companies that had run into trouble and been downgraded, so-called “fallen angels.” Companies lacking investment grade ratings were generally limited to taking out bank loans or borrowing from insurance companies through “private placements.” Michael Milken is generally credited with the idea, implemented in the late 1970s, that non-investment grade companies should be able to issue bonds if their interest rates are high enough to compensate for the risk of default. This kind of “risk/ return thinking” helped enable the development of today’s U.S. high yield bond market of roughly $1.5 trillion, along with most of the other developments under discussion here. A few small leveraged buyouts took place in the mid-1970s, but the popularization of high yield bonds in the 1980s enabled LBO funds, small companies, and “takeover artists” to borrow enough money to acquire much larger companies than was previously possible. That led to a massive expansion of LBOs, creating the industry that renamed itself “private equity” in the 1990s.

By purchasing undervalued bonds and selling short overvalued bonds affected by similar factors, gains would be earned consistently and without exposure to market risk. The intellect and accomplishments of Long-Term's managers, and its strong annual returns, compelled investors to invest and freed them from feeling they had to understand exactly what the fund did. The fund's approach may not have been fully delineated to investors, its portfolio was never disclosed, and the managers' actions were not even reported after the fact; 40% annual returns were enough to keep investors satisfied. You've probably heard us say that bond investing is a game of inches. So then how was Long- Term able to earn returns of 40% or more most years? The answer was leverage: they borrowed enough money to buy bonds worth many times their equity. It is now known that Long-Term's general partners' cash equity was increased through borrowings to roughly $1.5 billion and paired with $3.1 billion of limited partners' capital. This $4.6 billion of equity was somehow sufficient to enable Long-Term to hold investments totaling about $150 billion and long and short positions in derivatives believed to have had an aggregate "notional value" of $1.25 trillion!

However, if by whiskey you mean the oil of conversation, the philosophic wine, the elixir of life, the ale that is consumed when good fellows get together, that puts a song in their hearts and the warm glow of contentment in their eyes; if you mean Christmas cheer, the stimulating sip that puts a little spring in the step of an elderly gentleman on a frosty morning; if you mean that drink that enables man to magnify his joy, and to forget life’s great tragedies and heartbreaks and sorrow; if you mean that drink the sale of which pours into our treasuries untold millions of dollars each year, that provides tender care for our little crippled children, our blind, our deaf, our dumb, our pitifully aged and infirm, to build the finest highways, hospitals, universities, and community colleges in this nation, then my friend, I am absolutely, unequivocally in favor of it. This is my position, and as always, I refuse to compromise on matters of principle. Sweat’s response shows, depending on how you look at it, either how views can diverge on a given subject or how differently a tale can be spun. Thus it serves well to introduce the topic of this memo: gold. Before the global financial crisis, most participants in the world of finance felt they understood how things worked, and that in addition to the underlying processes, they could rely on institutions and currencies. Then the crisis occurred and a lot changed.

” Looking at the above, it’s important to note the degree to which people (and thus markets) seem to think long-term phenomena can change in the short run. It’s common knowledge that the coronavirus is still gaining ground in the U.S. and elsewhere; the economy is destined for a serious recession; leveraged entities have to worry about their sources of loans and liquidity; and the price of oil is among the very lowest since the 1973 OPEC embargo. But the prices of financial assets have moved down as well: appropriately, too much or too little? In other words, we have to consider the outlook and the appropriateness of value, in the context of unprecedented uncertainty and the total absence of guidance from analogies to the past. There’s no doubt about the ability of the government’s and the Fed’s massive cash injections to make things better in the short run, and certainly the market has treated them as sure winners. But I think it’s important to take time out for a serious discussion of possible scenarios. Are this past week’s remedies certain to work? Are the prior week’s negatives really erased? Which will win in the short and intermediate term: the disease, economic ramifications or Fed/Treasury actions? To try to think about these things in a responsible way, I’ve decided to try cataloging the optimistic and pessimistic elements. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have insight to appreciate the incredible wonders of the present. (John Kenneth Galbraith) One of the greatest differences between humans and animals is supposed to lie in the fact that we can learn other than through direct experience. We don‟t have to sit on a hot stove to learn not to do it. We can learn from history and from lessons passed on by our predecessors – things they experienced or learned from others in turn – so that we needn‟t experience them ourselves. But to enjoy this benefit, we must pay heed to the people and events that preceded us. As Twain said, the events of history don‟t repeat exactly. It‟s rarely the very same thing over and over. In investing, for example, the duration and amplitude of fluctuations are rarely the same from cycle to cycle. (It drives me crazy when people say, “high yield bonds tend to default around the second anniversary of their issuance.” That happened to be the average for one particular period, but there‟s no reason for it to be true, and thus no reason it should be a useful rule going forward.) © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

They apply optimism when things are going well in the world (elevating prices beyond reason) and pessimism when things are going poorly (depressing prices unreasonably). Shortness of memory plays a major part in abetting these swings. If investors remembered past bubbles and busts and their causes, and learned from them, the swings would moderate. But, in short, they don’t. And they may be forgetting again. High yield bonds and many other investment media have once again gone from being weeds to flowers – from pariahs to market darlings – and it happened in a startlingly short period of time. As is so often the case, things that investors wouldn’t touch in the depths of the crisis in late 2008 now strike them as good buys at twice the price. The swing of this pendulum recurs regularly and creates some of the greatest opportunities to lose or gain. Thus we must always be mindful. The Importance – and Shortcomings – of Investment Memory A number of my favorite quotations are on the subject of history and memory, and I’ve used them all in past memos. Humorist and author Mark Twain talked about the relevance of the past: © Oaktree Capital Management, L.P.Reserved

Another chance for someone else to help me say it better, this time from 100-plus years ago: As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing. “Common Sense” and Other Oxymorons Take, for example, the investment that “everyone” believes to be a great idea. In my view by definition it simply cannot be so.  If everyone likes it, it’s probably because it has been doing well. Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages sub-par performance from here on out.  If everyone likes it, it’s likely the price has risen to reflect a level of adulation from which relatively little further appreciation is likely. (Sure it’s possible for something to move from “overvalued” to “more overvalued,” but I wouldn’t want to count on it happening.)  If everyone likes it, it’s likely the area has been mined too thoroughly – and has seen too much capital flow in – for many bargains to remain.

• But from that low, the index regained the previous high in less than five months on August 18 (an increase of 51.5%). It ended 2020 up 67.9% from the low and up 18.4% overall for the year. • Unlike the credit crunches that accompanied many past crises, capital flowed like water. High yield bond issuance for the year was $450 billion, up 57% from 2019 and well above the prior record set in 2013. Investment grade debt issuance totaled $1.9 trillion, up a similar 58% from 2019 and also ahead of the previous record, set in 2017. • After the Fed cut its federal funds rate target to between zero and 0.25%, bond prices rose as bond yields fell in parallel. At year-end, the average A-rated bond yielded just 1.52%, and the average yield on high yield bonds (ex. energy) was just below 4%. So we had a health emergency, an ailing economy, the most generous capital market of all time, and strong stock and bond markets. The seemingly anomalous relationship between the pandemic and recession on one hand and the strong capital and stock markets on the other can be explained by the Fed’s and the U.S. Treasury’s aggressive actions. As suggested by the above catalog of events, the buying opportunity in 2020 turned out to be very brief, especially with regard to public securities and companies with the ability to access the capital markets.

It makes sense, it’s obvious, and people have been saying it for decades, so it has become common knowledge. But it’s wrong! There’s no such thing as net selling! And stock market transactions can’t cause cash to build up! Think about it. In every stock trade there’s a buyer and a seller. So how can selling exceed buying? And the buyer puts as much money into the market as the seller takes out. So how can selling create cash on the sidelines? As usual, there is a less simplistic explanation that’s closer to the truth:  While there can’t be more selling than buying, there can be more would-be sellers than would- be buyers. And the sellers’ desire to sell can be stronger than the buyers’ desire to buy. These factors are indicators of negative sentiment, and they can lead to a selling climax that creates a market bottom, so they can presage the (eventual) end of a decline.  And clearly, uninvested cash equates to potential buying power, and thus potential fuel for a rise. But uninvested cash can’t result from selling (which requires a buyer to put in the same amount of previously-uninvested cash as the seller takes out).potentially

It read like a personal note from a friend or colleague. It made reference to things I’ve talked about in past memos, like the sea change in interest rates and the pendulum of investor psychology, and it used them in metaphors related to AI. It argued logically, anticipated points I might make in response, injected humor, and bolstered its credibility by candidly acknowledging AI’s limitations, just as I might do. I’ve asked AI questions before and gotten answers back, but I’ve never received a personalized explanation like I did in this case. Understanding AI Before moving on to the meat of the matter – recent changes in AI and its capabilities – I want to share some insights into AI’s essence that the tutorial delivered for me. Importantly, the tutorial taught me not to think of an AI model as a search engine that retrieves data and regurgitates it. Rather, it’s a computer system that’s capable of synthesizing data and reasoning from it. There are two phases in the life of an AI model. In the first, it is “trained” by reading a vast amount of text. The training phase must not be thought of as loading the model with information, which I had done until now; it goes far beyond that. It consists of teaching the model how to think. By absorbing text, the model learns: • how to understand reasoning patterns and form them, • how arguments are structured, • how to generate new combinations of ideas, and • how to apply learned reasoning patterns to novel situations.

Here’s how I put it 33 years ago in that first memo, titled The Route to Performance: I feel strongly that attempting to achieve a superior long-term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year – and through discipline to have highly superior relative results in bad times – is: • less likely to produce extreme volatility, • less likely to produce huge losses which can’t be recouped and, most importantly, • more likely to work (given the fact that all of us are only human). Simply put, what [General Mills’s] record tells me is that, in equities, if you can avoid losers (and losing years), the winners will take care of themselves. I believe most strongly that this holds true in my group’s opportunistic niches as well – that the best foundation for above-average long-term performance is an absence of disasters. As you can see, my dinner with Dave was a seminal event; his approach was clearly the one for me. (Incidentally, I want to share that after decades of not having been in touch, Dave was among the many kind people who wrote in recent months to encourage me vis-à-vis my health issue. This is a great example of the many personal dividends my career has paid.) Putting It in Brief That first memo, and the bit cited above, include a phrase you’ve likely heard from Oaktree: If we avoid the losers, the winners will take care of themselves.

Not as short as the careers of professional athletes, but shorter than they should be in a physically non-destructive vocation. Where are the leading competitors from the days when I first managed high yield bonds 25 or 20 years ago? Almost none of them are around anymore. And astoundingly, not one of our prominent distressed debt competitors from the early days 15 or even 10 years ago remains a leader today. Where’d they go? Many disappeared because organizational flaws rendered their game plans unsustainable. And the rest are gone because they swung for the fences but struck out instead. That brings up something that I consider a great paradox: I don’t think many investment managers’ careers end because they fail to hit home runs.the

Here are a few:  the importance of risk and risk control  the repetitiveness of behavior patterns and mistakes  the role of cycles and pendulums  the volatility of credit market conditions  the brevity of financial memory  the errors of the herd  the importance of gauging investor psychology  the desirability of contrarianism and counter-cyclicality  the futility of macro forecasting Most or all of these have to do with behavior that’s observed in the markets over and over. When I see it recur and want to comment, I’m often tempted to dust off an old memo, update the details, and just insert the word “ditto.” But I don’t, because there’s usually something worth adding. Cycles One of the most important themes in investing – and one I often find worthy of discussion – relates to cycles. What is a cycle? Dictionaries define it as “a series of events that are regularly repeated in the same order” or “any complete round or series of occurrences that repeats or is repeated.” And here’s the definition of the term “business cycle”: “The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.” © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Time and time again, the post mortems of financial debacles include two classic phrases: “It was too good to be true” and “What were they thinking?” I’m writing to explore why these observations are so often invoked in the past tense. The combination of greed and optimism repeatedly leads people to pursue strategies they hope will produce high returns without high risk; pay elevated prices for securities that are in vogue; and hold things after they have become highly priced in the hope there’s still some appreciation left. Afterwards, hindsight shows everyone what went wrong: that expectations were unrealistic and risks were ignored. It is my point that:  Investors mustn’t dwell excessively on recent experience.  Instead, they must look to the future.  They must consider today’s developments critically.  That assessment must take place in the light of history’s lessons.

Further, I hope it’ll be of interest to Oaktree’s clients outside the U.S. While you may not be exposed to these issues to the degree we are at home, (a) you may want to know what I think the U.S. is up against, and (b) at bottom, we’re all in this together – all nations are intertwined. And who knows: you might be looking for farsighted help with your countries’ long-term problems, just like I am. The American Century The truth is that it’s great to live in America. Ours isn’t the only wonderful country, or the only good place to live, but we’ve benefited from:  230 years of stable democratic government;  140 years without civil war;  the generally peaceful co-existence of a highly heterogeneous population;  very high levels of personal freedom and opportunity;  a highly functioning free-market economy;  great educational institutions;  vast land mass and natural resources; and  a highly productive, inventive and entrepreneurial citizenry.

When the economy and markets boom, people tend to assume more of the same is in the offing. They find little to worry about, other than the possibility that others will make more money than they will. Fear of loss recedes, and fear of opportunity costs takes over. Thus risk aversion evaporates and risk tolerance rises. Risk aversion is absolutely essential in order for markets to function properly. When sufficient risk aversion is present, people shrink from riskier investments and prefer safer ones. Thus riskier investments have to appear to offer higher returns in order to attract capital. That’s as it should be. But when people get excited about the prospect of easy money – even if from assets or investment strategies that have become far too popular, turning into overpriced manias – they frequently drop their risk aversion and adopt risk tolerance instead. Thus they swarm into the investment du jour without concern for its elevated price and risk. This behavior should constitute an important warning flag for prudent investors. © Oaktree Capital Management, L.P.Reserved

 Its popularity rises, attracting more and more adherents, even as undervaluation moves to fully valued.  It turns into a mania or “bubble,” and price becomes immaterial.  Eventually, the last potential buyer becomes convinced and comes on board.  With no one else left to convert to the trend, the bubble of overvaluation is ripe for bursting.  When followers experience the first price declines, disillusionment sets in.  One-time devotees flee en masse, and the bubble turns into a crash. This cycle of discovery, mania and crash is best summed up by the most useful of all investment adages: “What the wise man does in the beginning, the fool does in the end.” This memo will be about recurring patterns, the history of stocks and bonds as I know it, and the adage’s applicability to that history. A Brief History of Stocks A significant milestone occurred in October 2008, attracting a lot of attention. For the first time in almost fifty years, it was reported, the dividend yield on the Standard and Poor’s 500 stock index was equal to the yield to maturity on the U.S. 10-year Treasury Note. People knew this meant stocks had cheapened, but it took an understanding of history to grasp the real significance. The truth is that stocks, like other investment media, tend to go in and out of style, and this was just one more example of the latter. © Oaktree Capital Management, L.P.Reserved

” In other words, (a) reducing the growth rate will result in a smaller increase in new cases each day (but still an increase), and (b) making the growth rate negative means there will be fewer new cases each day than the day before (but still new cases). Observers seem to be working under the assumption that, sooner or later, “the curve will be flattened and then bent downward,” meaning the disease will be controlled and perhaps disappear in three to six months. The reasons for optimism in this regard are as follows:  People will isolate increasingly. The closures of schools, businesses and gathering places will help in this regard.  Testing will allow us to identify those with the disease and separate them from the healthy population.  The disease will fade when warm weather sets in (other epidemics that have appeared in recent decades have proved seasonal in this way).  A preventive vaccine or therapeutic medication will be developed and approved. Of course, no one knows whether or when these things will happen. But we can hope that the combination will limit the disease to the next three to six months as described above. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

He said, "I'd think a self-professed non-forecaster like you would never say, ‘never’.” My response was, "Maybe it's a result of my sobering experience in the 1970s, but there are plenty of things I'll say "never" to ... on the negative side: Things will never go right forever. Investors' fondest hopes will never fail to be dashed eventually. Some unpleasant surprises will never fail to arise." This sounds terribly negative, as if I think good things are rare and only bad things are bound to happen. But if you think it over, I hope you'll conclude I'm not what our Kevin Clayton calls a "Negative Ned."

It did extremely well in the 1980s, when value beat growth and Penn outperformed the value school, and it lagged a little in the early ’90s, when those trends reversed. Penn’s portfolio completely lacked exposure to growth stocks, tech stocks, buyouts or venture capital. Thus it fell behind substantially in fiscal 1995 through fiscal 1999, when it gained 16% a year but the average of its peers gained about 23%. Then, in fiscal 2000, the last year before I became chairman, value stocks stagnated, tech stocks soared, and returns on venture capital ranged well into triple digits. Penn lost 2% while its peers averaged returns in the twenties and those with investments in the right venture capital funds made twice that. Penn constituencies such as alumni/donors and the administration were very unhappy in those years, despite the endowment’s high absolute overall return. Penn appointed its first Chief Investment Officer in the late 1990s and began to diversify the portfolio beyond value. Having been on the Investment Board for a few years, I became its chairman at the start of fiscal 2001. The events of the next decade, along with the decisions made and actions taken, provide a number of valuable lessons. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

stock market had its best week since 2014! The Dow Jones Industrials rose almost 5% for the week, taking them to a new all-time high. The Dow was up every day last week. It rose on Monday and Tuesday, when Clinton was expected to win. And then it rose Wednesday, Thursday and Friday, after she had lost. That behavior calls to mind my January memo, “On the Couch,” on the subject of the market’s irrationality. Clearly, the election was the biggest event last week, so it must have been the main influence behind the changes in stock prices. But how could the expectation of a Clinton victory make stock prices rise, and then the reality of her defeat make them rise further? In that memo, I included a cartoon showing a newscaster saying, “Everything that was good for the market yesterday was no good for it today.” In the case of the election, it might have been, “Whatever was good for the market yesterday, its polar opposite was good for it today.” It just doesn’t make sense. While people search the market’s behavior for logic, there really doesn’t have to be any. In “On the Couch,” I mentioned that sometimes the market interprets everything positively, and sometimes it © 2016 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Bullish behavior came out of the pandemic-related bottom of March 2020; since then, significant problems have developed inside the economy (inflation) and outside (Ukraine); and there’s been a significant correction. No one, including me, knows what the sum of those things implies for the future. I’m writing only to place recent events in the context of history and point out a few implied lessons. This is important, because we have to go back 22 years – to before the bursting of the tech-media-telecom bubble in 2000 – to see what I consider a real bull market and the ending of the resultant bear market, and I imagine many of my readers entered the investment world too late to have experienced that event. You may ask, “What about the market gains that preceded the Global Financial Crisis of 2008-09 and the pandemic-related collapse of 2020?” In my view, in both cases, the preceding appreciation was gradual, not parabolic; it wasn’t driven by overheated psychology; and it didn’t take stock prices to crazy heights. Moreover, high stock prices weren’t the cause of either crisis. The excesses in the former lay in the housing market and the creation of securities backed by sub-prime mortgages, and the latter collapse was a consequence of the arrival of Covid-19 and the government’s decision to shut down the economy to limit the spread of the disease.

The portion of Prince’s statement that I’ve highlighted seems emblematic of the attitudes that prevailed from early 2003 until the summer of 2007. People were doing risky things – often even though they recognized the attendant risk, as Prince seemed to do – because they saw no alternative if they wanted to remain competitive. Upon hearing of Prince’s departure, my immediate reaction was to think (a) when a firm fares so badly, the CEO may deserve to lose his job, and (b) to avoid that fate, Prince just had to cause Citi to avoid the risky behavior he identified. If he had done the latter, Citi would be among the big winners today instead of the losers; it wouldn’t have to recapitalize by selling equity at depressed prices; and instead it would have funds with which to take advantage of today’s better market environment. So in saying that if the music was playing, Citi had to dance – and thus letting the market call the tune – Prince’s leadership was flawed.

Although IBM rose 4%, it was overshadowed by America Online, which gained 11% and became the more valuable of the two companies for the first time. Illustrating the mania for things Internet, an article in the next day's New York Times reported on . . . . . . last week's initial offering of Priceline.com, which allows customers to name their own price for airline tickets on the Web. After less than a year in business, during which it lost $114 million selling $35 million worth of tickets, Priceline.com is valued at $10 billion, more than the combined net worth of UAL's United Airlines, Northwest Airlines and Continental Airlines. UIndifference to valuationU - The entire bullish article - 22 column inches long - omitted all mention of valuation parameters such as P/E ratio, EBITDA multiple or dividend yield. The bottom line is that many of the investors setting the prices in today's market don't care about valuation.managers

UMarket efficiencyU – A great deal of how one views the investment world depends on one's position on the subject of market efficiency. Rather than reinvent my own wheel, I'll lift parts of my memo "Irrational Exuberance" from May 2000. (Thankfully, when you copy from yourself it's not plagiarism.) First, I'll provide my take on the efficient marketeers' view. Then, I'll describe my own version of market efficiency. I'll admit again that academicians don't share my view and theory says I'm wrong. But my approach works for me, and I'll restate it below. While at Chicago, one of the first things I studied was the Efficient Market Hypothesis, which states:  There are many participants in the markets, and they share roughly equal access to all relevant information. They are intelligent, highly motivated and hard working. Their analytical models are widely known and employed.  Because of the collective efforts of these participants, information is reflected fully and immediately in the market price of each asset.

 We often sit there, frustrated, watching cars whiz by in the adjacent lane.  However, if we change to the faster lane, it slows down just as the one we left speeds up.  Sometimes a lane-jumper shoots past us, but we know deep down that drivers who constantly shift from one lane to another are unlikely to reach a given point much before we do. I think there are many ways in which the experience of drivers on a crowded highway is similar to that of investors. I'll touch on them below, and on what I see as the reasons (and the lessons). UFinding Your Way on an Efficient HighwayU – Some people find it difficult to understand the concept of efficient markets, and how efficiency makes it hard for investors to outperform. It's really for this that a crowded highway is the perfect metaphor.

Market crises are chaotic, not orderly, and the multiplicity and simultaneity of contributing causes play a big part in making them so. That was certainly the case in the three crises we’ve lived through as investors in credit. In addition to the recession and credit crunch that marked each one, we saw:  in 1990, the collapse of the most prominent leveraged buyouts of the 1980s; the Gulf War, with Iraq’s invasion of Kuwait and the allies’ response; and the government’s crusade against high yield bonds, Drexel Burnham and Michael Milken;  in 2002, the aftermath of 9/11, including our invasion of Afghanistan; the unraveling of the overbuilt fiber telecom industry; and the exposure of accounting scandals at Enron, WorldCom and Adelphia and the fall of Arthur Andersen; and  in 2008, the sub-prime mortgage meltdown; the defrocking of tranching, leverage and derivatives as constructive forces; the outing of credit rating agencies as no more © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

However, two factors argue strongly that high yield bonds are less vulnerable to rising interest rates than other fixed income sectors:  A high yield bond of a given maturity has a shorter duration than an investment grade rated bond of the same maturity, since duration is a measure of the weighted average time to receipt of the promised cash flows, and the larger interest coupons on high yield bonds mean the expected payments from interest and principal are received sooner on average. Thus an increase in interest rates of a certain amount implies less of a price decline for a high yield bond than for an investment grade rated bond of the same maturity.  In addition, rising interest rates usually imply a growing economy, and a growing economy usually means improving creditworthiness and fewer defaults. Of course it’s most unlikely that high yield bonds will deliver returns even close to 2012’s performance. On the other hand, they don’t have to equal last year’s return to warrant holding today. While yields are near all-time lows, yield spreads tell a very different story. Today the average spread on our U.S. high yield bond portfolios – approximately 490 basis points – is toward the high end of the normal historical range we’ve invested in for nearly three decades. We believe such an average spread provides more-than-adequate compensation for our default experience, which over the last 27 years has averaged 1.4% per annum.

That is, there was more appetite for securities built from high yielding mortgages than there were qualified borrowers. No problem: just provide incentives to increase production and turn a blind eye to creditworthiness. Mortgage brokers played an essential and often ugly part in this process. They were tasked with creating mortgages in quantity, and that’s where their incentives lay. Since neither they nor the Wall Street firms would hold the mortgages for long, the emphasis was on volume rather than creditworthiness. Making loans was good; rejections were bad. The website of broker Kevin Schmidt’s firm in Louisiana said it best, “We don’t get paid unless we say YES.” (The Wall Street Journal, January 17) The Journal went on to point out that, “Key players often get a cut from what a transaction is supposed to be worth when first structured, not what it actually delivers in the long term.”

Of course, the toolbox offers lots of possibilities, including interest rate reductions; quantitative easing; tax cuts, rebates and credits; stimulus checks; infrastructure spending; capital injections; loans, rescues and takeovers; regulatory forebearances and on and on. But no one should think there’s a “golden tool,” such that solving the problem is just a matter of figuring out which one it is and applying it. Anyone who holds the problem solvers to that standard is being unfair and unrealistic. There are a number of reasons why, including these:  Every situation is different, and none is exactly like any that has come before. That means fixed recipes can’t work. Certainly this one has never been seen before.  Most policy actions aren’t all good or all bad. They merely represent imperfect compromises as to ideology, goals, problem solving and resource allocation.  Economic problems are multi-faceted, meaning the solution for one aspect might not work on – and in fact might exacerbate – another aspect.  Economies are dynamic, and the problems are moving targets. The environment changes constantly, rather than sitting still and waiting for a solution to work.  The main ingredient in economics is psychology, and the workings of psychology clearly can’t be fully known, controlled or fixed.

The combination of too much money chasing too few ideas dashed the hopes of those who in 1999-2000 looked for the “silver bullet” in venture capital. “Never again,” they grumbled. UHope Springs Eternal Of course, what they meant was, “Never again until next time.” The fact is, investors never cease to dream of the silver bullet: the asset class or investment technique that can be counted on for high returns with low risk. Whenever one would-be silver bullet is discredited, investors give up on that irrational dream . . . and go looking for the next. I say over and over that there’s no such thing as a “good” asset class. No asset class or investment technique has the birthright of a particular rate of return, and certainly not of a high return with low risk. No asset can be depended on for good performance irrespective of the price at which it’s bought. And no area can be successfully invested in without regard for the balance between the supply of investment ideas in the area and the amount of money investors want to deploy in it.of

In my opinion, the difference between most people’s positive and negative views is likely to stem largely from their innate biases, and thus the data points they choose to overweight. Future scenarios comprise a large number of variables: today even more than usual. It’s relatively easy to build a spreadsheet listing the many things that will contribute to the future and rate them as likely to turn out well or poorly. But merely toting up the plusses and minuses won’t tell you whether the future will be favorable or unfavorable. The essential element is figuring out which ones will be most influential. That’s often where optimistic or pessimistic biases come in. The optimist takes cheer from the favorable outlook for the positive data points, and the pessimist is depressed by the unpleasant possibilities for the negative ones . . . even if they’re both working from the same underlying spreadsheet in terms of elements and ratings. There’s rarely such a thing as “knowing the future.” But usually the future will be mostly like the past. This time, I think we can agree that the near-term future isn’t likely to look much like it did a year ago. As I wrote last week in Which Way Now?, we have to consider our situation “in the context of unprecedented uncertainty and the total absence of guidance from analogies to the past.

Certainly, overall portfolio returns in the range of 8-10% were viewed as readily attainable. But all of a sudden, no one thinks so anymore. Goals at that level (or even a little lower) now seem quite daunting. What has changed is the equity return people feel can be expected. History is out the window, and few people believe any longer in 9-11% from equities. Moderates talk about long-term returns between 4% and 8%, and the bear case is considerably lower (or negative). With high grade bond yields also in the low to mid- single digits, the two biggest asset categories are promising returns that fall short of the overall goal. Thus it's unclear how that goal can be achieved while holding any meaningful amount in stocks and/or high grade bonds – or whether it can be achieved at all. We all know what happened to prospective bond returns: economic weakness and the Fed's stimulative actions combined to lower prevailing interest rates, and thus promised bond returns, to 40-year lows. But what happened to the prospective return on equities?

What’s been behind these returns, and where do they leave the credit sector? Background As everyone knows, promised yields on credit instruments were meager in the low-interest-rate period I’ve discussed so much: 2009-21. At the beginning of 2022, before the Fed embarked on its program of interest rate hikes, high yield bonds yielded in the 4% range, with issuance taking place in the 3s and one bond issued in the 2s! I described Oaktree’s challenge at that time as “investing in a low-return world.” The ultra-low bond yields were unhelpful for most institutional investors, and many got out of the habit of investing in fixed income. There was, however, good interest in private credit, where yields in the area of 6% were being levered up to 9% or so. In 2022, investors who feared the Fed’s rate increases would bring on a recession caused the average high yield bond price to incorporate risk protection in the form of a yield spread of more than 4%, taking the overall yield to roughly 9½%. I argued at the time that these promised returns were (a) high in the absolute, (b) relatively safe because of their contractual nature, and (c) well in excess of the returns most institutions targeted. For these reasons, I urged that credit should be weighted significantly in portfolios. These high-single-digit yields alone would have given holders healthy returns.

The math is irresistible.” We all know the result. The opinions of experts concerning the future are accorded great weight . . . but they’re still just opinions. Experts may be right more often than the rest of us, but they’re unlikely to be right all the time, or anything close to it. This year’s election season gave us plenty of opportunities to see expert opinion in action. I’ll start this memo by reflecting on them. The Year Polls Stopped Working Pollsters got off to a tough start last year with the June referendum concerning Britain’s membership in the European Union. Right up to the end, both pollsters and bookmakers considered U.K. citizens 70% likely to vote to remain a member. But, in the end, “Leave” won by a few percent. The reaction was shock. Voters on both sides of the issue were unprepared for the outcome. Within a day or two, the leaders of Britain’s main political parties had stepped down. People began to seriously discuss what that outcome meant and how “Brexit” would be accomplished. The explanations for the pollsters’ error centered around Britain’s lower level of experience with, and expertise in, polling. It couldn’t happen in the U.S. In fact, in the 2008 and 2012 presidential elections, Nate Silver, the proprietor of website FiveThirtyEight, correctly predicted the outcome in all 50 states once and in 49 the other time.

In short, we believe (and have witnessed many times over) that the easiest way to make unusually high risk-adjusted returns is to buy from depressed sellers and sell to euphoric buyers...thus to buy when assets are underpriced and sell when they're overpriced. The opposite is a nightmare. The greatest extremes in our experience include 1970, when the New York banks believed the Nifty- Fifty companies were so good that it essentially didn't matter what price you paid for their stocks (subsequent declines of 70% to 90% soon became common among the stocks of America's greatest companies), and 1990, when investors acted as if any company experiencing an iota of difficulty was practically worthless (the distressed debt funds we created that year returned about 50% per annum). John Maynard Keynes said (roughly) that "a speculator is someone who takes risks of which he is aware, and an investor is someone who takes risks of which he is unaware." We think speculating, according to this definition, is more prudent than investing. It makes a lot of sense to purchase unpopular assets that promise excessive compensation for knowingly bearing risk. Buying high- priced, popular assets which "everyone knows have no risk" often proves terribly dangerous. Here's a case in point: © 1997 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

It’s when most investors take a trend to excess, or the price of an asset to an extreme, that the few people smart and resolute enough to abstain from herd behavior can make truly exceptional profits. I think both Buffett’s and Galbraith’s dim views of the average investor are well founded. Although there exist a few rules and reminders that can make it easier to avoid the costliest investing mistakes, most investors rarely heed them. Investors truly do make the same mistakes over and over. It may be different people doing it each time, and usually they do it in new fields and in connection with new assets, but it is the same behavior. As Mark Twain said, “History doesn’t repeat itself, but it rhymes.” Rarely is the same error repeated in back-to-back years. Usually enough time passes for the repetitive pattern to go unnoticed and for the lessons to be forgotten. Often it’s a new generation repeating the errors of their forefathers. But the patterns are there, if you observe with the benefit of objectivity and a long-term view of history.

The father's dumbfounded silence clearly reflected his sudden realization that he knew less than he had thought. Obviously, in 2000, millions of investors across the board realized that they knew less than they thought they did, and that lots of what they had been sure of was wrong. * * * A year ago, I wrote in "bubble. com" that tech stocks had benefited in 1999 from a boom of colossal proportions. They exhibited all of the elements of a market bubble, with an attractive story providing the foundation for a gravity-defying escalation of prices far beyond reason, and for manic behavior on the part of investors.assets

Market participants have grasped at slender “green shoots”: things that are declining but at a slower rate, or that have stopped getting worse, or that have begun to improve, albeit anemically (e.g., “At some of the nation’s largest lenders, the number of consumer loans that are going bad is starting to level off.” The New York Times, January 21). Most of the good news falls into those categories; little or nothing has blown anyone’s socks off. We haven’t seen much economic news that’s overwhelmingly positive, despite the fact that (a) today’s comparisons are against very weak periods a year ago, (b) our exports have been made cheaper by a dollar that’s 10-20% lower, and (c) there’s been an enormous amount of government stimulus. The gains being reported are often in tenths of a percent, and the other day my drive-time radio commentator said, “Hirings are almost equal to firings.” That doesn’t tell me we’re in the midst of a strong recovery, or on track for one. In particular, most companies’ sales remain quite weak. The economy is generating very little growth at the so-called “top line” on which Gross Domestic Product is based. Rather, the profit gains being reported have been aided in large part by cost cutting. But “cost cutting” and “productivity gains” are nice-sounding ways of saying companies are getting by with less labor. Thus the employer’s productivity gain can be the employee’s job loss.for

No choices need be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real world, politicians seem to feel free to ignore them. . . . The purpose of this memo is to describe what happens when political behavior collides with economic reality, as illustrated in one area where the government is taking steps – tariffs – and another in which debate among politicians is heating up – restrictions on the capitalist system. Before I move forward, I’d like to state up front, as I did in Economic Reality in 2016, that I’m not writing to make political judgments or to make any politician or party look bad. But economic pronouncements can’t be separated from the people who make them. If you read through to the end, you’ll see I find something to complain about in the approach of members of both parties. Tariffs Tariffs are very much in the news these days, and their complexity renders them ripe for error and thus appropriate for discussion here. © 2019 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

I think this is the case largely because volatility is quantifiable and thus usable in the calculations and models of modern finance theory. In the book I called it “machinable,” and there is no substitute for the purposes of the calculations. However, while volatility is quantifiable and machinable – and can be an indicator or symptom of riskiness and even a specific form of risk – I think it falls far short as “the” definition of investment risk. In thinking about risk, we want to identify the thing that investors worry about and thus demand compensation for bearing. I don’t think most investors fear volatility. In fact, I’ve never heard anyone say, “The prospective return isn’t high enough to warrant bearing all that volatility.” What they fear is the possibility of permanent loss. Permanent loss is very different from volatility or fluctuation. A downward fluctuation – which by definition is temporary – doesn’t present a big problem if the investor is able to hold on and come out the other side. A permanent loss – from which there won’t be a rebound – can occur for either of two reasons: (a) an otherwise-temporary dip is locked in when the investor sells during a downswing – whether because of a loss of conviction; requirements stemming from his timeframe; financial exigency; or emotional pressures, or (b) the investment itself is unable to recover for fundamental reasons. We can ride out volatility, but we never get a chance to undo a permanent loss.

5 billion of total capital on natural gas trading, a percentage that was revised upward to 65% over the next few days. The fund sold off its energy trading book, Brian Hunter departed, and Amaranth threw in the towel and is liquidating. Now that Amaranth’s collapse has earned it a place on the list of investment disasters, we should consider the lessons that can be learned from it. I’ll try to provide some useful insights regarding Amaranth, as usual without claiming to be an expert on the subject. UYou Bet! As I read about Amaranth, one thing stood out: the repeated use of the words “trade” and, especially, “bet.” Nothing about “invest” or “own.” And certainly no reference to “value.” The pattern really is striking. Of course, part of this change in attitude could be attributable to the defrocking described above. Six months ago, the articles might have described Amaranth as an astute energy investor, rather than the reckless gambler it’s considered today. But certainly the new nomenclature is everywhere, and I find it appropriate. What’s the distinction? Investors want to own things for the long run, under the belief they’ll grow and strengthen over time (or that today’s values will come to be better appreciated).

stocks and bonds, and there was a time-honored notion that something like 60% equities and 40% bonds represented reasonable diversification. Today, investors are presented with so many choices – and there’s so much emphasis on getting the decision right – that the term “asset allocation” is very prominent, and there are individuals and whole departments dedicated to doing just that. It’s their job to decide how to weight the asset classes to be held in a portfolio, meaning asset allocators spend their time on decisions like these: • How much in equities and how much in debt? • How much in stocks and bonds and how much in “alternatives”? • How much in public securities and how much in private assets? • How much in one’s home country and how much abroad? • How much of the latter in the developed world and how much in emerging markets? • How much in high quality assets and how much in low quality? • How much in more volatile “high beta” assets and how much in steadier ones? • How much in levered strategies and how much unlevered? • How much in “real assets”? • How much in derivatives? It’s enough to make your head spin. Many investors use computer models to help with these decisions, but the models require inputs regarding expected return, risk, and correlation, and most of these are based on history and thus of questionable relevance to the future. Correlation between asset classes is particularly difficult to predict.

Contrarianism is widely misunderstood as simply doing the opposite of what the crowd is doing. That is a recipe for buying everything that is going down and selling everything that is going up, which is a way to lose money consistently. Real contrarianism is the discipline of identifying when the crowd has moved too far in one direction and acting on that view with conviction. The pendulum metaphor I have used throughout my career is meant to capture this. Market psychology swings between greed and fear, between risk tolerance and risk aversion, between optimism and pessimism. The pendulum rarely spends time at the midpoint; it tends to swing to one extreme, then to the other. The contrarian acts at the extremes — when the pendulum is at one end and the next move is back toward the middle, not further out. What makes this hard is that the pendulum can stay at the extreme for longer than the contrarian's patience or capital allows. The investor who is right about the extreme being an extreme but wrong about the timing can be carried out before the vindication arrives. The discipline required is to size positions so that the journey to vindication does not break the portfolio, and to maintain the conviction through the period when the market is still moving against the thesis.

Patience as an investment virtue is widely praised and rarely practiced. The reason it is rarely practiced is that patience requires accepting underperformance for periods that feel like eternities. The institutional investor who is patient through a multi-quarter period of underperformance faces career risk; the individual investor who is patient through a multi-year period of underperformance faces self-doubt. Both impulses push toward action when inaction would serve better. The contrarian case for patience is that the dislocations which produce the best returns are typically resolved over years, not weeks. The investor who buys a distressed credit at sixty cents on the dollar may wait two or three years for the restructuring to play out. During that period the position will appear to do nothing, and the temptation to sell into a slightly better bid will be constant. The investor who sells captures a small mark-to-market gain; the investor who holds captures the recovery. What I have observed across cycles is that the patient investor's outperformance comes in lumps. There are long stretches of little or no apparent progress, followed by short stretches in which the prior patience is vindicated all at once. The return stream is not smooth; the conviction that the work will pay off is what carries the investor through the dry stretches.

Second-level thinking in the spring of 2025 required asking not just whether the tariff news was bad, but what was already in the price. Markets had moved sharply in response to the announcement, but the move was based on the immediate read of the policy text rather than on the eventual implementation. The gap between announcement and implementation is the gap in which second-level thinking operates. The market's initial response to a shock is typically a price action that reflects forced selling, mechanical de-risking, and the closure of crowded positions. That first move is rarely the right move to extrapolate. The second move — once the policy detail becomes clear and the structural positioning has been adjusted — is the move that more accurately reflects the fundamental impact. Investors who react to the first move as if it were the final word tend to sell at the worst prices and buy back at the worst prices. The psychology of a sudden regime announcement is a textbook illustration of recency bias. The market prices the new regime as if it will persist indefinitely, then prices the reversal as if the original regime is gone for good. Both impulses are usually wrong. The investor who can hold both possibilities in mind — that the new regime may persist or that it may be reversed — is better positioned than the one who commits fully to either narrative.

 They’re aware that lots of other people are trying to do it too, but they figure either (a) everyone can be successful at the same time, or (b) only a few can be, but they’re among them.  They’re comfortable investing based on their opinions regarding the future.  They’re also glad to share their views with others, even though correct forecasts should be of such great value that no one would give them away gratis.  They rarely look back to rigorously assess their record as forecasters. “Confident” is the key word for describing members of this school. For the “I don’t know” school, on the other hand, the word – especially when dealing with the macro-future – is “guarded.” Its adherents generally believe you can’t know the future; you don’t have to know the future; and the proper goal is to do the best possible job of investing in the absence of that knowledge.

The panic of late 2008 was a textbook illustration of the pendulum swinging to its extreme. The same investors who had been eager buyers of complex structures at thin spreads became eager sellers of high-quality assets at distressed prices. The psychology moved from greed to fear in a period of weeks, and the price action reflected that swing far more than any change in underlying asset values. The contrarian case for buying in that environment was obvious in the abstract and difficult in the execution. The reason it was difficult is that the prices were falling every day, and every day the decision to wait looked smarter than the decision to act. The investor who bought on October 10, 2008 was down meaningfully by November; the investor who waited until March 2009 captured better prices but missed the chance to deploy capital in size before the rebound began. There is no clean resolution to this tension. The practical answer is to scale in — to deploy gradually as prices fall, knowing that you will look wrong at every step, but trusting that the average entry price will be attractive in retrospect. The investor who requires certainty before acting will never act in a crisis, and the investor who never acts in a crisis will miss the dislocations that define a generation of returns.

I want to be clear that taking a sea-change view does not mean refusing to invest. It means calibrating the price you pay for the risk you assume to the new reality rather than the old one. When risk premia were historically thin, demanding more is a defensive posture, not an offensive one. The opportunity cost of holding cash has risen as rates have moved higher, but the opportunity cost of locking capital into illiquid commitments at thin spreads has fallen, because those spreads no longer compensate for the regime change. The hardest part of contrarian investing is not the act of going against the crowd — it is the patience required to wait for the crowd to come around. In the meantime, periods of repricing typically produce dispersion. Some assets turn out to have been mispriced conservatively; others reveal that the assumptions behind them were heroic. Distinguishing between the two is where value is created. The investor who expects a return to 2021 conditions may under-prepare for what is actually coming. The investor who expects a continued regime shift may end up positioned better but also needs to remain humble about timing. I do not know when the cycle resolves; I do know that the regime assumptions in prices look different from the regime assumptions I grew up with.

The second-level thinker always asks what is already in the price. When interest rates were collapsing for forty years, virtually every long-duration asset repriced higher in concert — bonds, equities, real estate, fine art. The rising tide lifted all boats and made asset selection look less important than it actually was. Now that the tide has turned, the cost of being wrong about an asset's quality or durability has risen substantially. I have been frank that the era of free money distorted the relationship between price and value. Capital flowed to strategies that promised growth at any price, to private structures that offered illiquidity premiums whether they were earned or not, and to fee structures that rewarded asset gathering more than return generation. The opportunity cost of staying in those arrangements is now visible: capital tied up in below-market illiquid commitments cannot be redeployed into the dislocations that follow a credit tightening. The discipline that matters now is the one Oaktree was built around — patient, credit-anchored, second-level thinking that asks not just whether an asset is good but whether it is cheap given what the consensus already believes. In a world of repriced risk, the answers tend to be more selective and more time-sensitive than the previous decade accustomed us to.

” Unlike a “real” science like physics, in economics there are no rules that one can count on to consistently produce a given outcome, as in “if a, then b.” There are only patterns that tend to repeat, and while they may be historical, logical and often-observed, they’re still only tendencies. • In some recent memos, I’ve mentioned Marc Lipsitch, Professor of Epidemiology at Harvard’s T.H. Chan School of Public Health. In my version of his hierarchy, there are (a) facts, (b) logical inferences from past experience and (c) guesses. Because of the imprecision of economics, there certainly are no facts about the economic future. Economists and investors make inferences from past patterns, but these are unreliable at best, and I think in many cases their judgments fall under the heading of “guesses.” • These days I’m often asked questions like “Will the recovery be V-shaped, or a U, W or L?” and “Which of the crises you’ve lived through does this one most resemble?” Answering questions like those requires a historical perspective. • Given the exceptional developments enumerated above, however, there’s little or no history that’s relevant to today. That means we don’t have past patterns to fall back on or to extrapolate from. As I’ve said, if you’ve never experienced something before, you can’t say you know how it’s going to turn out.

They turned to “internal rate of return,” the now-ubiquitous “IRR,” as the yardstick with which to measure results for portfolios that experience significant cash inflows and outflows. In mathematical terms, IRR is the discount rate that sets a fund’s cash outflows equal to its inflows in present value terms. In other words, you list all of the fund’s contributions and distributions and solve for the discount rate that makes them add up to zero. If discounting at 20% accomplishes this, then the amounts received in distributions represent an average advance of 20% per year over the capital contributed, and that’s the fund’s IRR. I’ll provide a simple example on the next page to illustrate the difference that can arise between compound annual return and IRR.

We are not well designed, it seems, to live in uncertainty. Rousseau exaggerated only slightly when he said that when things are truly important, we prefer to be wrong than to believe nothing at all. . . . Apart from the actual biology of the coronavirus – which we are only beginning to understand – nothing is predestined. How many people fall ill with it depends on how they behave, how we test them, how we treat them and how lucky we are in developing a vaccine. The result of those decisions will then limit the choices about reopening that employers, mayors, university presidents and sports club owners are facing. Their decisions will then feed back into our own decisions, including whom we choose for president this November. And the results of that election will have the largest impact on what the next four years will hold. The pandemic has brought home just how great a responsibility we bear toward the future, and also how inadequate our knowledge is for making wise decisions and anticipating consequences. Perhaps that is why our prophets and augurs can’t keep up with the demand for foresight. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

I mean only the best, and I hope it comes out that way. UMy RoleU – I was merely a bystander at the events of last week. I was affected emotionally and logistically, but not involved. My father and daughter, both of whom live in New York, were safe. I had no friends or colleagues at the World Trade Center. As for me, I had arrived at midnight Monday after a dinner in Cleveland. I planned to speak to a Pensions East forum on Tuesday morning and then fly to Berlin to participate in an Institutional Investor conference. UThe EventsU – The crashing of planes into the WTC and the Pentagon represented the first large-scale foreign attack on continental United States soil. It was daring, well planned, coordinated and startlingly successful. It showed how the fruits of progress – the world's great airliners – can be used against us. It showed how, in this age, a handful of men from a smallish, amorphous enemy can cause destruction totally disproportionate to their number or materiel.

If you have a boom, eventually you’ll have a bust. And the further the boom goes, the worse the bust is likely to be. If there’s no boom, on the other hand, there needn’t be a bust. There was no great boom in the U.S. economy in 2003-07, and that’s one of the reasons why it has held up reasonably well despite the recent turmoil. But there was an incredible boom in the financial sector, and it has led to an incredible bust. (It remains to be seen whether its effects will slop over into the real economy. As you know, we think they will.) Finally, there wasn’t a boom in the U.S. stock market, and so it hasn’t busted. (If you think your stocks have given you pain, realize that their decline isn’t at all commensurate with the end-of-the-world thinking roiling the financial sector).

The Yale Investments Office site emphasizes that the endowment's heavy allocation to alternative assets is not a hedge-fund allocation in the popular sense but a deliberate commitment to long-duration private market partnerships across private equity, venture capital, and real assets. The structural argument is that the long holding period of these partnerships - typically ten years or more from the initial commitment through the final distribution - matches the long horizon of the institution and produces an illiquidity premium that compensates for the absence of mark-to-market liquidity. The site describes the discipline required to harvest this premium. The endowment commits new capital to private market funds across multiple vintages to avoid concentration in any single cycle, holds the positions through multiple J-curves, and re-underwrites the underlying general partners on the basis of long-cycle track records rather than short-cycle mark-to-market performance. The office's staff works continuously to maintain and refresh access to the top-tier partnerships whose persistence in the upper quartile of returns is the central premise of the allocation. The site is also explicit about the governance costs of the model. The Yale Investments Office employs a large professional staff, supports academic research and teaching in finance, and operates with a long-tenured investment committee. The site frames this institutional infrastructure as a precondition for the alternative-asset allocation rather than a separate cost - without the staff to evaluate partnerships, the access to top-quartile managers would not exist, and without access to top-quartile managers the asset class would not be worth the illiquidity cost. The model, in other words, is not transferable to institutions without the staff and the access.

Beyond the immediate tax matter, the settlement is informative about the structural tension between financial engineering and the regulatory perimeter. The Medallion Fund's returns had been so consistent for so long that any structure designed to enhance their after-tax efficiency would, eventually, attract the scrutiny of tax authorities who saw the structure as a vehicle for converting character of income. The episode illustrates a recurring pattern in which a strategy that is technically defensible on the tax law of the day becomes, over time and at sufficient scale, the object of regulatory recharacterization. The same audacity that allows a quant fund to find patterns that others miss also pushes the firm to construct structures that others would not. The eventual settlement can be read as the price the firm paid for the durability of the underlying edge. The deeper implication is that even a research-driven, quantitatively rigorous firm cannot insulate itself from the institutional environment in which it operates. The returns Medallion generated were a function of market microstructure; the after-tax retention of those returns was a function of the U.S. tax code and the firm's willingness to test its boundaries. The settlement closes one chapter but does not, in itself, change the research edge that produced the gains being taxed - though it does materially affect the after-tax economics of the principal shareholders.

The rebrand changed reporting before it changed anything else. Meta said its corporate structure was not altering, but beginning with fourth-quarter 2021 results it would report two operating segments: Family of Apps, containing Facebook, Instagram, Messenger, and WhatsApp, and Reality Labs, the virtual and augmented reality division whose spending had previously been buried in consolidated numbers. The company also reserved a new stock ticker, MVRS, to begin trading on December 1, replacing the FB symbol of its public life since 2012. The announcement took care to state that nothing about how the company used or shared data would change. For investors, the segmentation decision was the substantive act: it made the metaverse investment legible as a line item with its own revenue and its own losses, quarterly, for as long as Zuckerberg chose to fund it. The Facebook social network itself kept its name; the change applied to the parent company above it.

The philanthropic push came from witnessing change. Dalio describes diving at places like the Great Barrier Reef and returning years later to find how much had changed: more pollution, more illegal fishing, locals trying to eke out a living against huge trawlers decimating underwater life. With the ocean, he says, there is a surface, and if you do not penetrate it what you experience is a reflection; when you dive you go beyond that reflection and see precisely what is going on, dying fish populations, the impact of plastic, a sea treated like a toilet. When his financial circumstances allowed him to get involved in a big way, he realized he could not only support explorations but start showing them to the wider world, so OceanX pairs the ship and its media capabilities with partners, taking content into museums and science centers and recruiting aligned philanthropists. The launch joined a 185 million dollar, four-year oceans commitment with Bloomberg Philanthropies. By then he had given away more than 760 million dollars and had called the U.S. wealth gap a national emergency.

– to use the metaphor of a pendulum, not a cycle, to describe the swings of investor psychology. Because psychology swings so often toward one extreme or the other – and spends relatively little time at the “happy medium” – I believe the pendulum is the best metaphor for understanding trends in anything affected by psychology . . . not just investing. People frequently ask what caused me to start writing memos in 1990. My very first memo, The Route to Performance, resulted from two events I witnessed in short order, the juxtaposition of which led to what I thought was an important observation. Over the years, many memos have been prompted by connections I sensed between ostensibly unconnected events. At a recent meeting of the Brookfield Asset Management board, a discussion of Ukraine triggered an association with another aspect of international affairs – offshoring – which I first discussed in the memo Economic Reality (May 2016). Thus the inspiration for this memo. Background The first item on the agenda for Brookfield’s board meeting was, naturally, the tragic situation in Ukraine. We talked about the many facets of the problem, ranging from human to economic to military to geopolitical. In my view, energy is one of the aspects worth pondering.

No, I’ll Pay You! Historically – until the European Central Bank took the rate on its credit facility to -0.10% in 2014 – borrowers paid interest to the people from whom they borrowed money. But in the recovery from the Global Financial Crisis, interest rates went negative for the first time in recent history, meaning some lenders paid borrowers for the privilege of lending them money. I had my first direct brush with negative interest rates in 2014, when I was making an investment in Spain. The closing was due to take place on Monday, and I wired funds on the prior Wednesday so as to be in position to close. The following conversation ensued with my Spanish lawyer: Carlos: The money has arrived. What should I do with it between now and Monday? HM: Put it in the bank. © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

"# $%&'()*"+ “Things you don’t measure in dollars and cents” In ,-.., a couple named Richard and Grace Swensen moved to River Falls, Wisconsin, a college town, with their one-year-old son David, who had been born January /0, ,-.1, in Ames, Iowa. David’s father taught at the University of Wisconsin at River Falls (23(4) for the rest of his career, as a Ph.D. professor of chemistry, like his own father before him, and from ,-0- to ,-55 as Dean of the College of Arts and Sciences. Eventually David had five younger siblings, and all six Swensen children attended the town’s public schools and the college, 23(4. Life in the Swensen household was modest in material terms. The six children occupied two bedrooms, all the way through college, and the house had just one bathroom. But, as David Swensen would recall later, “I learned from my parents that there are a lot of important things in life you don’t measure in dollars and cents.” The second son, Stephen Swensen, 6.7., just a year younger than David, recalls their childhood experiences and friendship that led to their strong bond as adults. “I shared a bunkbed with David for two decades. We would listen to Minnesota Twins games or Beatles music in the even- ings on the radio. And the fate of the world during football season seemed to be determined by the weekly performance of the Packers—Bart Starr, Paul Horning, Max McGee—all on a small black-and-white cathode ray tube TV.

It helps to think of money as a commodity just like those others. Everyone’s money is pretty much the same. Yet institutions seeking to add to loan volume, and private equity funds and hedge funds seeking to increase their fees (see “The New Paradigm”), all want to move more of it. So if you want to place more money – that is, get people to go to you instead of your competitors for their financing – you have to make your money cheaper. As with the other commodities, low price is the most dependable route to increased market share. One way to lower the price for your money is by reducing the interest rate you charge on loans. A slightly more subtle way is to agree to a higher price for the thing you’re buying, such as by paying a higher p/e ratio for a common stock or a higher total transaction price when you’re buying a company. Any way you slice it, you’re settling for a lower prospective return. But there are other ways to cheapen your money, and they’re the primary subject of this memo.

• For the same reason, many of SVB’s clients had so much capital that they had little need to borrow. As deposits piled up at SVB, there wasn’t offsetting demand for loans. Few other banks have customers with similar cash inflows and consequently so little need to borrow money. • Because SVB had few traditional banking uses for the cash that piled up, it instead invested $91 billion in Treasury bonds and U.S. government agency mortgage-backed securities between 2020 and 2021. This brought SVB’s investments to roughly half its total assets. (At the average bank, that figure is about one-quarter.) • Presumably to maximize yield – and thus the bank’s earnings – in what was a low-return environment, SVB bought securities with long-dated maturities. SVB designated these securities as “hold to maturity” (HTM) assets, meaning they wouldn’t be marked to market on the bank’s balance sheet since it had no intention of selling them. • When the Federal Reserve embarked on its program of interest rate increases last year, bond prices fell rapidly, and, of course, the longer the tenor of the bonds, the greater the decline in value. In short order, the market value of SVB’s bond holdings was down $21 billion. • Word of the bank’s losses caused depositors to start withdrawing their money. To meet the withdrawals, SVB had to sell bonds. Consequently, the bonds could no longer be considered HTM.

An aside: I recently engaged in an exchange with a reader who took issue with my use of the word “cycle.” In his view, something is a cycle only if it’s so regular that the timing and extent of its ups and downs can be predicted with certainty. The cycles I describe aren’t predictable as to timing or extent. However, their fluctuations absolutely can be counted on to recur, and that’s what matters to me. I think it’s also what Mark Twain had in mind when he said “History doesn’t repeat itself, but it does rhyme.” The details don’t repeat, but the rhyming patterns are extremely reliable. Competing to Provide Capital When the economy is doing well and companies’ profits are rising, people become increasingly comfortable making loans and investing in equity. As the environment becomes more salutary, lenders and investors enjoy gains. This makes them want to do more; gives them the capital to do it with; and makes them more aggressive. Since this happens to all of them at the same time, the competition to lend and invest becomes increasingly heated. When investors and lenders want to make investments in greater quantity, I think it’s also inescapable that they become willing to accept lower quality. They don’t just provide more money on the same old terms; they also become willing – even eager – to do so on weaker terms. In fact, one way they strive to win the opportunity to put money to work is by doing increasingly dangerous things.

The second stated that in politics – and especially in the land of campaign promises – there’s no such thing as finiteness. As I wrote in Political Reality: I’ve always gotten a kick out of oxymorons – phrases that are internally contradictory – such as “jumbo shrimp” and “common sense.” I’ll add “political reality” to the list. The world of politics has its own, altered reality, in which economic reality often seems not to impinge. No choices need be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real world, politicians seem to feel free to ignore them. I followed those two memos with one in 2019 entitled Political Reality Meets Economic Reality. Its main thrust was that politicians can promise whatever they want regarding the economy, but they won’t be able to deliver if their promises fly in the face of economic reality because, ultimately, the laws of economics are incontrovertible. Free economies are driven by self-interested decisions made by millions of producers and consumers, employers and employees, and savers and investors. Governments can pass laws designed to encourage or even compel behavior, but in general they can’t mandate economic outcomes. There are so many moving pieces and second-order consequences that governments generally can’t engineer both prosperity and the specific economic outcomes that policymakers may seek. History is littered with command economies that didn’t succeed.

Then the shortcomings of those solutions are laid bare and there’s a call for regulation. Then the folly of government involvement becomes evident and people want the free market back, and so forth. Because neither extreme is perfect, the oscillation between them goes on. Governments can’t run economies or companies. But it’s equally true that in a free market, the rules will occasionally be stretched and participants harmed. In a free market, things will inevitably go past the optimal to the extreme. When they swing back, the retreat can be painful. Thus, if we’re going to rely on the market to settle things, we have to be willing to accept the consequences. In the pre-crisis years, the free market was revered and deferred to, and regulation was thought of as little more than a potential impediment to the market’s processes. (An article I can’t locate in my pile of clippings beautifully explained the dearth of government action: “That’s the kind of regulation you get from an administration that doesn’t believe in regulation.”) That attitude permitted financial institutions to take actions and bear risks that turned out to be unwise, unprofitable and unsustainable. Their strategies took them to the brink of disaster in 2008. In a truly free market, Bear Stearns, Merrill Lynch, Citibank, AIG, Fannie Mae, Freddie Mac and others likely would have gone bankrupt.instructive,

These are people who believe they can discern what the future holds, and in their world investing is a simple matter:  First you decide what the economy is going to do in the period under consideration.  Then you figure out what the impact will be on interest rates.  From this you infer how the securities markets will perform.  You choose the industries that will do best in that environment.  You make judgments about how the industries' companies will fare in terms of profits.  Based on all of this information, you pick stocks that are bound to appreciate. End of story. Of course, the usefulness of this approach depends entirely on people's ability to make these decisions correctly. What if you're wrong about the economy? What if you're right about the economy but wrong about its impact on a company's profits? Or what if you're right about profits but the valuation parameters contract, and thus the price? The bottom line is that the members of this school think these things are knowable. I know lots of people who are perpetually and constitutionally optimistic about both the long-term future for stocks UandU their ability to make these judgments correctly.

The greatest contributor to the 2002-07 boom likely was leverage; the recent past saw a steady flow of equity capital to levered entities, accompanied by willingness on the part of lenders to provide unprecedented amounts of leverage. Now the reversal of that process is underway, with consequences that are equally dramatic but much less pleasant. Let’s review the process which was often described and embraced as a virtuous circle:  Equity capital was provided to would-be leveraged entities.  Debt was readily available for them to use in expanding their total capital and thus their ability to pursue profit.  This combined capital was used to purchase assets, forcing prices higher.  Price appreciation caused the entities’ equity to expand at a faster rate thanks to their financial leverage. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

I took Peter’s use of the phrase in 1995 – and I’m using it in this memo – to mean something very different: recognition and acceptance of today’s givens . . . but not necessarily of the end result. What’s past is past and can’t be undone. It has led to the circumstances we now face. All we can do is recognize our circumstances for what they are and make the best decisions we can “given the givens.” URoots in Philosophy In the mid-’60s, Wharton students had to have a non-business minor, and I satisfied the requirement by taking five courses in Japanese studies. These surprised me by becoming the highlight of my college career and contributing to my investment philosophy in a major way. Among the values prized in early Japanese culture was mujo. Mujo was defined classically for me as recognition of “the turning of the wheel of the law,” implying acceptance of the inevitability of change, of rise and fall.head):

In fact, I’ve written in the past – exaggerating only slightly – that sometimes I think confidence is all that matters. I consider its impact to be significant, pervasive, self-reinforcing and self-fulfilling. The primary impact of confidence on the economy is simple. If people think the economic future will be good, they’ll spend and invest . . . thus things will be good.  Consumers’ optimism will translate into incremental demand for goods, adding to GDP.  Consumer buying will convince businesses to invest in expanded facilities and additional workers in order to keep up with growing demand.  Businesses’ investment in plant and workers will add to GDP.  Newly hired workers will have money to spend, and their buying will add further to the cycle.  The reports of confidence-fueled increases in GDP and other positive mentions of the economy in the media will reinforce this virtuous circle of optimism: back to step one. So, just like the wealth effect, increased confidence makes people and businesses spend more, and this in turn cycles back into the economy. Confidence leads to spending; spending © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

[Since most of the references in this memo are to American sports, with their peculiarities and unique terminology, this is a good time for an apology to anyone who’s unfamiliar with them.] Yogi Berra, Baseball Player Lawrence “Yogi” Berra was a catcher on New York Yankees baseball teams for eighteen years, from 1946 to 1963. Although he was rarely number one in any offensive category, he often ranked among the top ten players in runs batted in, home runs, extra-base hits (doubles, triples and home runs), total bases gained and slugging percentage (total bases gained per at bat). He excelled even more on defense: in the 1950s he was regularly among the top three or four catchers in terms of putouts, assists, double plays turned, stolen bases allowed and base stealers thrown out. Yogi was selected to play in the All-Star Game every year from 1948 through 1962. He was among the top three vote-getters for American League Most Valuable Player every year from 1950 through 1956, and he was chosen as MVP in three of those years. The Yankee teams on which he played won the American League pennant and thus represented the league in the World Series fourteen times, and they won the World Series ten times. He was an important part of one of the greatest dynasties in the history of sports. To me, the thing that stands out most is Yogi’s consistency.

The aspect I consider most important for the future relates to the Trump supporters – and some of the most active and vocal ones – who are motivated by an anger regarding “the system” that is neither purely emotional nor illegitimate. Many are older, white, non-college-educated men who might be described as “demographically dislocated.” When these men were born, white males ran America; their communities weren’t mixed and becoming more so; and the cultural shifts occasioned by the civil and women’s rights movements, technological change and mass immigration were unimagined. Certainly the shift to the America of today – with all these things quite different – might be jarring and unpleasant to the people I describe. At the same time, many Americans – and often the same ones – are experiencing the effects of job loss and diminished economic prospects. Fifty or even thirty years ago, men without college degrees could easily obtain good-paying jobs and the pride associated with being able to maintain their families at a good standard of living. One earner per household was enough, and one job per earner. Strong labor unions ensured adequate pay and benefits and protected workers from too-rapid changes in work rules and processes. Now the number of unskilled jobs has been reduced by automation, foreign manufacturing and increased globalization of trade. Unions are much less powerful in the private sector (name a powerful union leader of today who comes to mind).

but wrong this time, producing performance which was far enough behind to negate the majority of its 1987 achievement and pull its 18-month results well back into the pack. My observation at that time mirrored the fund manager quoted above, but from a negative viewpoint: . . . in order to strive for performance which is far different from the norm and better, you must do things which expose you to the possibility of being far different from the norm and worse. These cases illustrate that bold steps taken in pursuit of great performance can just as easily be wrong as right. Even worse, a combination of far above-average and far below- average years can lead to a long-term record which is characterized by volatility UandU mediocrity. As an alternative, I would like to cite the approach of a major mid-West pension plan whose director I spoke with last month.last

The memos that have raised yellow flags in the current up-cycle, starting with “How Quickly They Forget” in 2011 and including “On Uncertain Ground,” “Ditto,” and “The Race Is On,” also clearly were early, but so far they’re not right (and in fact, when you’re early by six or more years, it’s not clear you can ever be described as having been right). Since I’ve written so many cautionary memos, you might conclude that I’m just a born worrier who eventually is made to be right by the operation of the cycle, as is inevitable given enough time. I absolutely cannot disprove that interpretation. But my response would be that it’s essential to take note when sentiment (and thus market behavior) crosses into too-bullish territory, even though we know rising trends may well roll on for some time, and thus that such warnings are often premature. I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses. Since I’m convinced “they” are at it again – engaging in willing risk-taking, funding risky deals and creating risky market conditions – it’s time for yet another cautionary memo. Too soon? I hope so; we’d rather make money for our clients in the next year or two than see the kind of bust that gives rise to bargains. (We all want there to be bargains, but no one’s eager to endure the price declines that create them.)

An important ingredient in investment success consists of recognizing when the elements mentioned above make for unwise behavior on the part of market participants, elevated asset prices and high risk, and when the opposite is true. We should cut our risk when trends in these things render the market precarious, and we should turn more aggressive when the reverse is true. One of the memos I’m happiest about having written is The Race to the Bottom from February 2007. It started with my view that investment markets are an auction house where the item that’s up for sale goes to the person who bids the most (that is, who’s willing to accept the least for his or her money). In investing, the opportunity to buy an asset or make a loan goes to the person who’s willing to pay the highest price, and that means accepting the lowest expected return and shouldering the most risk.  Like any other auction, when potential buyers are scarce and don’t have much money or are reluctant to part with the money they have, the things on sale will go begging and the prices paid will be low.  But when there are many would-be buyers and they have a lot of money and are eager to put it to work, the bidding will be heated and the prices paid will be high. When that’s the case, buyers won’t get much for their money: all else being equal, prospective returns will be low and risk will be high.

That is, the participants must be motivated just by economics and willing to either buy or sell depending on price. If every owner wants to (or must) sell a given good and won't become a buyer no matter how low the price goes, the price of that good can fall below the "fair" level and it will become possible to find bargains. Conversely, prices can go too high when everyone wants to own something . . . whether it's tulip bulbs, South Sea pearls or nifty-fifty stocks. And that brings us to the high yield bond market which remains, in our opinion, decidedly inefficient. High yield bonds continue to offer 350-400 basis points more yield than "riskless" Treasury bonds to compensate for the risk of losing 50-150 basis points per year to credit problems. And high yield bonds have the best performance record of any major sector of the fixed income universe for virtually every period through today. One would certainly expect these facts to attract buyers and raise prices. In 1984, I was sure this market would become efficient in five years. But it hasn't done so ten years later, despite the high historic and prospective returns. Why haven't enough buyers stepped forward to eliminate the excessive risk premium, render these bonds fairly priced and correct the inefficiency?

I started my PowerPoint presentation with the following metaphor: To deal with particularly serious diseases, doctors sometimes have to take extreme action to save the patient: they induce a coma to permit the administration of harsh remedies, maintain life support, treat the disease, and bring the patient back to consciousness. In the case of Covid-19, one of the worst pandemics of the last century, policymakers were similarly required to take desperate measures. Upon the eruption of the disease, epidemiologists told us it would spread exponentially, possibly killing millions. In the absence of a vaccine, the only way to deal with the outbreak was to prevent those who had contracted the disease from spreading it to others. In order to do so, the authorities decided it was necessary to put the patient into a coma. Thus the economy was shut down to minimize interpersonal contact. Stores, restaurants, schools, places of worship, and entertainment and sports venues were ordered closed, travel was restricted, and people were told to work from home whenever possible. As we all know, the U.S. economy was largely frozen, causing 54 million Americans to file for unemployment benefits since March 21 and second-quarter GDP to shrink by an annualized 32.9%, three times the greatest quarterly decline in the 70 years of recorded quarterly history. (Please see © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

By my stage in life – if not well before – one should have figured out his strengths and weaknesses and tilted his activities toward the former. I’ve concluded that my strengths include the ability to:  frame questions,  logically organize data and weigh pros and cons,  know what I don’t know,  accept that future outcomes aren’t predictable,  think about the future probabilistically, and  make decisions incorporating all of the above (although far from always correctly). Also very important has been the ability to internalize Grayson’s point about decision quality (and thus live with my unsuccessful decisions from time to time). This set of attributes equipped me for a career in investing . . . and for finding enjoyment in games of chance. My Life as a Gambler Although I’ve made reference to them in some past memos, games have played a bigger part in my life than you probably know. Because of the many connections between investing and gambling, many of the investors I respect play blackjack, poker or backgammon. You might enjoy learning about my past in this regard. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

They will be hearing overwhelmingly compelling reasons why stock prices should go higher, why the bull market should last considerably longer than any other in history, why this boom will not be followed by a 1929-like crash and why “this time it’s different.” Many of these arguments will be tempting because they will have some element of truth to them. Even Mr. Templeton concedes that when people say things are different, 20 percent of the time they are right. But the danger lies in thinking that the different factor – like the recent investment in United States stocks by the Japanese – will be uninterrupted. Wallace’s essential message is that investors must take heed when the four words are in widespread use. Why? Look back at the paragraph introducing the above quote: when you first read it, did you happen to notice the date of publication? It was just eight days before Black Monday (October 19, 1987), the worst day in stock market history. We know how bad it feels when the market falls 20% in a year. Try 22% in a day!! Wallace’s warning was particularly important at the time the article was published, but for me it’s always important. * * * © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved On average, these predictions were off by 15%. In the three sets of half-year data I had available, the average expert forecaster couldn't even get closer than 96 basis points when attempting to predict the level of long rates six months out! And missing long rates by 96 basis points implies missing the price of the $1000 long bond by $120. Second, are these forecasts of any value? My limited survey shows the average forecast published by the Journal has not been helpful. The key isn't whether the forecasters accurately predicted the level of the parameters but, (since you make money by anticipating change), whether they were right about the likelihood of significant change and its direction. That these forecasts weren't of value can be seen clearly in the following table, which looks at changes rather than levels. U90-day bill rate U30-year bond rate UYen/$ December '93 12-Month Predicted Change + 60 b.p. + 10 b.p. +3 Actual Change +260 b.p. +160 b.p. -12 December '94 6-Month Predicted Change + 80 b.p. --0-- +4 June '95 Actual - 30 b.p. -130 b.p. -15 December '94 l2-Month Predicted Change + 70 b.p. - 30 b.p. +7 December '95 Actual - 60 b.p. -200 b.p. +3 June '95 6-Month Predicted Change --0-- --0-- +4 December '95 Actual - 30 b.p. - 70 b.p. +18 June '95 l2-Month Predicted Change - 10 b.p. --0-- +7 June '96 Actual - 20 b.p. + 30 b.p. +25 December '95 6-Month Predicted Change - 20 b.p. + 10 b.p.

Everyone realizes that there’ll be nothing left for the people who’re last in line to withdraw their money, so there’s a run on the bank. And you slide into bankruptcy. That’s true as far as it goes, but I’m going to devote this memo to things which could have followed that paragraph. UThe Problem at Financial Institutions It’s no coincidence that today’s financial crisis was kicked off at highly leveraged banks and investment banks. The paragraph above shows why that’s true, and why the problem is as big as it is. As I wrote in “Plan B”: Because of the high regard in which financial institutions were held; because of the implied government backing of Fannie Mae and Freddie Mac; and because permissible leverage increased over time, financial institutions’ equity capital was permitted to become highly inadequate given the riskiness of the assets they held.say

Our unlimited wants are continually colliding with the limits of our resources, forcing us to pick some activities and to reject others. Scarcity is the condition of having to choose among alternatives. (Macroeconomics Principles, Libby Rittenberg and Tim Tregarthen. Emphasis added) Because of the above, we make economic choices every day. Everyone knows choices like these are inescapable. Everyone, that is, except for politicians. The politician promises better grades and more leisure time. A cleaner environment and faster economic growth. That’s what caused me to write the memo: in politics and government – unlike the real world – the word “or” often goes out the window, replaced by “and.” No choices are necessary. A few months ago I saw a cartoon featuring caricatures of two primary opponents. Under one it said “bulls**t” and under the other it said “free s**t.” There’s bound to be a lot of the former in any election season, but economics tells us the latter is unrealistic. I wrote this memo to help readers understand why. * * * © 2016 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

And the trouble is that being right as often as the average forecaster won't produce superior results. Every investor wants results which are above average. In the institutional world, relative performance is the Holy Grail. Even elsewhere, the objective is to be the first to see the future -- and take the appropriate route to profit. It obviously doesn't help in these pursuits to be right only as often as others are.

Federal Reserve cut the fed funds rate to zero to counter the effects of the Global Financial Crisis, to the end of 2021, when the Fed abandoned the idea that inflation was transitory and readied what turned out to be a rapid-fire succession of interest rate increases. The memo concentrated on the impact that this lengthy period of unusually low interest rates had on the economy, the financial markets, and investment outcomes. I followed this up with the memo Further Thoughts on Sea Change, which Oaktree released to clients in May 2023 and to the public in October. In the latter memo and subsequent conversations with clients, I’ve emphasized the significant impact of low interest rates on the behavior of participants in the economy and the markets. Easy Times In Sea Change, I likened the effect of low interest rates to the moving walkway at the airport. If you walk while on it, you move ahead faster than you would on solid ground. But you mustn’t attribute this rapid pace to your physical fitness and overlook the contribution from the walkway. In much the same way, declining and ultra-low interest rates had a huge but underrated influence on the period in question. They made it: • easy to run a business, with the stimulated economy growing unabated for more than a decade; • easy for investors to enjoy asset appreciation; © 2024 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

• Worry about rising inflation has turned out to be well founded thus far, but there is still no consensus as to its primary cause (Federal Reserve policy or supply chain/labor market bottlenecks?) or whether it will prove transitory or long-lasting. All three of the conditions listed above were present months ago, and they’re little changed today. Thus, in the investment environment, it’s still Groundhog Day. Yet there are changes taking place, and they’ll be the subject of this memo. My focus isn’t the “little macro” changes, like what will happen to GDP, inflation and interest rates next year, but rather the “big macro” changes that will have an impact on our lives for many years. Many aren’t actionable today, but that doesn’t mean we shouldn’t bear them in mind. The Changing Environment for Investing As I’ve written before, the world I remember of 50, 60 and 70 years ago was a pretty static place. Things didn’t seem to change very much or very fast. The homes, cars, reading matter, business technology and general environment of 1970 weren’t very different from those of 1950. We were entertained by broadcast TV and radio, drove gasoline-powered cars dependent on carburetors, did most calculations on paper, composed documents on typewriters (with copies made using carbon paper), communicated via letters and phone calls, and got information primarily from books housed in libraries.

Nonetheless, since macro developments are so influential, many people think it’s downright irresponsible to ignore them when investing. Yet: • Most macro forecasts are likely to turn out to be either (a) unhelpful consensus expectations or (b) non-consensus forecasts that are rarely right. • I can count on one hand the investors I know who successfully base their decisions on macro forecasts. The rest invest from the bottom up, one investment at a time. They buy when they think they’ve found bargains and sell things they consider overpriced – mostly without reference to the macro outlook. • It may be hard to admit – to yourself or to others – that you don’t know what the macro future holds, but in areas entailing great uncertainty, agnosticism is probably wiser than self-delusion. But why take my word for it? How about these authoritative views? It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on. – Amos Tversky It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Current Events Given the suggestion that fraud may have played a role in both the First Brands and Tricolor bankruptcies, and given that both companies had borrowed in the private credit market, people saw a connection. Is this the beginning of a problem? As I mentioned in my memo Gimme Credit in March, the thing people have asked me about most often over the last few years is private credit. The sector took root around 2011, when banks were limited in making loans following the Global Financial Crisis and money managers stepped in to fill the void, primarily lending to leverage-hungry private equity sponsors. Because lenders were few, those who would put out money were able to demand high interest rates and a high level of safety. These loans looked good to investors in the low-rate environment that prevailed. Thus, private credit was anointed as a magic investment solution, with perhaps $2 trillion flowing into the sector in the subsequent years. The arrival of new entrants and a great deal of incremental capital created more competition to lend and inevitably reduced some of the lenders’ advantages. When asked about private credit, I answered that the investment environment had been mostly benign over the years since 2011, meaning – to echo Warren Buffett – the tide had never gone out on private credit (i.e., it hadn’t been tested). Now, with two high-profile bankruptcies in short order, people thought they might be starting to see cracks.

” By September 1720, the bubble was punctured and the stock price fell below £200, off 80% from its high three months earlier. It turned out, however, that despite having seen through the bubble earlier, Sir Isaac, like so many investors over the years, couldn't stand the pressure of seeing those around him make vast profits. He bought back the stock at its high and ended up losing £20,000. Not even one of the world's smartest men was immune to this tangible lesson in gravity! * * * It's obvious from “Devil Take the Hindmost” that many elements of speculative behavior were present during the South Sea Bubble. I'll cite some of its passages below and point out the parallels to today that I see: “The ideology of self-interest had recovered after the battering it received after the crisis of the mid-1690s ... its thesis [was] that private vices - avarice, prodigality, pride and luxury - produced public benefits.” [Sounds like the "greed is good" rationalization of the 1980s.]

Li's first entrepreneurial venture was at Shenzhen Anke High-tech Company, a partially state-owned enterprise set up by the Chinese Academy of Sciences, which became China's first home-grown developer of medical devices and launched the country's first MRI scanner in 1989.

Canary acted to profit from instances when security prices used to calculate the NAV had become "stale." Most forms of market timing consist of people undertaking trades in order to implement their views regarding the future direction of security prices. Mutual fund timing is different, however, because the fund timer acts to profit from events that occurred in the past. The opportunity for mutual fund timing arises from the fact that every fund's Net Asset Value is calculated as of the close of trading at 4:00 p.m. Eastern Time, and orders for fund shares entered up to that time are executed at that price. (Under the rules, orders placed after 4:00 p.m. are executed at the next day's NAV.) In brief, the mutual fund timer acts to take advantage of knowledge that a security price factored into a fund's NAV is out-of-date and not reflective of recent events. For an example, think of a mutual fund that holds a U.K. stock, the trading of which ceased at 4:30 p.m. London time. Since 4:30 p.m. London time is equivalent to 11:30 a.m. in New York, it's the stock's price at 11:30 a.m. Eastern Time that'll be used to calculate the NAV at 4:00 p.m. Thus a timer has 4½ hours in which to watch for a development rendering the London closing price obsolete, be it a general market movement or a company-specific event.extreme

” Non-investment grade bonds – those rated double-B and below – were off-limits to fiduciaries, since proper financial behavior mandated the avoidance of risk. For this reason, what soon became known as high yield bonds couldn’t be sold as new issues. But in the mid-1970s, Michael Milken and a few others had the idea that it should be possible to issue non-investment grade bonds – and to invest in them prudently – if the bonds offered enough interest to compensate for the risk of default. In 1978, I started investing in these securities – the bonds of perhaps America’s riskiest public companies – and I was making money steadily and safely. In other words, whereas prudent bond investing had previously consisted of buying only presumedly safe investment grade bonds, investment managers could now prudently buy bonds of almost any quality as long as they were adequately compensated for the attendant risk. The U.S. high yield bond universe amounted to about $2 billion when I first got involved, and today it stands at roughly $1.2 trillion. This clearly represented a major change in direction for the business of investing. But that’s not the end of it. Prior to the inception of high yield bond issuance, companies could only be acquired by larger firms – those that were able to pay with cash on hand or borrow large amounts of money and still retain their investment grade ratings.

The minimum investment to join PIF4 as a new partner is $5 million. For current investors in any of the funds, the minimum addition to their current investment is $25,000. For IRA investors the minimum is $5,000. Here are the deposit slips for PIF2, PIF3 and PIF4. If you are interested in or would like more information about the April 1, 2021 opening, please contact me at mp@pabraifunds.com or Valerie Magursky at vm@pabraifunds.com.are:

But since investors’ actions toward one group of assets and the resulting price movements influence other assets and other markets – and since they ensue largely from investor psychology, which is highly contagious – I think my comments are probably applicable to other asset classes, to private assets as well as public ones, and possibly to markets outside the U.S. I’ll start by laying out where I think investment value comes from and how it should be assessed. I don’t think I’ve ever done this before in this form. It’s a big topic, but I’ll try to cover it briefly. Value Investment assets – things such as stocks, bonds, companies, and buildings – have a value, which is sometimes referred to as their “intrinsic value”: what the asset is “worth” at a point in time. This value is subjective. It can’t definitively be found anywhere – not even by AI, as far as I know – and opinions will differ as to what it is. In my parlance, the value of an asset is derived from its “fundamentals.” The fundamentals of a company, for example, encompass a great many things. These include its current earnings, its earning power in the future, the steadiness or variability of its future earnings, the market value of its component assets, the skill of management, its potential to develop new products, the competitive landscape, the strength of its balance sheet, and the myriad additional factors that will influence the company’s future.

In fact, I’ve never heard anyone say, “The prospective return isn’t high enough to warrant bearing all that volatility.” What they fear is the possibility of permanent loss. Permanent loss is very different from volatility or fluctuation. A downward fluctuation – which by definition is temporary – doesn’t present a big problem if the investor is able to hold on and come out the other side. A permanent loss – from which there won’t be a rebound – can occur for either of two reasons: (a) an otherwise-temporary dip is locked in when the investor sells during a downswing – whether because of a loss of conviction; requirements stemming from his timeframe; financial exigency; or emotional pressures, or (b) the investment itself is unable to recover for fundamental reasons. We can ride out volatility, but we never get a chance to undo a permanent loss. Of course, the problem with defining risk as the possibility of permanent loss is that it lacks the very thing volatility offers: quantifiability. The probability of loss is no more measurable than the probability of rain. It can be modeled, and it can be estimated (and by experts pretty well), but it cannot be known. In Dare to Be Great II, I described the time I spent advising a sovereign wealth fund about how to organize for the next thirty years. My presentation was built significantly around my conviction that risk can’t be quantified a priori.

After quoting that paragraph, I went on to draw what I thought was the compelling conclusion: Any way you slice it, standards for mortgage loans have dropped in recent years, and risk has increased. Logic-based? Perhaps. Cycle-induced (and exacerbated)? I’d say so. The FT quoted John Paul Crutchley, a banking analyst at Merrill Lynch, as saying “When Abbey are lending a multiple of five times salary, that could be perfectly sensible – or it could be tremendously risky.” Certainly mortgage lending was made riskier. We’ll see in a few years whether that was intelligent risk taking or excessive competitive ardor. Auctions were taking place in the capital markets, and suppliers of capital were bidding against each other to make deals. In the case of UK home mortgages, the right to make loans would go to the institution willing to lend the highest multiple of annual salary . . . that is, willing to accept the most risk. In the last few years, there were many ways in which lenders and investors vied for deal flow on the basis of lowered return expectations and heightened risk. I considered Abbey’s decision emblematic of this trend.

Yet, that was 2015 or ’16, and I’m still waiting for “before year-end” to come around (in his defense, he didn’t say which year). As I indicated in my memo The Illusion of Knowledge (September 2022), there’s no way a macro- forecaster can produce a forecast that correctly incorporates all the many variables that we know will affect the future as well as the random influences about which little or nothing can be known. It’s for this reason, as I’ve written in the past, that investors and others who are subject to the vagaries of the macro- future should avoid using terms such as “will,” “won’t,” “has to,” “can’t,” “always,” and “never.” Politics When the 2016 presidential election rolled around, there were two things about which almost everyone was certain: (a) Hillary Clinton would win but (b) if by some quirk of fate Donald Trump were to win, the stock market would collapse. The least certain pundits said Clinton was 80% likely to win, and the estimates of her probability of victory ranged upward from there. And yet, Trump won, and the stock market rose more than 30% over the next 14 months. The response of most forecasters was to tweak their models and promise to do better next time. Mine was to say, “if that’s not enough to convince you that (a) we don’t know what’s going to happen and (b) we don’t know how the markets will react to what actually does happen, I don’t know what is.

Kohli told interviewer Shai Dubey in 2007 that going to Queen's University on a scholarship was 'the pivotal moment in his life', specifically because Indian education of the era emphasised rote learning whereas Queen's taught him 'to think critically' and 'to question' — a methodological shift he credited with much of his subsequent trajectory.

” (Emphasis added) Although I’ve learned a great deal in the time since that memo was published, I still think the paragraphs excerpted above capture almost the entire essence of market movements. I continue to believe that cycles are inevitable, often profound, and the most reliable feature of the business and investment worlds. In November 2001 I wrote a memo on this subject entitled “You Can’t Predict. You Can Prepare.” (It didn’t generate any reader reaction, even though I thought its contents were important.) The memo discussed some of the cycles that affect the investor:  The economic cycle evidences moderate fluctuations (although their impact can be profound). Viewed on a long-term graph, it looks like a gentle wave.  The business cycle responds to developments in the economy with a more pronounced effect, rising and falling as consumers and businesses loosen and tighten their purse strings.that

Soon after being appointed general manager, Zhang had 76 defective refrigerators smashed in front of staff to instill quality-control discipline among employees.

(I’m not going to go into detail, since the contemporaneous memos I cite in each section will supply more than enough for those who’re interested.) As you read the description of each event, look closely at how the forces that contributed to – and resulted from – each episode led to the next one. You’ll be able to appreciate why I’ve long stressed the role of causality in market cycles. January 2000 In the fall of 1999, against the backdrop of the massive gains being achieved in tech, media, and telecom stocks, I read Edward Chancellor’s excellent book Devil Take the Hindmost. I was struck by the similarities between the TMT boom and the historical bubbles that are the subject of that book. The lure of easy profits, the willingness to leave one’s day job to cash in, the ability to invest blithely in money- losing companies whose business models one can’t explain – all these felt like themes that had rhymed over the course of financial history, leading to bubbles and their painful bursting. And all of them were visible in investor behavior as 1999 came to an end. While I wasn’t involved directly in equities and Oaktree’s investments had little if any exposure to technology at the time, I observed many market narratives that I thought were too good to be true. Thus, I said so in the memo bubble.com, which was published as 2000 began.

Co-founder Cheng Yixiao, who created the Kuaishou app a decade earlier as a tool for creating and sharing animated pictures, took over as CEO and became responsible for company operations, reporting structurally to Su as chairman.

It’s astounding to think what these businesses have endured – dozens of wars, emperors, catastrophic earthquakes, tsunamis, depressions, on and on, endlessly. And yet they keep selling, generation after generation. These ultra-durable businesses are called “shinise,” and studies of them show they tend to share a common characteristic: they hold tons of cash, and no debt. That’s part of how they endure centuries of constant calamities. Clearly, all else being equal, people and companies that are indebted are more likely to run into trouble than those that aren’t. And it goes without saying that a home or car that hasn’t been used as collateral for a loan can’t be foreclosed on or repossessed. It’s the presence of debt that creates the possibility of default, foreclosure, and bankruptcy. Does that mean debt is a bad thing and should be avoided? Absolutely not. Rather, it’s a matter of whether the amount of debt is appropriate relative to (a) the size of the overall enterprise and (b) the potential for fluctuations in the enterprise’s profitability and asset value. Housel frames the issue by introducing the idea of potential volatility over one’s lifetime: “Not just market volatility, but . . . world and life volatility: recessions, wars, divorces, illness, moves, floods, changes of heart, etc.” With no debt, he postulates, we’re likely to survive all but the most infrequent, most volatile events.

Around the early-June high and in the time since, the most frequent ones have been, “How can stocks be doing so well during a severe pandemic and recession?” “Have the securities markets decoupled from reality?” and “Is this irrational exuberance?” The process of answering these questions gives me an opportunity to dissect the breathtaking market rise. The world is combatting the greatest pandemic in a century and the worst economic contraction of the last 80+ years. And yet the stock market – supposedly a gauge of current conditions and a barometer regarding the future – was able to compile a record advance and nearly recapture an all-time high that had been achieved at a time when the economy was humming, the outlook was rosy, and the risk of a pandemic hadn’t registered. How could that be? The possible reasons for the markets’ recovery are many and, as I write this memo, the list is growing as people find more things to take positively. (As usual, the higher the market goes, the easier it becomes for investors to find rationalizations for a further rise.) I’ll survey the apparent reasons below: © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

The latter came to be accorded far too little attention as the 1990s wore on, but that seems to have been corrected. Where can we look now for good risk-adjusted returns? UWhat's Been Tried? UCommon stocksU – Among the mantras that were repeated in the past decade, few received as much credence as "stocks outperform." Wharton's Professor Jeremy Siegel documented in his book, "Stocks for the Long Run," that equities have beaten bonds, cash and inflation over almost all long periods of time. In fact, his graph of the movements of the stock market over the last 200 years looks like a straight line from lower left to upper right. Evidence like this convinced people to increase their equity allocations while continuing to sleep well. Little did they know that the price gains that made them feel so sanguine about their positions were dramatically increasing their risk.

Adar Poonawalla told NPR he decided to invest tens of millions of dollars in glass vials alone and to produce four different COVID-19 vaccines — including the Oxford-AstraZeneca one — before any clinical trials proved them effective. If the vaccines worked, Serum would have hundreds of millions of doses stockpiled; if they failed, Serum would have useless vaccines and hundreds of millions of dollars in losses.

This plays out as follows:  First, because people are risk averse, riskier investments have to offer higher returns in order to attract capital.  Second, if investors are skillful, they should be able to capture higher returns on their riskier investments, and thus they should show higher average returns in the long run.  But investors’ returns tell just half the story. We have to know how much risk they took to get those returns before we can judge whether they did a good or a bad job. Thus developed the concept of risk-adjusted returns. It is from the relationship between risk and return that arises the graphic representation that has become ubiquitous in the investment world. It shows a “capital market line” that slopes upward to the right, indicating the positive relationship between risk and return that is essential.

one can easily see that the piece being given up will return concrete benefits that can be clearly calculated.” In other words, I put a piece in clear jeopardy, but I do this so that I’ll be able to take one of yours of greater value. • Others are deemed “real” sacrifices, where “. . . giving away a piece offers gains that are neither immediate nor tangible. The return on investment might be controlling more space, creating an assailable weakness in the opponent’s position, or having more pieces in the critical sector of attack.” The analogy to investing begins to become clear. Buying a 10-year U.S. Treasury note is a modest or “sham” sacrifice. You give up the use of your money for ten years, but that’s only an opportunity cost, and accepting it brings the certainty of interest income. Most other investments involve real sacrifices, though, where the risk of loss is borne in pursuit of “gains that are neither immediate nor tangible.” Ashley goes on to speak of sacrifice in risk/return terms that are familiar to investors. He describes his mother’s decision to leave him (at age two) and his two siblings in Jamaica and travel to the U.S. in search of a better life for herself and for them. She reached her goal a decade later and was able to bring her kids to the U.S., where they would find success in a variety of fields: It did not have to turn out that way. It did because she was willing to stomach the key aspect of making real sacrifices: the willingness to take risks.

This year many investing institutions are underperforming the passive benchmarks and attributing part of the shortfall to the fact that their fixed income holdings have been too short in duration to allow them to benefit from the decline of interest rates. While this has nothing to do with oil, I mention it to provide a reminder that what “everyone knows” is usually unhelpful at best and wrong at worst.  Not only did the investing herd have the outlook for rates wrong, but it was uniformly inquiring about the wrong thing. In short, while everyone was asking whether the rate rise would begin in December 2014 or April 2015 (or might it be June?) – in response to which I consistently asked why the answer matters and how it might alter investment decisions – few people I know were talking about whether the price of oil was in for a significant change. Back in 2007, in It’s All Good, I provided a brief list of some possibilities for which I thought stock prices weren’t giving enough allowance. I included “$100 oil” (since a barrel was selling in the $70s at the time) and ended with “the things I haven’t thought of.” I suggested that it’s usually that last category – the things that haven’t been considered – we should worry about most. Asset prices are often set to allow for the risks people are aware of. It’s the ones they haven’t thought of that can knock the market for a loop.  In my book The Most Important Thing, I mentioned something I call “the failure of imagination.

My extensive discussions with Andrew led me to conclude that the focus on value versus growth doesn’t serve investors well in the fast-changing world in which we live. I’ll start by describing value investing and how investors might think about value in 2021. What is Value Investing? Value investing is one of the key disciplines in the world of investing. It consists of quantifying what something is worth intrinsically, based primarily on its fundamental, cash flow-generating capabilities, and buying it if its price represents a meaningful discount from that value. Cash flows are estimated as far into the future as possible and discounted back to their present value using a discount rate made up of the prevailing risk-free rate (usually the yield on U.S. Treasurys) plus a premium to compensate for their uncertain nature. There are a lot of common valuation metrics, like the ratio of price to sales, or to earnings, but they’re largely subsumed by the discounted cash flow, or DCF, method. Now, determining this value in practice is quite challenging, and the key to success lies not in the ability to perform a mathematical calculation, but rather in making superior judgments regarding the relevant inputs. Simply put, the DCF method is the main tool of all value investors in their effort to make investment decisions based on companies’ long-term fundamentals.

That was really the problem: no scenario was too negative to be credible, and any scenario incorporating an element of optimism was dismissed as Pollyannaish. There was an element of truth in this, of course: nothing was impossible. But in dealing with the future, we must think about two things: (a) what might happen and (b) the probability it will happen. During the crisis, lots of bad things seemed possible, but that didn’t mean they were going to happen. In times of crisis, people fail to make that distinction. Since we never know much about what the future holds – and in a crisis, with careening causes and consequences, certainly less than ever – we must decide which side of the debate is more likely to be profitable (or less likely to be wrong).

But if investors are giddy and optimism is rampant, we have to consider whether a better buying opportunity mightn’t come along later. The Lessons – and Limits – of Experience I feel good about having been aware of where we stood in terms of the market cycle and investor behavior over the last four or five years. There were memos that talked about low prospective returns and meager risk premiums (“Risk and Return Today,” October 2004), repetition of past mistakes (“There They Go Again,” May 2005), investor inattention to warning signs (“Hindsight First, Please,” October 2005), and the rising willingness to accept lower returns and less safety (“The Race to the Bottom,” February 2007). Importantly, these views were factored into Oaktree’s actions, enabling us to make some good decisions on behalf of our clients.

Private equity was unknown, and hedge funds were too few and outré to matter. Innovations like quantitative investing and structured products had yet to arrive, and few people had ever heard of “alpha.” Return aspirations were modest. Part of this likely was attributable to the narrow range of available options: for the most part stocks and bonds. Stocks would average 9-10% per year, it was held, but we might put together a portfolio that would do a little better. And the admissible bonds were all investment grade, yielding moderate single digits. We wanted to earn a good return, limit the risks, beat the Dow and our competitors, and retain our clients. But I don’t remember any talk of “maximization,” or anyone trying to “shoot the lights out.” And by the way, no one had ever heard of performance fees. Quite a different world from that of today.then:

Hopefully, if I offered to sell you my car, you’d ask the price before saying yes or no. Deciding on an investment without carefully considering the fairness of its price is just as silly. But when people decide without disciplined consideration of valuation that they want to own something, as they did with tech stocks in the late 1990s – or that they simply won’t own something, as they did with “junk bonds” in the 1970s and early 1980s – that’s just what they’re doing. During the course of my 35 years in this business, investors’ biggest losses have come when they bought securities of what they thought were perfect companies – where nothing could go wrong – at prices assuming that degree of perfection . . . and more. They forgot that “good company” isn’t synonymous with “good investment.” Bottom line: there’s no such thing as a good idea regardless of price!commentator

The reluctance to make risky investments also meant that they had to be supported by research and analysis performed by skeptical experts.  There was a particular aversion to new, unproven and “alternative” forms of investment. Fiduciary caution was an overarching consideration. With the returns from U.S. equities expected to handily exceed the overall return needs of pension funds and endowments, alternative investments were something of an exotic luxury: tempting but also non-essential and somewhat forbidding.  Because the amounts of capital pursuing alternative investments were limited, investors had negotiating power and were able to insist on, among other things, an incentive system that aligned their interests with those of their money mangers, in which fixed fees merely covered managers’ expenses and incentive fees offered managers the hoped-for brass ring.

The illogicality of his advice makes clear how simplistic this adage – like many others – really is. However, regardless of the details, people may unquestioningly accept that they should sell appreciated investments. But how helpful is that basic concept? Origins Much of what I’ll write here got its start in a 2015 memo called Liquidity. The hot topic in the investment world at that moment was the concern about a perceived decline in the liquidity provided by the market (when I say “the market,” I’m talking specifically about the U.S. stock market, but the statement has broad applicability). This was commonly attributed to a combination of (a) the licking investment banks had taken in the Global Financial Crisis of 2008-09 and (b) the Volcker Rule, which prohibited risky activities such as proprietary trading on the part of systemically important financial institutions. The latter constrained banks’ ability to “position” securities, or buy them, when clients wanted to sell. Maybe liquidity in 2015 was less than it had previously been, and maybe it wasn’t. However, looking beyond the events of the day, I closed that memo by stating my conviction that (a) most investors trade too much, to their own detriment, and (b) the best solution for illiquidity is to build portfolios for the long term that don’t rely on liquidity for success.

” It included a number of what I consider provocative statements: that pension funds do want fewer bonds but generally not more stocks (raising the question of where the money will go, and specifically how much money can responsibly be absorbed in asset classes other than stocks and bonds), that, according to one consultant “There is recognition that bonds represent minimal-risk assets, so it‟s difficult for (plan executives) to abandon bonds in favor of equities. . .” (This overlooks the fact that there‟s no such thing as a minimal-risk asset regardless of price, and few assets that have been the beneficiaries of years of strong cash inflows can really be “minimal-risk”), and “that investors are taking short-term tactical advantage of the rising equity premium by, for example, allowing multiasset managers to drift toward the higher end of the equity allocation range.” So there we are, in the third bullet point, back to the matter of the equity risk premium. Everything You Ever Wanted to Know About Equity Risk Premiums (and Much More) The equity risk premium is generally defined as, “the excess return that an individual stock or the overall stock market provides over a risk-free rate.” (Investopedia) Thus it is the incremental return that investors in equities receive relative to the risk-free rate as compensation for bearing the risk involved. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Importantly, value investors recognize that the securities they buy are not just pieces of paper, but rather ownership stakes in (or, in the case of credit, claims on) actual businesses. These financial instruments have a fundamental worth, and it can be quite different from the price quoted in the market, which is © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved UThe Great New Days In my view, all of the elements listed above have changed drastically in the last few years. (You’ve seen some of this from me before, but not all in one place.)  The stock market’s losses in 2000-02 substantially cooled investors’ ardor for equities. Instead of 9-11%, U.S. stocks now are universally expected to return just 5-7%. Thus pension funds and endowments that need 8% or more are looking elsewhere for return. That “elsewhere” means non-traditional market niches such as buyouts, venture capital, hedge funds, real estate and emerging market equities and debt.  This stretch for return has overcome innate caution. Any aversion to the risks entailed in these markets has been wiped away by the combination of (1) the perceived paucity of return in traditional stocks and bonds, (2) the high returns achieved recently in the alternate markets, and (3) the failure of risk to turn into loss in the last few years. Recent successes have erased from the collective consciousness any reluctance to undertake the new, unproven or risky.  As a result, large amounts of money are demanding access to the alternative markets. However, these markets are much smaller than the traditional stock and bond markets that now seem uninteresting.

Zhang implemented strict, military-style workplace rules at Haier, including fines for employees who did not push in their chairs when leaving desks, reflecting an operating culture centered on discipline and process control.

Page 5 General Comments Life’s tragedy is that we get old too soon and wise too late. - Ben Franklin It has been a wonderful 26 years since I began my journey as a value investor. Before I heard about Warren Buffett in 1994, I had no clue about investing. I went through a very steep (and incredibly exhilarating) learning curve in 1994 and 1995. It was wonderful to enter this new world of Buffett, Munger, Graham and the magic of compounding. The 2nd highest period of learning and growth for me was last year. It was probably all that time I had at home to contemplate my naval. It led to a breakthrough change in my mindset. When I began my value investing journey, I was a buy and hold investor. I made several investments where I could not see the end of the runway and the mental model I used was to simply set it and forget it. In the period from 1994-1999, I captured two 100 baggers. In one case, I put 10% of my $1 million in investable assets in it and cashed out over $10 million five years later. The other one was a 1% bet. It went up 140x and I rang the register with over $1.4 million. There were also some losers and more than a few other winners, but it was these two 100 baggers that mattered the most. Buying and holding these high conviction bets was key. The 140-bagger was a company in India where I was sent physical share certificates. There were no digital confirms in India back then.

© Oaktree Capital Management, L.P. All Rights Reserved For forty years I’ve seen the manic-depressive cycle of investor psychology swing crazily: between fear and greed – we all know the refrain – but also between optimism and pessimism, and between credulity and skepticism. In general, following the beliefs of the herd – and swinging with the pendulum – will give you average performance in the long run and can get you killed at the extremes. Two or three years ago, the world was so different as to be almost beyond remembering. It was ruled by greed, optimism and credulity. In short, it was the opposite of the last few weeks: no story was too positive to be believed.  “There’s a worldwide ‘wall of liquidity’ that can never dry up.”  “Triple-A CDOs are as safe as triple-A corporate debt but will deliver higher returns.”  “Leverage holds the key to better investment results.”  “Tranching and selling onward are spreading the risk, thereby eliminating it.”  “Decoupling has reduced nations’ economic reliance on the U.S.” Boy, what a good time that was for a dose of skepticism! What benefits it could have provided (in terms of losses avoided). But when conventional wisdom is rosy, few can stand against it. People who do so too early look woefully wrong and are swept aside. That discourages others from trying the same thing, even as the cycle swings further to the positive extreme.

© Oaktree Capital Management, L.P. All Rights Reserved Thus, you can imagine my reaction upon reading the following in the Financial Times of April 8: First-time buyers with no cash savings were shut out of the housing market yesterday after Abbey became the last mainstream lender to stop offering 100 per cent mortgages. Borrowers who a month ago had a choice of mortgages offering 100 per cent of a property’s value, will now need a deposit of at least 5 per cent . . . More than 20 lenders . . . offered 100 per cent mortgages at the start of last month. These have been pulled out of the market one by one as banks and building societies have distanced themselves from riskier lending. Eighteen months ago, Abbey was the first to take lending standards to a new low in terms of times-salary-loaned. Now, it’s the last to raise them with regard to down payments. Can there be a clearer example of the credit cycle at work? For now, high-risk, no-worries lending seems to be a dead duck, a casualty of the corrections in risk aversion and demanded returns that have accompanied – or are at the root of – the current credit crunch. At the highs of the credit cycle, anyone can get money for any purpose. At the lows, even deserving borrowers are shut out. The former is highly expansionary, and the latter depresses economic activity. It’ll always be so. UThe Canard of Free Market Infallibility “Canard” is the French word for “duck.

Inside Serum's sprawling Pune factory, NPR describes filled vaccine vials whizzing off conveyor belts at around 5,000 per minute. Scientists in goggles and gloves steered microscopes over a chimpanzee virus spiked with coronavirus protein. Human embryonic kidney cells fermented in floor-to-ceiling stainless steel vats imported from Europe that cost upward of $4 million each.

But with the ability to issue high yield bonds, smaller firms could now acquire larger ones by using heavy leverage, since there was no longer a need to possess or maintain an investment grade rating. This change permitted, in particular, the growth of leveraged buyouts and what’s now called the private equity industry. © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: investors are able to ignore short-term performance, hold for the long run, and avoid excessive trading costs, while everyone else worries about what’s going to happen in the next month or quarter and therefore trades excessively. In addition, long-term investors can take advantage if illiquid assets become available for purchase at bargain prices. Like so many things in investing, however, just holding is easier said than done. Too many people equate activity with adding value. Here’s how I summed up this idea in Liquidity, inspired by something Andrew had said: When you find an investment with the potential to compound over a long period, one of the hardest things is to be patient and maintain your position as long as doing so is warranted based on the prospective return and risk. Investors can easily be moved to sell by news, emotion, the fact that they’ve made a lot of money to date, or the excitement of a new, seemingly more promising idea. When you look at the chart for something that’s gone up and to the right for 20 years, think about all the times a holder would have had to convince himself not to sell. Everyone wishes they’d bought Amazon at $5 on the first day of 1998, since it’s now up 660x at $3,304. • But who would have continued to hold when the stock hit $85 in 1999 – up 17x in less than two years?

The memo described how tech investors were buying the stocks of young companies at astronomical prices set in many cases as a multiple of current revenues, as the companies often had no profits. In fact, many had no revenues, in which case the price was based on little more than a concept and hope. I define a bubble as an irrationally © 2023 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved operating profits change more than revenues) and financial leverage (such that net income changes more than operating profits).  The credit cycle moves dramatically, usually oscillating between periods when the capital markets are wide open and periods when they’re slammed shut.  The market cycle reacts violently, as investor psychology magnifies all of the above. Security prices yo-yo in what can often be described as extreme over-reaction. Everyone’s aware of these cycles and their influence on the markets, but it’s important that their essence and origin be thoroughly understood. For me that means delving into human nature and emotion. The theme of this memo will be that the cyclical phenomena that so heavily influence our investment outcomes aren’t caused by the operation of institutions or physical laws. Rather, they largely result from people’s frailties and excesses. A thorough understanding of these things can increase an investor’s ability to achieve gains and avoid losses. 1BUGreed or Fear When I was a rookie analyst, we heard all the time that “the stock market is driven by greed and fear.” When the market environment is in healthy balance, a tug-of-war takes place between optimists intent on making money and pessimists seeking to avoid losses. The former want to buy stocks, even if they have to pay a price a bit above yesterday’s close, and the latter want to sell them, even if it’s on a downtick.

” Even before the much-discussed presidential debate of three weeks ago, no one I know expressed much confidence regarding the outcome of the coming election. Today, Ms. O’Malley Dillon would likely soften her position regarding the certainty of a Biden victory, explaining that she was blindsided by the debate result. But that’s the point! We don’t know what’s going to happen. Randomness exists. Sometimes things go as people expected, and they conclude that they knew what was going to happen. And sometimes events diverge from people’s expectations, and they say they would have © 2024 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Ever since coming up with my sea change thesis regarding interest rates two years ago, I’ve been talking about the increased utility of credit investments. And the more I’ve done so, the more I’ve thought about the difference between credit investments and equities. Thus, the first thing I want to mention about my “Australian epiphany” is the unconventional idea that, at bottom, there are only two asset classes: ownership and debt. If someone wants to participate financially in a business, the essential choice is between (a) owning part of it and (b) making a loan to it. When I moved from Citibank’s equity research department to its bond department in 1978, I learned firsthand that this is a matter of night and day. On my new desk, I found a machine called a Monroe 360/65 Bond Trader. If you typed in a bond’s interest rate, maturity date, and market price, it would tell you the yield to maturity . . . in other words, what your return would be if you bought the bond at that price and held it to maturity (and it paid). This was revolutionary to me. On the equity side I’d come from, there was no place you could look to find out what your return would be. This highlighted for me something I’ve always felt most investors don’t grasp viscerally: the essential difference between stocks and bonds . . . that is, between ownership and lending.

© Oaktree Capital Management, L.P. All Rights Reserved the general welfare, consumer spending or GDP growth if the level of business activity, as seen in revenues, isn’t rising; GDP doesn’t benefit from profit margin expansion. Reliance on Government Stimulus A year or so ago, the government came to the rescue of the economy with massive stimulus. With the Great Depression as a reference point, Bernanke et al. were determined to limit the contraction in liquidity, support financial institutions and encourage economic activity. Some say too much has been spent, the resulting deficits are worrisome, and the program’s a flop, since the economy’s still languishing and unemployment remains high. But the fact that growth is sluggish doesn’t mean the stimulus has failed. The relevant question isn’t how the economy is doing, but how growth compares against what it would have been without the stimulus. “What if” questions like that are largely unanswerable, but I’m sure we’re much better off than we would have been without the government’s help. Home sales are weak, but what would they be if the federal government wasn’t directly or indirectly backing 80-85% of all new mortgages and providing $8,000 tax credits to first-time home buyers? What would 2009 auto sales have been without the “cash for clunkers” program? GDP growth is insubstantial, but what would it be if government spending hadn’t risen by double digits?

© Oaktree Capital Management, L.P. All Rights Reserved I am a great believer in common stock investing, but I hold tight to a few caveats:  Return expectations must be reasonable.  The ride won't be without bumps.  It's not easy to get above-market returns. We live in the world's most productive economy, under a very effective capitalist system, at a wonderful point in time. In general, it's great to own productive assets like companies and their shares. But occasionally, people lose track of the fact that in the long run, shares can't do much better than the companies that issue them. Or to paraphrase Warren Buffett, when people forget that corporate profits grow at 8 or 9% per year, they tend to get into trouble. It's never clear what base period makes for a relevant comparison, but between 1930 and 1990, annual returns from stocks averaged about 10% per year. Periods when they did better were followed by periods when they did worse. The better periods were usually caused by the expansion of p/e ratios, but valuations tended to return from the stratosphere, and returns roughly paralleled profit growth in the long run. There always will be bull markets and bear markets. The bull markets will be welcomed warmly and unskeptically, because people will be making money.

Li founded Mindray in Shenzhen in 1991 together with Xu Hang and Cheng Minghe, both former Anke colleagues; the company secured its first contract, a 360,000-yuan sale, at a medical equipment convention in the 1990s, and by 2008 had become China's largest medical device manufacturer.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: A company may own land, buildings, machinery, vehicles, and natural resources such as mineral deposits or forests, and even facilities that allow it to derive electricity from river water or sunshine (which it obviously doesn’t own). These are tangible assets, and there’s often a market for them and a realizable price. But a company may also have assets that are intangible, such as patents, trade secrets, knowhow, research capability, reputation and image, human talent, management skill, and culture. Some of these may be transferable and salable, but others are not. All the assets mentioned above have earning power individually, and in combination they create a company’s overall earning power. A company’s earning power almost always exceeds the sum of the earning power of each of its individual assets taken in isolation. Combining individual assets to maximize a company’s overall earning power is the top job of management. When successful, the result is synergy: the benefit gained from skillfully combining things. But not all assets have earning power (as I define it), and thus not all have calculable investment value. I describe earning power as the money you can make by owning and operating an asset – that is, I omit from “earnings” the possible gains from simply holding an asset and ultimately selling it.

© Oaktree Capital Management, L.P. All Rights Reserved how to invest in today’s stock market. “Figure out which industries have been doing best, and pick out the leading companies in those industries. The professionals know which they are, so their stocks will sport P/E ratios that are higher than the rest. But that’s okay: do you want the best companies or the worst?” My answer’s simple: I want the best buys. The most important thing is a solidly based, strongly held estimate of intrinsic value. To value investors, an asset isn’t an ephemeral concept you invest in because you think it’s attractive (or think others will find it attractive). It’s a tangible object that should have an intrinsic value capable of being ascertained, and if it can be bought below its intrinsic value, you might consider doing so. Thus intelligent investing has to be built on estimates of intrinsic value. Those estimates must be derived rigorously, based on all of the available information. And the level of belief in estimates of intrinsic value has to be high. Only if the estimate is strongly held will a manager be able to do the right thing. If there’s no conviction, a drop in the price of a holding can weaken the investor’s faith in the estimate and make him fail to buy more, or maybe even sell, just when a lower price should lead him to increase his position.

© Oaktree Capital Management, L.P. All Rights Reserved Risk Return 0 Risk Return Before going further, I want to stop for a brief tirade. In my opinion, especially in good times, far too many people can be overheard saying, “Riskier investments provide higher returns. If you want to make more money, the answer is to take more risk.” But riskier investments absolutely cannot be counted on to deliver higher returns. Why not? It’s simple: if riskier investments reliably produced higher returns, they wouldn’t be riskier! The correct formulation is that in order to attract capital, riskier investments have to offer the prospect of higher returns, or higher promised returns, or higher expected returns. But there’s absolutely nothing to say those higher prospective returns have to materialize. The way I conceptualize the capital market line makes it easier for me to relate to the relationship underlying it all: Risk Return 0 Risk Return

But in a succession of illustrations, Housel shows that as the level of one’s indebtedness increases, the range of volatility one can withstand narrows, until at a very high level of debt, only the tamest of environments are survivable. As Housel puts it, “as debt increases, you narrow the range of outcomes you can endure in life.” © 2024 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Another of their advisors, a professor from a business school north of New York, insisted it can. This is something I prefer not to debate, especially with people who’re sure they have the answer but haven’t bet much money on it. One of the things the professor was sure could be quantified was the maximum a portfolio could fall under adverse circumstances. But how can this be so if we don’t know how adverse circumstances can be or how they will influence returns? We might say “the market probably won’t fall more than x% as long © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

For a chess player, risk is as much intuited as it is calculated. Due to the inherent complexity of the game, it is virtually impossible to assess with certainty whether a risky move will pay off in the end. It’s up to the player to decide if sufficient conditions have been met to take the chance on a risky move. . . .

Kuaishou had gone public in Hong Kong earlier in 2021 and had grown into China's second-largest short-video platform after ByteDance's Douyin, per SCMP.

© Oaktree Capital Management, L.P. All Rights Reserved. The term is also used to describe the extent to which the return on stocks exceeds the return on bonds, again as compensation for bearing incremental risk. (For example, an August 18, 2011 article on the Seeking Alpha website, entitled “What the Equity Risk Premium Is Saying,” discusses the prospects for stocks versus the ten-year U.S. Treasury note.) My real problem with the term – or, more correctly, the way it‟s used – has to do with one of the littlest words in the English language. Or, to paraphrase a former President of the United States, “it all depends on the meaning of the word is.” Many people know what they think they mean when they talk about the existence and magnitude of the equity risk premium – or even what they actually mean – but I don‟t think many are logical or consistent in using it. My complaints surround the definition they apply to the term, and specifically the tense of the verb they employ (I‟m not just being grammatically picky). Most specifically, I strongly dislike the use of the present tense, as exemplified by the writer for P&I: “The long-term equity risk premium is typically between 4.5% and 5%.” This suggests that the premium is something that solidly exists in a fixed amount and can be counted on to pay off in the future. Imagine instead that she had said “The long-term equity risk premium has typically been between 4.5% and 5%.

” I defined it as “either being unable to conceive of the full range of possible outcomes or not understanding the consequences of the more extreme occurrences.” Both aspects of the definition apply here. The usual starting point for forecasting something is its current level. Most forecasts extrapolate, perhaps making modest adjustments up or down. In other words, most forecasting is done incrementally, and few predictors contemplate order-of-magnitude changes. Thus I imagine that with Brent crude around $110 six months ago, the bulls were probably predicting $115 or $120 and the bears $105 or $100. Forecasters usually stick too closely to the current level, and on © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

In 1945, in his final year at Government College, Lahore, Kohli's father died; the emotional shock and need for independence pushed him to apply for the Indian Navy, but a chance newspaper advertisement for a government scholarship to study electrical engineering at Queen's redirected him to Canada in 1946 — a single small ad rerouting the trajectory of Indian IT.

© Oaktree Capital Management, L.P. All Rights Reserved UCompulsory Short-Termism But is it right to say Prince and Citi could have avoided trouble by refusing to go along? Let’s do what some DVDs let you do nowadays: go back and consider an alternative ending. It’s July 2005 instead of July 2007. Presciently, Chuck Prince says, “When the music stops, in terms of liquidity, things will get complicated. We’re not going to get caught in that trap. As of today, we’re adopting a conservative stance toward loans, mortgages, subprime, CDOs and SIVs. The others can dance all they want; we’re sitting this one out.” What would’ve happened? Rather than lose his job in late 2007, he probably would have lost it sooner. Why? Because from whenever he made that statement until July 2007, Prince would have looked dumb. While other banks were gaining market share, Citi’s share would have been shrinking. And while other banks were borrowing on the cheap to make mortgage-related investments at seemingly attractive spreads, Citi would have been on the sidelines, forgoing easy profits. Shareholders would have been yelling for Prince’s scalp. The bottom line is one of my three favorite adages: Being too far ahead of your time is indistinguishable from being wrong. Of the two things I think are most wrong about American business, the worst is short-termism. (The other is the ability of executives to thrive while their companies do poorly.)

In the same way that expanded risk tolerance accompanies appreciated asset prices and contributes to the risk of loss, so does risk aversion tend to rise in times of depressed prices, increasing the risk of missed opportunity. When people refuse to buy assets regardless of their low prices, they miss out on the best, lowest-risk returns of the cycle. Recent History – on the Upside Just as the recent market cycle was extreme, so was the swing in attitudes regarding the “twin risks.” And thus so are the resultant learning opportunities. Risk aversion was clearly inadequate in the years just before the onset of the crisis in mid-2007. In fact, I consider this the main cause of the crisis. (Last year, DealBook, the online business publication of The New York Times, asked me to write about what I thought had been behind the crisis. My article, entitled “Too Much Trust, Too Little Worry,” was published on October 5, 2009. It offers more on this subject should you want it.) Here’s the background regarding the early part of this decade: Interest rates kept low by the Fed combined with the first three-year decline of stocks since the Depressionto reduce interest in traditional investments. As a result, investors shifted their focus to alternative and innovative investments such as buyouts, infrastructure, real estate, hedge funds and structured mortgage vehicles.

© Oaktree Capital Management, L.P. All Rights Reserved Here’s how Thomas Friedman put it in The New York Times of January 31: Everyone is looking for the guy – the guy who can tell you exactly what ails the world’s financial system, exactly how we get out of this mess and exactly what you should be doing to protect your savings. . . . But here’s what’s really scary: the guy isn’t here. He’s left the building. . . . There is no magic bullet for this economic crisis, no magic bailout package, no magic stimulus. We have woven such a tangled financial mess with subprime mortgages wrapped in complex bonds and derivatives, pumped up with leverage, and then globalized to the far corners of the earth that, much as we want to think this will soon be over, that is highly unlikely. The “I know” school (which first appeared in a memo in 2001) is still making predictions. Statistical comparisons are being made to past recessions and solutions extrapolated from those experiences. Thus it’s the consensus of this school that the recovery will start during the first quarter of 2010. I also see people projecting a stock market rebound based on the average time between past declines and the recoveries therefrom. I think it’s a mistake to hold confident opinions about the events of today. Instead, I think this is a great time to reaffirm faith in the “I don’t know” school, of which I’m a card-carrying member. No one should feel certain they know what’s going to unfold, or when.

© Oaktree Capital Management, L.P. All Rights Reserved backing the large-cap growth stocks and Internet high flyers can imagine prices at which they would be mere "holds" or (heaven forbid) "sells." ULooking on the bright sideU - The bulls - who are firmly in control - have joined with the media to interpret things in a positive light. I got a chuckle out of the article's description of investor reaction to the jobs data released on April 2: Those showed low unemployment, which was good for consumer spending; low wage increases, which implies weak inflation; and mild job creation, which implies a growing but not overheating economy. I'm sure that in other times and climes, it would have come out this way instead: Those showed low unemployment, which carries a threat of renewed inflation; low wage increases, which implies an anemic economy; and mild job creation, which presages weak consumer spending. Of course, economic developments are always subject to varying interpretation. The above passage sent me to the archives for one of the absolute classic cartoons: “On Wall Street today, news of lower interest rates sent the stock market up, but then the expectation that these rates would be inflationary sent the market down, until the realization that lower rates might stimulate the sluggish economy pushed the market up, before it ultimately went down on fears that an overheated economy would lead to a reimposition of higher interest rates."

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved History doesn’t repeat itself, but it does rhyme. The philosopher Santayana stressed the penalty for failing to attach sufficient importance to history: Those who cannot remember the past are condemned to repeat it. And economist John Kenneth Galbraith described the shabby way investors treat history and those who consider it important: Contributing to . . . euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present. String together these three pearls of wisdom and you get a pretty accurate picture of investment reality. Past patterns tend to recur. If you ignore that fact, you’re likely to fall prey to those patterns rather than benefit from them.

© Oaktree Capital Management, L.P. All Rights Reserved The answer, we feel, is simple: investors continue to be unfairly prejudiced against them. Not every investor, clearly, but enough big players to create a buyers' market and tilt the opportunity in favor of those who are willing to participate. Prove it, you say? Well, this memo was occasioned by an article in "Pensions & Investments" reporting consultant SEI's recommendation that pension plan sponsors invest 10% to 30% of their fixed income portfolios in high yield bonds. As I went through the article, my reaction was that it was a great selling piece for our market sector -- not just SEI's recommendation, but what the article demonstrated about investor attitudes. According to the article, SEI feels "a sponsor could add about 20 basis points of return without adding risk by putting 10% of its fixed income portfolio in high yield, or junk, bonds." And that's after SEI "tried to be as conservative as possible in its assumptions." I'm sold! But the article goes on to show how a market can be biased against an asset class: . . . High yield is perceived as a way to add diversification, but is not well- received by clients. "Not a lot of our clients are opting to use them . . . . We work with some clients who just plain don't want them in their portfolio."

© Oaktree Capital Management, L.P. All Rights Reserved All too often, investors’ interest in the past is limited to the last few months or perhaps a year or two. They look unskeptically, are dazzled by the high returns they see, and jump aboard for more of the same. But they usually fail to consider longer-term history, which would show that “free lunches” never last forever. When the check ultimately comes in the form of losses, there’s surprise and disappointment that could have been avoided. Time after time when I read about trends being taken to excess – and later, when the painful consequences become clear – I find myself asking what they could have been thinking. The alpha that’s so much in demand today is really the ability to see ahead to things others will see only afterwards, in the rearview mirror. The people of Oaktree spend a lot of their time figuring out what might be the next mistake and preparing for it. In other words, we try to anticipate – and avoid – pitfalls that others will rue after the fact. 0BUCaveat Emptor Today’s financial cause célèbre is the Bayou group of hedge funds. Results were falsified and a lot of money has disappeared. It’s easy to make a list of those who deserve blame in this affair, but few of the articles I see focus on the people I think should head the list: the funds’ investors. We live in an age when fingers are pointed at others all the time. Losers feel aggrieved and sue.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Short-Term Response It’s clear that strong actions are essential in order to halt or reverse the rising trend in the number of new coronavirus cases. Things we’ve seen in other countries include:  Not suggesting, but ordering people to desist from going out, gathering and socializing.  Imposing punishment for stepping over the threshold of their homes.  Prohibiting movement on the part of people who have been diagnosed, and tracking their movement through cell phones. There seems to be no doubt about the fact that success in flattening the curve comes best from identifying the people who have the disease and preventing them from passing it on to others. Thus the battle against the virus may bring public health considerations into conflict with civil liberties. It’s “un-American” to restrict people’s movements, but so far the American spirit of independence seems to be allowing some people to justify maintaining their usual behavior. Rules may be required, not just warnings, suggestions and encouragement. Restrictions will increase our chances of winning the war. People should not be surprised to see them, although their promulgation may come as a shock. Likewise, people coming together to do business would prolong and exacerbate the epidemic. The more businesses that close, the more success we’re likely to have against the disease.

With corporate balance sheets in relatively good shape (thanks in large part to all of the refinancing activity over the past two years), the capital markets awash in liquidity, and economies (at least in the U.S.) showing some © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved to remain so for a long time. I certainly had no idea that the excesses I saw in the market would be remedied as quickly as they have. UThe Bubble Bursts In every regard enumerated in "bubble. com" and more, the tech-media-telecom extremes of 1999 were reversed in 2000. I must say I've never seen anything quite like it. UBusiness models questioned U– A year ago, I went to great lengths criticizing dot-com business models that valued eyeballs over profits and viewed operating losses as a good investment. This year, investors realized that the emperor was naked. The first signs came in articles like "Burning Up" (Barron's, March 20), which cited the rate at which Internet companies were using their finite cash to fund operating losses. More recently, "The Giveaway Is Going Away On Web Sites" (Wall Street Journal, December 4) stated that "many of the online companies that are in a sad state today can blame their woes on the cornucopia of free stuff and services they have been doling out to build market share." So now it's "p-to-p," or path-to-profit . . . just a little late. Technology entrepreneurs went through their cash, secure in the expectation that they could always raise more by selling shares to eager buyers. In today's market, as the British say, that's simply not on. UTechnology firms disrespectedU – Prospective investors (not to mention bankers, suppliers and landlords) now want to see profit potential.

© Oaktree Capital Management, L.P. All Rights Reserved commissions. The head of a charity draws a salary that reduces the amount left for the organization’s good work. The doctor collects for his services, and the more he charges, the fewer the people who can afford them. And we investment managers charge management fees, and sometimes a percentage of the profits, that cut into our clients’ net return. We all want to increase our incomes, but it should be possible to stick to the high road while doing so. The tradeoffs present challenges, but they can be overcome. I do not argue that mutual fund executives – or investment managers in general – should be expected to serve in an eleemosynary capacity. Certainly Oaktree doesn’t run on pure altruism. Vanguard comes close to the ideal, as a non-profit organization owned by its fund owners, but Vanguard’s people take compensation, not vows of poverty. The critical question in my mind isn’t whether people make money, or even how much, but what methods they employ to do so, how candid they are about those methods, and how the inevitable conflicts of interest are resolved. U What’s Wrong With a Little Salesmanship? My October memo “The Feeling’s Mutual” argued that late trading wasn’t the worst thing going on in the mutual fund industry. Rather, it pointed to questionable long-term practices relating to governance, marketing and compensation.

© Oaktree Capital Management, L.P. All Rights Reserved investable cash must come from sources that are exogenous to the market, such as household income, savings, tax refunds, and cash contributions to pension funds or endowments. The bottom line: there’s often no wisdom in the stuff that “everyone knows.” And nowhere is that more true than in investing. 4BUToward Understanding Market Movements One day in early 1995, the dollar made a big move against the yen. On my way to work, my radio station’s Tokyo correspondent reported that the Nikkei average of Japanese stocks had been off big that day. He was glad to explain why: investors were worried about the weakness of the yen. On my way home, the same station reported that the U.S. stock market also had declined a lot. The explanation given: investors were concerned about the strength of the dollar. Well that just can’t be. If one currency moves relative to another, how can companies in both countries be worse off than they were the day before? I think this episode illustrates a few themes. First, the general understanding of economic events and their implications is very poor. Second, everyone wants to explain the movements of the markets, and they’ll grasp at any straw with which to do so. Third, much of their commentary is useless. And, of course fourth, markets often do things that defy logical explanation – but people keep explaining them anyway.

Prior to the 1950s, common stocks were viewed as a speculative, inferior (i.e., junior) asset class. For that reason, stocks had to pay higher yields than bonds in order to attract buyers; of course a riskier asset should yield more. In fact, most states had laws restricting holdings of stocks in fiduciary portfolios. This attitude toward stocks largely traced from the speculative stock bubble in the 1920s – featuring high-margin buying, bucket shops and shoe shine boys sharing stock tips – which collapsed in the Crash of ’29. Poor economic and market performance stretching from 1929 to the end of World War II further contributed to the skepticism toward stocks. It was only after WW II that economic performance began to support optimism. Brokerage firms led by Merrill, Lynch, Pierce, Fenner and Smith trumpeted the merits of stocks. Equity investing became widespread, and “customers’ men” in local brokerage offices delivered stock investing to a great many households: I remember my mother buying 10 shares of Columbia Gas and 15 shares of Chock Full of Nuts around 1959. I also remember a brochure on “growth stock investing” that Merrill put out in the mid-1960s, touting the desirability of rapid earnings growth and the strength of companies like IBM, Xerox, Avon, Coke, Texas Instruments and Johnson & Johnson. This idea grew into “nifty-fifty” investing, a true mania adopted by many of the large banks, among others.

© Oaktree Capital Management, L.P. All Rights Reserved one honest answer, I think it should be “what’s the relationship between supply and demand?” If there are lots of assets for sale and few takers, those assets can often be bought cheap. If there are few assets offered and many would-be buyers, bargains are usually few and far between. While no guarantee of a silver bullet, the former can be the source of some good ammunition. With the latter you’re more likely to shoot yourself in the foot. UThe New Solution This memo’s about hedge funds. They’re the hot topic in the investment world today – the latest would-be silver bullet – largely, I think, because most have yet to disappoint performance-wise and because the big asset classes look unappealing. Common stocks were the big-picture silver bullet in the 1990s. Professor Jeremy’s Siegel’s “Stocks For the Long Run” assured us there had never been a long period in which stocks didn’t beat bonds, cash and inflation. The authors of another book, “Dow 36,000,” were given space on The Wall Street Journal’s op-ed page. Thus when stocks’ popularity – and their representation in portfolios – hit a peak in early 2000, they were ready for a fall. A swoon that included the first three consecutive losing years since the Depression took the S&P 500 down 49% and the NASDAQ down 78%.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: populism of the left and populism of the right. As a rule, populists of the right (who are usually capitalists) don’t know how to divide the pie well, while populists of the left (who are usually socialists) don’t know how to grow the pie. [Emphasis added] Populism of both the right (behind Donald Trump) and the left (behind Bernie Sanders) played a big part in the 2016 presidential election season. It’s the latter that’s my subject here. In my January memo, I argued at length that capitalism can be credited with much of what made the United States what it is today. In short, to borrow Ray’s terminology, the capitalist system achieved this by creating the biggest pie: the largest total GDP in the world and one of the highest per-capita GDPs. And only capitalism is likely to cause the pie to continue to grow. The failure of non-capitalist systems to produce economic growth and prosperity is well documented. Obviously, however, when the pie is divided up under capitalism, not everyone gets the same-sized piece. That’s the idea underlying the following line in Winston Churchill’s speech in the House of Commons on October 22, 1945: The inherent vice of capitalism is the unequal sharing of blessings . . . As with so many things, Churchill said it best.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: interprets everything negatively. The market often fails to act rationally in the short run, primarily because of the role played by people in determining its course. Thus two key observations can be made based on last week’s developments:  First, no one really knows what events are going to transpire.  And second, no one knows what the market’s reaction to those events will be. These observations reinforce my belief that it’s a mistake to base investment decisions on macro forecasts. But you knew that. Impact on the Markets Of course there’s logic to the market’s rise last week, just a logic different from that which would have made it go up if Clinton had won. The reasons one might cite are these:  As a businessman, Trump doubtless intends to be a pro-business president. In fact, he’ll probably make more of an effort to nurture business than Clinton would have (especially when being pushed to the left by Sanders and Elizabeth Warren), and more than I think characterized the Obama administration.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. And what does the fact that we can’t know these things mean for our portfolio management? Simple: it means we mustn’t act as if we can. If you could know these things, the path to success would be clear: Stick to markets that will do well and avoid the rest. Concentrate on the individual securities that will be the best performers. Load up when the market’s about to rise and get out at the top. And use maximum leverage when the return will exceed the cost of capital and none when it won’t. But what if you can’t? You should acknowledge your limitations, enroll in the “I don’t know” school of thought, and accommodate your behavior to reality (see “Us and Them,” May 7, 2004). The more you acknowledge you don’t know what the future holds:  the more you should diversify, spreading your bets to make sure you don’t miss the winners or, more importantly, overload on the losers,  the less you should attempt to augment performance through adroit short-term market timing, and  the less you should employ leverage. The difference in behavior between those who think they can know the future and those who don’t is potentially enormous. It’s essential to be on the right side of this choice because, as Mark Twain said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” That’s an essential component of the formula for investment survival. What Can We Do?

© Oaktree Capital Management, L.P. All Rights Reserved. Demographic Luck Gladwell’s term for this key ingredient in success has a simpler everyday label: “being born at the right time and the right place.” Gladwell’s examples are compelling:  By the time the first hockey tryouts take place for all the little Canadian boys born in a given calendar year, those born in January will be eleven months older – and thus much bigger and stronger and more coordinated – than those born in December. They’re likely to be put on better teams, receive better coaching, and spend more time on the ice. They’re more likely to get 10,000 hours of practice and – all other things equal – to have their skills honed and showcased.  When I went to college in the mid-sixties, we inputted computer projects via punch cards; they ran overnight; and we went back for our results the next morning. But going to a private high school a few years later enabled Bill Gates to enter his work via a time-sharing terminal connected directly to a central computer, and to see the results in real time. Thus he could perform hundreds of iterations a week, not seven, and develop his skills and his ideas much faster. In addition, the University of Washington was a short bus ride from his home, and his family’s contacts enabled him to use its computer lab.  When Joe Flom and his Jewish cohorts graduated from law school in the 1930s, there were no jobs for them with prestigious Wall Street law firms.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: This is a very important point. If you believe the market has some special insight that exceeds the collective insight of its participants, then you and I have a fundamental disagreement. The thinking of the crowd isn’t synergistic. In my view, the investment IQ of the market isn’t any higher than the average IQ of the participants. And everyone who transacts gets a volume-weighted vote in setting an asset’s price at a given point in time. People of all different levels of ability act together to set the price. They vary all over the lot in terms of knowledge, experience, insight and emotionalism. The market doesn’t give the ones who are superior in these regards any more influence than the others, especially in the short run. My bottom line on this subject is that the market price merely reflects the average insight of the market participants. That’s point number one. If anything, I think it’s emotion that’s synergistic. It builds into herd behavior or mass hysteria. When 10,000 people panic, the emotion seems to snowball. People influence each other, and their emotions compound, so that the overall level of panic in the market can be higher than the panic of any participant in isolation. That’s something I’ll return to later. Now let’s think about the first goal of investing: to buy low.

© Oaktree Capital Management, L.P. All Rights Reserved When your investments so greatly exceed your equity, it doesn't take a big drop in security prices to wipe out that equity. Between August 1 and late September, price declines on all bonds other than Treasurys, appreciation on Treasury bonds (which Long-Term had shorted to offset its exposure to interest rates on "long" positions), and declines on equities (it had invested heavily in takeover stocks) were sufficient to erase 90% of Long-Term's equity. Further, if margin calls had caused its vast positions to be dumped on the world's unsteady markets, the proceeds might have been less than the amounts borrowed, causing write-offs at the banks and brokers that had provided Long-Term's credit and perhaps destabilizing them. Incredibly, articles about Long-Term describe its possible forced liquidation with phrases like "threat to the stability of the world financial system ... “ (The Wall Street Journal, September 29). These conditions gave rise to the restructuring and additional investment agreed to by 14 financial institutions. That's the background; now for the lessons. The techniques employed at Long-Term have been variously described as "rocket science" or “black box.” Computers were used to scan thousands of securities to detect instances where historic relationships had been violated and profit could be earned on the return to the norm; these are referred to as "convergence trades."

© Oaktree Capital Management, L.P. All Rights Reserved We do the same in our roles as investors. We expect well-managed companies with good products to make money and be valued accordingly. We assume companies that have the money will service their bonds. We count on the economy to recover from slowdowns and grow over time. So most of our actions depend on extrapolation. Certainly in investing, we rely on forecasts that assume the future will look a lot like the past. And most of the time they're right. My main quibbles with forecasters are two: 1. While most forecasts call for a future that's a lot like the past, the truly valuable forecasts are those that call for radical change. Forecasters rarely make such forecasts, however, and those who do are rarely right. 2. Most forecasters present their work as deserving more credence than it does. In short, they rarely say, "Here's my forecast, and if I were you, I'd take it with a grain of salt." Even today, forecasters are out there with predictions for the economy and the market that are based primarily on history. And yet it seems to me that the future may be less likely to look like the past than it has until now, and that things we've never even considered before have a chance of happening. Immediately after the attacks, there began to appear articles citing how long it has taken the market to recover after past crises. But who's to say those precedents are at all relevant?

© Oaktree Capital Management, L.P. All Rights Reserved That's the way we think it should be done: by consistently finishing in the money, but with no need for headline-grabbing victories. What we think matters isn't whether you hit a home run or win the Masters on any given day, but rather what your long- term batting average is. Many money managers, it appears, believe either (a) that they really can predict what's in store for the markets and which issues will do best, or (b) that their clients expect them to be able to, and to act as if they can. Thus they swing for the fences each year with a portfolio which will earn big rewards if their forecasts are right ... and vice versa. The record suggests very few managers truly know what the future will bring, and yet many keep trying to make money through stock picking and market timing in even the most efficient markets. When their holdings appreciate, they recount their insights and take credit, never admitting when they've been right for unforeseen reasons. When they're wrong, they complain about the circumstances that conspired against them and explain that they were fundamentally right but just off in terms of timing or betrayed by chance. Then they go on espousing new predictions without ever publishing a scorecard from which to judge their record as forecasters. Our response on this subject is simple: (1) We accept that we're among the many who do not know what the big-picture future holds.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: • Since that didn’t cause inflation to rise from its sub-2% level, the Fed felt comfortable maintaining accommodative policies – low interest rates and quantitative easing – for essentially all of the next 13 years. • As a result, we had the longest economic recovery on record – exceeding ten years – and “easy times” for businesses seeking to earn profits and secure financing. Even money-losing businesses had little trouble going public, obtaining loans, and avoiding default and bankruptcy. • The low interest rates that prevailed in 2009-21 made it a great time for asset owners – lower discount rates make future cash flows more valuable – and for borrowers. This in turn made asset owners complacent and potential buyers eager. And FOMO became most people’s main concern. The period was correspondingly challenging for bargain hunters and lenders. • The massive Covid-19 relief measures – combined with supply-chain snags – resulted in too much money chasing too few goods, the classic condition for rising inflation. • The higher inflation that arose in 2021 persisted into 2022, forcing the Fed to discontinue its accommodative stance. Thus, the Fed raised interest rates dramatically – its fastest tightening cycle in four decades – and ended QE. • For a number of reasons, ultra-low or declining interest rates are unlikely to be the norm in the decade ahead.

© Oaktree Capital Management, L.P. All Rights Reserved The first quarter's swing back from the negative extreme has been rapid and impressive. No one can say whether it came too soon or went too far, and we are cautious that these dramatic results may have been realized without great improvement in the fundamental economy. However, we feel "fair" does a much better job of describing the prices which resulted than would "excessive." That is, the pendulum is closer to the midpoint at this time than to an extreme. The bargains which were so readily available in the fourth quarter of 1990 are no longer there to the same extent, and we are not acting as if they were. And we certainly are not planning on a continuation of the first quarter's performance. Instead, from today's more reasonable prices, we consider our three areas to be poised for a continuation of their "normal" above-average risk-adjusted performance. April 11, 1991

Don’t most of us know what events are likely to transpire? Can’t we just buy the securities of the companies that are most likely to benefit from those events? In the long run, maybe, but I want to turn to a theme that Bruce Karsh has been emphasizing lately, regarding a major reason why it’s particularly challenging to profit from a short-term focus: It’s very difficult to know which expectations regarding events are already incorporated in security prices. © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: that we adopted it as our motto when Oaktree was formed in 1995. Our reasoning was simple: If we invest in a diversified portfolio of bonds and are able to avoid the ones that default, some of the non- defaulters we buy will benefit from positive events, such as upgrades and takeovers. That is, the winners will materialize without our having explicitly sought them out. We thought that phrase was innovative. But in 2005, while working with Seth Klarman to update the 1940 edition of Benjamin Graham and David Dodd’s Security Analysis – the “bible of value investing” – I read something that indicated we were late by about 50 years. In the section Seth asked me to edit, I came across Graham and Dodd’s description of “fixed-value” (or fixed-income) investing as “a negative art.” What did they mean? At first, I found their observation cynical, but then I realized what they were saying. Let’s assume there are one hundred 8% bonds outstanding. Let’s further assume that ninety will pay interest and principal as promised and ten will default. Since they’re all 8% bonds, all the ones that pay will deliver the same 8% return – it doesn’t matter which ones you bought. The only thing that matters is whether you bought any of the ten that defaulted. In other words, bond investors improve their performance not through what they buy, but through what they exclude – not by finding winners, but by avoiding losers.

© Oaktree Capital Management, L.P. All Rights Reserved  If everyone likes it, there’s significant risk that prices will fall if the crowd changes its collective mind and moves for the exit. Superior investors know – and buy – when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don’t see its merit. Yogi Berra is famous for having said, “Nobody goes to that restaurant anymore; it’s too crowded.” It’s just as nonsensical to say, “Everyone realizes that investment’s a bargain.” If everyone realizes it, they’ll have bought, in which case the price will no longer be low. The Anatomy of a Bargain “Is it a good idea?” That’s what everyone wants to know. And from time to time, popular opinion unites behind an investment, anointing it as a good idea – the next solution – the low-risk sure thing – the “silver bullet.” Often this crowd mentality creates a self-fulfilling prophecy . . . for a while. I’ve seen it many times in my 39 years in this business: “it’s a good idea to invest in the stocks of high-growth companies” (or energy stocks, small companies, disc drive companies, emerging markets, venture capital funds, technology stocks, hedge funds, real estate, China and India, or private equity). But just as often, I’ve stated my view: There’s no such thing as a good idea. Only a good idea at a price. Something can be a very good idea at one price and a very bad idea at another.

© Oaktree Capital Management, L.P. All Rights Reserved Most drivers share the same goal: we want to get there as quickly as possible, with safety. A few people drive like slowpokes, sacrificing speed for excessive safety, and a few others are maniacs who keep the pedal down without a care. The vast majority of us, however, conduct ourselves reasonably but really would like to cut our travel time. As we drive along, we see from time to time that another lane is moving faster than ours. Just as obviously, however, we know that jumping to that lane is unlikely to bring much net improvement. And that's where the metaphor comes in. If I could switch to the faster lane while everything remained unchanged, doing so would cut my travel time. But everyone sees which lane is moving fastest, and if everyone switches into that lane, that will make it the slow lane. Thus the collective actions of drivers alter the environment. In fact, they create the environment. In April 2001, I wrote the following in "Safety First . . ." Over the years, performance has constantly improved in areas like golf. That's because while the participants develop new tools and techniques, the ball never adjusts and the course doesn't fight back. But investing is dynamic, and the playing field is changing all the time. The actions of other investors will affect the return on your strategy. Just as nature abhors a vacuum, markets act to eliminate an excessive return.

© Oaktree Capital Management, L.P. All Rights Reserved No one alive today has experienced anything other than American preeminence. In fact, the twentieth century has been called “The American Century.” But there’s no reason why the twenty-first century necessarily will be another. National preeminence – like most other things – is cyclical, not permanent. Given time, leading nations overextend themselves, lose their energy or squander their advantages. They get fat and happy, and they relax. Underdogs try harder and rise from a lower base. Perhaps they study the leaders and learn how to emulate them. And perhaps they begin to make better use of untapped resources and underutilized labor forces. They may even benefit as the leaders share the wealth (such as the U.S. did through the Marshall Plan after World War II). Regardless of the reasons, just as the U.S. supplanted colonial powers like England, France, Spain and Portugal that had held sway earlier, countries like China, India, Russia and Brazil now seem likely to grow faster than the U.S. in the twenty-first century, narrow the gap and enjoy their time in the sun. In Praise of the Melting Pot One of the greatest sources of America’s growth and preeminence has been the bounty of immigration. With the exception of the Native American Indians, there was no one here 500 years ago. We’re a country of immigrants. We’ve benefited as waves of foreigners moved to the U.S. to escape mistreatment or seek opportunity.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: In 1977, responding to the difficult energy outlook brought on by the Arab Oil Embargo, President Jimmy Carter created the position of Secretary of Energy and chose James Schlesinger as America’s first “energy czar.” Previously Schlesinger had served as Chairman of the Atomic Energy Commission, Director of Central Intelligence, and Secretary of Defense, and in his early days he taught economics at the University of Virginia. I was tickled by a story – undoubtedly apocryphal – about his days in academia that made the rounds when Schlesinger was in his new energy post. As the story went, Schlesinger was such a convincing evangelist for capitalism that two students in his economics class decided to go into business after graduation. Their plan was to borrow money from a bank, buy a truck, and use it to pick up firewood purchased in the Virginia countryside, which they would then sell to the grandees in Georgetown. Schlesinger wholeheartedly endorsed their entrepreneurial leanings, and they proceeded with great enthusiasm. From the start of their venture, the former students could barely keep up with the demand. Thus it came as quite a shock when their banker called to tell them the balance in their account had reached zero and the truck was about to be repossessed.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: • easy and cheap to lever investments; • easy and cheap for businesses to obtain financing; and • easy to avoid default and bankruptcy. In short, these were easy times, fueled by easy money. Like travelers on the moving walkway, it was easy for businesspeople and investors to think they were doing a great job all on their own. In particular, market participants got a lot of help in this period as they rode the 10-year-plus bull market, the longest in U.S. history. Many disregarded the benefits that ensued from low interest rates. But as one of the oldest investment adages says, we should never confuse brains with a bull market. As I’ve continued to think and talk about the switch from declining and/or ultra-low interest rates to more normal, stable ones, I’ve emphasized the fact that low rates alter investor behavior, distorting it in ways that have serious consequences. Thinking about the change in interest rates sensitized me to media mentions of low rates, and I’ve noticed many. This was particularly true following Silicon Valley Bank’s meltdown last March, which many articles attributed to faulty managerial decisions made “during the preceding period of easy money.” More recently, there’s been much discussion of the less-favorable outlook for private equity, usually related to expectations that interest rates aren’t going to return to the low levels of the recent past.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. But as Twain also said, there are themes that rhyme. It‟s what I would call “tendencies” or “behavioral patterns” that present the important lessons. The tendency of investors to overlook or forget the past is noteworthy. So is their habit of succumbing to emotion and swallowing tall (but potentially lucrative) tales. In particular, people tend to forget the cyclical nature of things, extrapolate past trends to excess, and ignore the likelihood of regression to the mean. The tech bubble may not recur anytime soon. No online grocer may ever again sell at 200 times revenues. There may never be another CDO-squared or SIV. Those aren‟t the things that matter. But there’s sure to be another cycle, another bubble and another crisis. There’ll be another time when people overpay for exciting investment ideas because their future appears limitless, and then a time of disillusionment and price collapse. There’ll be another period when leverage is embraced to excess, and then, consequently, a period when it gets people killed. And there’ll certainly be another time when people can only imagine the possibility of gain, and then one when – after huge sums have been lost – they can think only of further declines. These are the kinds of things that rhyme. If we stay alert, we can anticipate and recognize them and thus avoid the losses and opportunity costs they bring so reliably.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. reliable than their models; the banks’ major losses in off-balance-sheet investments; and, as a result of all of the above, the collapse or rescue of a number of prominent financial institutions and grave concern about the rest. It’s my sense that it was the simultaneous nature of these occurrences – in addition to, or perhaps rather than, their force individually – that rendered the markets so incapable of maintaining their equanimity. Certainly that was the case in early August. For the first time in history, the Dow Industrials either rose or fell by at least 400 points four days in a row. What was it that sent the markets on that wild ride? I can think of a number of factors:  rising awareness of the import of the U.S.’s fiscal deficit, and the bitterly disappointing display that played out in Washington as we approached the date on which the debt ceiling would bind,  Standard & Poor’s downgrading of U.S. government debt,  increasing worry about Europe’s ability to deal with the excessive debts of its peripheral countries, and thus about the health of European banks holding them,  concern over the possibility of a double-dip recession, and  mounting evidence that China and the rest of the emerging world are something less than unstoppable economic miracles. Importantly, we saw the onset of one of those negative feedback loops where intelligence is imputed to market developments.

alternative investing areas such as real estate and private equity, the managers make it sound like they’ve done great. But the long-term average returns in most such areas have been lackluster, and many managers’ records are inconsistent. One of my favorite quotes came from “Dandy Don” Meredith while announcing on Monday Night Football: “They don’t make ‘em anymore the way they used to,” he said, “but then again they never did.” Rarely are the real records as good as the ones people (and especially the managers who created them) fondly remember. Take a look at the performance over time in venture capital, buyouts and real estate and you’ll see results for the median manager that are far from exciting. Professor Steven Kaplan, head of the entrepreneurial studies department at the University of Chicago’s Graduate School of Business, authored a paper showing that a dollar invested in the totality of buyout funds between 1980 and 1997 did no better than a dollar invested in the S&P 500. And that was despite the fact that the buyout funds were leveraged in a rising equity market and the S&P wasn’t. The eye-popping results of the funds at the top of the performance range draw money magnetically to alternative investment areas, while the average return usually deserves a big yawn. For superior results, it’s absolutely essential to invest with superior managers. My old boss at Citibank, Peter Vermilye, is famous for saying that only 5% of analysts add value.

© Oaktree Capital Management, L.P. All Rights Reserved Dare to Be Different Here’s a line from Dare to Be Great: “This just in: you can’t take the same actions as everyone else and expect to outperform.” Simple, but still appropriate. For years I’ve posed the following riddle: Suppose I hire you as a portfolio manager and we agree you will get no compensation next year if your return is in the bottom nine deciles of the investor universe but $10 million if you’re in the top decile. What’s the first thing you have to do – the absolute prerequisite – in order to have a chance at the big money? No one has ever answered it right. The answer may not be obvious, but it’s imperative: you have to assemble a portfolio that’s different from those held by most other investors. If your portfolio looks like everyone else’s, you may do well, or you may do poorly, but you can’t do different. And being different is absolutely essential if you want a chance at being superior. In order to get into the top of the performance distribution, you have to escape from the crowd. There are many ways to try. They include being active in unusual market niches; buying things others haven’t found, don’t like or consider too risky to touch; avoiding market darlings that the crowd thinks can’t lose; engaging in contrarian cycle timing; and concentrating heavily in a small number of things you think will deliver exceptional performance. Dare to Be Great included the two-by-two matrix and paragraph below.

Eventually the economy recovers; consumers resume buying; investors regain their equilibrium – some even sense the bargains that have been made available; and the upswing takes the economy back toward good health . . . and the cyclical process continues. So, most of the time, downturns stem primarily from economic weakness, and they are repaired with economic tools. But this episode is different. It was caused by an exogenous, non-economic development, the pandemic. The recession – rather than being the cause – was the result: a closure of business induced intentionally in order to minimize inter-personal contact and halt the spread of the disease. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: private debt outstanding – used the same receivables as collateral for multiple loans. Tricolor turns out to have made loans to buyers lacking credit scores or driver’s licenses and had been previously cited by regulators for practices such as selling cars for which it lacked titles. And then, last month, as Robert Armstrong of the Financial Times noted in his daily online column, “Unhedged” (which is one of my favorites): On [October 15], Zions Bancorp disclosed in a regulatory filing that it “recently became aware of . . . apparent misrepresentations and contractual defaults” by two corporate borrowers that did not respond to the bank’s subsequent inquiries, and would take a $50mn writedown on the loans. And on [October 16] another mid-sized bank, Western Alliance, disclosed that back in August it had initiated a fraud lawsuit against one of its commercial real estate borrowers. Most recently, it’s been revealed that two small telecom firms under common control, Broadband Telecom and Bridgevoice, borrowed extensively on the basis of fabricated receivables and have filed for bankruptcy. If one is an isolated instance and two hint at a pattern, are six an ominous trend? As I pointed out in my memo What Does the Market Know? in 2016, in real life things fluctuate between pretty good and not so hot, but in investors’ minds they go from flawless to hopeless.

© Oaktree Capital Management, L.P. All Rights Reserved Simply put, people began to search for the elements that would lead to continued lofty equity returns, and they failed to find them. In the 1990s, few people pondered the fact that if corporate profits grow in single digits and "normal" equity performance is 9-11 %, two decades or so of returns almost twice that might be borrowing from the future. Now the future is here and that realization has set in. Those single digit profit increases (accompanied by low dividend yields) are expected to result in mid-single digit equity returns if P/E ratios are unchanged, and less if multiples shrink. So the question has switched from "How much would you like to make and spend?" to "How much can you make safely, and what will that let you spend?" UIs There No Opportunity in Equities? It is clear that (a) most people's expectations for equities now are in the mid single digits, and (b) equities are attracting as little interest as at any time in the last 25 years. There are, however, factors supportive of a more positive case:  The most obvious is the fact that stock prices are off substantially since hitting record highs in early 2000.  Another positive might be seen in the fact that the curtailing of expectations for equity returns coincided with the incurrence of substantial losses.

” Whereas the future is always uncertain, today the uncertainty is much greater than usual: the probability distribution governing future events is much wider and the tails much fatter. In fact, there are potential negatives (and perhaps positives) that few living people have faced before. Most of what we have is subjective opinion and interpretation. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved  Thus, market prices provide accurate estimates of assets' intrinsic value, and no participant can consistently identify and profit from instances when they are wrong.  Assets therefore sell at prices from which they can be expected to deliver risk- adjusted returns that are "fair" relative to other assets. Riskier assets must offer higher returns in order to attract buyers. The market will set prices so that appears to be the case, but it won't provide a "free lunch." That is, there will be no incremental return that is not related to (and compensatory for) incremental risk. I believe strongly that some markets are quite efficient, including those for the world's leading stocks and bonds. Take international fixed income, for instance. Here, people try to decide whether British, French or German government bonds are the cheapest at a given time and establish portfolio weightings accordingly. The primary differences between these bonds, it seems to me, relate to their issuing countries' rates of economic growth and inflation. But it's to make allowance for those differences that there exist differential interest rates and floating exchange rates. And aren't those some of the world's most closely watched phenomena, with hundreds of sophisticated financial institutions on both sides of every question? Can any one participant realistically expect to be able to do a superior job in such a market?

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. What Matters? The first of those lessons is that the ability to ignore relative performance depends on the circumstances and, in particular, the constituencies the performance has to please. Endowments provide an outstanding example of this phenomenon. Intellectually, no one could be unhappy with 16% a year for five years. In fact, the trustees of a private foundation probably would have been delighted with such a return in FY1995-99. But it’s harder for an institution with outside constituents, like a university, to dismiss relative performance. Alumni question the management of the endowment, and prospective donors start to say, “I love the school, but it makes no sense for me to make my gift now. I’ll hold onto the money, grow it at a rate above what you’re achieving, and give it later.” No university president wants to be the recipient of that message. In order to survive and have a chance to produce long-term performance, investors have to live up to their constituents’ expectations in the short run. Of course, it’s important to inculcate reasonable expectations, or to choose clients who have them. But ultimately, the manager’s job isn’t to make money, it’s to deliver client satisfaction, so expectations have to matter. All of us, on both sides of the process, should be sure we know what pattern of performance is expected. How else can we know how satisfaction can be delivered?

© Oaktree Capital Management, L.P. All Rights Reserved game because they strike out too often – not because they don’t have enough winners, but because they have too many losers. And yet, lots of managers keep swinging for the fences.  They bet too much when they think they have a winning idea or a correct view of the future, concentrating their portfolios rather than diversifying.  They incur excessive transaction costs by changing their holdings too often or attempting to time the market.  And they position their portfolios for favorable scenarios and hoped-for outcomes, rather than ensuring that they’ll be able to survive the inevitable miscalculation or stroke of bad luck. At Oaktree, on the other hand, we believe firmly that “if we avoid the losers, the winners will take care of themselves.” That’s been our motto since the beginning, and it always will be. We go for batting average, not home runs. We know others will get the headlines for their big victories and spectacular seasons. But we expect to be around at the finish because of consistent good performance that produces satisfied clients. UFor Me, It Started With Tennis In July, Larry Keele and I met with the Directors of the Vanguard Convertible Securities Fund to report on Oaktree’s performance as the fund’s manager. I was extremely pleased to see Charles Ellis of Greenwich Associates, one of the great thinkers in the investment field, whom I hadn’t come across in many years.

Earlier this year, our distressed debt fund bought a troubled company's commercial paper at 77 cents on the dollar. It was scheduled to mature later that month, but we thought there was little chance it would be paid off then. There appeared to be, however, a variety of other ways we could turn a profit. On the day we started buying, everyone assumed there would be no way out of a morass of overstated earnings, possible fraud, a resulting short-term cash squeeze and a likely bankruptcy filing. The issuer's common stock fell 86% that day. This confluence of circumstances presented an excellent opportunity for intelligent speculation under Keynes's definition -- we were buying into a company everyone considered highly risky. It was reported the next day that a money market fund's management company had bought that same commercial paper from its fund's portfolio at par in order to keep the fund from reporting a principal loss. The article said "money market funds...traditionally invest in only the safest government and corporate bond securities." In other words, when the paper was considered to be among "the safest," the money market fund bought it at a 6% yield which incorporated no compensation for bearing the credit risk which subsequently proved to have been present. But after the scandal became common knowledge and the risks were on the table, we got to buy the money market fund's former holding at a price which we felt could give us an annual return of 20% or more.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: The Positive Case No one thinks things are good right now, but the optimist’s view is built around the early cessation of bad news and the arrival of better news in the not-too-distant future. Here are the components. (As you know, I usually avoid using macro forecasts and never make my own. I will borrow from others for the purposes of exposition in this memo, but not because I have reason to believe they’re correct): • The earliest countries to contract the virus have shown good progress. The reported data on their new cases has flattened, and in South Korea, more people are being released from the hospitals than are entering. Hermann Dambach, head of our Frankfurt office, reports that the numbers are improving in Italy, Germany and Austria. • Every forecast I’ve seen assumes the virus will be brought under control within three months or so. The curve is flattened and then turned downward. The virus is contained and then eliminated. o Testing identifies those infected, and isolation/quarantine keeps them from infecting others. o Herd immunity develops, reducing the number of people capable of transmitting the disease. o Warmer weather causes the disease to recede. o Treatments are found that aid recovery. o A vaccine is developed. • The negative impact of the disease on the economy will be sharp but brief. The term “V- shaped” dominates most forecasts, both between Q2 and H2 and between 2020 and 2021.

© Oaktree Capital Management, L.P. All Rights Reserved things happened that had never happened before and had been considered capable of happening only once in several generations or centuries. But they happened, and sometimes a few in a single week. These were negative “black swan” developments, and they had a number of ramifications. First, they imposed substantial losses. Second, they called into question the predictability and understandability of the financial world and introduced new levels of uncertainty. And third, they set off a search for things that would provide certainty and safety in the newly uncertain world. This search led many to look to gold. On the Merits of Gold I have no doubt: gold is the ideal investment. It serves as a reliable store of value, especially in challenging and uncertain times. It’s a hedge against inflation, since its price rises in sympathy with the general level of prices. It exists without the involvement of man-made constructs such as governments. And it’s desired and accepted all around the world (and always has been). The supply of gold is finite. It can’t be created out of thin air. Thus it’s not subject to dilution or debasement, as is paper currency when governments decide to print more. In comparison, currency can be similarly reliable only if backed by gold. Finally, gold is tangible, meaning you can take delivery and store it. Most other investment media exist only in the form of figures on a computer screen.

© 2026 Oaktree Capital Management, L.P. All Rights Reserved Follow us: ability to think, reason, synthesize, evaluate, analogize, combine ideas, create concepts, compose arguments, and so on. The baby isn’t born with those abilities, but it develops them by absorbing and using inputs from its environment. An AI model is the same. (A word here: I’m not implying that I understand how AI does what it does. There’s no chance of that. At best, I’ll describe what AI can do and the implications.) The second phase in an AI model’s life is “inference.” Once the model has been built and trained, inference is what it does for the rest of its life, using its capabilities to meet the demands of users. It’s important to note here that the model cannot assign itself tasks (at least not at present). It has to be ordered to perform tasks through “prompts” written by users. The better and more comprehensive the prompts, the more AI can do. For example, AI can write software to perform work a user wants done. It can also test the software, identify bugs, fix them, and test again, but it has to be instructed to do those things, at least at the current stage (read on). Because many people today lack awareness of the importance of prompts and fail to possess the ability to create them, AI’s potential is probably being underestimated. But note that the limitation is on the part of the users, not the model.

© Oaktree Capital Management, L.P. All Rights Reserved I read decades ago that every bull market has three stages: The first, when a few far-sighted people begin to believe that some improvement is possible, the second, when most investors come to agree that improvement is actually underway, and the third, when everyone believes everything will get better forever. If you're going to succeed at all in timing cycles, the only possible way is to act as a contrarian: catch some opportunities at the bottom, let your optimism abate as prices rise, and hold relatively few exposed positions when the top is reached. To find bargains at the bottom, you don't have to think that things will get better forever; you just have to remember that every cycle will turn up eventually, and that prices are lowest when it looks like it won't. But it's just as important to avoid holding at (and past) the top, and the key is not to succumb to the popular delusion that "trees will grow to the sky." What I think is important is that, although markets can be underpriced or overpriced and yet go on for months or years to become even more so, it's most prudent to be optimistic when no one else is, and it can be highly profitable. But it can be dangerous to be optimistic when everyone else is, and very costly. * * * All of the above might be interesting, but of course the crucial question is "Where do we stand today?" Certainly, the secret's out: something bad can happen -- and has.

© Oaktree Capital Management, L.P. All Rights Reserved Thus I believe mortgage brokers committed many sins. They offered more debt than many subprime borrowers could carry. They assured borrowers that they’d always be able to refinance into new loans at teaser rates, so they needn’t worry about a reset to market rates. They probably weren’t clear on all the terms and practiced the old bait-and- switch. They hid from first-mortgage lenders the fact that borrowers were borrowing their equity too. And I’m sure some encouraged borrowers to lie about their incomes, invoking “Everyone does it,” “Why should Joe and Sue have a nicer house than you?” and “Nobody gets hurt.” Appraisers made a similarly negative contribution to the process. In the days when home prices were stable, appraisals were based on established parameters like price per square foot. But with prices rising rapidly, they could only reference “comps” to other highly appreciated homes. Like the credit rating agencies, appraisers lent a veneer of respectability to a faulty process. And like rating agencies, the job probably went to the appraiser willing to assign the highest value. I’ve read about appraisers being black- listed because they were too conservative, restraining loan volume. According to the L.A. Times of January 27, a Wharton professor, Susan Wachter, has estimated that “appraisers helped inflate mortgage values by $135 billion during 2006 alone.

Defaults affected a large dollar amount of high yield debt securities, but default rates came nowhere near the highs that had been predicted and soon began to recede. Highly motivated selling was short-lived – essentially limited to the month of March – and we never saw the full-throated panic (accompanied by margin calls, meltdowns and forced selling) witnessed in prior crises. In just a few months: © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: And as I told CNBC, what matters is “the level that securities are trading at and the emotion that is embodied in prices.” Investors’ actions should be governed by the relationship between each asset’s price and its intrinsic value. “It’s not what’s going on; it’s how it’s priced. . . . When we’re getting value cheap, we should be aggressive; when we’re getting value expensive, we should pull back.” Here’s how I summed up on Bloomberg: It’s all about investors’ willingness to take risk as opposed to insisting on safety. And when people are highly willing to take risk, and not concerned about safety, that’s when I get worried. If it’s true, as I believe, that (a) the easy money in this cycle has been made, (b) the world is a risky place, and (c) securities are priced high, then people should probably be taking less risk today than they did three, five or seven years ago. Not “out,” but “less risk” and “more caution.” And from my visit to CNBC: All I’m saying is that prices are elevated; prospective returns are low; risks are high; people are engaging in risky behavior. Now nobody disagrees with any of the four of those, and if not, then it seems to me that this is a time for increased caution. . . . It’s maybe “in, but maybe a little less than you used to be in.” Or maybe “in as much as you used to be in, but with less-risky securities.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Here’s how I explained the situation: Of course, it’s not easy and clear-cut, but I think it’s the general situation. If your behavior and that of your managers is conventional, you’re likely to get conventional results – either good or bad. Only if the behavior is unconventional is your performance likely to be unconventional . . . and only if the judgments are superior is your performance likely to be above average. The consensus opinion of market participants is baked into market prices. Thus, if investors lack insight that is superior to the average of the people who make up the consensus, they should expect average risk-adjusted performance. Many years have passed since I wrote that memo, and the investing world has gotten a lot more sophisticated, but the message conveyed by the matrix and the accompanying explanation remains unchanged. Talk about simple – in the memo, I reduced the issue to a single sentence: “This just in: You can’t take the same actions as everyone else and expect to outperform.” The best way to understand this idea is by thinking through a highly logical and almost mathematical process (greatly simplified, as usual, for illustrative purposes): • A certain (but unascertainable) number of dollars will be made over any given period by all investors collectively in an individual stock, a given market, or all markets taken together.

© Oaktree Capital Management, L.P. All Rights Reserved What we knew about Enron in December was a fraction of what we know today. It's now clear that there are many lessons to be learned from it. UQuestionable Transactions – Form Over Substance As little as six months ago, Enron was considered an exemplar of corporate growth and ingenuity. Little did we know, however, that its inventiveness had been directed not at developing highly profitable businesses, but rather transactions that could be used to paint an inaccurate picture of Enron and still squeak by under Generally Accepted Accounting Principles. Some of these transactions were breathtaking in their duplicity and chutzpah. The most notorious examples relate to the creation of off-balance sheet partnerships. These "special-purpose entities" were used to hide debt and pump profits. As our analysts studied Enron, they couldn't believe the lengths to which its management had gone. When Enron wanted to increase its debt to an extent that would have jeopardized the credit rating that was so essential to its business, it formed partnerships to do the borrowing away from Enron's balance sheet. Off-balance sheet partnerships are common, but for their debt not to be consolidated with that of the parent, outsiders must provide at least 3% of their equity capital. The self-interest of the providers of this risk capital, it is thought, will serve to keep the entities independent. But Enron had a problem.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: What does the U.S. see today? • one of the greatest pandemics to reach us since the Spanish Flu of 102 years ago, • the greatest economic contraction since the Great Depression, which ended 80 years ago, • the greatest oil-price decline in the OPEC era (and, probably, ever), and • the greatest central bank/government intervention of all time. The future for all these things is clearly unknowable. We have no reason to think we know how they’ll operate in the period ahead, how they’ll interact with each other, and what the consequences will be for everything else. In short, it’s my view that if you’re experiencing something that has never been seen before, you simply can’t say you know how it’ll turn out. In my last two memos, I stressed my conviction that there’s no “informed” way to choose between the positive and negative scenarios we face today, and that most people decide in a way that reflects their biases.

As we increasingly become knowledge-based economies, will we need as many less-educated workers as in the past? If not, what will be the ramifications for unemployment, income inequality and society as a whole?  Consumer behavior – Will consumers regain the confidence required to return to their expansive spending behavior? Will they employ credit as in the past to perpetuate growth in consumption? © 2016 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: The Machine The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge. – Daniel J. Boorstin In my first decade or so working at First National City Bank, a word was in vogue that I haven’t heard in a long time: econometrics. This is the practice of looking for relationships within economic data that can lead to valid forecasts. Or, to simplify, I’d say econometrics is concerned with building a mathematical model of an economy. Econometricians were heard from a great deal in the 1970s, but I don’t believe they are any longer. I take that to mean their models didn’t work. Forecasters have no choice but to base their judgments on models, be they complex or informal, mathematical or intuitive. Models, by definition, consist of assumptions: “If A happens, then B will happen.” In other words, relationships and responses. But for us to willingly employ a model’s output, we have to believe the model is reliable. When I think about modeling an economy, my first reaction is to think about how incredibly complicated it is. The U.S., for example, has a population of around 330 million. All but the very youngest and perhaps the very oldest are participants in the economy. Thus, there are hundreds of millions of consumers, plus millions of workers, producers, and intermediaries (many people fall into more than one category).

© Oaktree Capital Management, L.P. All Rights Reserved I was struck by a New York Times article saying these terrorists are not insane. They are extremists who follow a dogma that most Muslims do not. They are highly indoctrinated and perhaps brainwashed. But they are intelligent, highly trained soldiers who will carry out orders to destroy what they believe is their enemy. We count on others to act in their own self-interest; this makes them predictable and helps us know how to deal with them. It is not there in the case of the terrorists, in that they care little about their own survival. This adds greatly to the danger they pose. UReactionU – I left Oaktree's New York office Tuesday afternoon to collect my daughter and the children of friends in a natural desire to assure safety and feel the sorely-mis ability to create order. I walked north through streets that were strangely normal but not quite. The tourists were there, with their cameras and maps. There was no smoke and no ash. There were a few more people than usual, and almost all were moving in one direction: north, away from the WTC. There was no screaming or crying, no running or panic, just occasional knots of people gathered around radios. sed Only knowledgeable onlookers would have detected the differences. Few people were talking. Eyes didn't meet – which is not unusual in New York. There clearly were no smiles.

© Oaktree Capital Management, L.P. All Rights Reserved - the domestic investor looks overseas, - the international investor emphasizes emerging markets, and - the traditional bond-and-stock investor searches for "alternative investments" likely to repeat the success of the LBO and bankruptcy funds. And why shouldn't they? The "stick" is the low prospective return offered in each investor's traditional bailiwick, and the "carrot" is the high returns earned recently in the riskier sectors. In brief, "why should I settle for 3% in T-bills when I can get double-digit returns in stocks?" There are numerous signs of infatuation with -- or non-questioning acceptance of -- the pursuit of high returns. The torrential inflow of dollars to mutual funds is one; I recently attended a conference at which a fund group representative said they were taking in $100 million a day, 90% of it for foreign funds. The rising level of margin debt is another. Books on investing are reaching the best-sellers list. The names of hedge fund managers are almost household words. And that brings me, for purposes of illustration, to the subject of hedge funds. When I first got to know the money management community twenty years ago, only a handful of managers were good enough to command a share of the profits as compensation. Today, according to a recent article in Forbes, there are 800 hedge funds, and some people think being accepted by one of the big names is the chance of a lifetime.

© Oaktree Capital Management, L.P. All Rights Reserved uncertainty over Whitewater. At the same time, Mexico's stock market had its own correction, in reaction to the assassination of the leading presidential candidate. The important lesson to be learned here is that whenever market participants act as if nothing can go wrong (or right), that represents an extreme swing of psychology -- of the pendulum we wrote about in April 1991 -- that must be recognized for what it is and acted on. As Roseanne Rozanadana used to say on Saturday Night Live, "it's always something." UInvestment actions predicated on everything continuing to go well are bound to failU. If the spark that set off the decline in bond prices was the rate increase, why did the slump spread to so many other markets, including equities, foreign bonds, and commodities? Where were the benefits of strategic diversification? I would respond citing the following factors: - First, interest rates affect the value of everything. Investing consists of putting out money today in order to get more back at a later date. The "discounted present value" of the projected future proceeds varies inversely with the current level of interest rates. Simply put, when rates rise, the present value of a future dollar declines. - Another reason the impact of rates is broad stems from the fact that, as I was once told by sid Cottle (of Graham, Dodd and Cottle fame), "Investing is the discipline of relative selection."

Men of the sort described above – older, white and non-college- educated – are likely to have lost jobs, know someone who has, or seen the impact on their communities. © 2016 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved UThe Virtuous Circle The financial world seems to have melted down in just a few weeks. But the truth is, the seeds of the crisis have been growing for years – unnoticed by most – as a seemingly virtuous circle spun unabated. Henry Kissinger was a member of TCW’s board when I worked there, and a few times each year I was privileged to hear him hold forth on world affairs. Someone would ask, “Henry, can you explain yesterday’s events in Bosnia?” and he’d say, “Well, in 1722 . . .” The point is that chain reaction-type events can only be understood in the context of that which went before. The challenge is figuring out how far back to go. In talking about how the market got to its current condition, I’ll just look back five years. Everyone remembers the last corporate debt crisis, during the summer of 2002. Recession, credit crunch, 9/11, Afghanistan, the telecom meltdown, and scandals at Enron and the like combined to make bonds available at ridiculously high yields. Those who were willing to buy had an opportunity to earn ultra-high returns with what turned out to be very little risk. Around the beginning of November 2002, however, it felt like a switch was thrown. Maybe distressed debt managers who hadn’t been aggressive enough during the summer concluded they had to get invested before year-end. For whatever reason, bond prices started to rise.

© Oaktree Capital Management, L.P. All Rights Reserved UHow Things Got This Way Much of the current problem can be attributed to a decades-long bubble in the financial sector that made it the employer of obvious choice; attracted employees who were “the best and the brightest” (although often untrammeled by experience); contributed to greed and risk taking; drove out fear and skepticism; and carried institutions, behavior, expectations and asset prices to unsustainable levels. What are the factors that got us in the current mess?  Excess liquidity, which had to find a home.  Interest rates that had been reduced to stimulate the economy.  Dissatisfaction with the resulting prospective returns on low-risk investments.  Inadequate risk aversion, and thus a willingness to step out on the risk curve in search of higher returns.  A broad-scale willingness to try new things, such as structured products and derivatives, and to employ massive leverage.  A desire on the part of financial institutions to supplement operating income with profits from proprietary risk taking – that is, to be “more like Goldman.”  A system of disintermediation, selling onward, and slicing and dicing that caused many participants to overlook risk in the belief that it had been engineered away.  Excessive reliance on rating agencies which were far from competent to cope with the new instruments, and on black-box financial models that extrapolated recent history.

Not only did he perform well in so many different categories, but also:  He led the American League in number of games played at the grueling catcher position eight years in a row. © 2015 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

In March 2020, I reused the title of the 2008 memo for Nobody Knows II, my first memo during the Covid-19 pandemic. In it, I cited Harvard epidemiologist Marc Lipsitch, who said we usually make decisions on the basis of (a) facts, (b) informed extrapolations from analogous experiences, and (c) opinion or speculation. But since there were no applicable facts regarding a Covid pandemic and no analogous experiences, we were left with only speculation.

As far as I know, no one invested that way at the time and there were no publicly available vehicles for doing so: no “index funds” and no “passive investing.” I don’t think the terms even existed. But the © 2018 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: So, overall, there are facts, inferences and guesses. It’s always essential to know which you’re dealing with. As for the virus, I don’t think anybody knows the answers to the following questions:  How does the virus travel from person to person and community to community? – People have tested positive who had no known contact with other people who had it or who were in countries in which there are known outbreaks.  How many people will contract it? – On February 28, the head of the World Health Organization said it had “increased our assessment of the risk of spread and the risk of impact of COVID-19 to very high at a global level.” According to Dr. Lipsitch, it will affect 40% to 70% of all adult Americans. (I only provide this as an example. I don’t assert that it’s correct, or that his is the opinion to accept.)  Will it recede? – According to the reported data, the number of new cases in China has declined substantially, from 9 out of 13 days with more than 3,000 the first half of February, to 8 out of 9 with less than 500 at the end of the month. How much of this is a function of the restriction of people’s freedom of movement? To what extent can this downtrend be extrapolated to the rest of the world? Some say the virus will recede when the weather turns warm, as happens with other flus. Will that apply in this case?  What will its effect be?

We published our guiding principles in the spring of 1995 and literally haven’t changed a word since (other than to add the criteria for new Oaktree strategies). And as we head into the second decade, we consider them just as applicable to the future as they have been in the past. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved The bottom line is that, in the world of investing, words mean almost nothing. All that matters is what you’re buying, the price you’re paying for it, and the risk that it will fail to deliver all you expect. No weight should be attached to what something’s called, as labels alone have little significance with regard to risk and return. UAsset Class Returns Importantly in this connection, I continue to insist that no asset class and no investment technique possesses a natural or embedded rate of return. Fixed income comes closest, with its promise of interest and the repayment of principal. But for the holder of a 20-year bond, most of the total return over its lifetime will come from “interest on interest” – the interest that is earned on interest payments that have been received – and this will vary with rates. Thus, even in fixed income instruments (other than zero-coupon bonds), the return is far from intrinsic. And from there, the connection between an asset class label and a prospective rate of return grows more and more tenuous. What’s the return on S&P 500 stocks? If you had asked 100 institutional investors and consultants in 1999, virtually all of them would have said 9-11%. Ask them today and they’re likely to say 5-7%. What changed? Not the asset class itself, but opinions surrounding it. Obviously, meanings ascribed to words alone often fail to hold up.

© Oaktree Capital Management, L.P. All Rights Reserved An investment that "everyone" knows to be undervalued is an oxymoron. If everyone knows it's undervalued, why haven't they bought it and driven up its price? And if they have bought, how can the price still be low? Yogi Berra said, "nobody goes to that restaurant; it's too popular." The equally oxy-moronic investment version is "Everybody likes that security because it's so cheap." 5. Book the bet that no one else will. If everyone likes the favorite in a football game and wants to bet on it, the point spread will grow so wide that the team -- as good as it is -- is unlikely to be able to cover the spread. Take the other side of the bet -- on the underdog. Likewise, if everyone is too scared of junk bonds to buy them, it will become possible for you to buy them at a yield spread which not only overcompensates for the actual credit risk, but sets the stage for their being the best performing fixed income sector in the world. That was the case in late 1990. The bottom line is that one must try to be on the other side of the question from everyone else. If everyone likes it, sell; if no one likes it, buy. 6. As Warren Buffet said, “the less care with which others conduct their affairs, the more care with which you should conduct yours." When others are afraid, you needn't be; when others are unafraid, you'd better be. It is usually said that the market runs on fear and greed.

© Oaktree Capital Management, L.P. All Rights Reserved Second, no one knows what the future holds, especially in the short term. The movements of markets are primarily determined not by physical laws, but by the reaction of emotional humans to developments in their environment. These reactions are well beyond accurate prediction. The fraternity of would-be forecasters consists of people who've been right once or twice, giving them credibility, and people who've never been right. None of them has a high probability of being right this time. Third, the market's "observable historic patterns" (a) are very inconsistent and (b) have been derived from a small number of observations over a period of just a century or so under widely varying circumstances. Thus these historic patterns are of very limited relevance in predicting this market's next move. Last, I want to admit that, as usual, my analysis is likely to overweight the negatives and the rebuttals to the positives. I've been cautious for a long time – in fact, I don't remember ever having written a bullish piece on stocks – and this memo is unlikely to be any different. There are "horses for courses," and I admit it: I'm usually going to cost you money on the upside. Taken together these caveats mean that very little trust, if any, should be put in any market prediction – especially mine.

© Oaktree Capital Management, L.P. All Rights Reserved To illustrate, take the case of high yield bonds, whose prices have been sagging, partly because of steady capital flows out of high yield mutual funds (for redeployment in equity funds). I was asked the other day when flows into high yield bonds would resume. My answer: When people realize once again that 11 % is a good return. But this disrespect for traditional investment thinking shall pass--and in fact it appears to be in the process of doing so. In general, the portfolios that did best last year have done worst so far this year, and vice versa. Traditional investing values will be respected again. I can even imagine a day when words like “prudence” return to investors' everyday speech. UIt Restores Your Faith If common sense and logic don't work, how are we to run our lives? In “bubble.com” I battologized (look that up in your Funk & Wagnall's) regarding the dot-coms’ divergence from the old-fashioned notion that only if revenues exceed expenses is a business attractive. Instead, in 1999 business models were based on giving away products as a way to get ads in front of eyeballs, or on selling things for less than they cost. WebHouse Club is a poster child for failed giveaways. A spin-off of Priceline.com, it let customers name their own price for groceries and gas. There was a problem: manufacturers were unwilling to supply goods at the prices customers wanted to pay, so WebHouse made up the difference. In “bubble.

© Oaktree Capital Management, L.P. All Rights Reserved As I noted a few years ago, (see “Risk and Return Today,” October 2004) we were living in a low-return world. The prospective returns offered on traditionally safe investments were low in the absolute. Moving out on the risk curve added little to expected returns; i.e., risk premiums were in many cases at record lows. Overall, then, the Capital Market Line – the risk/return curve – was “low and flat.” In all, the rewards offered for risk bearing were paltry. So what was an investor to do in that low-return world? You could make your usual investments and accept returns below those you’re used to, perhaps deciding to allocate your capital for the long term and ignore the short term. Or you could decline to invest and hold cash instead, despite the fact that the expected return for doing so is invariably the lowest. Or – as I think most people did – you could reject the low returns available on your usual investments and go for more. That is, you could insist on achieving high returns in a low-return world. But insisting on them is one thing, and positioning your portfolio to get them is another. How might the latter be accomplished? The answer is simple: many reached for return. Primarily that meant making riskier investments or using leverage to increase the capital at risk (or both). That’s the main story of the last few years, and the reason behind the jam the markets are in today. USo What Happened?

© Oaktree Capital Management, L.P. All Rights Reserved “Wealth effect” is the term used to describe the impact on the economy of major increases in the prices of stocks or other assets. When asset prices rise, people feel richer and spend more. When the resulting demand outstrips supply, inflation heats up. Further, when the upward trend of asset prices inevitably turns down, the wealth effect works in reverse, putting a damper on economic growth (although Greenspan is more likely to have been worried about inflation than economic softness). Prior to expressing his concern about exuberance, Greenspan was credited with the power and wisdom needed to keep the economy rising forever. So how did investors react to his remark? In the first half-hour of trading the next day, they took the Dow down by 145 points (which used to be considered a big move). But the exuberance of which he had warned soon reasserted itself, with the Dow closing the year virtually unchanged from its pre-critique level and moving 1000 points higher over the next six months. If it was irrational exuberance that had taken the Dow to 6,437 in late 1996, what would describe the rise to 7,437, and eventually to 11,497, in relatively short order? And what accounts for Greenspan's two subsequent years of silence on the subject? My guess is that he was feeling pressure from people – perhaps with a political stake in the continuing rise of the stock market-who castigated him for being a wet blanket.

I’ve concluded there are two different but interrelated bubble possibilities to think about: one in the behavior of companies within the industry, and the other in how investors are behaving with regard to the industry. I have absolutely no ability to judge whether the AI companies’ aggressive behavior is justified, so I’ll try to stick primarily to the question of whether there’s a bubble around AI in the financial world.

If someone annoying, like a journalist or an opposing candidate, asks about potential consequences, it’s easy these days to misrepresent them or deny they exist. And if it turns out that costs or consequences were willfully © 2016 Oaktree Capital Management, L.P. All Rights Reserved.

Morgan Asset Management, shows that: • the market capitalization of the seven largest components of the S&P 500 represented 32-33% of the index’s total capitalization at the end of October; • that percentage is roughly double the leaders’ share five years ago; and • prior to the emergence of the “Magnificent Seven,” the highest share for the top seven stocks in the last 28 years was roughly 22% in 2000, at the height of the TMT bubble.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Many people – albeit President Trump’s supporters more often than economists in general – applaud his decision to impose tariffs against China. Whereas the simple story was that he was doing so to (a) reduce our trade deficit with China, (b) support U.S. manufacturers and (c) protect U.S. jobs, there’s more in play. In The Wall Street Journal of October 20, Richard Haass, president of the Council on Foreign Relations, an independent, nonpartisan organization, enumerated complaints that have been lodged against China in the area of trade: . . . higher-than-warranted tariff and non-tariff barriers, forced transfers of technology, theft of intellectual property, government subsidies and currency manipulation designed to make exports cheaper and to reduce the demand for imports. Everyone knowledgeable tells me these complaints are warranted. While they’re not new, past presidents don’t seem to have done much about them, or at any rate didn’t produce any results. Clearly Trump likes to take action and doesn’t shy away from confrontation. Given that China’s economy is much more reliant on exports to the U.S. than ours is on exports to China – and given China’s need for rapid economic growth in order to reach its goals – imposing tariffs represents a possible way for Trump to get China to alter its behavior.

© Oaktree Capital Management, L.P. All Rights Reserved To be strong you have to be like water: if there are no obstacles, it flows; if there is an obstacle, it stops; if a dam is broken, then it flows further; if a vessel is square, then it has a square form; if a vessel is round, then it has a round form; because it is so soft and flexible, it is the most necessary and the strongest thing. In other words, mujo means cycles will rise and fall, things will come and go, and our environment will change in ways beyond our control. Thus we must recognize, accept, cope and respond. Isn’t that the essence of investing? UCoping With Cycles In the world of investing, (as you’ve heard me say many times) nothing is as dependable as cycles. Fundamentals, psychology, prices and returns will rise and fall, presenting opportunities to make mistakes or to profit from the mistakes of others. They are the givens. We cannot know how far a trend will go, when it will turn, what will make it turn, or how far things will then go in the opposite direction. But I’m confident that every trend will stop sooner or later. Nothing goes on forever. Trees don’t grow to the sky, and neither do many things go to zero and stay there. Success carries within itself the seeds of failure, and failure the seeds of success. So what can we do about cycles? If we can’t know in advance how and when the turns will occur, how can we cope?

© Oaktree Capital Management, L.P. All Rights Reserved too high given their prospects. Conversely, buying what no one else will buy at any price almost assures eventual success, and that leads to a discussion of the current level of demand for convertibles and its impact on their prices. I wrote this summer that convertibles tend to capture most of the upside performance of stocks while being significantly insulated from declines, and that such performance characteristics should be attractive given the high level of uncertainty today. What I didn't mention -- and what I want to point out now -- is that one of the factors contributing to the availability of bargains among convertibles is the relatively low level of demand for them. Here in 1992, strong demand has supported stock prices. Important among the components of that demand is the heavy flow into mutual funds of cash fleeing from low- yielding short term investments. But flows into convertible funds have been low, as indicated by the following clipping from Barron's. The figures are worth reviewing. Convertible securities funds don't get much respect. They had a great 1991, when they rose 30%, matching the S&P 500, and so far this year, they're up 3.5%, while the S&P is down a fraction. This showing is impressive since convertibles, bond-equity hybrids, are usually a more conservative choice than stocks, trailing the S&P in bull markets and falling less than stocks in down markets.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Were [the politicians levying taxes on Americans] seeking to redistribute wealth, to recast society along more egalitarian lines? Or were they simply trying to ensure that rich people paid their “fair share”? The answer, predictably, is both. . . . If poor and middle class Americans were going to be asked [by President Roosevelt], of necessity, to shoulder much of the fiscal burden, then they needed assurance the rich were paying their share. . . . No one made the case more succinctly than Rep. Cordell Hull, legislative father of the 1913 income tax. “I have no disposition to tax wealth unnecessarily or unjustly,” he explained in his memoirs. “But I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty.” (“Soaking the Wealthy: An American Tradition” The Wall Street Journal, January 29-30, 2011) The rhetoric remained unchanged in the late twentieth century: “We will lower the tax burden on middle class Americans,” [Bill Clinton] pledged in 1992, “by asking the very wealthy to pay their fair share.” (“The Middle-Class Tax Trap” The New York Times, April 17, 2011) More recently, President Obama carried on the tradition. I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share.

© Oaktree Capital Management, L.P. All Rights Reserved pressure on asset prices, further weakening financial positions and reinforcing the loss of faith. And thus the circle becomes vicious and we have a “run on the bank.” We saw many runs on banks during the Great Depression; the result was the introduction of federal deposit insurance. We also saw a bank run in the U.K. last year, when depositors lined up at the Northern Rock building society until the Bank of England calmed fears by guaranteeing all deposits. (I had money there, and believe me, absent the guarantee, the 2% penalty for early withdrawals would have been powerless to dissuade me from moving the remaining 98% to a safer institution. Take a few hundred or thousand of me, and you have a run on the bank.) In short, the government is attempting to prevent a loss of belief. Is such a thing possible? Ask yourself whether eight months ago you thought possible this year’s developments at Bear Stearns, IndyMac, Lehman Brothers, AIG, Fannie Mae and Freddie Mac. To some extent, they all stemmed from a loss of faith. UThe Source of the Problem There are two principal fundamental causes behind the events we’re seeing. The first is the huge losses in complex mortgage-backed securities. As I’ve written before, the issuance and purchase of these securities resulted from the following confluence of factors:  Quest for return, decline in risk aversion and lowering of skepticism.

© Oaktree Capital Management, L.P. All Rights Reserved find your position is highly liquid: you can sell it quickly, and at a price equal to or above the last transaction. But if you want to sell when everyone else wants to sell, you may find your position is totally illiquid: selling may take a long time, or require accepting a big discount, or both. If that’s the case – and I’m sure it is – then the asset can’t be described as being either liquid or illiquid. It’s entirely situational. There’s usually plenty of liquidity for those who want to sell things that are rising in price or buy things that are falling. That’s great news, since much of the time those are the right actions to take. But why is the liquidity plentiful? For the simple reason that most investors want to do just the opposite. The crowd takes great pleasure from buying things whose prices are rising, and they often become highly motivated to sell things that are falling . . . notwithstanding that those may be exactly the wrong things to do. Further, the liquidity of an asset is very much a function of the quantity involved. At a given time, a stock may be liquid if you want to sell a thousand shares but highly illiquid if you want to sell a million. If so, it can’t be said categorically that the stock is either liquid or illiquid. But people do it all the time. Investment managers are often asked how long it would take to liquidate a given portfolio.

© Oaktree Capital Management, L.P. All Rights Reserved explosion of non-bank lending rendered the traditional restraints impotent, with unregulated hedge funds and derivative traders doing what financial institutions wouldn’t or couldn’t. And when traditional providers of capital did participate, competition to lend caused them to join in the trend to “covenant-lite,” “PIK/toggle” and other loosey-goosey structures.  Financial innovation enjoyed enormous popularity. The application of leverage, securitization and tranching permitted debt backed by assets such as mortgages to be created and sold around the world. This process, it was said, enabled just the right level of risk and return to be delivered to each investor.  Financial sector participants and observers concluded that the world had been made a less risky place by disintermediation (in which banks sold off loans rather than hold them), adroit central bank management and developments that made debt more borrower-friendly. In many cases, this sense of reduced risk encouraged individuals to assume correspondingly more risk.  Because the structured products were so new, sophisticated and opaque, high ratings would be needed if they were to gain acceptance. Wall Street’s persuasiveness, combined with the rating agencies’ susceptibility, caused the needed ratings to be assigned. Thus the final element was in place for the financial innovations to gain widespread popularity.

© Oaktree Capital Management, L.P. All Rights Reserved making of those loans didn’t create the problem. Rather, it’s the fact that both borrowing and lending decisions were quite poor and in many cases misguided. As I described in “It’s All Good,” loan originators and mortgage brokers were incentivized by fees to generate loan volume and often were able to do so without having to risk their own capital. They were paid to produce quantity, not quality, and – surprise! – they did. Capital providers’ lack of concern regarding creditworthiness enabled borrowers to borrow more than they could repay and more than was justified under prudent lending standards . . . at adjustable rates even if the borrowers couldn’t withstand an upward adjustment . . . often supported by inadequate documentation regarding incomes and assets. Deficiencies in due diligence even permitted numerous cases of mortgage fraud, where borrowers bought houses, marked them up through sales to related parties, and then borrowed against them in amounts far in excess of their actual value (and their cost). It’s not surprising that these circumstances combined to produce a high volume of deficient loans. In fact, it would be amazing if they hadn’t. Who could have looked at this system without expecting this outcome? Okay – bad loans were made, and delinquencies and foreclosures have been rising among the weakest of mortgage borrowers.

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: What Are the Effects? Since a subscription line doesn’t lever a fund, its use doesn’t increase the total dollar profits that the fund will earn from investments over its lifetime (assuming the GP makes the same investments that it would have made if the fund didn’t have a line). Also, the use of a subscription line – obviously – doesn’t alter the fund’s committed or invested capital. Thus, assuming all LP capital eventually is drawn, the fund’s ratio of distributions to LP capital – either the multiple of committed capital (MOCC) or the multiple of invested capital (MOC) – isn’t improved by the use of a line. So much for what isn’t changed. The question, then, is “what is?” First the positives:  The original purpose of subscription lines was (a) to enable GPs to make investments and pay fund fees and expenses without frequent capital calls and (b) to prevent opportunistic funds that don’t sit on large amounts of cash from missing out on attractive investments requiring quick funding. More recently, however, their use has grown for the additional reasons discussed below.  With calls for LP capital postponed, the reported Internal Rate of Return or IRR in the early years – the dollar-weighted return on LP capital – will increase substantially (assuming the early profits exceed the interest and expenses on the line).

© Oaktree Capital Management, L.P. All Rights Reserved Traders buy and sell, usually in short order, to take advantage of momentary phenomena. I usually think of them as betting on the direction of the next price move. Certainly we can say their timeframe is hours or days, or maybe weeks, but rarely months and never years. And what is a “bet”? That’s one of those words we all know the meaning of but would be hard- pressed to define without using the synonym “wager” or the word “bet” itself. I consulted The Random House Dictionary of the English Language and found a very useful definition: a bet is “a pledge of a forfeit risked on some uncertain outcome.” In other words, you attempt to profit from an uncertain event, and if it doesn’t go as you hope, you forfeit something of value. Well then, Amaranth certainly was a bettor. One question: If it’s so obvious today that Amaranth was “betting,” were people equally aware of that fact a few months ago? I don’t think so. Gains are often presumed to be the result of carefully considered investments, while it’s usually losing ventures that are described as having been bets. U What Was Their Game? Amaranth’s energy trading operation was in business to bet (there I go!) on short-term movements in energy prices. But it didn’t base its activities on saying “we want to own natural gas” or “we want to be short.” That would be risky.

© Oaktree Capital Management, L.P. All Rights Reserved larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.  UCycles are self-correctingU, and their reversal is not necessarily dependent on exogenous events. The reason they reverse (rather than going on forever) is that trends create the reasons for their own reversal. Thus I like to say success carries within itself the seeds of failure, and failure the seeds of success.  Seen through the lens of human perception, Ucycles are often viewed as less symmetrical than they areU. Negative price fluctuations are called "volatility," while positive price fluctuations are called "profit." Collapsing markets are called "selling panics," while surges receive more benign descriptions (but I think they may best be seen as "buying panics"; see tech stocks in 1999, for example). Commentators talk about "investor capitulation" at the bottom of market cycles, while I also see capitulation at tops, when previously-prudent investors throw in the towel and buy. I have views on how these general observations and others apply to specific kinds of cycles, which I will set forth below. UThe Economic Cycle Few things are the subject of more study than the economy.

Strange Bedfellows “Shared values” is one of the things I credit for Oaktree’s success over the years. All of Oaktree’s senior managers are conservative, cautious people; we all agree that risk control and consistency hold the keys to long-term investment success; and we all put clients’ account performance ahead of our company’s profit. Shared values make it easy to run an organization and particularly easy to reach agreement on policies and tactics. Now imagine what it would be like to run an enterprise where (a) some of the constituents believed much more in thrift, discipline and transparency than others and (b) there was no mechanism for making sure everyone played according to the agreed-upon rules. Welcome to Europe. In the 1950s Belgium, France, Italy, Luxembourg, the Netherlands and West Germany came together to form the European Coal and Steel Community, European Atomic Energy Community and European Economic Community, which in 1967 combined as the European Community. Denmark, Ireland and the U.K. joined in 1973, and Greece, Spain and Portugal joined in the 1980s. Membership has since expanded to 27 nations, and the name “European Union” (E.U.) was adopted in 1993. In 1999, eleven nations (since expanded to 16) agreed to form the euro zone and replace their individual currencies with the euro. Europe seemed to have accomplished the daunting task of pulling together its nations and adopting a single currency.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: It’s certainly not mechanical. In physics, I think the pendulum has certain qualities, and as a result, its behavior can be predicted. But in the things I’m talking about, no. As you know, my last book, in 2018, was called Mastering the Market Cycle, and I talked a lot in there about the pendulum. I got a note from Nick Train of Lindsell Train in London, saying something like, “I disagree with you, Howard: this isn’t a pendulum. Its movement is not regular, it’s not predictable, the speed of the fluctuations varies, and their extent varies.” And I said, “Nick, let’s have lunch.” So, when I next got to London, we sat down and I explained to him that there are multiple definitions of a pendulum. One definition says it’s mechanical and thus predictable, and governed by the laws of physics. And another definition says that it’s a swing.” In your question to me, Patrick, you used the term “mood swing,” and I think understanding it as a mood swing is much more useful for our purposes. As this discussion progresses this morning, I think the main thrust is going to be that these things are not scientific and thus not consistent and repeatable. PS: Russell Napier, another member, has a related question also covering the mechanical angle.

Instead, they had to be categorized as “available for sale” (AFS), meaning (a) the bonds were marked down on SVB’s financial statements and (b) actual sales caused the losses to be crystalized. © 2023 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

it goes. If it works well this time, readers may conclude that in the future they can fashion their own memos from bits and pieces of my old ones. The Credit Cycle at Work Consider this: the ups and downs of economies are usually blamed for fluctuations in corporate profits, and fluctuations in profits for the rise and fall of securities markets. However, in recessions and recoveries, economic growth usually deviates from its trendline rate by only a few percentage points. Why, then, do corporate profits increase and decrease so much more? The answer lies in things like financial leverage and operating leverage, which magnify the impact on profits of rising and falling revenues. And if profits fluctuate this way – more than GDP, but still relatively moderately – why is it that securities markets soar and collapse so dramatically? I attribute this to fluctuations in psychology and, in particular, to the profound influence of psychology on the availability of capital. In short, whereas economies fluctuate a little and profits a fair bit, the credit window opens wide and then slams shut . . . thus the title of this memo. I believe the credit cycle is the most volatile of the cycles and has the greatest impact. Thus it deserves a great deal of attention. In “The Happy Medium,” I discussed the workings of the credit cycle in creating market extremes: Looking for the cause of a market extreme usually requires rewinding the videotape of the credit cycle a few months or years.

© Oaktree Capital Management, L.P. All Rights Reserved Fund A Annual Return Dollar Gain Distribution Portfolio Value Initial Investment $1,000 Year 1 10% $100 $600 500 Year 2 40 200 650 50 Year 3 100 50 100 -- Comp. Ann. Return 45% IRR 21% The 10% gain in year one, achieved on starting capital of $1,000, produced a $100 gain in the fund’s value. The 100% return in year three, on the other hand, was applied to just $50 of capital, producing a gain of $50. Although the percentage return was much higher in year three, it produced just half the dollar gain as the smaller return in year one. Thus, in calculating the fund’s overall performance, the 100% return should be accorded much less weight than the 10% return. IRR produces that result (whereas compound annual return does not). Because a given year’s annual result is weighted in the IRR calculation by the number of dollars in the fund that year, and thus counts for more when the fund is larger and less when it’s smaller, internal rate of return is referred to as a “dollar-weighted” return. To make the distinction clear, the old compound annual return is now referred to as a “time-weighted” return. This nonsensical term means that every year’s individual return is given the same weight in the calculation. It’s the same as saying “equal-weighted,” or even “unweighted” . . . but “time-weighted” sounds much more scientific. (It’s not for nothing that George Bernard Shaw defined professions as “conspiracies against the laity.

© Oaktree Capital Management, L.P. All Rights Reserved. Economic growth doesn’t just happen. Its vigor depends on a combination of population gains, a conducive infrastructure, positive aspiration and profit motive, advances in technology and productivity, and benign exogenous developments. In many ways and to varying degrees, I think the future for these things in the U.S. is less good than it was in the past. The birthrate is down; our infrastructure is out of date; it’s uncertain whether technology can add as much to productivity in the future as it has in the recent past (but perhaps it always is); and mobility up the income curve has stagnated. I think a lot about the role of deficit spending and credit. In the forty or so years leading up to the crisis of 2008, consumers could grow their spending faster than their incomes because of the increasing availability of credit (and their increasing willingness to make use of it). Likewise, generous capital markets greatly facilitated deficit spending on the part of governments. Economic units around the world were able to spend money they didn’t have and thus buy things they couldn’t afford. This made a big contribution to economic growth, but few people recognized the negative implications: increased leverage, increased dependency on the continued generosity of the capital markets, and thus increased precariousness. In other words, unwise behavior in the short run led directly to problems in the long run.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: What Do Fed Actions Tell Us? Many people look at the operation of an economy and the efforts of a central bank to influence it and see things that are logical and straightforward. Others see a complex ecosystem that has financial, political and behavioral components, with tendencies that are understandable but certainly subject to significant uncertainty and ambiguity. I’m one of the latter. I think of the Fed and its considerations as complex, multi-faceted and characterized by a great deal of on-the-one-hand-but-on-the-other- hand. I’ll explain at length below, right after issuing my usual caveats: I’m not an economist, an expert on monetary policy or a Fed watcher – just a casual observer. Many people take Fed actions at face value. When the Fed cuts interest rates, as the consensus expects it to do soon, investors take that as a “buy” signal. Their thought process is simple: weak economy → rate cuts → economic stimulus → stronger GDP → higher corporate profits → higher stock prices. For this reason, many people – first-level thinkers that they are – take a statement like Powell’s above as simplistic and a positive. But there’s much more to the story. Digging deeper, one should ask, “Why is the Fed cutting rates?” The answer, of course, is that the Fed anticipates economic weakness (or sees it taking place) and wants to ward it off.

term gain. The main urgency for both parties seems to be about pinning blame on the other, before November’s elections, for budget deficits now averaging $1 trillion a year, the largest since World War II relative to the size of the economy. Two weeks later, Wessel put it this way in The Journal: The stalemate over health-care legislation, despite widespread acknowledgment that the status quo is unsustainable, underscores the inability of the political system to cope with complex, long-term fiscal issues. . . . Today, the deficits projected are bigger than ever, baby boomers are beginning to retire, health-care costs keep rising and, surely, we’re closer to the day when Asian governments grow reluctant to lend ever-greater sums to the U.S. Treasury at low interest rates. The Congressional Budget Office projects current policies would take the deficit from today’s 10% of gross domestic product to over 20% by 2020 and over 40% by 2080. Yet today’s politics appear more toxic, and the ranks of congressional leaders with the skill and desire to fashion compromises instead of talking points are depleted. Here we have remarkably similar themes voiced in what some would call “a Democrat newspaper” and in a stalwart of the pro-business Republican establishment. Both articles complain that the current trends in politics reduce the likelihood that major problems will be tackled and solved . . . a rare example of agreement across the aisle.

That day, Fed Chair Jerome Powell confirmed that the Fed was moving closer to a rate cut, and things appeared to be on track for economic growth and further stock market appreciation. But that same day, the Bank of Japan announced its biggest increase in its short-term interest rate in over 17 years (to a whopping 0.25%!) This shocked the Japanese stock market, to which people had been © 2024 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. These facts combined with other causes to produce a market crash of epic proportions; widespread losses; a drying up of capital; deflation; and a massive depression with a resulting increase in unemployment to 25%. Unsurprisingly, fingers were pointed at the prior administration and political power shifted to believers in an activist role for government. The most lasting result was the enactment of laws that governed the financial system for decades and in many cases still do: the Securities Act, the Securities and Exchange Act, and the Glass- Steagall Act. Thus the 1930s saw a massive swing of the pendulum in favor of regulation. The next several decades on Wall Street were – perhaps thanks to the impact of those laws – a relatively placid period. This led to a view that, with rare exceptions, market participants are well-behaved by nature. Further, steady growth with only moderate dips caused a perception of an inherently benign and productive economy that could achieve even more if only the regulatory shackles were loosened. After President Carter deregulated the transportation industry in the late 1970s, the door was open for much of the regulatory apparatus built in the early part of the century to be relaxed. Ronald Reagan, whose famously free-market views coincided with a period of peace and prosperity, led the deregulatory charge.

This change has led to a rise in optimism, confidence and “animal spirits” among corporate executives, things that have great potential to be self- reinforcing. Thus, for example, in the first three quarters of 2017, capital spending rose at an annualized rate of 6.2%.  The recent tax law will put money into the pockets of corporations that pay U.S. taxes by reducing their tax rate, and it will result in the repatriation of large amounts of foreign profits that © 2018 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved fourteen years, under the direction of this man and his predecessors, has been way ahead of the S&P 500. He shared with me what he considered the key: We have never had a year below the 47th percentile over that period or, until 1990, above the 27th percentile. As a result, we are in the fourth percentile for the fourteen year period as a whole. I feel strongly that attempting to achieve a superior long term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year -- and through discipline to have highly superior relative results in bad times -- is: - less likely to produce extreme volatility, - less likely to produce huge losses which can't be recouped and, most importantly, - more likely to work (given the fact that all of us are only human). Simply put, what the pension fund's record tells me is that, in equities, if you can avoid losers (and losing years), the winners will take care of themselves. I believe most strongly that this holds true in my group's opportunistic niches as well -- that the best foundation for above-average long term performance is an absence of disasters.

In my view, this is a good part of the basis for Charlie’s comment: anyone who thinks it’s easy to achieve unusual profits is overlooking the way markets operate. This memo is largely about the challenges they present. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: That brings me to the subject of forecasters’ track records, or rather the lack thereof. Back in the 1970s, an elder told me, “an economist is a portfolio manager who never marks to market,” and that description still seems highly appropriate. Have you ever heard an economist or macro strategist say, “I think there’ll be a recession soon (and xx% of my recession predictions have turned out to be right within a year)”? Would anyone invest with an investment manager who didn’t publish a track record? Why follow macro forecasters who don’t disclose theirs? Finally, I want to point out that the same comments apply to most investors. You rarely hear them say they have no idea what the macro future holds or beg off from expressing opinions. One of the most important requirements for success in investing is self-assessment. What are your strengths and weaknesses? If you invest on the basis of your macro views, how often have they helped? Is it something you should keep doing or discontinue? Having gotten everything off my chest concerning the shortcomings of forecasts, I’m going to devote the rest of this memo to thinking about the future. Why? To invert the Buffett quote that began this memo, the macro future may not be knowable, but it certainly is important. When I think back to the years leading up to 2000, I picture a market that largely responded to events surrounding individual companies and stocks.

© 2018 Oaktree Capital Management, L.P. All Rights Reserved Follow us: In 2005-06, Oaktree adopted a highly defensive posture. We sold lots of assets; liquidated larger distressed debt funds and replaced them with smaller ones; avoided the high yield bonds of the most highly levered LBOs; and generally raised our standards for the investments we would make. Importantly, whereas the size of our distressed debt funds historically had ranged up to $2 billion or so, in early 2007 we announced the formation of a fund to be held in reserve until a special buying opportunity materialized. Its committed capital eventually reached nearly $11 billion. What caused us to turn so negative on the environment? The economy was doing quite well. Stocks weren’t particularly overpriced. And I can assure you we had no idea that sub-prime mortgages and sub-prime mortgage backed securities would go bad in huge numbers, bringing on the Global Financial Crisis. Rather, the reason was simple: with the Fed having cut interest rates in order to prevent problems, investors were too eager to deploy capital in risky but hopefully higher-returning assets. Thus almost every day we saw deals being done that we felt wouldn’t be doable in a market marked by appropriate levels of caution, discipline, skepticism and risk aversion. As Warren Buffett says, “the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.

© Oaktree Capital Management, L.P. All Rights Reserved  In the mid-1960s, growth investing was invented, along with the belief that if you bought the stocks of the “nifty-fifty” fastest-growing companies, you didn’t have to worry about paying the right price.  The first of the investment boutiques was created in 1969, as I recall, when highly respected portfolio managers from a number of traditional firms joined together to form Jennison Associates. For the first time, institutional investing was sexy.  We started to hear more about investment personalities. There were the “Oscars” (Schafer and Tang) and the “Freds” (Carr, Mates and Alger) – big personalities with big performance, often working outside the institutional mainstream.  In the early 1970s, modern portfolio theory began to seep from the University of Chicago to Wall Street. With it came indexation, risk-adjusted returns, efficient frontiers and risk/return optimization.  Around 1973, put and call options escaped from obscurity and began to trade on exchanges like the Chicago Board Options Exchange.  Given options’ widely varying time frames, strike prices and underlying stocks, a tool for valuing them was required, and the Black-Scholes model filled the bill.  A small number of leveraged buyouts took place starting in the mid-1970s, but they attracted little attention.  1977-79 saw the birth of the high yield bond market. Up to that time, bonds rated below investment grade couldn’t be issued.

© Oaktree Capital Management, L.P. All Rights Reserved The success of South Sea spawned talk of any number of speculative schemes, some of which was probably apocryphal. “The most famous of the legendary bubble companies was that ‘for carrying on an undertaking of great advantage but no one to know what it is.’” [I can't understand what it does, but that's okay; just tell me the name, II. or maybe the symbol's enough.] Despite their lack of profits, companies like South Sea were able to finance their operations by issuing stock at higher and higher prices. “The circularity inherent in the scheme made a rational calculation of the shares' fair value difficult to compute. Some argued that the higher the shares rose, the more they were actually worth .... ‘Was there ever such a delusion from the beginning of the world ... according to this Way of Computing, no Person can Purchase at too high a Rate, since his Profit will increase in Proportion to the Price he gives.’” [There's no such thing as too high a price if the concept is right, and the ability to issue stock at rising prices will lead to profitability.] "Adam Anderson, a former cashier of the South Sea Company, later claimed that many purchasers of shares ... bought knowing that their long-term prospects were hopeless, since they aimed to get 'rid of them in the crowded alley to others more credulous than themselves.'" [The greater fool theory is nothing new.]

The crisis revealed how thin the layer of true liquidity actually was. Instruments that had traded daily in normal markets became untradeable. The bid-ask spread that had been a rounding error became a chasm. Capital that had been committed on the assumption of roll-over financing had to be redeployed at any price the market would bear. The lesson is that liquidity is a regime-dependent asset, and the regime that produces abundant liquidity is not the regime in which you need it most. What we did at Oaktree during that period was deploy capital into the dislocations. The opportunity set was the widest I had seen in my career — distressed debt trading at prices that implied default rates several times any reasonable estimate, structured credit that had been marked down mechanically, and senior secured loans trading at deep discounts to par. None of these would have been available at those prices in any other market environment. The decision to buy aggressively required capital, conviction, and a tolerance for being wrong in the short run. We had raised a meaningful distressed debt fund in 2007 and 2008 that gave us the dry powder to act. Without that capital pre-arranged, we would have been unable to participate. The lesson of 2008, as of every prior crisis, is that the time to raise capital for distress is before the distress arrives.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Like most people my age, I spent time as a child playing card games like “War” and “Old Maid” (there were no videos to watch or video games to play, and my parents considered television a pernicious influence that had to be strictly rationed). My first brush with “grown-up” games and betting involved gin rummy starting around age 12. Hours spent playing with my three closest buddies established a pattern for life. When I was a sophomore in college (1964-65), card games at the fraternity house took up an embarrassingly large fraction of my time. A different game occupied our afternoons each semester, including gin, pinochle, cribbage, hearts, casino, bid whist, spades and tonk (many of these have since been relegated to the dustbin of leisure-time history). Most evenings were devoted to poker. (You’re right to wonder when I studied. I actually can’t remember doing much of it that year.) And when I eventually got serious about my studies as an upper-classman, I took up the commensurately serious game of bridge. The next big step came in 1970-72, when I began to ski and was introduced to backgammon back at the lodge. Although probably dismissed by non-game players as trivial, backgammon, like bridge, is a game that requires a great deal of thought and one where study and practice can lead to a very high level of skill. More on it later. As you may know, I got Citibank to move me to Los Angeles in 1980.

© Oaktree Capital Management, L.P. All Rights Reserved The article goes on to cite the arguments behind this year's version of "this time it'll be different." First, because the recovery has been wishy-washy to date, there is no "boom" to "bust." Second, today's enhanced pace of business has been accommodated more through flexibility and efficiency than through brick-and-mortar expansion and inventory building. Third, the service economy has largely supplanted the more cyclical manufacturing sector. Fourth, globalization of the economy will enhance geographic diversification and provide new sources of demand for goods. Similarly, we all hear lots of reasons why today's high stock market valuations aren't dangerous and no correction is required. These include the inevitability of 401(k) inflows; the steadfastness of mutual fund investors; the shortage of stocks which will result from corporate buybacks (in 1987, the shortage was going to result from the privatization of companies via leveraged buyouts); the vast opportunities presented by technology and the Internet; the improved profit stance of business after years of downsizing and cost-cutting; the fiscal responsibility imposed on government and the resulting favorable outlook for the deficit; and the irrelevance of dividend yield and other traditional valuation parameters. As always, the list appears to grow longer as higher levels are reached on the Dow.

 The increases in equity were matched by further increases in borrowings.  In fact, the good performance convinced lenders to increase the amount of leverage they would supply per dollar of equity. This meant the entities could grow their portfolios even faster than the rates at which equity capital flowed in and assets appreciated.  Further, because of the seeming impregnability of the leveraged entities’ profitability, risk aversion shrank and the risk premiums and returns demanded by lenders declined. Leverage became cheaper and thus even more attractive.  As is typical of virtuous circles, everything ran smoothly . . . for a while: additional equity flowed in; it was leveraged up increasingly; buying caused assets to appreciate further; and the upward spiral continued. With things working increasingly well and investors becoming more and more excited, processes like this one seem destined to go on forever. Of course, they cannot. But people forget that, satisfying one of the key prerequisites for a cycle that goes to excess. Overestimating the longevity of up legs and down legs is one of the mistakes that investors insist on repeating. Deleveraging and Deflating Over the years I’ve written a number of memos about cycles, and in each one I’ve tried to remind readers that trees don’t grow to the sky, and that success carries within itself the seeds of failure.

The tariff announcement of April 2025 produced immediate pressure on leveraged positions and on assets whose value depended on the prior globalization regime. Some investors were forced to sell at exactly the moment when patient capital could buy at dislocations. This is the recurring pattern of crises: forced sellers provide liquidity to patient buyers, and the buyers who have the capital and the conviction to act during the panic capture returns that are unavailable in any other environment. The patience required to act in such moments is harder than it sounds. To deploy capital aggressively when the news is worst and the prices are falling requires a tolerance for being wrong in the short run and a confidence in the underlying mathematics of the assets being purchased. The mathematics of distressed credit — buying senior secured claims at deep discounts to par, with coupons that recover cost basis quickly — typically work even when the macro path is uncertain. What I have learned across three Nobody Knows memos is that the most important preparation for crisis is structural. The capital must be raised and committed before the crisis, the team must be in place, the underwriting muscles must be exercised, and the mandate must be clear. When the crisis arrives, there is no time to assemble the apparatus; there is only time to deploy it. The firms that have done the preparation in advance are the ones able to act, and the firms that act are the ones that capture the returns.

The psychology of selling is dominated by the fear of giving back gains and the fear of realizing losses. Both fears are present in every investor, and both fears lead to systematic errors. The investor who sells winners too early and holds losers too long is not making a series of independent mistakes; he is making the same mistake in two different forms — the mistake of letting tax and behavioral considerations override the underlying investment case. Second-level thinking on the sell side requires asking what the next owner of the asset will pay and why. If the answer is that the next owner will pay more because the consensus view is improving, the case for holding is strong. If the answer is that the next owner will pay more only because the price is rising, the case for selling into strength is strong. Distinguishing between these is the work. The simplest rule I can offer is to sell when the investment case has changed — when the price has risen to reflect the value you originally identified, when the fundamentals have deteriorated beyond what you underwrote, or when you have found a meaningfully better alternative. To sell for any other reason is to substitute activity for judgment, and activity is no substitute for judgment.

However, investors began to buy because they saw there was good value in credit, and they anticipated rate cuts that would make bonds with high coupons more desirable. Over time, investors also became less worried about a possible recession, and this led to reduced insistence on generous risk protection via credit spreads. Increased demand, lower interest rates, and reduced insistence on risk protection in the form of higher spreads is a perfect formula for price appreciation, and it ensued.the

The psychology that produces extreme pendulum swings is itself fascinating. The same investors who were cautious at the bottom become aggressive at the top, and the same investors who were aggressive at the top become cautious at the bottom. The reason is that the recent past is the most salient evidence in any investor's mind, and the recent past at the top is gains, while the recent past at the bottom is losses. The temptation to extrapolate the recent past is the engine of the pendulum. The second-level thinker recognizes this pattern and uses it. At the top, when the consensus believes the recent gains will continue, the second-level thinker asks what is already in the price and what would have to be true for the gains to continue. At the bottom, when the consensus believes the recent losses will continue, the second-level thinker asks the same questions in reverse. The work is symmetric; the emotional discipline required is not. I beg to differ with the consensus not because I am smarter but because I have spent a career studying how consensus views form and dissolve. The consensus at any moment is the product of recent experience, and recent experience is not a sound basis for forecasting the future. The investor who can step outside the consensus frame and ask whether the consensus itself is built on solid assumptions has a structural edge. The edge is not in information; it is in the discipline of asking better questions.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Typically in investing, historical norms put limits on asset prices. Thus, for example, bull markets can generally go to extremes only if investors discard the notion that the p/e ratio on the S&P 500 stock index shouldn’t go much above its post-World War II average of 15 or 16. If the earnings of the S&P’s underlying companies grow at 10% a year, by definition the index can rise 20% a year (as it did in the 1990s) only if the ratio of price to earnings is viewed as highly expandable. It was such a perspective that allowed the index to reach 32 times earnings at the start of this century (with highly negative implications for equity returns in 2000-02). Think of a rocket launched from Cape Canaveral. Gravity has to be overcome in order for it to escape the earth’s atmosphere. Likewise, the limitations imposed by past norms have to be overcome in order for asset prices to slip their historic moorings and blast off into outer space. Today we’re not hearing much about historic valuations being irrelevant, as they’re not terribly high. Instead, what we’re told is different this time is the relevance of restrictions on future economic and market performance:  There doesn’t have to be a recession.  Continuous quantitative easing can lead to permanent prosperity.  Federal deficits can grow substantially larger without becoming problematic.  National debt isn’t worrisome.

We would also wrestle—in the bedroom, in the rec room, in the yard – until the day I ended up the winner. We never wrestled after that day, but our friendly banter continued for the next half-century. Looking back at our tussles, I believe there was actually much more affec- tion than squabble.” The kids had the run of River Falls, a town of about .,888, where everyone seemed to know everyone else, both downtown and on the campus. “At Isaacson’s Grocery,” Stephen recalls, “there was a lined green sheet of paper, and customers could sign for purchases for later payment. We children had signing privileges, and the store owner knew each of us. We could sign for a candy bar, and he’d nod—or an apple, and then he’d smile. We were, in effect, raised by our parents and the whole community.” At home, Stephen said, “our parents set a lively intellectual tone,” and “dinner-table talk was always about something. The subject might be marijuana, the Vietnam war, a recycling program, politics, or what we had done that day. Dad also had many practical science lessons for us. David always found joy in this learning. He was just gifted intellectually, skipped third grade, and always excelled. “We received so much from our parents to broaden our understanding of the world. They led cultural and international exchanges for decades and promoted fine arts programs with artists from all over the country, inviting people of different races, religions, and nationalities.

Of course, the problem with defining risk as the possibility of permanent loss is that it lacks the very thing volatility offers: quantifiability. The probability of loss is no more measurable than the probability of rain. It can be modeled, and it can be estimated (and by experts pretty well), but it cannot be known. In Dare to Be Great II, I described the time I spent advising a sovereign wealth fund about how to organize for the next thirty years. My presentation was built significantly around my conviction that risk © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved Why do the mistakes repeat? That’s a good question, but not much of a mystery. First, few investors have been around long enough to recognize reoccurrence of the errors of twenty or forty years ago. And second, the greed that argues for ignoring “the old rules” easily trumps caution; hope truly does spring eternal. That’s especially true when the good times are rolling. The tendency to ignore the rules invariably reaches its apex in periods when following them has cost people money. It is thus, as Galbraith points out, that those who harp on the lessons of the past are dismissed as old fogies. What are some of the recurring mistakes investors make?  It’s Different This Time – Trends in investing are carried to their greatest (and most punishing) extremes by the belief that something has changed – that rules that applied in the past have been rendered obsolete by new circumstances. (E.g., the traditional standards for reasonable valuations weren’t applicable to shares in tech companies whose products were likely to change the world.)  It Can’t Miss – The fact is, anything can miss. There’s no asset so good or trend so strong that you can’t lose money betting on it. No investment technique is guaranteed to deliver high returns or keep risk low.

© Oaktree Capital Management, L.P. All Rights Reserved As the graphic suggests, there is a low return that can be earned on the riskless asset and, from there, prospective return will rise with prospective risk. Thus we have a “capital market line” that, as the academics say, “is upward sloping to the right.” (The “riskless asset” is generally felt to be the shortest U.S. Treasury bill, with regard to which investors don’t worry about credit risk or the risk that inflation will erode the purchasing power of principal before it’s repaid upon maturity.) 1BUThe Market at Work I’ll use a “typical” market of a few years back to illustrate how this works in real life: The interest rate on the 30-day T-bill might have been 4%. So an investor says, “If I’m going to go out five years, I want 5%. And to buy the 10-year note I have to get 6%.” He demands a higher rate to extend maturity because he’s concerned about the risk to purchasing power, a risk that is assumed to increase with time to maturity. That’s why the yield curve, which in reality is a portion of the capital market line, normally slopes upward with the increase in asset life. Now let’s factor in credit risk. “If the 10-year Treasury pays 6%, I’m not going to buy a 10- year single-A corporate unless I’m promised 7%.” This introduces the concept of credit spreads. Our hypothetical investor wants 100 basis points to go from a “guvvie” to a “corporate.

In 2016, FiveThirtyEight estimated the odds of Hillary Clinton winning as slightly better than 50/50 as of the end of the Republican convention in July. Then it had her as an 8-to-1 favorite in August, when the Democrats concluded their convention and Donald Trump’s perceived missteps peaked. And then it © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved cases involving infrequently traded securities, a timer may gain an advantage from knowledge that security prices haven't been updated for days or weeks. At first glance, this all appears relatively benign. It is not improper in itself to trade on knowledge that the prices of some fund holdings are stale. All investors have potentially equal access to this information, and they all have the same ability to enter orders for fund shares up to 4:00 p.m. Eastern Time. Further, most of these situations involve small pricing imperfections that relate to a small portion of the fund's portfolio, and trading on them isn't likely to materially change the return on a long-term investment in the fund. However, these trades can be highly profitable if the impact is magnified through minimization of the holding period. (E.g., taking advantage of a 1¢ error in a $10 NAV will add just .1% to the annual return if the fund shares are held for a year, but taking advantage of a new 1¢ disparity every day will increase the annual return by 25%!) Obviously, then, the key to achieving unusual profits through mutual fund timing lies in rapid-fire trading.

When I refer above to “a real bull market,” I’m not talking about standard definitions such as these from Investopedia: • A period of time in financial markets when the price of an asset or security rises continuously • A situation in which stock prices rise by 20%, usually after a drop of 20% © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

+1 June '96 Actual --0-- +100 b.p. +7 As the table shows, it's not that the forecasters were always wrong; when there was little change, they were often right. It's just that in times of major changes, (when accurate forecasts would've helped one make money or avoid a loss), the forecasters completely missed them. In the years reviewed, the expert consensus failed to predict all of the major developments. Included here are interest rate increases of 1994 and 1996, the rate decline of 1995, and the massive gyrations of the dollar/yen relationship. In summary, there simply hasn't been much correlation between predicted changes and actual changes.

Since we never know when risky behavior will bring on a market correction, I’m going to issue a warning today rather than wait until one is upon us. I’m in the process of writing another book, going into great depth regarding one of the most important things discussed in my book The Most Important Thing: cycles, their causes, and what to do about them. It will be out next year, but this memo will give you a preview regarding one of the most important cyclical phenomena. © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

The Yale Investments Office site places the endowment's success in the context of compounding over decades. Under Swensen's tenure from 1985 to 2021, the endowment grew from approximately $1.3 billion to over $31 billion, generating returns that materially exceeded broad-market benchmarks net of spending. The site frames this record as the product of patient compounding rather than of any single period of outperformance - the average annual return over the long horizon exceeded the spending rate by enough to grow the real value of the corpus despite continuous distributions to the university's operating budget. The site is also explicit about the role of spending discipline in this record. The 5.25 percent spending rule, calculated on a smoothed long-term value basis, insulates the operating budget from short-term market drawdowns and ensures that the institution spends a predictable share of the corpus rather than a volatile share. This means that during market downturns the spending rule supports the operating budget at the cost of corpus drawdown, and during market recoveries the corpus is rebuilt before spending is increased - a countercyclical discipline that anchors the institution's long-horizon compounding. The site closes on the institutional mission that the endowment serves. The distributions from the endowment fund a substantial share of Yale's operating budget, financial aid, faculty salaries, and academic programs. The site frames the long-horizon investment framework as the financial backbone of the university's academic mission in perpetuity - the reason that the endowment exists, and the constraint that every investment decision must serve. The Yale Model, in this framing, is not an end in itself but a disciplined means of stewarding institutional capital across generations.

© Oaktree Capital Management, L.P. All Rights Reserved institutions took on too many risky assets given the limitations of their equity capital. That, in a nutshell, is why institutions have disappeared. So what exactly did these institutions do wrong? Here are a few examples, using Bank X, with $10 billion of capital, to illustrate:  Bank X uses leverage to buy $100 billion of triple-A mortgage-related debt, under the assumption that it can’t lose more than 1%. Instead, home prices decline nationwide, causing it to write down its holdings by 10%, or $10 billion. Its capital is gone.  Alternatively (but in fact probably simultaneously), Bank X sells Hedge Fund G $10 billion of credit default swaps on the bonds of Company A, and it buys $10 billion of the same credit protection from Investment Bank H. Company A goes bankrupt, and Bank X pays Hedge Fund G $10 billion. But Investment Bank H goes bankrupt, too, so Bank X can’t collect the $10 billion it’s due. Its capital is gone.  Bank X lends $50 billion to Hedge Fund P with equity of $10 billion, which then buys $60 billion of securities. The value of the fund’s portfolio falls to $50 billion; the bank sends a margin call; no additional collateral can be posted; so the bank seizes and sells out the portfolio. But in the downward-spiraling market, the bank only realizes $40 billion. Its capital is gone.  Hedge Fund Q also borrowed to buy securities.

The desire to punish Russia for its unconscionable behavior is complicated enormously by Europe’s heavy dependence on Russia to meet its energy needs; Russia supplies roughly one-third of Europe’s oil, 45% of its imported gas, and nearly half its coal. Since it can be hard to arrange for alternative sources of energy on short notice, sanctioning Russia by prohibiting energy exports would cause a significant dislocation in Europe’s energy supply. Curtailing © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Carlos: You know that means you’ll get less out on Monday than you put in today. HM: Okay, then don’t put it in the bank. Carlos: You have to put it in the bank. HM: So put it in the bank. That’s it in a nutshell. Money can’t be free-floating in space. It has to be someplace. And you can’t keep much of it in your wallet or under the mattress. Thus, in general, any substantial sum has to go into the bank. And in Europe – then and now – doing so means you’ll get out less than you put in. I have to admit that this didn’t come as a shock to me. Oaktree and I had turned very cautious in 2005-06, and as a result, all of my money that wasn’t in Oaktree funds was in a “laddered portfolio” of U.S. Treasurys. (In my case, equal amounts of 1, 2, 3, 4, 5 and 6-year maturities. When the closest-in note matures, you roll it to the end of the line. It’s the most mindless form of investing known to man.) At the time I put that portfolio together, I signed up for a yield in the range of 5-6%. And I was thrilled: the greatest safety, total liquidity and a meaningful yield. But then, in 2007, the Fed started cutting rates to rescue the economy from the sub-prime mortgage crisis. And one day in late 2008, my banker called to say, “The 6% note has matured. You can roll it over at five-eighths.” I asked, “What-and-five-eighths?” “No, that’s it,” he said, “just five-eighths.” The world had changed.

© Oaktree Capital Management, L.P. All Rights Reserved. As you can see, the common thread is the concept of a series of events that is repeated. Many people think of a cycle as a continuous pattern in which a rise is followed by a fall, followed by another rise and another fall, and so forth. These definitions are fine as far as they go, but I think they all miss something very important: the sense that each of the events in a cycle not only follows the one preceding it but is a result of the one preceding it. I think in the economic, investment and credit arenas, a cycle is usually best viewed not merely as a progression through a standard sequence of positive and negative events, but as a chain reaction. Before I launch into the discussion of cycles that will follow, I want to make the point that it’s hard to know where to start. It’s tough to say, “The cycle started with y,” since usually y was caused by x, and x by w. But we have to start someplace. The Real Estate Cycle I’ll use the cycle in real estate as an example. In my view it’s usually clear, simple and regularly recurring:  Bad times cause the level of building activity to be low and the availability of capital for building to be constrained.  In a while the times become less bad, and eventually even good.  Better economic times cause the demand for premises to rise.

This behavior was the subject of The Race to the Bottom. In it I said to buy a painting in an auction, you have to be willing to pay the highest price. To buy a company, a share of stock or a building – or to make a loan – you also have to pay the highest price. And when the competition is heated, the bidding goes higher. This doesn’t always – or exclusively – result in a higher explicit price; for example, bonds rarely come to market at prices above par. Instead, paying the highest price may take the form of accepting © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

The elected officials enacting rent control will say they’re only trying to produce fairness for existing occupants, but they’re obviously treating others unfairly. In addition, there are negative implications for society overall. Tenants living in rent-controlled apartments enjoy a very valuable asset: a bargain-priced place to live. But there’s no way to monetize that asset; they can only enjoy the benefit by continuing to live there. For this reason, they tend not to move, reducing mobility for themselves and everyone else.with

The fathers who have to have “the talk” with their children, warning them to “yes, sir” the police, not move their hands too fast and not run down the street at night. The men who are stopped and asked © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: • Investors placed great credence in the ability of the Fed and Treasury to bring about an economic recovery. Investors were cheered by the steps taken to support the economy during the shutdown, reopen it, put people back to work and begin the return to normalcy. Everyone understands that the recovery will be gradual and perhaps even bumpy – few people are talking about a powerful V-shaped recovery these days – but a broad consensus developed that recovery is a sure thing. • As the market recovery took hold, the total number of Covid-19 cases and deaths, and the statistics in states like New York that had experienced the earliest and worst outbreaks, were going in the right direction. Daily new cases declined to very low levels in many places, and the signs of a second-wave rebound were limited. The curve in most locations clearly had been flattened. • In short, the worst fears – things like massive shortages of hospital beds and PPE, and an immediate “second wave” as soon as reopening began – weren’t realized. This was cause for relief. • Rising optimism with regard to vaccines, tests and treatments added to investors’ willingness to write off the present episode. • People became comfortable looking past the pandemic, considering it one-of-a-kind and thus not fundamental. In other words, for some it seemed easy to say, “I’m glad that’s over (or soon will be).

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: At some level, people must be thinking that the more they learn about what is predetermined, the more control they will have. This is an illusion. Human beings want to feel that they are on a power walk into the future, when in fact we are always just tapping our canes on the pavement in the fog. A dose of humility would do us good in the present moment. It might also help reconcile us to the radical uncertainty in which we are always living. Let us retire our prophets and augurs. [Emphasis added] Lilla’s article pulls together in one place several themes from Uncertainty and other recent memos: • the very human hunger for forecasts to help us navigate the future, • the conditionality of the future on multiple future developments, • our own ability to influence the future through the decisions we make, • the unpredictability of each development, • thus the futility of forecasting, • the importance of accepting our ignorance of the future, and thus • the general importance of intellectual humility. Articles like this one and those cited in my last memo should drive home these points to everyone’s satisfaction. But rarely will people fully accept that we must make decisions regarding the future without knowing it. The Future as Path-Dependent Forecasters seem to act as if the future already exists, and all we have to do is be smart enough to discern it.

There’s proof for this that includes the “control group” required by the scientific method. Eighty years ago, Korea was a single country. Then, following World War II, it was split in two, obviously with similar people, geography and resources: South Korea (under U.S. influence), and North Korea (under Soviet influence). Since then, South Korea has operated as a capitalist democracy and North Korea as a communist dictatorship. There’s little © 2024 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved I remember having a spirited discussion on this topic with my father in the late 1960s. I came home from the University of Chicago filled with the notion that the value of a share of stock is the present value of its future dividends. "Baloney," my father said, "no one buys stocks for the dividends; they buy them for appreciation." "But what makes them appreciate?" I asked. We never have reached agreement on this matter. I think we were both right and both wrong. Certainly in a real-world sense, people don't buy stocks for dividends. Dividends provided a small portion of the total return on stocks in the 1960s and far less in the 1990s. Yes, most people buy stocks for appreciation. But what causes appreciation? There has to be an underlying process at work. We're in trouble if all we can say is "we buy stocks in the hope they'll go up, and they'll go up if new buyers are willing to pay more than the last price." To explain what'll make the buyers pay more than the last price, we either have to (1) identify what I call an underlying process or (2) fall back on the bromides listed above that led investors off the cliff in the 1990s. The "underlying process" has to be related to financial parameters. By that I mean the asset values and/or cash flows must be recognized as being worth more than the last price paid. That's what causes appreciation.

© Oaktree Capital Management, L.P. All Rights Reserved UAn Average Forecast Doesn't Help Even If It's Correct Being "right" doesn't lead to superior performance if the consensus forecast is also right. For example, if the consensus forecast for real GNP growth is 5%, then stock prices will come to reflect that expectation. If you then conclude that GNP will grow at 5% and your expectation of rapid growth motivates you to buy stocks, the stocks you buy will be at prices which already anticipate such growth. If actual GNP growth at 5% is subsequently announced, stock prices probably will not jump -- because their reaction to 5% growth took place when the consensus forecast was arrived at. Instead, the best guess is that you will earn the normal risk-adjusted return for equities over your holding period. Bottom line: correct forecasts do not necessarily translate into superior investment results. UAbove-Average Profits Come From Correctly Forecasting Extreme Events At least twenty-five years ago, it was noted that stock price movements were highly correlated with changes in earnings. So people concluded that accurate forecasts of earnings were the key to making money in stocks. It has since been realized, however, that it's not earnings changes that cause stock price changes, but earnings changes which come as a surprise. Look in the newspaper. Some days, a company announces a doubling of earnings and its stock price jumps.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved not in degree. This merely shows that in the economic/investment world, what matters most in the short run isn’t necessarily what’s true but, rather, what’s on people’s minds. Serious attention began to be paid to government debt in April 2010, when the Greek crisis burst into the news. Prior to that, no one seemed to worry about the way Greece – like many other countries – increased its budget deficit and national debt each year relative to its GDP. Banks and investors around the world were perfectly willing to extend credit without limitation based on Greece’s strong EU-backed credit rating, and without thought as to whether there was any prospect for Greece ever paying down the debt, or even slowing its growth or growing out of it. If you ask me, one of the most pronounced trends in the global economy over the course of my 42-year career has been the growth in the use of credit. And it’s not just governments that have vastly expanded their use of credit over this period. If I wanted to buy something upon my arrival at college in 1963, I had two choices: I could spend money I had in my pocket, or I could write a check against money I had in the bank. The one thing I couldn’t do – now here’s a radical concept – is spend money I didn’t have. As a result, I had no way to buy things I couldn’t afford.

© Oaktree Capital Management, L.P. All Rights Reserved UCongratulations! What else is there – besides return – that you can accept less of in order to accelerate the pace at which you put out your money? The answer is simple: safety. So a provider of capital who wants to increase market share – that is, make a bigger percentage of the loans or investments that are made – will accept risks that others won’t. That’s another way to get the deal instead of having it go to someone else. I sometimes buy at auctions. When the bidding’s over, the auction house personnel come up and say “congratulations.” I usually say, “On what? All I did is pay more than anyone else would pay.” That’s how auctions work – most market mechanisms, in fact: the deal goes to the person who’ll pay the most for the goods (or, looked at conversely, get the least for his money). The capital markets are no different. Of course, when the subject is price, it’s obvious that the person who’s willing to pay the most wins the auction. It’s a little more subtle that, when it comes to quality and safety, the person who’ll accept the least is likely to be congratulated as the “winner.” Winner in quotes, that is, because in putting out capital, the person who gets the deal is likely to be a loser if he accepts a level of safety that turns out to be inadequate. That leads me to one of my pet peeves.

© Oaktree Capital Management, L.P. All Rights Reserved but also quite painful. If the world is unwilling to live with such lessons from time to time – and if some institutions are considered to be “too big to fail” for society’s purposes – then free markets and self-interest have to be restrained. Greed may be good, but it can be permitted to run free only up to a point. Nothing’s More Risky Than a Widespread Belief That There’s No Risk The recent crisis came about primarily because investors partook of novel, complex and dangerous things, in greater amounts than ever before. They took on too much leverage and committed too much capital to illiquid investments. Why did they do these things? It all happened because investors believed too much, worried too little, and thus took too much risk. In short, they believed they were living in a low-risk world. In 2006 and early 2007, for instance, we heard a lot about the “wall of liquidity” that was coming toward us from China and the oil producing countries, a flow that could be counted on to provide capital and raise asset prices non-stop. Likewise, we were told (a) the Fed had tamed the business cycle through its adroit management, (b) securitization, tranching and disintermediation had reduced risk by putting it where it could best be handled, and (c) the “Greenspan put” could always be counted on to bail out investors who made mistakes. These and other things were said to have lowered the risk level worldwide.

• While unique developments like those of today make forecasting unusually difficult, the presence of all four elements at once probably renders it impossible. In addition to the © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: the end of this memo for postscript in which I discuss the significance of that reported 32.9% decline.) The comatose patient – the economy – required life-support, and the Fed and Treasury supplied it. They rushed in with trillions of dollars to keep the patient alive: payments to individuals and households; grants to distressed industries; general business loans and tax relief; loans to small businesses; aid to states, hospitals and veterans’ care; and guarantees for money market funds and commercial paper. These are sometimes described as stimulus programs, but that’s a misnomer: they were support payments designed to replace cash that normally would have circulated throughout the economy. With the economy comatose and on life support, elected officials proceeded to administer the cure. In the absence of a vaccine, this was designed to take the form of testing to identify those who had the disease and tracing to identify those with whom they’d come into contact; quarantining and social distancing to keep them separate from others; and masking to prevent the asymptomatic sick from infecting the healthy. When the number of new cases, hospitalizations and deaths declined, and in view of the desirability of allowing economic activity to resume, those in charge turned to resuscitating the patient.

© Oaktree Capital Management, L.P. All Rights Reserved On the other hand, I and most of the investors with whom I feel an affinity belong to the "I don't know" school. In short, (1) we feel it's impossible for anyone to know much about a vast number of things, (2) we consider it especially difficult to outperform by guessing right about the direction of the economy and the markets, (3) we spend our time trying to know more than the next person about specific micro situations, and (4) we think more about what can go wrong than about what can go right. In contrast to the "I know" school, people in this group are more cautious and feel a strong need for downside protection. Sticking to this approach requires some solid building blocks. One of those is contrarianism. Basically that means leaning away from the direction chosen by most others. Sell when they're euphoric, and buy when they're afraid. Sell what they love, and buy what they hate. In general, I think you'll find few bargains among the investments that everyone knows about, understands, feels comfortable with, is impressed by and is eager to own. Instead, the best bargains usually lie among the things people aren't aware of, don't fully understand, or consider arcane, unseemly or risky. Closely related to contrarianism is skepticism. It's a simple concept, but it has great potential for keeping investors out of trouble: If it sounds too good to be true, it probably is.

Credit cycles are driven by the pendulum between fear and greed. For most of the post-2008 era, the pendulum sat squarely on the side of greed — capital was abundant, covenants were loose, and access to financing was assumed. The pendulum's swing back toward fear, even modestly, exposes everything that was financed under optimistic assumptions. Loan structures designed for a low-default world face their first real test. Liquidity is the asset that matters most when credit conditions tighten because it is the optionality that lets an investor act rather than react. Many investors learned in 2022 that the liquidity they assumed was on call from credit facilities and prime brokers had been pulled. The illusion of liquidity is the most expensive discovery an investor can make at exactly the moment when actual liquidity matters most. What we have observed across cycles is that the firms which pre-arranged financing, kept dry powder available, and resisted the temptation to deploy fully into late-cycle exuberance were the ones able to act when the cycle turned. Sea Change is, in part, a reminder that the credit cycle has not been repealed — it was merely suspended, and the suspension has ended.

© Oaktree Capital Management, L.P. All Rights Reserved Investment markets make the same pendulum-like swing:  between euphoria and depression,  between celebrating positive developments and obsessing over negatives, and thus  between overpriced and underpriced. This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at the “happy medium.” UPolar Opposites My 2004 memo, “The Happy Medium,” took its title from this last phrase and went beyond the three listed above to discuss additional pairs of opposites between which the investment pendulum oscillates:  between greed and fear,  between optimism and pessimism,  between risk tolerance and risk aversion,  between credence and skepticism,  between faith in value in the future and insistence of concrete value in the present, and  between urgency to buy and panic to sell. I find particularly interesting the degree to which the polarities listed above are interrelated. When a market has been rising strongly for a while, we invariably see all nine of the elements listed first. And when the market’s been declining, we see all nine of the elements listed second. Rarely do we see a blend of the two sets, given that the components in each are causally related, with one giving rise to the next.

© OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED. CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. Rather, investors swing wildly from optimistic to pessimistic – and from over-confident to terrified – and as a result asset prices can lose all connection with intrinsic value. In addition, investors often fail to unearth all of the relevant information, analyze it systematically, and step forward to adopt unpopular positions. These are some of the elements that give rise to what are called “inefficiencies,” academics’ highfalutin word for “mistakes.” I absolutely believe that markets can be efficient – in the sense of “quick to incorporate information” – but certainly they aren’t sure to incorporate it correctly. Underpricings and overpricings arise all the time. However, the shortcomings described in the paragraph just above render those mispricings hard to profit from. While market prices are often far from “right,” it’s nearly impossible for most investors to detect instances when the consensus has done a faulty job of pricing assets, and to act on those errors. Thus theory is quite right when it says the market can’t be beat . . . certainly by the vast majority of investors. People should engage in active investing only if they’re convinced that (a) pricing mistakes occur in the market they’re considering and (b) they – or the managers they hire – are capable of identifying those mistakes and taking advantage of them.

© Oaktree Capital Management, L.P. All Rights Reserved I recite these successes not for the purpose of self-congratulation, but to point out that while I was highly aware of the short-term cycle, I – like almost everyone else, it seems – failed to fully appreciate the big-picture peril implied by the level to which the cycle had risen. In short, I thought 2003-07 was like the other cycles I’ve lived through, just more so. I missed the fact that it was different not only in degree, but also in kind. This episode is different because over the preceding decades, the accretion of progressively higher highs and higher lows – in a large number of phenomena – brought us to a macro-high that hadn’t been witnessed for many years and held great danger . . . as we’re seeing. Forty years have passed since I first served as a summer trainee in First National City Bank’s Investment Research Department. My experience in seeing investors punished in 1969-70, 1973-74, 1977, 1981, 1987, 1990, 1994 and 2000-02 is what enabled me to detect the excesses of 2003-07. But since I didn’t live through the Great Depression or work through the full run-up to the painful 1970s, I didn’t have the perspective needed to understand where those relatively short cycles of boom/bust/recovery were taking us.

The idea of pooling debt instruments and selling off tranches with varying seniority, risk, and thus interest rates began with the creation of mortgage-backed securities in the 1970s – most often associated with Louis Ranieri of Salomon Brothers – and expanded in the 1980s and ’90s. Prior to the 1990s, banks made loans – some of them to non-investment grade companies – and “syndicated” them to a handful of fellow banks. But then “broadly syndicated loans,” “leveraged loans,” or “senior loans” were developed by Wall Street.large

© Oaktree Capital Management, L.P. All Rights Reserved. strengthens the economy; and economic strength buttresses confidence. It’s a circular, self- fulfilling prophesy. Confidence can also fuel market movements. Belief that the price of an asset will rise causes people to buy the asset . . . making its price rise. This is another way in which confidence is self- fulfilling. Of course, the confidence that underlies economic gains and price increases only has an impact as long as it exists. Once it dies, its effect turns out to be far from permanent. As the economist Herb Stein said, “If something cannot go on forever, it will stop.” This is certainly true for confidence and its influence. Confidence Today Back in September, I wrote a memo entitled “On Uncertain Ground.” It began as follows: “The world seems more uncertain today than at any other time in my life.” I went on to review the many elements contributing to uncertainty. For the sake of completeness, I’m going to restate and update my list. These are things I’m asked about all the time. I don’t recall another time when the list was as long: In the U.S.:  Will the recovery from the recession of 2008 – long in the tooth but still halting and unsteady – ever gain vitality? Today it seems we’re experiencing “two steps forward, one step back,” as positive reports are regularly mixed with disappointments.

The four-function calculator, personal computer, cellular phone, email and Internet didn’t yet exist, and some of them wouldn’t for a good while longer. I describe this environment as a mostly unchanging backdrop – I think of it as scenery in the theater – in front of which events and cycles played out. © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Second-level thinking in a regime-shifted environment is uncomfortable because it requires questioning what worked. Many investment processes were optimized for the prior regime — the spread compression trade, the multiple-expansion trade, the duration trade, the illiquidity premium trade. Each of these worked not because of skill but because the macro wind was at the back of anyone who applied them. Now that the wind has shifted, processes need to be re-examined. Patience is the virtue most needed at moments like this. The temptation is to act decisively — to declare the bottom is in or that the bear market has only just begun. Both impulses are usually wrong. The prudent posture is to deploy gradually, retain optionality, and resist the urge to commit capital in size until prices reflect the new regime's risk premium. I am often asked whether I think we are in a new bull or bear market. My honest answer is that I do not know, and that the question is less important than the question of whether current prices compensate for the risks that are now visible. If they do, deploy gradually; if they do not, wait. Sea Change is not a forecast of direction; it is a framework for asking better questions.

© Oaktree Capital Management, L.P. All Rights Reserved UThe Benefits of Membership As a member of the “I know” school, you get to opine on the future (and maybe have people take notes). You may be sought out for your opinions and considered a desirable dinner guest . . . especially when the stock market’s going up. Join the “I don’t know” school and the results are more mixed. You’ll soon tire of saying “I don’t know” to friends and strangers alike. After a while, even relatives will stop asking where you think the market’s going. You’ll never get to enjoy that 1-in-1,000 moment when your forecast comes true and the Wall Street Journal runs your picture. On the other hand, you’ll be spared all those times when forecasts miss the mark, as well as the losses that can result from investing based on over-rated knowledge of the future. But how do you think it feels to have prospective clients ask about your investment outlook and have to say, “I have no idea”? For me, the bottom line on which school is best comes from the late Stanford behaviorist, Amos Tversky: “It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.” 0BU“A group of related or coincident things, events, actions, etc.

Long-Term Trends Looking back over my career, it’s clear that the securities markets have been riding a number of salutary secular trends (“secular,” as in “of or relating to a long term of indefinite duration” per Webster’s New Collegiate Dictionary). Some of these actually began at the end of World War II and ran through 2007, for a total of more than six decades. Macro Environment – The period following World War II was one of American dominance and prosperity. The U.S. benefited from the “baby boom,” the fact that our shores hadn’t been reached by the war, and the effective transition of our factories and labor force to peacetime use. We were aided by a modern infrastructure, strong education and healthcare systems, and gains in technology. Corporate Growth – The last sixty years have seen strong growth in corporations and their profits. Especially in the early part of this period, the U.S. developed superior products, produced them very efficiently and found ready markets in the rest of the world. Gains in automation, information technology, management practices and productivity all contributed. Growth in sales was supported by strong consumer demand. The Borrowing Mentality – As further discussed below, advances in financing – and greater acceptance of the use of debt – allowed companies to augment their growth rates and returns on capital and allowed consumers to increase consumption. In fact, over the last several decades, economic units of all sorts in the U.S.

The “industry rags” in private equity are devoted almost exclusively to reporting who bought what company, with accounts of how competitors were outbid and innovative financing arranged. But the articles should focus instead on whether the price was right, and the champagne should probably be kept on ice until the company has been sold at a profit. Buying shows who was the highest bidder, not necessarily the smartest bidder. (Let me hasten to point out here that while I generalize as usual for simplicity and effect, there are always exceptions. Oaktree routinely gains admittance to deals because we provide prompt commitments, certainty of closure, assistance in structuring and/or the promise of constructive behavior should problems arise. But much of the time – especially today – deals go to the capital providers who’ll pay the most and/or accept the least. We try to gain access to deals by adding value, not by paying the most.) UThe Auction’s On While the last few years have given me many opportunities to marvel at excesses in the capital markets, in this case the one that elicited my battle cry – “that calls for a memo” – hit the newspapers in England during my last stay. As the Financial Times reported on November 1, Abbey, the UK’s second-largest home loans provider, has raised the standard amount it will lend homebuyers to five times either their single or joint salaries, eclipsing the traditional borrowing levels of around three and a half times salary.of

 We can have economic strength without inflation.  Interest rates can remain “lower for longer.”  The inverted yield curve needn’t have negative implications.  Companies and stocks can thrive even in the absence of profits.  Growth investing can continue to outperform value investing in perpetuity. I rarely participate in a meeting these days without someone asking about one or more of these propositions. The bottom line is that for any of the nine to be true, things really have to be different this time. I’ll discuss the outlook for each below. The avoidable recession – The questions I get most often these days are “Is the U.S. heading for a recession?” and “When will it start?” My answer to the first is a simple “yes.” (At least I can never be proved wrong.) We’ve always had economic cycles, and I believe we always will. Eventually, favorable developments will lead people to engage in behavior premised on excessively optimistic assumptions, and eventually the over-optimism of those assumptions will be exposed and the excesses will correct in a period of negative growth. Moreover, even economies that aren’t marked by excesses are subject to exogenous shocks. When people ask about the coming recession, what they mostly mean is “Might it be a long way off?” Well, the longest U.S. recovery on record lasted ten years, and the current one is in the twelfth month of its tenth year.

Up until the Global Financial Crisis, we could store money with the government and be well paid to do so. But now my reaction was, “given the level of fear in the financial world, maybe one of these days people will end up paying to store their money safely.” In the period 2008-14, Europe experienced the Global Financial Crisis, a European debt crisis (with concern over the solvency of “peripheral” nations on Europe’s southern tier), and rapidly escalating prices for commodity raw materials. In response, the European Central Bank and some non-EU countries moved to adopt negative interest rates. Here’s how it goes: Commercial banks usually earn interest on the extra reserves they keep with central banks, like the Fed or the European Central Bank. Negative policy interest rates force them to pay to keep money in those accounts, a penalty aimed at pushing them to lend more and goose the economy. (The New York Times, September 9) Central banks determine short-term base rates (“policy rates”) as described above. That establishes the origin of the yield curve, and rates/yields on other types of short-term debt, as well as longer-term instruments, can be expected to respond by moving to a logical relationship with the base rate. Eventually, negative interest rates paid on bank deposits should be reflected in negative yields on bonds. (Note: for the most part, negative rates are applied today only to large deposits. Small depositors have thus far been spared.)

As a result of holding a highly idiosyncratic portfolio, Penn experienced performance that deviated – unfavorably – from that of its peers to an extent that became intolerable. This necessitated change. Do It Now? Upon starting in on the job, I was immediately confronted by one of the truly classic investment dilemmas: You take on the management of a portfolio, and you just know it’s structured wrong in principle. In Penn’s case, it was clearly unwise – probably in terms of optimizing risk and return, and certainly in terms of keeping up with peers, and thus expectations – to completely omit the things that had been excluded from Penn’s portfolio. I knew right away that Penn’s portfolio should include some exposure to growth, tech, buyouts and venture capital. But the reason their exclusion had become so painful is that they had done so well for a half-decade. So in principle you should own something, but its price is sky- high. Should you hold your nose and buy at what may be excessive prices? Or should you wait for a correction, at the risk of continuing to underperform if it goes higher (since we know how often things that are overpriced can continue upward)? Whenever I’m presented with this dilemma, I trot out a 1957 cartoon from The New Yorker Magazine that was reproduced in the Financial Analysts Journal in 1975. It’s my absolute favorite, and I’ve been waiting for an opportunity to share it with you: © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

The economy began to reopen in May, supported by a near-zero base interest rate and the Fed’s provision of abundant liquidity, and the initial response was positive. Retail sales moved up 17.7% in May (after a 22.3% decline in March/April), and the unemployment rate fell to 11.1% in June, from a peak suspected to have been near 20%. Case closed. Failure to Fix It If only it was that simple. Unfortunately, in some instances the reopening took place before the number of new cases had declined enough for the spread of Covid-19 to be brought under control, and people in areas that had been spared in the early days acted cavalierly, allowing the disease to regain a foothold in their regions. Borrowing from Churchill (who probably borrowed it from Machiavelli), people who regulate economies and manage businesses say “never let a good crisis go to waste.” But in the case of Covid-19, the U.S. did just that. The nations of Asia and Europe had the earliest outbreaks, but they took swift and stern action – some say Draconian – including enforcing isolation and fining violators. But they got the disease under control. Unfortunately, a number of elements combined to weaken the actions taken in the U.S. and permit a resurgence of the disease: • The absence of uniform national policies on shutdowns, social distancing, masking and re- opening. • Inadequate support for the recommendations of health professionals and scientists.

© Oaktree Capital Management, L.P. All Rights Reserved. a higher valuation parameter (e.g., a higher price/earnings ratio for a stock or a higher multiple of EBITDA for a buyout) or accepting a lower return (e.g., a lower yield for a bond or a lower capitalization rate for an office building). Further, rather than paying more for the asset purchased, there are other ways for an investor or lender to get less for his money. This can come through tolerating a weaker deal structure or through an increase in risk. It’s primarily these latter elements – rather than securities merely getting pricier – with which this memo is concerned. History Rhymes In the pre-crisis years, as described in the 2007 memo, the race to the bottom manifested itself in a number of ways:  There was widespread acceptance of financial engineering techniques, some newly minted, such as derivatives creation, securitization, tranching and selling onward. These innovations resulted in the creation of such things as highly levered mortgage-backed securities, CDOs and CLOs (structured credit instruments offering tiered debt levels of varying riskiness); credit default swaps (enabling investors to place bets regarding the creditworthiness of debtors); and SPACs (Special Purpose Acquisition Companies, or blind-pool acquisition vehicles).

Assumedly, Long-Term used models to assess the probability of history reasserting itself and the risk to the overall portfolio of individual relationships going the wrong way. Thus would they determine the amount of risk and leverage that could safely be taken on. In his wonderful book, Against the Gods, Peter Bernstein shows how development of the study of probability made possible both informed gambling and informed investing (along with other forms of decision making concerning the future). But the products of this pursuit remain mere probabilities, or reasonable expectations. Likely events sometimes fail to occur, and unlikely events sometimes do. Or, as my friend Bruce Newberg says when I get the one improbable roll of the dice needed to beat him in backgammon, “there can be a big difference between probability and outcome.” If you are conscious of the difference between a likely outcome and a certain one, you may not want to bet the ranch. The same is true in the world of investments; put simply, relationships that are supposed to hold sometimes fail to do so.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: ignored, no redress is available: election victories based on unmet promises can’t be rescinded, and candidates can’t be sued over falsehoods on the stump. In the addendum to “Economic Reality,” I pointed out that candidates rarely talk about choice. Instead, they’re likely to promise “all of the above.” And rarely if ever do they mention the cost that will be attached to something, or the downside, as in “I’ll give you A, but you’ll have to give up B.” I imagine page one of The Politician’s Handbook must say “never deliver an unpleasant message.” In “What Worries Me” (August 2008), I wrote: Imagine two candidates for president. One says, “I’m going to give you eight years of discipline and denial – of higher taxes and lower spending – but I’ll leave the country in better shape.” The other says, “I have a secret plan that will solve all of our problems without requiring any sacrifice on your part.” Who do you think would win? How about a real-world example? In 1984, Walter Mondale was the Democratic candidate for president, running against Republican incumbent Ronald Reagan. Mondale became famous for his candor in accepting his party’s nomination: Whoever is inaugurated in January, the American people will have to pay Mr. Reagan’s bills. The budget will be squeezed. Taxes will go up. And anyone who says they won’t is not telling the truth to the American people. . . . Mr.

The effects of low interest rates are multi-faceted and ubiquitous, yet frequently overlooked. I became more conscious of them as I read The Price of Time, and I want to catalog them here: i. Low interest rates stimulate the economy Everyone knows that when central banks want to stimulate their countries’ economies, they cut interest rates. Lower rates reduce costs for businesses and put money into the hands of consumers. For example, since most people buy cars on credit or lease them, lower interest rates make cars more affordable, increasing demand. The result is typically good for automakers, their suppliers, and their workers, and thus for the economy in general. It’s important to realize that easy money keeps the economy aloft, at least temporarily. But low interest rates can make the economy grow too fast, bringing on higher inflation and increasing the probability that rates will have to be raised to fight it, discouraging further economic activity. This oscillation of interest rates between extremes can have effects and encourage behavior that natural/neutral rates (see p. 13) would be less likely to induce. ii. Low interest rates reduce perceived opportunity costs Opportunity cost is a major consideration in most financial decisions. But in low-interest-rate environments, the rate earned on cash balances is minimal.

There it is: a negative art. One more anecdote concerning the origin of the phrase: I’ve always been interested in old books. A few years ago, while walking through a Las Vegas convention center on the way to meet with a client, I came upon a rare book fair. I stopped at the booth of a book dealer I know, and my eye immediately fell on a book he had for sale: How to Trade in Stocks, by Jesse Livermore. Here’s the quote the dealer had highlighted: “Winners take care of themselves; losers never do.” You may be tempted to believe Livermore borrowed my idea . . . until you realize that, like Graham and Dodd, he published these lines in 1940. So much for my innovation. At the time I adopted that saying, my partners and I were primarily high yield bond investors. And since non-convertible bonds have little upside potential beyond their promised yield to maturity, it truly was the case that our main job was to avoid the non-payers, with the assumption that some subset of the payers would likely give us exposure to positive developments that occurred. It was an appropriate way to sum up our approach as bond investors. But fortunately, I joined up with Bruce Karsh in 1987, and in 1988 we organized our first distressed debt fund. Now we were investing in bonds that had defaulted or seemed likely to do so. We thought we might be able to buy them at bargain prices because of the cloud they were under, giving us the possibility of capital appreciation.

Other earnings doublings don't even cause a ripple -- or they prompt a decline. The key question is not "What was the change?" but rather "Was it anticipated?" Was the change accurately predicted by the consensus and thus factored into the stock price? If so, the announcement should cause little reaction. If not, the announcement should cause the stock price to rise if the surprise is pleasant or fall if it is not. This raises an important Catch 22. Everyone's forecasts are, on average, consensus forecasts. If your prediction is consensus too, it won't produce above-average performance even if it’s right. Superior performance comes from Uaccurate non- consensusU forecasts. But because most forecasters aren't terrible, the actual results fall near the consensus most of the time -- and non-consensus forecasts are usually wrong. The payoff table in terms of performance looks like this: Forecast Consensus Non-Consensus Yes Average Above Average Accurate?Average

But that ignores the fact that all of us – and many other influences – are constantly creating the future through our collective activity. In his article, Lilla stated, “. . . the post-Covid future doesn’t exist. It will exist only after we have made it.” I think this is a very important concept. We might predict the future today, and we might even correctly assess what today’s conditions and actions are likely to produce in the future. But that prediction will be shown to have been right only if no one and nothing causes the future to become different between now and the day it arrives. Thus I’ll repeat what I quoted from Lilla earlier: How many people fall ill with [the coronavirus] depends on how they behave, how we test them, how we treat them and how lucky we are in developing a vaccine. Not only how will the virus behave, morph, travel, react to warm weather and infect, but also how fast will we reopen the economy, how will people behave when we reopen it, and what will the virus do at that time? Thomas Sowell, a Hoover Institution economist and social theorist, provided a glimpse at how these things work in another field: © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

” Their mother Grace supported programs for an early wave of Vietnam war refu- gee immigrants, at a time when small towns didn’t always welcome such initiatives. She eventually became a Lutheran minister. Both parents set community service as a responsibility, and were significant role models to David, who in turn also influenced his siblings. To further the children’s exposure to the world outside River Falls, Richard and Grace took all six of them to Europe in ,-98, where they camped with a big canvas tent, backpacks, and sleeping bags.David

Further, even the improvements – in areas like job creation, consumer confidence and manufacturing output – seem tepid rather than eye-popping. This is quite different from the recoveries of the last few decades.  To what extent will the recovery be impaired by recent tax increases and the budget cuts mandated by “sequestration”?  When will sales increases overcome businesses’ resistance to spending on plant and personnel?  How much longer will the Fed keep interest rates low? Three months? Three years? In perpetuity?  What will happen when it no longer does? Will rates rise? How much? Will the effect of higher rates on the cost of financing purchases and investments be enough to slow the economy? And what will be the impact of higher rates on the government’s cost of financing, and thus on the deficit?  What are the implications of the fact that the Fed’s balance sheet has swelled to over $3 trillion? How does the Fed pay for the bonds it buys under QE? Will it have to pay that money back? Will the Treasury have to pay off the Fed when the debt matures? Where will it get the money? And where will the money go? (Think about this for a minute: do you feel you understand the workings of this process? Do you know anyone who does?)  Will our economy ever get back to the higher growth rates of the late twentieth century, or will we be stuck in a slow-growth mode? © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

That phrase is always heard UafterU the losses have piled up – be it in portfolio insurance, "market neutral" funds, dot-coms, or Enron. My career in money management has been based on the conviction that free lunches do exist, but not for everyone, or where everyone's looking, or without hard work and superior skill. Skepticism needn't make you give up on superior risk-adjusted returns, but it should make you ask tough questions about the ease of accessing them. Thus I also advocate modest expectations. To shoot for top-quartile performance every year, you have to hold an idiosyncratic portfolio that exposes you to the risk of being outside the pack and dead wrong. It's behavior like that that leads to managers being carried off the field when things go poorly – and to clients losing lots of money. It's far more reasonable just to try for performance that's consistently a little above average. Even that's not easy to achieve, but if accomplished for a long period it will result in an outstanding track record. I think humility is essential, especially concerning the ability to know the future. Before acting on a forecast, we must ask whether there's good reason to think we're more right than the consensus view already embodied in prices. I think it's possible to get a knowledge advantage with regard to under-researched companies and securities, but only through hard work and skill. Finally, I'm a strong believer in investing defensively.

When Hedge Fund P got its margin call and its portfolio was sold out, that forced securities prices downward. So Fund Q – which holds many of the same positions – also receives a margin call, perpetuating the downward spiral and bringing more losses to more institutions. All of these scenarios, and many others, are connected by a common thread: the combination of leverage and illusory safety, which allowed institutions to take on too much risk for the amount of capital they had. First, it should be clear from the above that the amount of borrowed money – leverage – that it’s prudent to use is purely a function of the riskiness and volatility of the assets it’s used to purchase. The more stable the assets, the more leverage it’s safe to use. Riskier assets, less leverage. It’s that simple. One of the main reasons for the problem today at financial institutions is that they underestimated the risk inherent in assets such as home mortgages and, as a result, bought too much mortgage-backed paper with too much borrowed money. Let’s go back to the paragraph on page one. Here it is again: I’ll keep it simple. Suppose you have $1 million in equity capital. You borrow $29 million and buy $30 million of mortgage loans. Twenty percent (or $6 million) of the mortgages go into default, and the recovery on them turns out to be only two-thirds ($4 million).$2

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: again said she was slightly ahead just before the first presidential debate on September 26. It never made her out to be an underdog. And on election day, it estimated that she was 71.4% likely to win.* Most other pollsters put her chances of winning at between 80% and 99%, and only one considered Trump the favorite. In the end, of course, Trump won in the Electoral College by a final count of 304 to 227, despite losing the popular vote by almost 2.9 million votes, or about 2%. In particular, he won in a number of “swing states,” such as Pennsylvania, Michigan and Wisconsin, where the polls had him well behind. So much for experts’ forecasts. Finally, rounding out the pollsters’ failures in 2016, the reform referendum that Italy’s Prime Minister Matteo Renzi bet his career on – which had been considered 3% behind – lost by 20%. The outcome wasn’t a surprise, but the margin certainly was. No one really knows why polling failed so miserably last year. Clearly there was a groundswell of populist, anti-establishment and anti-insider sentiment, but shouldn’t it have been detected? In particular, Trump did much better than predicted (or much less badly) with a number of important groups, such as Hispanics and college-educated women.

Since the Tech Bubble burst in 2000, however, the market has appeared to think mostly about the economy, the Federal Reserve and Treasury, and world events. That’s been even more true since the Global Financial Crisis in 2008. That’s why I’m devoting a memo to a subject I largely disavow. I’ll try below to enumerate the macro issues that matter, discuss the outlook for them, and end with some advice regarding what to do about them. That reminds me to put forth my conviction that we all have views about the future, but as we say at Oaktree, “It’s one thing to have an opinion, but something very different to assume it’s right and bet heavily on it.” That’s what Oaktree doesn’t do. Inflation As of this writing, macro considerations are certainly in the ascendency, centering on the subject of inflation. Over the last 16 months, the Fed, Treasury and Congress have used a firehose of money to support, subsidize and stimulate workers, businesses, state and local governments, the overall economy and the financial markets. This has resulted in (a) confidence in the prospects for a strong economic recovery, (b) skyrocketing asset prices, and (c) fear of rising inflation.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: One of the biggest changes that did take place in the 1960s was the emergence of “growth investing” via fast-growing companies, many of which were quite new. The “Nifty Fifty” I talk about so much ruled the stock market in the late 1960s: this group included office equipment manufacturers IBM and Xerox, photography titans Kodak and Polaroid, drug companies like Merck and Eli Lilly, tech companies including Hewlett Packard and Texas Instruments, and advanced marketing/consumer goods companies such as Coca-Cola and Avon. These companies’ stocks carried very high price/earnings ratios, reaching up to 80 and 90. Obviously, investors should only pay multiples like these (if ever) if they’re sure the companies will be preeminent for decades to come. And investors were sure. In fact, it was widely believed that nothing bad could happen to these companies and they could never be disrupted. This was one of post-war America’s first major brushes with newness and – in a good example of illogicality – investors embraced these companies, with their revolutionary newness, but somehow assumed that a newer and better new thing could never come along to displace them. Of course, those investors were riding for a fall. If you bought the stocks of “the greatest companies in America” when I started working in 1969, and held them steadfastly for five years, you lost almost all your money.

It is for this reason that a quest for consistency and protection, not single-year greatness, is a common thread underlying all of our investment products: UIn convertiblesU, we insist that our call on potential appreciation be accompanied by above average resistance to declines. UIn high yield bondsU, we strive to raise our relative performance by avoiding credit losses, not by reaching for higher (but more uncertain) yields. UIn distressed company debtU, we buy only where we believe our cost price is fully covered by asset values. There will always be cases and years in which, when all goes right, those who take on more risk will do better than we do. In the long run, however, I feel strongly that seeking relative performance which is just a little bit above average on a consistent basis -- with protection against poor absolute results in tough times -- will prove more effective than "swinging for the fences."1990

” Random House’s secondary definition for the word “syndrome,” shown above, suggests a set of elements that can be viewed separately but take on greater meaning when considered together. And the more I think about it, the more I see such a pattern in the contrasting styles of investment industry participants. Investors don’t just differ in regard to their views on foreknowledge, but in terms of a large number of elements. And the pattern among those elements seems to be consistent – correlated – not random. Ask yourself, for example, whether the “I don’t know” school is evenly divided between bulls and bears. Maybe, but in my experience, members of the “I don’t know” school tend to trust less in the market than those of the “I know” school. That’s an example of the pattern, or syndrome, that I think investors tend to demonstrate in many regards. In my memo “Returns and How They Get That Way” (November 2002), I gave examples from a brilliant dichotomization propounded by Nicholas Taleeb. His book, “Fooled By Randomness,” has as its theme the pervasive role of luck in investing and the tendency of people to overlook its effect. He provides a table that shows a number of things in the first column that can easily be mistaken for things in the second column.investor

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Thus, this down-cycle cannot be fully cured merely through the application of economic stimulus. Rather, the root cause has to be repaired, and that means the disease has to be brought under control. An effective vaccine will do this – in time – but healthy behavior will be required in the meantime. Spikes like much of Europe is seeing represent something of a step backward in this regard. And even with the disease controlled, economic stimulus is unlikely to reverse all the damage. The trauma has been deep, and the impact may not be easily shaken off. Large firms will continue to automate and streamline. Large numbers of smaller businesses – such as restaurants, bars and shops – will never re-open. Thus millions of people will not be rehired into the jobs they formerly held. For this reason, the expectations with regard to economic recovery have to be realistic. To me, as I’ve said, “V- shape” has too positive a connotation. The Need for Further Assistance One of the things weighing on the recovery is the matter of help from Washington. Whereas the Treasury was able to announce aggressive spending programs in the spring, there has been no new package here in the fall. Partisan differences have arisen regarding the size of a package and its contents.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: the needs of the community in terms of both condition and quantity. In other words, governments can limit the rents landlords can charge for their apartments, but they can’t make developers build new ones. These things can reduce overall societal welfare and interfere with the movement of resources to the use where they’re most productive. Fire Insurance in California Most unfortunately, earlier this year, in the aftermath of the Southern California wildfires, we witnessed an extreme economic consequence of overriding the laws of economics. When fires decimated the communities of Pacific Palisades and Altadena, thousands lost their homes, including a dozen Oaktree employees. On top of the severe disruption of all aspects of their lives, many of them are suffering extremely negative financial consequences. This is because many were uninsured or underinsured, often as a result of actions taken by California insurance regulators. Most of California’s government is firmly under the control of the Democratic party, which generally leans toward a high level of activism in general and intervention in economic matters in particular. Notably, because the Democrats hold a super-majority in the state legislature and have little fear of potential Republican opponents, Democratic elected officials don’t have to moderate their behavior to pass legislation or hold on to their seats.

Belief that risk has been banished is a key element in allowing people to engage in practices they would otherwise view as risky, and in permitting assets to be bid up to prices that would clearly be too high in a world perceived to involve risk. . . . former Fed Chairman Paul A. Volcker noted that one of the causes of the financial crisis “was the ultimately explosive combination of compensation practices that provided enormous incentives to take risks” just as new financial innovations “seemed to offer assurance – falsely, as it turned out – that those risks had been diffused.” (The Wall Street Journal, September 18, 2009) Worry and its relatives, distrust, skepticism and risk aversion, are essential ingredients in a safe financial system. To paraphrase a saying about the usefulness of bankruptcy, fear of loss is to capitalism as fear of hell is to Catholicism. Worry keeps risky loans from being made, companies from taking on more debt than they can service, portfolios from becoming overly concentrated, and unproven schemes from turning into popular manias. When worry and risk aversion are present as they should be, investors will question, investigate and act prudently. Risky investments either won’t be undertaken or will be required to provide adequate compensation in terms of anticipated return. But only when investors are sufficiently risk averse will markets offer adequate risk premiums.

” Thus the imprudent deals that were getting done in 2005-06 were reason enough for us to increase our caution. The Current Environment What are the elements that have created the current investment environment? In my view, they’re these:  In order to counter the contractionary effects of the Crisis, the world’s central banks flooded their economies with liquidity and made credit available at artificially low interest rates.  This caused the yields on investments at the safer end of the risk/return continuum to range from historically low in the United States to negative (and near zero) in Europe and elsewhere. At least some of the money that in the past would have gone into low-risk investments, such as money market instruments, Treasurys and high grade bonds, turned elsewhere in search of more suitable returns. (In the U.S. today, most endowments and defined-benefit pension funds require annual returns in the range of 7½-8%. It’s interesting to note that the notion of required returns is much less prevalent among investing institutions outside the U.S., and where they do exist, the targets are much lower.)  Whereas I thought while it was raging that the pain of the Crisis would cause investors to remain highly risk-averse for years – and thus to refuse to provide risk capital – by injecting massive liquidity into the economy and lowering interest rates, the Fed limited the losses and forced the credit window back open, rekindling investors’ willingness to bear risk.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: difficulty of understanding each of the four individually, we can’t be sure how they’ll interact. For example: o Will the massive, multi-faceted Fed/Treasury program of loans, grants, stimulus and bond buying be sufficient to offset the unparalleled damage done to the economy by the fight against Covid-19? o To what extent will reopening bring back economic activity, and to what extent will that cause the spread of the disease to resume, and the renewal of lock-downs? For investors, the future is determined by thousands of factors, such as the internal workings of economies, the participants’ psyches, exogenous events, governmental action, weather and other forms of randomness. Thus the problem is enormously multi-variate. Take the current situation, with its four major components (Covid-19, the economy, oil and the Fed), and consider just one: the disease. Now think about all the questions surrounding it: • How many people have it, including those who are asymptomatic? • How likely is contact with someone who’s infected to create another case? • To what degree will distancing and masks deter its spread? • Will the cases be severe, mild or asymptomatic? Why? • Will the supply of protective gear for medical personnel, hospital beds and ventilators be adequate? • Will a treatment be developed? To what extent will it speed recovery and prevent fatalities?

” • Positive economic announcements reinforced this conclusion. And the unprecedented extent of the economic carnage in the current quarter made it highly likely that we’ll see substantial quarter-over-quarter gains in the next three quarters and dramatic year-over- year comparisons in mid-2021. • Thus, overall, investors were glad to “look across the valley” at better times ahead. There will be a substantial dip this year in GDP and corporate earnings, but investors became willing to anticipate a time – perhaps in 2022 – when full-year earnings for the S&P 500 would exceed what they were in 2019 and had been expected to be in 2020. • With the outlook now positive, investors likely concluded that they no longer needed to insist on the generous risk premiums afforded by low entry prices, meaning purchase prices could rise. • In other words, with regard to economic and corporate developments, investors concluded that it was “all good” or at least heading in the right direction. Monetary and fiscal actions made an enormous contribution to the market rebound: • The chant went up during the week of March 23: “You can’t fight the Fed.” Certainly the evidence convinced investors that interest rates will be what the Fed wants them to be, and the markets will do what the Fed wants them to do. The higher the market went, the more people believed that it was the goal of the Fed to keep it going up, and that it would be able to.

That’s what Bayou’s investors will do, and certainly they were defrauded. But what was their part in the process? Where was their disbelief when they swallowed the following:  They put their trust in a manager who claimed to have been a senior trader at Leon Cooperman’s Omega Fund. But Leon – who denies that claim – says he got only one call over the years to verify it, while investors poured hundreds of millions into the fund.  They invested in funds that executed trades through a brokerage firm owned by the funds’ manager. Didn’t they worry about the conflict that arises when a manager makes more money when his fund trades more often?  They invested with managers who were the subject of complaints and lawsuits alleging improper conduct; these things can be checked out but apparently weren’t. It seems investors took comfort from the fact that the brokerage affiliate was licensed by the NASD. What they missed, however, was the fact that the NASD would police the conduct of the brokerage arm but not the fund or its management.  They went into funds whose auditors they’d never heard of. They couldn’t have heard of them, because they’d never audited anyone. And if they had asked, they would’ve learned that the accounting firm’s registered principal was the hedge fund’s CFO.

© 2017 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Before starting in, I want to apologize for the length of this memo, almost double the norm. First, the topic is wide-ranging – so much so that when I sat down to write, I found the task daunting. Second, my recent vacation gave me the luxury of time for writing. Believe it or not, I’ve cut what I could. I think what remains is essential. Today’s Investment Environment Because I don’t intend this to be a “macro memo,” incorporating a thorough review of the economic and market environment, I’ll merely reference what I think are the four most noteworthy components of current conditions:  The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.  In the vast majority of asset classes, prospective returns are just about the lowest they’ve ever been.  Asset prices are high across the board. Almost nothing can be bought below its intrinsic value, and there are few bargains. In general the best we can do is look for things that are less over-priced than others.  Pro-risk behavior is commonplace, as the majority of investors embrace increased risk as the route to the returns they want or need. Ditto In January 2013, I wrote a memo entitled “Ditto.

But I recoil any time I hear a prediction that trees will grow to the sky, or that centuries of history are irrelevant. When I hear people say the valuation measures of the past no longer matter, I think John Kenneth Galbraith put it well, stating that in a speculative episode, Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present. (UA Short History of Financial EuphoriaU, Viking, 1990) And I feel cyclicality is one of the few constants in the economy and markets. Cycles are the result of human behavior, herd instinct and the tendency to psychological excesses, and these things are unlikely to evaporate. Galbraith cites "the extreme brevity of the financial memory" in explaining why markets are able to move to extremes of euphoria and panic. And few adages have been borne out as often as "What the wise man does in the beginning, the fool does in the end." It is rare for trends to be curtailed at a reasonable point before swinging to the excesses from which they invariably correct. Today, there are some signs just as worrisome as the bullish arguments are constructive. We detect the decline of skepticism and discipline and the aggressive extension of credit which regularly precede corrections. Capacity expansion has been strong in some industries, and construction seems about to resume.

 The use of borrowed money can reduce or even eliminate the deleterious impact on early returns of the so-called “J-curve.” The J-curve results from (a) the fact that in a fund’s early years, management fees are usually charged on total committed capital, while a relatively small percentage of the capital has been put to work, and (b) the tendency of private investments to take a while to show results.  Over the course of a fund’s life, LP capital will typically be called for investments or to repay the borrowings under the subscription line. This will cause the ratio of subscription line capital employed to LP capital to decline. As a result, the fund’s IRR will retreat from its elevated early level and move down toward what it would have been if the fund hadn’t employed a subscription line. However, all other things being equal, the fund’s lifetime IRR will remain higher than it otherwise would have been, since the impact of using the line will taper off but not reverse.  Finally, any committed capital that hasn’t been called because of borrowing under the line will remain in the hands of the LPs. Thus any return the LPs earn on the uncalled capital in excess of their share of the fund’s subscription line costs will be additive to their results. What about the negatives?  If a fund finances investments by borrowing under a subscription line, interest and expenses will be paid that wouldn’t have been paid if LP capital had been called instead.

© Oaktree Capital Management, L.P. All Rights Reserved Third, where do these forecasts come from? The answer is simple: If you want to see a high correlation, take a look at the relationship between current levels and predicted future levels. The table below, which does just that, shows a remarkably better "fit." U90-day bill rate U30-year bond rate UYen/$ December '93 Actual 3.1% 6.3% 112 12-Month Prediction 3.7 6.4 115 December '94 Actual 5.7 7.9 100 6-Month Prediction 6.5 7.9 104 December '94 Actual 5.7 7.9 100 12-Month Prediction 6.4 7.6 107 June '95 Actual 5.4 6.6 85 6-Month Prediction 5.4 6.6 89 June '95 Actual 5.4 6.6 85 l2-Month Prediction 5.3 6.6 92 December '95 Actual 5.1 5.9 103 6-Month Prediction 4.9 6.0 105 Now that's a correlation! On average, the predictions were within 5% of the levels which prevailed at the time they were made. When rates were low, the experts predicted that they would stay low; after rates rose, they were expected to stay high. High dollar/yen exchange rates brought high dollar/yen forecasts, and vice versa. There's no question about it: each consensus forecast represented a near-extrapolation of then-current levels. Like many forecasters, these economists were driving with their eyes firmly fixed on the rearview mirror.

Smoothly functioning markets don’t permit the combination of high return and low risk to persist – good results bring in buyers who raise prices, lowering future returns and elevating risk. It’ll never be otherwise.  The Explanation Couldn’t Be Simpler – By this I mean to poke some fun at investors’ tendency to fall for stories that seem true on the surface but ignore the workings of markets. The stage was set for some of the greatest debacles by platitudes that were easy to swallow – but too simplistic and, in the end, just plain wrong. These include “For a company with good enough growth prospects, there’s no such thing as too high a price” (1969 and 1999) and “Emerging markets are a sure thing because of the terrific potential for growth in per capita consumption” (1994).  This Tree Will Grow to the Sky – The fact is, no trend will go on unabated forever. Most trends are limited by cycles, which are caused by people’s reaction to developments. Buyers, sellers and competitors respond to trends, altering the current landscape and the future.  The Positives of Today Will Still Be Positives Tomorrow – From time to time, some combination of optimism and greed convinces people that the favorable elements in the current environment – responsible for today’s high asset prices – will stay that way. But (a) things usually turn less rosy, and (b) even before they do, investors take prices to levels that are too high even for today’s positives.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: this supply would be difficult at any time, but particularly so at this time of year, when people need to heat their homes. That means Russia’s biggest export – and largest source of hard currency ($20 billion a month is the figure I see) – is the hardest one to sanction, as doing so would cause serious hardship for our allies. Thus, the sanctions on Russia include an exception for sales of energy commodities. This greatly complicates the process of bringing economic and social pressure to bear on Vladimir Putin. In effect, we’re determined to influence Russia through sanctions . . . just not the potentially most effective one, because it would require substantial sacrifice in Europe. More on this later. The other subject I focused on, offshoring, is quite different from Europe’s energy dependence. One of the major trends impacting the U.S. economy over the last year or so – and a factor receiving much of the blame for today’s inflation – relates to our global supply chains, the weaknesses of which have recently been on display. Thus, many companies are seeking to shorten their supply lines and make them more dependable, primarily by bringing production back on shore. Over recent decades, as we all know, many industries moved a significant percentage of their production offshore – primarily to Asia – bringing down costs by utilizing cheaper labor.

Just as the balloon of levered entities expanded beyond reason in the last few years, now it’s well into the process of deflating. And, as I mentioned in “Now What?” the air always goes out a lot faster than it went in. Eventually, developments that are exogenous to the process interfere, or perhaps the process collapses of its own weight. In the current instance, consider subprime mortgages. The process described above was going along just fine, with increasing numbers of ever-larger mortgages being granted to cover a rising percentage of the cost of houses bought at rising prices by borrowers of declining creditworthiness. So far, so good: a process unhampered by discipline or restraint. But it must be seen that, eventually, reality will intrude. For example, eventually the amounts borrowed will necessitate payments that exceed what the borrowers can afford. Oops; investors forgot that part. To understand what’s going on now, all you have to do is reverse the process described above and squeeze (the squeeze – the force behind the deflating – comes from the pain that accompanies disclosure of the process’s flaws).  Something causes asset prices to weaken.  Now the leverage works in reverse, causing the entities’ equity to shrink faster than the rate of decline in asset prices, and their ratios of borrowings to assets to rise.  Lenders, worried about declining asset prices, either call in their loans or refuse to roll over debt when it matures.

© Oaktree Capital Management, L.P. All Rights Reserved Riskier investments are those where the outcome is less certain. That is, the probability distribution of returns is wider. When priced fairly, riskier investments should entail:  higher expected returns,  the possibility of lower returns, and  in some cases the possibility of losses. The traditional graph shown first above is deceptive, because it communicates the positive connection between risk and return but fails to suggest the uncertainty involved. It has brought a lot of people a lot of misery through its unwavering intimation that taking more risk leads to making more money. I hope my version of the graph is more helpful. It’s meant to suggest both the positive relationship between risk and expected return and the fact that uncertainty about the return and the possibility of loss increase as risk increases. 1BUWhat Is Risk? According to the academicians who developed Capital Market Theory, risk equals volatility, because volatility indicates the unreliability of an investment. I take great issue with this definition of risk. It’s my view that – knowingly or unknowingly – academicians settled on volatility as the proxy for risk as a matter of convenience. They needed a number for their calculations that was objective and could be ascertained historically and extrapolated into the future. Volatility fits the bill, and most of the other types of risk do not.

 Among the innovations, collateralized debt obligations, or CDOs, deserve particular mention. CDO originators would issue tranches of debt with varying levels of priority regarding the cash flows from debt portfolios assembled with the proceeds. In many cases, the portfolios consisted heavily of residential mortgage-backed securities, each comprised of large numbers of mortgages, often subprime. I find it inconceivable that buyers of CDO debt really understood the riskiness of the tranched debt of leveraged pools of tranched mortgage securities underlaid by thousands of anonymous loans. But solid ratings made the debt highly salable.  With vast sums available for high-fee investment products, managers’ incentives favored the rapid amassing and deploying of large pools of capital. The usual effect of such a process is to drive up asset prices, drive down prospective returns and narrow investors’ margin of safety. It was no different this time.  Due to widespread prosperity, large amounts of capital flowing into the mortgage market, and the flowering of the American dream of home ownership (and of wealth therefrom), rapid home price appreciation became a prominent feature of this period. Price gains further inflamed the people’s hopes, and behavior regarding residential real estate grew increasingly speculative.than

The only things we have to fall back on at this juncture are intrinsic value, company survival and our own staying power as investors. Of course, even these things mean we have to make judgments about what the future is likely to look like. That requirement, in turn, means nothing can be approached with complete safety or certainty. Nevertheless, we can take action if we think those three elements will be present under most circumstances. That’s the right mindset for today. Harder Than Sudoku The impossibility of reaching into the economic toolbox for that one perfect tool is easily illustrated with a list of some of the challenges present today. For a learning exercise, skip today’s Sudoku or crossword puzzle and take a crack at resolving these dilemmas:  Consumer confidence and spending are weak. We want to stimulate, but we don’t want to replace weakness with hyperinflation.  We’re willing to drop fiscal discipline in favor of stimulus through deficit spending, but we don’t want to scare away offshore investors from the Treasury securities we’ll issue to fund our deficits.  We’re willing to distribute stimulus checks, but we seem unable to make frightened individuals spend the money rather than save it.and

As a result, stocks receive much less attention today than they did five years ago; less is expected from them in terms of return (even given today’s lower prices); and they certainly aren’t viewed as the place to put additional capital. Neither are money market assets (yielding 1%+), Treasury notes and bonds (3-5%) or high-grade corporate bonds (4-6%). Institutional investors find these promised yields unexciting (and far below their portfolio goals of 8%+/-), and the widespread expectation of rising rates makes it seem likely that holding period total returns will be even lower. With the two biggest markets holding so little appeal – and given the fact that it has to go someplace – money has been flowing to non-mainstream markets such as high yield bonds, buyouts, real estate, oil, timber . . . and hedge funds. UThe Hedge Fund Movement Hedge funds did great in the 1990s, produced moderate gains during the collapse of stocks in 2000-02, and were in double digits in 2003. I think they also exhibit many of the traits associated with the venture capital boom described on page one of this memo, including widespread investor participation. I don’t think hedge funds will bring losses at all comparable to what happened in venture capital at the peak, but I think their popularity is overdone and likely to lead to disappointment.the

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: One of the critical mistakes people are guilty of – we see it all the time in the media – is believing that changes in security prices are the result of events: that favorable events lead to rising prices and negative events lead to falling prices. I think that’s what most people believe – especially first-level thinkers – but that’s not right. Security prices are determined by events and how investors react to those events, which is largely a function of how the events stack up against investors’ expectations. How can we explain the company that reports higher earnings, only to see its stock price drop? The answer, of course, is that the reported improvement fell short of expectations and thus disappointed investors. So, at the most elementary level, it’s not whether the event is simply positive or not, but how the event compares with what was expected. In my earliest working years, I used to spend a few minutes each day looking over the earnings reports printed in The Wall Street Journal. But after a while, it dawned on me that since I didn’t know what numbers had been expected, I had no idea whether an announcement from a company I didn’t follow was good news or bad.

We’re told the falling prices reflect problems lying ahead, and thus investors sell in response to the message being provided by . . . investors who’re selling. Again, I think it was the collective force of these things that convinced people the world was a scary place. What could be worse than the convergence of a number of major worries whose extent, interaction and solution seem beyond comprehension? Washington Debt Follies Where can I start on this sorry subject? As described in “Down to the Wire” in late July, America and the world contemplated the collision of an irresistible force (the U.S. government’s need to borrow due to its habit of spending more than it brings in) with an immovable object (the debt ceiling and Washington’s seeming inability to reach a constructive solution to it). With control of the government divided and many legislators committed to preventing either tax increases or cuts in social programs, it was obvious to most level-headed observers that any solution would require compromise. But while it could have been a negotiating stance, several of the participants in the debate seemed not to attach much © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

What I meant is that, unless the Greens Committee changes the layout, a golf course is a static environment. The actions of golfers don't change the game. If I try a certain approach to a hole – or even if everyone does – that won't alter the effectiveness of the approach. In contrast, highways – like markets – are dynamic environments. What the other participants do on a given day goes a long way toward determining what will and will not work for us. When people flock to the fast lane, they slow it down. And with the lane they left suddenly less crowded, it speeds up. UThis is how the "efficient market" in travel acts to equalize the speed of the various lanes, and thus to render ineffective most attempts at lane-picking. Efficient securities markets work the same way to eliminate excess returnsU. Everyone knows what has worked well to date. Just as they know which lane has been moving fastest, they know which securities have been performing best. Most people also understand there is no guarantee that past performance will continue. What is a little less widely understood, however, is that past returns influence investor behavior, which in turn alters future performance. While investors have the option of switching into the securities that have been performing best, most know the outperformance isn't likely to last forever.more

We saw a very strong reaction in this case: notably, the stock prices of some prominent alternative asset managers were down 5-7% on October 16, close on the heels of the regional banks’ disclosures. The truth is that there are always defaults and not infrequently defalcations (how’s that for a good old- fashioned word?) Over my 47 years in the high yield bond market, more than 2% of all bonds by value have defaulted in a typical year, and many more during crises. If you apply that percentage to the number of sub-investment grade issuers, which runs in the thousands, it shouldn’t come as a surprise if there are a few dozen defaults in a normal year. So no, I don’t think this is necessarily the beginning of a trend. It’s not an indictment of the whole sub- investment grade debt market, or the whole private credit market. Rather, it’s just a reminder that the yield spreads people care about so much are there for a reason: because sub-investment grade debt entails credit risk. And thus a reminder that credit skills are always a necessity for debt investors . . . even if the need for those skills isn’t apparent in good times. The Cycle in Attitudes Toward Risk In 2016, when I first sat down to write my book Mastering the Market Cycle: Getting the Odds on Your Side, I had an idea what topics I would cover – the economic cycle, the profit cycle, the cycle in investor psychology, the credit cycle, the distressed debt cycle, and the real estate cycle.

• Thus, we’re likely to see tougher times for corporate profits, for asset appreciation, for borrowing, and for avoiding default. • Bottom line: If this really is a sea change – meaning the investment environment has been fundamentally altered – you shouldn’t assume the investment strategies that have served you best since 2009 will do so in the years ahead. Having supplied this summary, I’m going to put flesh on these bones and share some additional insights. A Momentous Development To promote discussion these days, I often start by asking people, “What do you consider to have been the most important event in the financial world in recent decades?” Some suggest the Global Financial Crisis and bankruptcy of Lehman Brothers, some the bursting of the tech bubble, and some the Fed/government response to the pandemic-related woes. No one cites my candidate: the 2,000-basis-point decline in interest rates between 1980 and 2020. And yet, as I wrote in Sea Change, that decline was probably responsible for the lion’s share of investment profits made over that period. How could it be overlooked? First, I suggest the metaphor of boiling a frog. It’s said that if you put a frog in a pot of boiling water, it’ll jump out. But if you put it in cool water and turn on the stove, it’ll just sit there, oblivious, until it boils to death.

Companies are rewarded for short-term success and penalized for short- term failure, whereas few people ask about the long term. The only thing that matters is “What have you done for me lately?” A lot of this emanates from stockholders. In a memo several years ago, I listed a few phrases that have sunk into obscurity over the course of my career. They included “fiduciary duty,” “preservation of capital” and “dividend yield.” Another is “long-term investor.” Most investment managers are measured against a benchmark every quarter and expected to add value. Some clients have their fingers on the trigger, ready to axe a manager who underperforms for a year or two. For this reason, managers sit with their own fingers on the trigger, ready to dump a stock or bond whose short-term performance lags. And company CEOs whose securities are laggards are likewise on the hot-seat, with boards that rarely support executives who disappoint Wall Street. Too many people think of the long run as nothing but a series of short runs. The way to have the best five-year investment record, they think, is by sequentially assembling the twenty portfolios that will produce the best performance in each of the next twenty quarters. No one wants to invest in a company that may lag until long-term investments pay off down the road. They’ll just sell its stock today, assuming they’ll be able to buy it back later.

But gold is something you can actually hold and know you own. Thus it’s one of the few things you can depend on in an uncertain world. Gold is perfect. Except, of course, gold is nothing but a shiny metal. Since its real-world applications are limited to jewelry and electronics, very little of its value comes from actual usefulness. Further, the amount put to those uses each year is small compared to the total amount in existence, so its value for those purposes is at the margin and can’t be of much help in putting a price on the world’s gold reserves. There’s little intrinsic to gold that enables it to serve as a store of value and a hedge against inflation. Gold serves those purposes only because people impute to it the ability to do so. It’s self-deception, nothing but the object of mass hysteria like that exhibited in “The Emperor’s New Clothes.” Gold has no financial value other than that which people accord it, and thus it should have no role in a serious investment program. Of this I’m certain. A Never-Ending Argument The foregoing aren’t my views, of course. Rather, they’re my effort to summarize the prevailing – and obviously polar – points of view regarding gold.engenders

[Before I go further, I want to do something I failed to do in October: make clear that neither my earlier memo nor this one is intended as a universal indictment of the mutual fund industry. While there are questionable aspects to the industry’s general practices and some bad apples, there also are clean operators and even shining examples. I apologize to any of the latter that feel I’ve treated them like the former. The good news is that the money withdrawn from the bad apples is being reinvested in other mutual funds, meaning the good citizens are being rewarded, as they should be.] Recent months have brought disclosure of a variety of questionable asset-building practices.  Revenue sharing – According to the Wall Street Journal of January 9, this is an arrangement through which, in addition to any explicit sales compensation, “fund companies give brokers a cut of their management fees to induce them to sell their products.” Many brokerage firms have a list of preferred funds or fund companies, and often the funds pay to be on the list. The Journal reported, for example, that Edward D. Jones & Co. “has selling arrangements with about 100 mutual funds, but 90% to 95% of its fund sales come from the seven preferred companies who engage in revenue sharing.” Under revenue sharing, a brokerage firm can get a percentage of the assets invested in the relevant funds or of the management fees (and in some cases, of both).as

Several people told me the matrix was helpful. Of course it’s not that easy and clear-cut, but I think that’s the general situation. If your behavior and that of your managers is conventional, you’re likely to get conventional results – either good or bad. Only if your behavior is unconventional is your performance likely to be unconventional . . . and only if your judgments are superior is your performance likely to be above average. For those who define investment success as being “average or better,” three of the four cells of the matrix represent satisfactory outcomes. But if you define success strictly as being superior, only one of the four will do, and it requires unconventional behavior. More from the 2006 memo: The bottom line on striving for superior performance has a lot to do with daring to be great. Especially in terms of asset allocation, “can’t lose” usually goes hand-in-hand with “can’t win.” One of the investor’s or the committee’s first and most fundamental decisions has to be on the question of how far out the Conventional Behavior Unconventional Behavior Favorable Outcomes Average good results Above-average results Unfavorable Outcomes Average bad results Below-average results © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© 2026 Oaktree Capital Management, L.P. All Rights Reserved Follow us: amounts, growing to today’s market of roughly $1.5 trillion in the U.S. The significant increase in the ability to issue this type of financing helped fuel the growth of private equity. After the tech bubble of the late 1990s imploded in 2000, leading to the first three-year decline in the S&P stock index since the Great Depression, investors became uninterested in the stock market and stayed that way for a decade. And when central banks reduced interest rates to fight the resulting economic and market malaise, investors sought returns above those available on bonds. With stocks and bonds out of favor, investors looked for a new solution. They turned to hedge funds and private equity, which had held up relatively well, and the label “alternative investments” was born. Hedge funds couldn’t find enough bargain-priced opportunities to accommodate large amounts of institutional capital, so many investors gravitated toward private equity as the solution du jour. The first $10 billion private equity funds were organized. Around the same time, corporate debt began to be securitized in “structured credit” vehicles such as collateralized loan obligations, or CLOs. The banks that packaged these vehicles, with internal leverage from “tranching,” found eager buyers for both the high-yielding junior classes and the overcollateralized senior classes.

Ballyhoo took over from logic – excitement from value-consciousness – and these growth stocks’ prices reached 80 and 90 times earnings. The nifty-fifty stocks were tested – and found wanting – when the tide went out in the 1970s. Prosperity shifted to recession. The Arab oil embargo, a period of strong cost-push, and self- reinforcing cost-of-living adjustments created hyperinflation to which few people saw a chance for an end. Those growth stock p/e ratios went from 80 or 90 to 8 or 9. And stocks, Wall Street and the general economy went through a truly dreary decade, culminating in a BusinessWeek cover story entitled “The Death of Equities,” in August 1979. For evidence of the cyclicality of attitudes toward stocks, consider its final paragraph: Today, the old attitude of buying stocks as a cornerstone for one’s life savings and retirement has simply disappeared. Says a young U.S. executive: “Have you been to an American stockholders meeting lately? They’re all old fogies. The stock market is just not where the action is.” In the investment world, lows in sentiment usually coincide with lows in price, and the late Seventies were no exception. Because of the dreadful environment, you could buy an existing company in the stock market for less than it would cost to start one. I was fortunate to become a portfolio manager in mid-1978, and thus to benefit from the subsequent recovery of investor psychology from its nadir.

They formed their own firm, Skadden, Arps, Slate, Meagher and Flom, but their work was largely confined to matters the “white shoe” firms rejected as unseemly and disreputable. Thus when proxy fights and hostile takeovers became commonplace in the 1970s and ’80s, Joe Flom had superior experience and became a leader in advising on them, earning multi-million dollar fees. It seems like more than a coincidence that not only was Bill Gates born in 1955, but his Microsoft co- founder Paul Allen was born in 1953; Sun Microsystems founders Bill Joy and Scott McNealy were born in 1954; Steve Jobs and Eric Schmidt were born in 1955; and Steve Ballmer was born in 1956. Ten years earlier and there would have been no remote computer terminals for them to work at in high school and college; ten years later and the kids born before them would have beat them to the “new, new thing.” Likewise, the greatest pioneers of the M&A bar were born at the right time to benefit from the upsurge in corporate activities that the legal establishment had frowned upon: Joe Flom in 1923 and all four founders of Wachtell, Lipton, Rosen and Katz in 1930-31. During the holidays, I enjoyed spending time with three legends of the pop music business: producer David Geffen, entertainment attorney Allen Grubman, and Robbie Robertson, leader of the group “The Band.” I was struck by the fact that they were all born in the same year: 1943.

 With few buildings having been started during the soft period and now coming on stream, this additional demand for space causes the supply/demand picture to tighten and thus prices and rents to rise.  This improves the economics of real estate ownership, reawakening developers’ eagerness to build.  The better times and improved economics also make lenders and investors more optimistic. Their improved state of mind causes financing to become more readily available.  Cheaper, easier financing raises the pro forma returns on potential projects, adding to their attractiveness and increasing developers’ desire to pursue them.  Higher projected returns, more optimistic developers and more generous providers of capital combine for a ramp-up in building starts.  The first completed projects encounter strong pent-up demand. They lease up or sell out quickly, giving their developers good returns.  Those good returns – plus each day’s increasingly positive headlines – cause additional buildings to be planned, financed and green-lighted.  Cranes fill the sky (and additional cranes are ordered from the factory, but that’s a different cycle).  It takes years for the buildings started later to reach completion. In the interim, the first ones to open eat into the unmet demand.  The period between the start of planning to the opening of a building is often long enough for the economy to transition from boom to bust.

Thus, for example, one forecaster who has the earnings of the S&P 500 companies down 120% in Q2 thinks they may rise roughly 80+% in Q3 on a quarter-over-quarter basis (that is, to down just 20% from 2019) and then rise by a further 50% in Q4. And after a decline of 33% in 2020, earnings will rise by 55% in 2021 and exceed what they were in 2019. • Telling people to stay home – and thus causing businesses to close – is the economic equivalent of putting a patient into a coma to facilitate curing a serious disease. The government will provide life support to the economy during the coma and bring the patient out of the coma after the cure has been effected. The economic recovery will be abetted by better news about the disease, but the improvement will mainly be the result of the success of the Fed/Treasury package of rescue and stimulus. These organizations have announced unprecedented expenditures and have indicated that they’ll do whatever else it takes. Actions that were taken after months of deliberation in the Global Financial Crisis have been rolled out in the early weeks of the current episode. Further steps are likely to include everything anyone can think of and be unconstrained as to amount. • The banks are much less vulnerable than they were during the Global Financial Crisis, with only a third of the leverage. Thus concerns for the health of the overall financial system are greatly reduced. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

New Yorker Magazine, 1981 Every day we hear or read that “the market rose on hopes that . . .” or “. . . because investors were cheered by the news that . . .” Or perhaps it’s “the market fell on fears that . . .” or “. . . because of negative reaction to . . .” How do the commentators know? Where do they look to learn the reason for each day’s move? Does there have to be an explanation? Why don’t we UeverU hear, “The market rose today, but no one knows why”?!

That’s probably true as well of portfolio managers, consultants and investment committees and their members. (Of course you and I are in that 5%, but I have my doubts about the others.) The consensus opinion of market participants is baked into market prices. Thus, if investors lack insight that is superior to the average of the people who make up the consensus, they should expect average risk-adjusted performance. Few people are able to consistently identify cases where the market price is wrong and act on them to their advantage. “But how about Peter Lynch?” people respond. That’s just the point. His singular reputation is proof how rare the Peter Lynches are. As my mother used to say, it’s the exception that proves the rule. So, the first job in trying to access superior performance consists of getting in with the best funds and managers. Everyone wants above-average results, but far from everyone can achieve them. (Of course, the chore is complicated by the fact that the investment capacity of superior investment vehicles is limited, and the inrush of money can itself render them less superior, since the cost of investing will be pushed up as the money arrives.) Escape From the Crowd This just in: you can’t take the same actions as everyone else and expect to outperform. The search for superior results has to lead to the unusual, perhaps the idiosyncratic. Take manager selection. Above-average managers aren’t easy to find.

They contacted Schlesinger, and he listened attentively as they recounted their experience: they had, in fact, been able to acquire vast amounts of wood for $50 a cord, and they’d been able to sell all they had for $40 a cord. How could they be broke? Where had they gone wrong? Schlesinger puffed on his ever-present pipe and said: “The answer’s obvious: you need a bigger truck.” * * * While it certainly wasn’t the case with Schlesinger (despite what the above tale suggests), most ordinary citizens don’t have what it takes to figure out what is and isn’t economically feasible. Since we’re in the midst of election season, with promises of cures for our economic woes being thrown around, this seems like a particularly appropriate time to explore what can and can’t be achieved within the laws of economics. Those laws might not work 100% of the time the way physical laws do, but they generally tend to define the range of outcomes. It’s my goal here to point out how some of the things that central banks and governments try to do – and election candidates promise to do – fly in the face of those laws. * * * When I was in high school, one of my buddies convinced me to take a class in accounting. I found the double-entry bookkeeping we learned to be logical, symmetrical and unambiguous. After accounting I moved on to economics, and I found it equally logical. The die was cast for my career in business.

Investing consists almost entirely of making preparations for the future, and I just stated that the future is largely unknowable. Does this mean that there’s nothing we managers can do for our clients? No, quite the contrary. Investors who understand reality can restrict their efforts to areas in which they can make a difference and avoid wasting their time (or – even worse – taking unjustified risks) where they can’t. In fact, there’s a long list of things we can do for our clients despite our lack of prescience:  We can highlight potentially fruitful asset classes, strategies and approaches. Clients generally have no choice but to know a little bit about a great many things. But because specialist managers are supposed to know a lot about a few things, they should be able to identify superior opportunities and the best way to access them.  We can help inform the capital allocation decision by describing the attractiveness of our asset classes. We should know more than others about our markets’ fundamental strengths and weaknesses, technical conditions and price attractiveness. This doesn’t mean just speaking up when our markets are cheap; it also means admitting when they aren’t. It can’t always be “the greatest time” for any asset class.  We can strive to know more than others about companies, industries and securities. A knowledge advantage is a clear prerequisite for consistently superior investment © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

 Trump’s campaign promises have included tax reform; reduced income tax rates on corporations and big earners; some form of tax holiday to enable corporations to bring in profits stranded abroad; a reduction of business regulation (Carl Icahn tells me this will be huge); a big infrastructure program ($1 trillion announced); an end to bank-bashing; less pressure on pharmaceutical and health care companies to cut prices; and an end to the estate tax. That’s quite a pro-business agenda.  The populist power of Sen. Warren will be reduced.  Businessmen and Wall Streeters will be welcome to serve in the administration, not verboten as in recent years. At the bottom line – if everything works as promised – there will be massive fiscal stimulus; big increases in GDP growth, corporate profits and jobs; higher inflation than otherwise would have been the case; a big increase in the national debt; and more of everything for everybody. Writing in the Financial Times, Anthony Scaramucci, a member of Mr. Trump’s economic advisory council, said the president-elect would finance the new spending plan with “historically-cheap debt and public-private partnerships” and said it would cut deficits by stimulating economic growth. “Economies around the world are fighting deflation largely because of a post-crisis move toward fiscal austerity. We can close the wealth gap in America by replacing emergency-level interest rates with fiscal stimulus.

We want to buy things whose price underestimates the value of the underlying assets or earnings (value investing) or the future potential (growth investing). In either case, we’re looking for instances when the market is wrong. If we thought the market was always right – the efficient market hypothesis – we wouldn’t spend our lives as active investors. Since we do, we’d better believe we know more than the consensus. So by definition we must not think the market – that is, the sum of all other investors – knows everything, or knows more than we do, or is always right. That’s point number two. And that leads logically to point number three: why take instruction from a group of people who know less than you do? In “On the Couch,” I wrote that it all seems obvious: investors rarely maintain objective, rational, neutral and stable positions. Do you agree with that or not? Is the market a clinical and rational fundamental analyst, or a barometer of investor sentiment? Does the market’s behavior these days look like something a mature adult should emulate? It seems clear to me: the market does not have above average insight, but it often is above average in emotionality. Thus we shouldn’t follow its dictates. In fact, contrarianism is built on the premise that we generally should do the opposite of what the crowd is doing, especially at the extremes, and I prefer it. A Case in Point – The Crash of 2008 The year 2008 culminated in the greatest panic I’ve ever seen.

I never forget that my grandparents weren’t born here, and how far I’ve been able to progress nonetheless. When I was a kid in the 1950s, a joke asked why we were ahead of the Russians in technology. The answer: our German scientists were better than theirs. This country attracted people from all over the world, gave them unprecedented opportunity, and permitted the most talented to rise to the top. What a great recipe for success. But today the outlook isn’t the same:  The stick isn’t as strong as it used to be: economies and living conditions in other countries have gotten better and continue to do so.  The carrot isn’t as strong, either: we’re no longer the only country offering opportunity.  The barriers to entry threaten to rise, as some Americans consider immigration one of our biggest problems. And 9/11 has made visas, including those for students, much harder to obtain. My involvement as a university trustee has exposed me to a developing trend. It used to be that foreign students were eager to come to the U.S. to gain a higher education and then stay to pursue their fortunes. They still want to come for the education, but today many want to return to participate in economic booms in their native countries. This makes me wonder whether there’ll come a day when the opportunity for a first-class U.S.developed

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: promised yields, and as a result, the high yield bond market delivered an annualized return of 10.8% over the two-year period 2023-24. The flip side of a rising price, of course, is a declining prospective return. As a result of the developments described above, the yield to maturity on the average high yield bond now stands just above 7%, down from 9½%. Just as rising fear and risk aversion cause investments to offer higher prospective returns, rising optimism and risk tolerance lead to lower ones, incorporating reduced yield spreads. (The reduced yield is also attributable to 100 basis points of cuts in the base interest rate.) What Is a Yield Spread? Why would someone lend money to a risky borrower when there are plenty of safe borrowers to lend to? The answer is that risky borrowers pay more for their money, and if you can charge a risky borrower an interest rate that’s high enough to produce a return above that available on safe debt, even after allowing for expected credit losses, it could be worth taking the risk. That was precisely the theory that underpinned Michael Milken’s popularization of high yield bonds in the late ’70s, as well as my career. The differential between the promised yield on risky debt and the yield on a less risky comparator is called a “yield spread,” “credit spread,” or just plain “spread.

But when markets get cooking, the lessons of the past are readily dismissed. These are nothing short of eternal verities, and their collective message is indispensible. Why Does Investment Memory Fail? Think back to the emotions you felt so strongly during the recent financial crisis, and the terrifying events that brought them on. You swore at the time that you’d never forget, and yet their memory has receded and nowadays has relatively little influence on your decisions. Why does the collective memory of investment experiences – and especially the unpleasant ones – fade so thoroughly? There are a number of reasons.  First, there’s investor demographics. When the stock market declined for three straight years in 2000-02, for example, it had been almost seventy years since that had last happened in the Great Depression. Clearly, very few investors who were old enough to experience the first such episode were around for the second. For another example, I believe a prime contributor to the powerful equity bull market of the 1990s and its culmination in the tech bubble of 1999 was the fact that in the quarter century from 1975 through 1999, the S&P 500 saw only three minor annual © Oaktree Capital Management, L.P.Reserved

(Callan) Because of the negative publicity surrounding high yield bonds around the turn of the decade, plan sponsors either are wary of investing in them, or are afraid of being associated with them. (Pensions & Investments) Some plan sponsors may be limited by plan guidelines to investment-grade securities, . . . Other sponsors may be wary of junk bonds because of the market's well-publicized collapse in 1989 and 1990, and the securities' association with Michael Milken and the now-defunct bond house Drexel Burnham Lambert. (SEI) If we're going to worry about a collapse, I hope it'll be one looming ahead, not one which occurred five years ago. The asset class that collapsed in the past is likely to be cheap, not to be riding a crest of popularity and thus heading for a fall. But too many investors drive looking in the rear-view mirror. As someone at my former place of employment once told clients, "We're buying the oils; they've been good to us." We'd rather buy what has performed badly or is the subject of negative bias and thus is cheap. We feel strongly that high yield bonds qualify today, and we'd be glad to talk more about them, or about the opportunities in other areas.

Invariably when I hear the media and the herd describe something as a good buy, it’s without regard for price. They never say, “Internet stocks are a good buy at p/e ratios up to 50.” Or “class-A office buildings are a good buy as long as the cap rate exceeds 7%.” Or “private equity’s a good idea at purchase prices below seven times EBITDA.” Just “it’s a good buy.” My response is simple: There is no investment idea so good that it can’t be ruined by a too- high entry price. And there are few things that can’t be attractive investments if bought at a low-enough price. When investors forget these simple truths, they tend to get into trouble. How Money Is Made The fact is, there is no dependable sign pointing to the next big moneymaker: a good idea at a too-low price. Most people simply don’t know how to find it. If someone really knew, why would he share his knowledge? And when the investing herd or some media commentator expresses an opinion, they’re invariably pointing in the wrong direction. Large amounts of money (and by that I mean unusual returns, or unusual risk-adjusted returns) aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.

In the low- return climate of the time, much of the appeal of these asset classes came from the fact that they promised higher returns thanks to their use of leverage, whether through borrowing, tranching or derivatives. Given the high promised returns, investors forgot about (or chose to ignore) the ability of leverage to magnify losses as well as gains. Contributing to investors’ rosy view of leverage’s likely impact was their belief that risk had been banished by (a) the efficacy of the Fed and its “Greenspan put,” (b) the combination of securitization, disintermediation, tranching, decoupling and financial engineering, and (c) the “wall of liquidity” coming toward us from China and the oil producing nations. For these reasons, few market participants were afraid of losing money. Most just worried about missing opportunity. The unattractive outlook for stocks and bonds meant investors would have to be aggressive and innovative if they were going to earn significant returns in the low-return environment. Thus risk aversion (a) was unnecessary and (b) would be counter-productive. “You’d better invest in this new financial product,” people were told. “If you don’t, you’ll miss out. And if you don’t and your competitor does – and it works – you’ll look out-of-step and fall behind.” When contemplating a virtuous circle without end, investors usually think of only one word: “buy.

Bought when "riskless," this paper proved to be a disaster; purchased off the trash heap, we found it very attractive. That leads us to the $64,000 question (although many of you already know my answer): Where do we currently stand? What attitudes and behavior characterize today's investors? We think many "investors" have been buying with euphoria and belief rather than hesitance and skepticism. Many investors seem to be most afraid of being uninvested and missing out on the gains others are enjoying; that is, they're most worried about the risk of not taking enough risk. Although many valuation indicators are at all-time highs and price gains in July set record after record, investors are quite willing to accept platitudinous rationalizations like "technology has brought a new era," "globalization offers unlimited opportunities for growth" and "we have nothing to worry about from the business cycle." Some analyses suggest that prices are fair today, implying that future returns will be proportional to the risks involved; by many other standards, prices are too high. We find it very difficult, however, to conclude that stocks are underpriced, and thus that the potential exists for high and dependable returns from here. We find particularly troubling the oft-repeated mantra that "because the outlook continues to call for low inflation and stable interest rates, stocks can continue to rise."

I was especially pleased to have a chance to tell him about the seminal part his 1975 article, “The Loser’s Game,” had played in the development of my thinking. The article employed a metaphor that was simple but profound. Charley’s article described the perceptive analysis of tennis contained in “Extraordinary Tennis for the Ordinary Tennis Player” by Dr. Simon Ramo, the “R” in TRW. Ramo pointed out that professional tennis is a “winner’s game,” in which the match goes to the player who’s able to hit the most winners: fast-paced, well-placed shots that his opponent can’t return. But the tennis the rest of us play is a “loser’s game,” with the match going to the player who hits the fewest losers. The winner just keeps the ball in play until the loser hits it into the net or off the court. In other words, in amateur tennis, points aren’t won; they’re lost. I recognized in Ramo’s loss-avoidance strategy the version of tennis I try to play. Charley took Ramo’s idea a step further, applying it to investments. His views on market efficiency and the high cost of trading led him to conclude that the pursuit of winners is unlikely to pay off. Instead, you should try to avoid hitting losers. I found this view of investing absolutely compelling. I can’t remember saying, “Eureka; that’s the approach for me,” but the developments over the last three decades certainly suggest his article was an important source of my inspiration.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: • investors grew confident about the inevitability of an economic recovery; • optimism developed regarding the outlook for a Covid-19 vaccine; • the near-zero fed funds rate brought down prospective returns all along the capital market line; • risk tolerance returned, and fear of missing out took over from fear of losing money; • asset prices rose, and the markets bounced back; and • the exceptional buying opportunity came to what for our purposes was a premature end. Oaktree Performance Last year’s extreme, rapid-fire developments – and especially their origin in an exogenous and unforeseeable event, the virus outbreak – created great challenges for investors. To have taken maximum advantage, one would have had to have gone into late February prepared for a significant shock and then turned bullish a month later. Obviously, few investors did both. While we never radically shift our portfolios, I think Oaktree did a very good job under these circumstances. For years we had been leery of the markets, because of our view that they were characterized by a great deal of uncertainty, full-to-high asset prices, the lowest prospective returns in history, and pro-risk behavior on the part of investors trying for high returns in a low-return world.

We see Asian currencies, economies and perhaps social orders in free-fall. But what strikes me is the fact that the major U.S. equity indices are just about where they were when I wrote in September. Our market justifiably benefits from a flight to quality, and it is true that many of our companies may not be directly affected by the Asian turmoil. But are the people pricing stocks near all-time highs too optimistic, too pessimistic, or just right? What amazes me is that even though people say "the market abhors uncertainty," it has been doing rather well despite the large number of things that no one can pretend to fully understand. 1) How bad will the Asian crisis get, how far will it spread, what solution is possible, and what will be the second- and third-order ramifications on our economy and companies? Will governments topple? Will contracts be abrogated? How many people who are sanguine about U.S. equities today can answer these questions concerning Asia (and how can you be the former if you can't do the latter)?

” Numbers three and four – arguing that it’s too early to sell even if the market is expensive or holdings are past their sell point – are interesting. They’re either (a) absolutely illogical or (b) signs of the investor error and lack of discipline that are typical in bull markets.  If the market is expensive, why wouldn’t you lighten up?  Why would you prefer to sell after a few big down days, rather than today? (What if the big down days are the start of a slide so big that you can’t get out at anything close to fair value? What if there’s a big down day followed by a big up day that gets you right back where you started? Does the process re-set? And is it three big down days in a row, or four?)  And if you continue to hold past your sell points, what does “sell point” mean? Bottom line: I think these things translate into “I want to think of myself as disciplined and analytical, but even more I want to make sure I don’t miss out on further gains.” In other words, fear of missing out has taken over from value discipline, a development that is a sure sign of a bull market. The fifth and final comment – that one should exercise the same degree of care and risk aversion at all times – gives me a lot to talk about.

In addition, the fact that closings reduce the spread should alleviate the flow of patients to doctors and hospitals, improving the health system’s ability to help sufferers. But, of course, the impact on individuals and the economy will be painful. Unavoidable Pain The news in the near term is unlikely to be good; instead it’ll probably include:  Business closures  Job losses  Supply-chain disruption  Shortages of life’s necessities, stemming from reduced production and distribution difficulties  Challenges to the health system Many businesses have been ordered to close (e.g., restaurants and bars). Some have seen their revenues evaporate (e.g., airlines, hotels and theaters). All of these things will cause job losses, with a particularly heavy impact on lower-income workers. On March 17, Treasury Secretary Mnuchin warned that failure of the government to take appropriate action could take the U.S. unemployment rate to nearly 20% (by way of comparison, it reached 25% in 1933, during the Great Depression, and hit 10% as a result of the Global Financial Crisis). Regardless of the action taken, it seems sure to rise substantially from the 50-year low of 3.5%. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

“As Edward Ward observed in his poem ‘A South Sea Ballad’: Few Men who follow Reason's Rules, Grow fat with South-Sea Diet, Young Rattles and unthinking Fools Are those that flourish by it.” [The profits went to those unrestrained by reason or experience.] Robert Digby wrote “The South Sea Company is continually a source of wonderment. The sole topic of conversation in England revolves around the shares of the Company, which have produced vast fortunes for many people in such a short space of time. Moreover it is to be noted that trade has completely slowed down, that more than one hundred ships moored along the river Thames are for sale, and that the owners of capital prefer to speculate on shares than to work at their normal business.” [The name of the company was on everyone's lips, the fortunes it created were front-page news, and the average Joe was willing to give up his day job to participate ... sound familiar?] * * * I will devote the rest of this memo to what certainly seems to me to be another market bubble. Before doing so, however, I must point out a few things: First, as usual, little that I will write will be original; instead, I hope to add value by pulling together ideas from a number of sources. Second, a single word suffices to describe my recent caution regarding the stock market: wrong.and

(2) It is for this reason that we choose to work in inefficient markets where specialization, skill and hard work can add value and lead to above-average performance over time. (3) Lastly, we feel that because we're not clairvoyant, it's important to acknowledge our limitations and Uput the highest priority on avoiding losses,U not executing bold strategies. I was raised on an adage which had good things to say for "he who knows and knows he knows" but warned about the danger of following "he who knows not but knows not he knows not.” Or, as expressed in my favorite quotation, from Stanford behaviorist Amos Tversky, . . . It's frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what's going on. We never forget how risky it is to join that group. Thus our "game plan" is directed at avoiding strikeouts and building a high batting average over time, not at hitting a home run each trip to the plate.1995

The Death of Equities Sometimes the ideas for my memos come from the gradual accretion of insights over a long period of time, and sometimes they come from a single inspiration. This time it‟s the latter. Lying in bed sleepless on Sunday the 11th, while on a business trip to South America, I dug into my Oaktree bag for something to read. I came across a reprint of “The Death of Equities” from BusinessWeek magazine of August 13, 1979. I‟d spoken about it over lunch with Josh Kuntz of Rivulet Capital, and he was good enough to send it to me at my request. As I read it thoroughly for the first time in 33 years, my wife Nancy‟s battle cry rang out: “This calls for a memo.” This was a seminal article, signaling a tectonic shift in investing. Here was its thrust: Seven million shareholders have defected from the stock market since 1970. The Labor Department has interpreted ERISA as giving institutions that invest pension money the ability to go beyond listed stocks and high grade bonds and into “shares of small companies, real estate, commodity futures and into gold and diamonds.” Thus they were “pouring money into . . . mortgage-backed paper, foreign securities, venture capital, leases, guaranteed insurance contracts, indexed bonds, stock options, and futures.” “Whereas stocks once made up 80% of mutual fund assets, today that figure has slumped to less than 50%.” “Few corporations can find buyers for their stocks.

” Borrowers, home sellers, mortgage brokers and Wall Street all had a vested interest in seeing high values assigned. There’s something fundamentally wrong when there’s no party to a transaction who wants the appraisal to be conservative. But that became the case when far-away, ratings-assured buyers of sliced-and-diced mortgage securities took the place of lenders risking their own money and expecting to hold to maturity. Mortgage insurers played a similar role by lending their imprimatur and thus implying instruments were safe. Everyone thinks of taking out insurance as a cautious thing to do. When risks are insured, the people exposed to them believe they’re safe to behave differently than they otherwise would. But what happens when the insurers miscalculate the risks involved, and thus issue more coverage than their capital can support in tough times? In the extreme, losses can go unreimbursed, meaning the insureds don’t really have the protection they think they have and their situation is riskier than they intended. Certainly in this cycle, insufficiently cautious insurers abetted the bearing of risks that have exceeded expectations. Let’s remember that the mortgage borrowers don’t deserve a free pass. It was stupidity or cupidity, naïveté or moral turpitude. At best they took on massive financial responsibilities they didn’t understand, and at worst they were fraudsters.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: The first of these is too bland, failing to capture a bull market’s emotional essence, and the second attempts false precision. A bull market shouldn’t be defined as a percentage price movement. For me, it’s best described by what it feels like, the psychology behind it, and the behavior that psychology leads to. (I started investing before the development of numerical criteria for bull and bear markets, and I consider such yardsticks meaningless. Take a look, for example, at a couple of recent newspaper articles. On May 20, the S&P 500 Index’s decline from the top passed the “magic” 20% threshold; thus on May 21 the Financial Times wrote, “Wall Street stocks slumped into a bear market yesterday . . .” But because a late rally reduced the final decline to just under 20%, the headline of the same day’s New York Times read, “S&P 500 Drops . . . but Evades Bear Market.” Does it really matter whether the S&P 500 is down 19.9% or 20.1%? I prefer the old-school definition of a bear market: nerve-racking.) Excesses and Corrections My second book is Mastering the Market Cycle: Getting the Odds on Your Side. It’s well known that I’m a student of cycles and a believer in cycles. I’ve lived through (and been schooled by) several significant cycles during my years as an investor. I believe understanding where we stand in the market cycle can give us a hint regarding what’s coming next.

Under capitalism we’re likely to see bigger slices of the pie go, for example, to those who are smarter, more talented and more hardworking, but also to those who are luckier or born into wealth. The first three of these explanations are generally considered valid, the fourth is not, and people fight about the last. The gains produced by capitalism are inseparable from – actually they derive from – the opportunity for those who are smarter, more talented and more hardworking to end up with bigger slices of the pie. On the other hand, no one considers it inherently desirable that lucky people do so also. And many think the benefits of inheritance should at least be watered down (although generally not the benefactors or beneficiaries). And what do the “populists of the left” want? For the most part, “fairer” and more equal outcomes. They say relatively little about expanding the pie but more about fairness in how it’s apportioned. That’s why Churchill went on from the above to add: . . . The inherent virtue of Socialism is the equal sharing of miseries. When we look around the world, we see countries that have stressed equal sharing of the pie and others that have cared more about expanding the pie. The equal sharers include Cuba, North Korea, Venezuela and the USSR, while the expanders, in addition to the U.S., include South Korea, Hong Kong and Singapore. In which group of countries do people generally live better? In which group would you rather live?

Stocks are less homogenous, and there's more to choose between them, but I still think the market for popular stocks is efficient. That's the reason why, when I left equity research in 1978, I told Citibank I would "do anything other than spend the rest of my life choosing between Merck and Lilly." I believed in efficient markets then, and I believe in them now. But what do I mean? When I say efficient, I mean it in the sense of "speedy," not "right." I agree that because investors work hard to evaluate every new piece of information, asset prices immediately reflect the consensus view of the information's significance. I do not, however, believe the consensus view is necessarily correct. In January 2000, Yahoo! sold at $237. In April 2001 it was at $11. Anyone who argues that the market was right both times has his head in the clouds; it has to have been wrong on at least one of those occasions. But that doesn't mean many investors were able to detect and act on the market's error. If prices in efficient markets already reflect the consensus, then sharing the consensus view will make you likely to earn just an average return. To beat the market you must hold an idiosyncratic, or non-consensus, view. But because the consensus view is as close to right as most people can get, a non-consensus view is unlikely to make you more right than the market (and thus to help you beat the market).

© Oaktree Capital Management, L.P. All Rights Reserved. strength, default rates are projected to remain below the long-term average for at least the next twelve months. Given their current average yield spread, we estimate that our portfolios could suffer a default rate of approximately 9% every year and still do no worse than Treasurys – and it’s worth noting that we have never had even one year with a 9% default rate. So we don't think high yield bonds are overpriced in relative terms. In fact, we feel the odds favor their delivering relative performance that is superior to Treasurys and high grade corporates over multi-year holding periods ahead. Finally, let’s consider the potential absolute result for high yield bonds from today. Suppose we hold (or buy) high yield bonds currently at around 5.7% average yield, and we have Oaktree’s average experience: an annual default rate of 1.4% and loss of about half the money invested in the defaulting bonds, or 0.7% of our portfolio per year. This results in 5% net return per year before fees and price fluctuations. Given the alternatives today, that’s an attractive absolute return. What else is better? If interest rates rise and/or yield spreads expand, we will suffer price declines (as will holders of all other fixed-rate securities). But if Oaktree is right in its credit judgments, those declines will prove to be temporary.

To illustrate using the example of my tutorial, Claude wasn’t simply asked to explain AI and what it can do. When I queried Claude about the task it was assigned, here’s what it said: Someone designed a nine-module curriculum specifically for you, built around your December memo, your intellectual frameworks, and the goal of giving you enough technical understanding to write a credible addendum. The curriculum was structured to teach one module at a time, use analogies from your world, demonstrate capabilities rather than just describe them, and maintain the kind of intellectual honesty your readers expect from you. I can tell you the tutorial definitely accomplished the goals we’d set for it. This was entirely due to the quality and specificity of the prompts my advisers helped me prepare. Can AI Think? I’m going to take time here for a question I find fascinating. I know AI can reconfigure what people have already figured out and apply it to new data and other fields. But can it break new ground? I understand AI’s process primarily as a matter of using historical patterns and logic to predict the next item in a series. Write five words in a sentence, and it’ll predict what the sixth should be (look at the suggested words on your phone the next time you write an email – that’s AI in action).

But then, around 1967, Bank of America came out with the first credit card, the BankAmericard, and First National City Bank countered with The Everything Card. (When I was hired into FNCB that year for my first summer job, it was to go door-to- door trying to convince merchants to accept the card. But then volume on the New York Stock Exchange spiked to 25 million shares a day and banks like FNCB couldn’t keep up with the related paperwork; thus I was assigned instead to a task force whose job it was to eliminate bottlenecks in the back office. But that’s another story.) Before the BankAmericard and The Everything Card, the only plastic in circulation consisted of T&E (“travel and entertainment”) cards – American Express, Diners Club and Carte Blanche – which generally were limited to people in the upper economic strata and had to be paid off each month. It was only in the last forty years that we’ve seen the morphing of BankAmericard into Visa and The Everything Card into MasterCard. With them came the ability of consumers to maintain an outstanding balance. Now it was easy for people to buy things they couldn’t afford. And so they did. When I was a boy, as I recall, owing money was considered undesirable and debts were generally expected to be paid off. When people bought homes, they put down 30% and took out thirty-year mortgages to finance the rest.

The laws of business are being enforced, meaning that money-losing companies can't attract additional capital. Scores of firms have closed, and tens of thousands of employees have lost their jobs. In perhaps the height of indignity, the Internet has been turned against its own, as dot-coms have been formed to chronicle the collapse of dot-coms. Log on to dotcomfailures.com for a list of more than eighty. UTech/media/telecom stocks brought low U– Of course, the stocks that soared in 1999 tanked in 2000. The 86% gain of the NASDAQ Composite in 1999 was the greatest in history for any major average. Its 39% loss in 2000 was the greatest in its history and, in terms of major averages, trailed only the 1931 drops in the Dow and S&P. Throughout my 30-plus years in the investment business, I have seen one localized boom after another. Each time, the end was marked by a Wall Street Journal table cataloging once-hot stocks that had fallen more than 90% from their highs. Conglomerates (late 1960s), computer software and services (1969-70), the Nifty-Fifty (1973-4), oil stocks (early '80s) and biotech (early '90s) – they've all been there, and I felt certain that TMT stocks would join them sooner or later. The only difference is that in 2000, the top ten losers on the NASDAQ all declined more than 99%! The 14 stocks mentioned a year ago in "bubble.com" provide a pretty good sample; they're down 82% on average from their year-end 1999 prices and 87% from their highs in 2000.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: I don’t think I’m likely to have superior knowledge regarding the outlook for the virus, its impact on the economy, the success of Fed/government actions or the direction of oil prices. I organized and discussed the possibilities for each of these things in the March memos, but I’m unlikely to be a better predictor than anyone else. I do, however, hope to help by discussing how you might think about your behavior in the current context. That’s my subject today. But before I end with the conclusion I’ve reached, I want to summarize the relevant statements from the March memos. (As you’ll see, I wrote two memos in mid-March that only went to Oaktree clients, although one was made available on our website a few days later.) Here we go (emphasis in the originals): Nobody Knows II – March 3 We were still early in the crisis at this time, with just a handful of cases of the disease reported in North America. We were also early in the process of economic decline and market reaction. In fact, the S&P 500 was only down 13% from its level on February 19. In this first memo of the crisis, I struck a number of themes I would return to in the following weeks: These days, people have been asking me whether this is the time to buy. My answer is more nuanced: it’s probably a time to buy. There can be no unique time to buy that we can identify.

One of the big ways this changed my life was that it led me to meet my great friend Bruce Newberg, whose mind is perfect for handling the odds and strategies involved in games (as it is for investing). Bruce and I have had thousands of hours of enjoyment playing backgammon and gin over the last 40 years. We’re probably about even financially after all that time, and if not, the winner’s hourly rate of pay is in pennies. All we get out of it is fun. Our motto is, “The only thing worse than losing is not playing.” I also enjoy visiting a casino once in a while, and the opportunity to play blackjack. In blackjack, you and the dealer are each dealt two cards. You can “hit” or “stay” as you choose – take additional cards from the deck or decline to do so. The dealer has no choice; he’s required to hit (or forced to stay) depending on his card total. In the end, whoever’s total is closer to 21 without going over is the winner. Lots of people go to casinos every year and lose money at blackjack without knowing the first thing about how to play successfully. Instead, they count on luck and hunches and say they “just play to have fun.” But there are actions you can learn to take in blackjack – mostly regarding when to hit or stay – that will improve your results. These have been codified into what’s called “basic strategy.

Thus it's tempting to think that the moderation of expectations may have stemmed from the corrosive emotional effect of recent losses on investor psyches, not from new data or objective analysis.  In fact, it's comforting to note a hopeful analogy. In August 1979, after a harsh correction in 1973-74 followed by several sluggish years, the cover of Business Week proclaimed "The Death of Equities" . . . just prior to the ignition of the historic bull market that lasted through 1999. As in that case, with attitudes toward equities beaten down so universally, the contrarian position today might be to bet heavily on them. Sentiment toward equities can hardly get worse and, unimaginable as it seems, it just could get better. At the same time, there are negatives to be dealt with:  Even though stock prices have come down substantially, the average P/E ratio remains high – in the upper teens or low twenties, depending on whom you ask. In the last major cycle, which bottomed in the 1970s, P/E ratios reached levels like today's at the UhighU and fell to single digits when prices hit bottom. By that standard, today's valuations suggest a high, not a low.  One reason today's P/E ratios are high in the absolute is that interest rates are so low. Low interest rates justify a high valuation of future cash flows.what

For example, I read that the market sagged for five months after Iraq's invasion of Kuwait but made up all of that ground, and then some, soon thereafter. But that experience had a very favorable outcome. We all want this one to be as good and as quick, but are we willing to bet that it will? We all want a feeling of assurance. We want to live in a world where the future seems knowable and decisions that extrapolate normalcy can be depended on. We want to believe life in this country will return to the carefree days pre-September 11. We want to believe our leaders will be able to keep the ship upright and manage their way out of problems. So I think we're eager to embrace predictions that these things will hold true. But is it prudent today in making decisions regarding the future to assume a return to the status quo? UThe New FutureU – It seems to me that today we know even less about the future than we usually do, and that's never a lot. 1. About terrorism. How much of what we have to worry about stems from Osama bin Laden and al Qaeda, and how much relates to other groups? How much of bin Laden's plans and resources went into the September 11 attacks, and how much remains on tap? Is bin Laden a diabolical genius against whom we're powerless, or a paper tiger who got lucky? Are there additional shoes left to drop? Will there be a high-profile attack once a year?violence

A diamond ring, painting, or classic car doesn’t produce earnings for its owner (short of renting it out or charging people to look at it). For this reason, its economic potential comes exclusively from the possibility of selling it at a profit. And the person who buys it is likely to be doing so in the hope of selling it to someone else at a still-higher price . . . despite the fact that it won’t produce earnings in the interim. I think of assets that don’t produce operating cash flow or have the potential to do so in the future as not having earning power, and that makes them impossible to value objectively, analytically, or intrinsically (see my 2010 memo about gold, All That Glitters). Some earning power is current and produces income today. The result can be seen in this year’s financial statements: the income that today’s assets are producing in their current configuration and under today’s conditions. Other earning power exists in the form of potential: for example, the income that will be earned when today’s holdings of natural resources are exploited in the future, or the income that will be generated from new products developed by the company’s employees from its intellectual property. The result will be dependent on the environment that unfolds, which in turn will be influenced by decisions made by company management, competitors, customers, governments, and even investors.

” In English, however, a “canard” is “a Tfalse or unfounded report or story T.” That English meaning comes from the French phrase “vendre des canards à moitié”: to cheat, literally, to half-sell ducks. A canard gained broad acceptance over the last decade or two, as faith in the ability of the free market to optimally allocate assets morphed into an irrational expectation that the free market would produce a continually rising tide, lifting all boats and bringing a better life for everyone. Here’s my version of the saga. One of the longest cycles I’ve witnessed has taken place in the area of government involvement in the financial industry. Prior to 1929 (I wasn’t around for this part), there was little regulation. When much of the subsequent market collapse was attributed to improper conduct in investment banking and in investments generally, this led to significant new regulation. For an interesting look at behavior in the 1920s, I’d recommend Wall Street Under Oath, written in 1939 by Ferdinand Pecora, who led the Senate investigation into the causes of the Great Crash and then became a New York State judge. It’s a scathing indictment: imagine Wall Street operating in the 1920s unhampered by today’s securities laws. Among other things, the Street’s conduct led to the enactment of the Glass-Steagall Act of 1933 that mandated the divorce of commercial banks from investment banks, the Securities Act of 1933 and the Securities Exchange Act of 1934.the

© Oaktree Capital Management, L.P. All Rights Reserved as things aren’t worse than y and z,” but how can an absolute limit be specified? I wonder if the professor had anticipated that the S&P 500 could fall 57% in the global crisis. While writing the original memo on risk in 2006, an important thought came to me for the first time. Forget about a priori; if you define risk as anything other than volatility, it can’t be measured even after the fact. If you buy something for $10 and sell it a year later for $20, was it risky or not? The novice would say the profit proves it was safe, while the academic would say it was clearly risky, since the only way to make 100% in a year is by taking a lot of risk. I’d say it might have been a brilliant, safe investment that was sure to double or a risky dart throw that got lucky. If you make an investment in 2012, you’ll know in 2014 whether you lost money (and how much), but you won’t know whether it was a risky investment – that is, what the probability of loss was at the time you made it. To continue the analogy, it may rain tomorrow, or it may not, but nothing that happens tomorrow will tell you what the probability of rain was as of today. And the risk of rain is a very good analogue (although I’m sure not perfect) for the risk of loss. The Unknowable Future It seems most people in the prediction business think the future is knowable, and all they have to do is be among the ones who know it.

Haier pursued an active foreign-acquisition strategy under Zhang, including acquiring New Zealand appliance maker Fisher & Paykel in 2012 and Sanyo's Japanese white-goods business around 2011, as part of global expansion.

Stepped down as Kuaishou CEO in October 2021, transferring operational responsibility to co-founder Cheng Yixiao while remaining chairman.

By mid-2022, New Oriental's Douyin live-streaming sessions featuring Yu and English-teaching content were ranking among the platform's top 10 in sales, indicating a commercially significant pivot away from the banned tutoring business, though the report did not quantify overall company revenue recovery.

Mindray listed on the New York Stock Exchange in September 2006, raising US$270 million; in 2016, Li and his two co-founders took the company private in a US$1.9 billion deal, and the company subsequently re-listed on China's A-share market.

NPR captures the founding story: the property that houses Serum has been a stud farm since 1946, and part of it still is. The Poonawallas are a wealthy family of racehorse breeders (and collectors of luxury cars, including a Batmobile replica). In the 1960s they would donate retired racehorses to the government's Haffkine Institute, which used the horses' blood to develop serums and vaccines.

Investors seem to think of stocks and bonds as two things that fall under the same heading. But the difference is enormous. In fact, ownership and lending have nothing in common: • Owners put their money at risk with no promise of a return. They acquire a piece of a business or other asset and are entitled to their proportional share of any residual that remains after the necessary payments have been made to employees, providers of raw materials, landlords, tax authorities, and, of course, lenders. If there’s something left over, it’s called profit or cash flow, and the owners have the right to share in whatever part of it is paid out. And if there’s profit or cash flow (or the potential for it in the future), the business will have “enterprise value,” in which the owners also share. • Lenders typically provide funds to help owners purchase or operate businesses or other assets and, in exchange, are promised periodic interest and the repayment of principal at the end. The relationship between borrower and lender is contractual, and the resulting return is known in advance as described above, again assuming the borrower makes the promised payments when due. That’s why this kind of investing is called “fixed income” – the income is fixed. For the purposes of this memo, however, it might help to think of it as “fixed outcome” investing. This isn’t a difference in degree; it’s a difference in kind.

They will be propelled to great heights, usually by the rationalization that "it's different this time; productivity, technology, globalization, lower taxation – something – has permanently elevated the prospective return from stocks." The bear markets will come as a shock to the unsuspecting, demonstrating that, most of the time, the world doesn't change that much. For example, when you look at Siegel's 200-year straight-line stock market graph, no hiccup is visible in 1973-74. Try telling that to the equity investors who lost half their money. The bottom line is that risk of fluctuation is always present. Thus stocks are risky unless your time frame truly allows you to live through the downs while awaiting the ups. Lord Keynes said "markets can remain irrational longer than you can remain solvent," and being forced to sell at the bottom – by your emotions, your client or your need for money – can turn temporary volatility (the theoretical definition of risk) into very real permanent loss. Your time frame does a lot to determine what fluctuations you can survive. UActive managementU – In order to get more out of the ups and try to lessen the pain of the downs, most people turn to active management via market timing, group rotation, industry emphasis and stock selection. But it's just not that easy. The American Way – earnestly applying elbow grease – doesn't often payoff.

I put those dilapidated certificates in the bottom shelf of a filing cabinet and did not open that drawer for several years. It was helpful to not have the shares available in a brokerage account. The effort required to sell them helped me hold on with zero activity for several years. When Pabrai Funds started in July 1999, the tech bubble was heading towards a crescendo. Just eight months after we launched, the Nasdaq would top out at over 5000 and eventually bottom out at 1114 in 2002 - down 78% from its March 2000 peak. As the funds launched in 1999, I was able to sidestep the aftermath by focusing on being a Grahamian investor. Instead of buy and hold, I focused on buying dollar bills for 50 cents or less and selling them for 90 cents or more. This worked very well. From inception in 1999 through March 2018, $100,000 dollar invested in PIF2 turned into more than $1.8 million – after my ridiculous fees and all expenses. Now it is $1.4 million. All three funds beat virtually all the indices from inception through 2017 over one, three, five or ten years or life of funds1. For the first nineteen years, we outperformed regardless of whether we had $1 million in AUM or $600 million. When I look back at the full 21+ year history of Pabrai Funds, we’ve had two periods of two years each when we’ve seriously underperformed the indices. The first was during the financial crisis of 2007-09 and the second was from April 2018 to March 2020.

© 2022 Oaktree Capital Management, L.P. All Rights Reserved Follow us: However, the most important aspect of this change didn’t relate to high yield bonds, or to private equity, but rather to the adoption of a new investor mentality. Now risk wasn’t necessarily avoided, but rather considered relative to return and hopefully borne intelligently. This new risk/return mindset was critical in the development of many new types of investment, such as distressed debt, mortgage backed securities, structured credit, and private lending. It’s no exaggeration to say today’s investment world bears almost no resemblance to that of 50 years ago. Young people joining the industry today would likely be shocked to learn that, back then, investors didn’t think in risk/return terms. Now that’s all we do. Ergo, a sea change. At roughly the same time, big changes were underway in the macroeconomic world. I think it all started with the OPEC oil embargo of 1973-74, which caused the price of a barrel of oil to jump from roughly $24 to almost $65 in less than a year. This spike raised the cost of many goods and ignited rapid inflation. Because the U.S. private sector in the 1970s was much more unionized than it is now and many collective bargaining agreements contained automatic cost-of-living adjustments, rising inflation triggered wage increases, which exacerbated inflation and led to yet more wage increases.

” This makes the premium seem more like a historical fact but also less dependable in the future (probably as it should be). The equity risk premium can actually be defined at least four different ways, I think: 1. The historic excess of equity returns over the risk-free rate. 2. The minimum incremental return that people demanded in the past to make them shift from the risk-free asset to equities. 3. The minimum incremental return that people are demanding today to make them shift away from the risk-free asset and into equities. 4. The margin by which equity returns will exceed the risk-free rate in the future. The four uses for the term are different and, importantly, all four are applied from time to time. And I‟m sure the four uses are often confused. Clearly the import of the term is very different depending on which definition is chosen. The one that really matters, in my opinion, is the fourth: what will be the payoff from equity investing. It’s also the one about which it’s least reasonable to use the word “is,” as if the risk premium is a fact. What Will Equities Give You? There are problems with at least three of the four meanings. Only number one can be measured. There‟s a lot of data on the historic performance of stocks versus bonds and cash. In fact, in the 1990s Wharton Professor Jeremy Siegel documented to a fare-thee-well that stocks always won out over long periods of time. Of course the subsequent decade proved that didn‟t have to remain the case.

• Who among those who held on would have been able to avoid panicking in 2001, as the price fell 93%, to $6? • And who wouldn’t have sold by late 2015 when it hit $600 – up 100x from the 2001 low? Yet anyone who sold at $600 captured only the first 18% of the overall rise from that low. This reminds me of the time I once visited Malibu with a friend and mentioned that the Rindge family is said to have bought the entire area – all 13,330 acres – in 1892 for $300,000, or $22.50 per acre. (It’s clearly worth many billions today.) My friend said, “I’d like to have bought all of Malibu for $300,000.” My response was simple: “you would have sold it when it got to $600,000.” The more I’ve thought about it since writing Liquidity, the more convinced I’ve become that there are two main reasons why people sell investments: because they’re up and because they’re down. You may say that sounds nutty, but what’s really nutty is many investors’ behavior. Selling Because It’s Up “Profit-taking” is the intelligent-sounding term in our business for selling things that have appreciated. To understand why people engage in it, you need insight into human behavior, because a lot of investors’ selling is motivated by psychology. In short, a good deal of selling takes place because people like the fact that their assets show gains, and they’re afraid the profits will go away. Most people invest a lot of time and effort trying to avoid unpleasant feelings like regret and embarrassment.

(The Financial Times reported on September 11 that according to JPMorgan, the alternative investment world amounts to $3 trillion, while the size of the mainstream bond and equity world is estimated at $60 trillion.) Thus the amounts people are trying to invest can overwhelm these markets. For this reason, investors may attach more importance to the ability to put large sums to work than to being able to attain historic returns and risk premiums, clear high due diligence hurdles, or structure fee arrangements that channel managers’ energies for the benefit of clients.  For now, the high level of liquidity is creating a “virtuous cycle.” The inflows have (1) given rise to asset appreciation, high returns and further demand, and (2) made it easy for weak companies to finance their way out of trouble, thus contributing to the impression that the level of risk is low.  The business model for managers in these areas has been completely altered by these developments. Because the amounts under management are so large (and the ability to charge high management fees is so great), managers can get rich off management fees and deal fees alone. For managers, then, high returns may be a nice-to-have, not a need-to- have, and avoiding endangering the fee machine can become a greater preoccupation.that:

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: reliable economic data regarding North Korea, but according to the CIA’s Worldbook, its GDP in purchasing power terms is estimated at $2,000 per person versus $50,000 in South Korea. North Korea’s citizens are described as impoverished, but at least it doesn’t have a border problem, since nobody’s trying to sneak in. There are political differences (democracy versus dictatorship) in addition to the economic ones, but I think it’s fair to say capitalism has won. In discussions of economic systems, I usually ask people what they think has been responsible for the economic preeminence the U.S. has enjoyed since the end of World War I, and thus for its citizens’ higher average standard of living. Are Americans smarter? Harder working? More deserving? None of the above. I’m confident it’s because of our historical embrace of the free-market system and capitalism. The incentives provided by free markets efficiently direct capital and other resources where they’ll be most productive. They prompt producers to make the goods people want most and workers to take the jobs where they’ll be most productive in terms of the value of their output. And they encourage hard work and risk taking. The result is a higher standard of living for society in general, but certainly not everyone benefits to the same degree.

And price appreciation, which under most circumstances should prompt a review of a holding’s retention, can tend instead to seduce the investor into raising the target price and possibly buying more. As expressed by David Swensen of Yale, “. . . investment success requires sticking with positions made uncomfortable by their variance with popular opinion. Casual commitments invite casual reversal, exposing portfolio managers to the damaging whipsaw of buying high and selling low.” You may wonder from time to time about the high level of confidence exhibited by your managers. But bear in mind that the most profitable investments are unconventional, and maintaining unconventional positions can be lonely. When you buy something you think is cheap and then see its price fall, it takes a strong ego to conclude it’s you who’s right, not the market. So ego strength is necessary if a manager is going to be able to make correct decisions despite Swensen’s “variance from popular opinion.” Oh yeah, one last thing: those strongly-held views had better be right. Few things are more dangerous than an incorrect opinion held with conviction and relied on to excess. The most important thing is investing defensively.

That changed with the spread of the argument – associated primarily with Michael Milken – that incremental credit risk could responsibly be borne if offset by more-than-commensurate yield spreads.  Around 1980, debt securitization began to occur, with packages of mortgages sliced into securities of varying risk and return, with the highest-priority tranche carrying the lowest yield, and so forth. This process was an example of disintermediation, in which the making of loans moved out of the banks; 25 years later, this would be called the shadow banking system.  One of the first “quant” miracles came along in the 1980s: portfolio insurance. Under this automated strategy, investors could ride stocks up but avoid losses by entering stop-loss orders if they fell. It looked good on paper, but it failed on Black Monday in 1987 when brokers didn’t answer their phones.  In the mid- to late 1980s, the ability to borrow large amounts of money through high yield bond offerings made it possible for minor players to effect buyouts of large, iconic companies, and “leverage” became part of investors’ everyday vocabulary.  When many of those buyouts proved too highly levered to get through the 1990 recession and went bust, investing in distressed debt gained currency.  Real estate had boomed because of excessive tax incentives and the admission of real estate to the portfolios of S&Ls, but it collapsed in 1991-92.

The Queen's piece emphasises the culture shock Kohli faced in post-war Kingston — a visible minority in a much smaller student body, with different food and culture — but argues the more important shift was methodological: critical thinking over rote learning, which he carried back into every institution he later built in India.

UThe Black Swan You may recall that in “The Aviary” in May, I wrote about The Black Swan, the second book from Nassim Nicholas Taleb, author of Fooled by Randomness. In The Black Swan, Taleb talks about unlikely, extreme, unpredictable events that have the potential for dramatic impact. His title was derived from the fact that, never having traveled to Australia and seen its black swans, Europeans of a few centuries ago were convinced all swans were white. In other words, because they’d never seen something, they considered it impossible. The message of The Black Swan is how important it is to realize that the things everyone rules out can still come to pass. That might be generalized into an understanding of the importance of skepticism. I’d define skepticism as not believing what you’re told or what “everyone” considers true. In my opinion, it’s one of the most important requirements for successful investing. If you believe the story everyone else believes, you’ll do what they do. Usually you’ll buy at high prices and sell at lows. You’ll fall for tales of the “silver bullet” capable of delivering high returns without risk. You’ll buy what’s been doing well and sell what’s been doing poorly. And you’ll suffer losses in crashes and miss out when things recover from bottoms. In other words, you’ll be a conformist, not a maverick (an overused word these days); a follower, not a contrarian.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: based on the manic-depressive ups and downs of a character Benjamin Graham called “Mr. Market.” On any given day, Mr. Market can be exuberant or despondent, and he quotes prices for securities based on how he feels. The value investor understands that – rather than informing us as to what a given asset’s value is – Mr. Market is there to serve us by offering up securities at prices, which can be meaningfully disconnected from the actual value of a stake or claim in the underlying business. In doing so, he sometimes gives us the opportunity to snatch up shares or bonds at a meaningful discount from their intrinsic value. This activity requires independent thought and a temperament that resists the emotional pull of the market cycle, making for decisions based solely on value. Thus, to me the essential underlying principles of value investing are these: • the understanding of securities as stakes in actual businesses, • the focus on true worth as opposed to price, • the use of fundamentals to calculate intrinsic value, • the recognition that attractive investments come when there is a wide divergence between the price at which something is offered in the market and the actual fundamental worth you’ve determined, and • the emotional discipline to act when such an opportunity is presented and not otherwise. Value vs.

© Oaktree Capital Management, L.P. All Rights Reserved those rare occasions when they call for change, they often underestimate the potential magnitude. Very few people predicted oil would decline significantly, and fewer still mentioned the possibility that we would see $60 within six months. For several decades, Byron Wien of Blackstone (and formerly of Morgan Stanley, where he authored widely read strategy pieces) has organized summer lunches in the Hamptons for “serious,” prominent investors. At the conclusion of the 2014 series in August, he reported as follows with regard to the consensus of the participants: Most believed that the price of oil would remain around present levels. Several trillion dollars have been invested in drilling over the last few years and yet production is flat because Nigeria, Iraq and Libya are producing less. The U.S. and Europe are reducing consumption, but that is being more than offset by increasing demand from the developing world, particularly China. Five years from now the price of Brent is likely to be closer to $120 because of emerging market demand. I don’t mean to pick on Byron or his luncheon guests. In fact, I think the sentiments he reported were highly representative of most investors’ thinking at the time. As a side note, it’s interesting to observe that growth in China already was widely understood to be slowing, but perhaps that recognition never made its way into the views on oil of those present at Byron’s lunches.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: What we do know, however, is that the famous saying “No risk, no reward” is true in many cases. A skilled adversary is normally able to handle solid, conservative play and therefore able to rob us of opportunities that may be inherent in our position. As [five- time world chess champion] Magnus Carlsen put it, “Not being willing to take risks is an extremely risky strategy.” (Emphasis added) And there you have it: the indispensability of risk. The Risk of Not Taking Risk Because the future is inherently uncertain, we usually have to choose between (a) avoiding risk and having little or no return, (b) taking a modest risk and settling for a commensurately modest return, or (c) taking on a high degree of uncertainty in pursuit of substantial gain but accepting the possibility of substantial permanent loss. Everyone would love a shot at earning big gains with little risk, but the “efficiency” of the market – meaning the fact that the other participants in the market aren’t dummies – usually precludes this possibility. Most investors are capable of accomplishing “a” and most of “b.” The challenge in investing lies in the pursuit of some version of “c.” Earning high returns – in absolute terms or relative to other investors in a market – requires that you bear meaningful risk – either the possibility of loss in the pursuit of absolute gain or the possibility of underperformance in the pursuit of outperformance.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Housel’s approach to thinking about debt – and especially his illustrations – reminded me of my December 2008 memo, Volatility + Leverage = Dynamite. (Unless otherwise indicated, this memo is the source of the quotations that follow; in all cases, emphasis is in the original.) In that memo, I used a series of simple graphics to show that the lower a company’s debt load is, the greater the decline in fortune it could survive. And I made the following observation about the root cause of the Global Financial Crisis, which was in full force at the time of the memo: . . . the amount of borrowed money – leverage – that it’s prudent to use is purely a function of the riskiness and volatility of the assets it’s used to purchase. The more stable the assets, the more leverage it’s safe to use. Riskier assets, less leverage. It’s that simple. One of the main reasons for the problem today at financial institutions is that they underestimated the risk inherent in assets such as home mortgages and, as a result, bought too much mortgage-backed paper with too much borrowed money. Portfolios, Leverage, and Volatility The reason for taking on debt – i.e., using what investors call “leverage” – is simple: to increase so-called capital efficiency. Debt capital is usually cheap relative to the expected returns that motivate equity investments and thus relative to the imputed cost of equity capital.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: elevated opinion of an asset or sector, and the TMT craze of the late 1990s exemplified this definition. Thus, I wrote as follows: In short, I find the evidence of an overheated, speculative market in technology, Internet and telecommunications stocks overwhelming, as are the similarities to past manias. . . . To say technology, Internet and telecommunications stocks are too high and about to decline is comparable today to standing in front of a freight train. To say they have benefited from a boom of colossal proportions and should be examined very skeptically is something I feel I owe you. In my opinion, the TMT bubble burst in early 2000 for no reason other than that stock prices had become unsustainably high. The Standard & Poor’s 500 Index fell by 46% from its 2000 high to the low in 2002, and the tech-heavy NASDAQ Composite declined by 80% during this period. Many tech stocks lost much more, and many young companies in fields such as e-commerce ended up becoming worthless. And the word “bubble” became part of everyday speech for a new generation of investors. Late 2004 to Mid-2007 The aftermath of the TMT bubble led to an environment in the mid-aughts that felt to me like a slow- developing trainwreck, with an emphasis on “slow-developing.” I started complaining too soon . . . or maybe my timing was reasonable but the negative consequences just took longer to develop than they should have.

When the market doesn’t go anyplace, it’s because the sentiment behind this tug-of-war is evenly divided, and the people – or feelings – on the two ends of the rope carry roughly equal weight. The optimists may prevail for a while, but as securities are bid up they become more highly priced, and then the pessimists gain sway and sell them down. The result is a market that rises or falls moderately if at all – not unlike the experience so far this year. For example, as The Wall Street Journal wrote on May 17, The Dow Jones Industrial Average has been down for three weeks in a row, . . . Still, a determined group of optimists has refused to throw in the towel, stepping in to buy what they view as cheap stocks whenever prices began to plummet. On Wednesday, when the Dow Industrials fell as low as 9852.19 during the day, these people began to buy, pushing the blue-chip average back above 10000. Two forces continue to compete in the market: those who believe that the current skittishness will end once investors get used to the idea of rising interest rates, and those who think further stock declines are inevitable. It didn’t take long in my early days, however, for me to realize that often the market is driven by greed UorU fear. At the times that really count, large numbers of people leave one end of the rope for the other. Either the greedy or the fearful predominate, and they move the market dramatically.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: been right if only some unexpected event hadn’t transpired. But, in either case, the chance for the unexpected – and thus for forecasting error – was present. In the latter instance, the unexpected materialized, and in the former, it didn’t. But that doesn’t say anything about the likelihood of the unexpected taking place. Macro Economics In 2021, the U.S. Federal Reserve held the view that the bout of inflation then underway would prove “transitory,” which it has subsequently defined as meaning temporary, not entrenched, and likely to self- correct. I think the Fed might have been proved right, given enough time. Inflation might have retreated of its own accord in three or four years, after (a) the Covid-19 relief funds that caused the surge in consumer spending were spent down and (b) the global supply chain returned to its normal operations. (However, not slowing the economy would have brought the risk that inflationary psychology might take hold in those 3-4 years, necessitating even stronger action.) But because the Fed’s view wasn’t borne out in 2021 and waiting longer was untenable, the Fed was forced to embark on one of the fastest programs of interest rate increases in history, with profound implications. In mid-2022, there was near certainty that the Fed’s rate increases would precipitate a recession. It made sense that the dramatic increase in interest rates would shock the economy.

Although not all the money has been well spent – “a blunt and messy solution” according to William Dudley, president of the New York Federal Reserve (The New York Times, January 21) – it seems clear the stimulus program has prevented a much more dire outcome. Regardless, the economy’s response is tepid, and I wonder whether the slow growth reflects negative underlying secular trends. This makes me tend toward an expectation that the recovery will be lackluster, and that it will take years before we get back to anything approaching the vibrancy of the period preceding the crisis. I fall back on the analogy of a stalled car (the economy) being pulled by a tow truck (government stimulus). The tow truck will want to let the car down one of these days and go on its way. Will the car be able to move on its own? We can only wait and see. I think it’s more likely to sputter along than it is to move forward energetically. But at least we don’t have to worry any longer about the analogy of fifteen months ago: an airplane whose engine has flamed out. A powerless plane in mid-flight presents a far more troubling image than a stalled car. The Role of Interest Rates Interest rate reduction has played an extremely important part in the government’s efforts to end the crisis and bring the economy back to life.  By reducing short-term interest rates (in this case to near-zero), the government makes it more attractive to spend and invest, stimulating the economy.

The problem is that "knowledge-advantaged short-term trading" is inimical to the interests of a fund's other holders – in essence, these tactics permit a bystander to occasionally dart into the game and appropriate for himself some profit that otherwise would accrue to the fund's long-term investors (and also to run up the fund's costs). There are tools the funds can use to discourage short-term trading: they can impose exit fees, turn away investors based on their past behavior, or revoke trades. Many funds have policies of fighting short-term traders, and those policies and the actions the funds will take are set forth in their prospectuses. That's where the problem comes in. The complaint against Canary Capital states that, "Canary entered into agreements with dozens of mutual fund families allowing it to time many different mutual funds." Some of these funds ignored or contravened the policies stated in their prospectuses, and some accepted compensation for doing so. It is these actions on the part of the funds – and what Canary did to induce them – that are improper. Late trading is highly analogous to fund timing – it's another form of "knowledge- advantaged short-term trading." However, in this form it consists of placing a buy or sell order for a mutual fund after the 4:00 p.m. deadline, for execution at the previously set NAV, in contravention of the SEC's "forward pricing rule." This is done in order to profit from developments that have occurred since 4:00 p.m.

© 2018 Oaktree Capital Management, L.P. All Rights Reserved Follow us: logic was clear and convincing, per the following citation from Wikipedia (with apologies to Richard Masson, my conscience regarding sources, for relying on it): In 1973, Burton Malkiel wrote A Random Walk Down Wall Street, which presented academic findings for the lay public. It was becoming well known in the lay financial press that most mutual funds were not beating the market indices. Malkiel wrote: What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out “You can’t buy the averages.” It’s time the public could. . . . there is no greater service [the New York Stock Exchange] could provide than to sponsor such a fund and run it on a nonprofit basis. . . . Such a fund is much needed, and if the New York Stock Exchange (which, incidentally has considered such a fund) is unwilling to do it, I hope some other institution will. (Emphasis added) The first index fund appeared around that time. Again according to Wikipedia, the registration statement for the Qualidex Fund, designed to track the Dow Jones Industrial Average, became effective in 1972. I have no reason to believe it attracted many investors.

 Unquestioning acceptance of financial platitudes without wondering whether altered circumstances and elevated asset prices had rendered them irrelevant: o Houses and condos are good investments and can be counted on to appreciate. o Mortgages rarely go into default. o There can never be a nation-wide decline in home prices. o It’s okay to grossly lever a balance sheet if you’ve hedged enough through derivatives. o It’s safe to borrow and invest funds equal to a huge multiple of your equity capital if the probabilistic expected value is positive, because “disasters rarely happen.”  Individuals such as mortgage brokers and mortgage borrowers who were given incentives to do the wrong thing.  Newly minted financial “masters of the universe” encouraged to maximize returns for themselves and their employers without concern for whether they were adding value to the financial system or endangering it. In general, the above can be summed up as a shortage of adult supervision, common sense, skepticism, ethical concern and good old-fashioned prudence. As often happens in booms, the kids shouldered the adults aside or impressed them too much. The list of errors can make you laugh . . . or cry. I mentioned in “Hindsight First, Please” how often financial people do things that look downright silly afterwards. But that never stops them from repeating the old mistakes or making new ones.

© Oaktree Capital Management, L.P. All Rights Reserved USomething for everyone (but little genuine debate) U-- As the article reported, Wells Capital last week urged clients to move money into stocks from bonds, shifting holdings to 70% stocks and 30% bonds, from 65% and 35% . . . Taking the opposite approach to Wells Capital, . . . Bear Stearns urged clients to cut their stock exposure to 55% from 60% of their portfolio, moving the money into short-term cash accounts. As for me, I'm certain one of them will be proved right. U Weak underpinningsU - The article reflected the bulls' preoccupation with things that either don't really matter in any fundamental sense . . . . . . people are buying cars, they are buying houses, they are spending money. . . I think the wind is still at the market's back. . . . or say absolutely nothing about long-term value: The whisper today was that the online firms are going to have very strong earnings. UGobbledegook U-- Lastly, some of what's going on just makes no sense at all. People are very comfortable that the earnings projections are going to be hit, but the expectations are higher than that. I have no idea what that means, but I'm sure it'll be good for a few hundred points on the indices. * * * Lots of sound and fury, signifying nothing. There's a lot said, in the article I'm writing about and in the media generally, but not a lot of insight.

On this, I am dogmatic: We may never know where we’re going, but we’d better have a good idea where we are. That is, even if we can’t predict the timing and extent of cyclical fluctuations, it’s essential that we strive to ascertain where we stand in cyclical terms and act accordingly. U What Can We Know, and How? Even without knowing where we’re going and when, we can deduce lots of valuable information about our investment environment. First, where do we stand in the economic cycle? Is the economy several years into a recovery that may be due for a rest? Has it leveled out and begun to weaken? Or has it been weak enough long enough that we can reasonably expect recession to give way to recovery? Second, how have the markets been performing? Have they been weak for years, possibly pushing prices to bargain basement levels? Or have they been so strong that we should suspect (1) the positives have been fully discounted, (2) several years of potential gains have been accelerated into the returns to date, and (3) assets today are “priced for perfection”? Finally, and often most important, how are people around us behaving? If they’re chastened by losses and afraid of the future, there’s reason for us to be optimistic. If they’re unworried and complacent, that’s something we should worry about.Buffettism,

Thus rather than criticize Trump’s tariffs, I’m going to use them as an example to illustrate the central messages of this memo: (a) economic actions have costs and consequences, (b) for that reason, it’s generally safe to say there are no simple solutions to complex problems, (c) given the complexities, few people thoroughly understand economics, and (d) because of that understanding deficit, politicians’ proposed solutions often fail to receive the scrutiny they should. First, there’s misunderstanding. The U.S. runs chronic trade deficits with most of its trading partners, and with China it amounted to $335 billion in 2017. Trump takes these deficits to mean our trading partners are winning and we’re losing. “We have countries ripping us off for years. . . . We have trade deficits; they have surpluses.” In particular, he says “China’s been killing us,” suggesting there’s something nefarious about trade deficits. But is that the correct inference? The other day I went to the barber for a haircut, and when I paid him, I ran a trade deficit. He got my money, and I got a haircut. I didn’t feel like I had lost. Likewise, Chinese businesses make money from the U.S., and U.S. consumers get the low- priced goods they want. Both sound like winners to me. Trump has said, “If we didn’t trade, we’d save a hell of a lot of money.” Would we? That would be true only if we didn’t otherwise buy the things we’ve been importing, or if we were able to buy them cheaper domestically.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: It’s also important to note that at the end of November, U.S. stocks represented over 70% of the MSCI World Index, the highest percentage since 1970 according to another Cembalest chart. Thus, it’s clear that (a) U.S. companies are worth a lot compared to the companies in other regions and (b) the top seven U.S. stocks are worth a heightened amount relative to the rest of U.S. stocks. But is it a bubble? What Is a Bubble? Investment lingo comes and goes. My young Oaktree colleagues use a lot of terms these days for which I have to request translation. But “bubble” and “crash” have been in the financial lexicon for as long as I’ve been in the investment business, and I imagine they’ll remain there for generations to come. Today, the mainstream media uses them broadly, and people seem to consider them to be subject to objective definition. But for me, a bubble or crash is more a state of mind than a quantitative calculation.

This is a normal aspect of the economic process. Few debtors can tap the capital markets today to the same extent they could five or ten years ago. In a radical turn of events, lenders now appear to care about borrowers’ ability to repay, and they find some of their customers less than creditworthy. Since almost no borrowers actually have the ability to pay off their debts, this has led to credit difficulties ranging from home foreclosures, to municipal bankruptcies in the U.S., to debt crises in peripheral Europe. American consumers seem to have concluded that they should owe less (or have found that they can’t borrow as much). For whatever reason, the savings rate has risen, suggesting a decline in the propensity to spend all one makes and more. All around the world, there’s movement on the part of borrowers – sometimes voluntary and sometimes involuntary – toward austerity (reducing the excess of spending over incomes) or even delevering (spending less than you make and using the surplus to pay down debt). These trends are healthy for individual borrowers’ balance sheets, but they imply reduced consumption and thus are negative for GDP growth. If everyone does these things at the same time, the results can be quite contractionary. Regardless of how you look at it, less use of consumer credit implies less economic growth. The other specific element that gives me pause relates to confidence.

© 2015 Oaktree Capital Management, L.P. All Rights Reserved  He was regularly among the catchers with the fewest passed balls and errors committed.  He had around 450-650 at bats most years, but over his entire career he averaged only 24 strikeouts per year, and there was never one in which he struck out more than 38 times. (In 1950 he did so only 12 times in nearly 600 at bats.) Thus, ten times between 1948 and 1959 he was among the ten players with the fewest strikeouts per plate appearance. In short, Yogi rarely messed up. Consistency and minimization of error are two of the attributes that characterized Yogi’s career, and they can also be key assets for superior investors. They aren’t the only ways for investors to excel: some great ones strike out a lot but hit home runs in bunches the way Reggie Jackson did. Reggie – nicknamed “Mr. October” because of his frequent heroics in the World Series – was one of the top home run hitters of all time. But he also holds the record for the most career strikeouts, and his ratio of strikeouts to home runs was four times Yogi’s: 4.61 versus 1.16. Consistency and minimization of error have always ranked high among my priorities and Oaktree’s, and they still do. Yogi Berra, Philosopher Although Yogi was one of the all-time greats, his baseball achievements may be little-remembered by the current generation of fans, and few non-sports lovers are aware of them.

© 2024 Oaktree Capital Management, L.P. All Rights Reserved Follow us: warming for over a year. In addition, and importantly, the announcement played havoc with investors who had engaged in “the carry trade.” For years, Japan’s infinitesimal – and often negative – interest rates have meant that people could borrow cheaply in Japan and invest the borrowed funds in any number of assets, there and elsewhere, that promised to return more, for a “positive carry” (aka “free money”). This led to the establishment of highly levered positions. It seems odd that a quarter-point increase in interest rates could require some of these positions to be unwound. But it did, leading to motivated selling in a variety of asset classes as those who had engaged in the practice moved to cut their leverage. Starting the next day, the U.S. announced mixed economic news. On August 1, we learned that the Manufacturing Purchasing Managers’ Index had dipped and initial jobless claims had risen. On the other hand, corporate profit margins continued to look good, and gains in productivity surprised to the upside. A day later, we learned that employment gains had moderated, with hiring rising less than had been expected. The unemployment rate stood at 4.3% at the end of July, up from a low of 3.4% in April 2023.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: I want to say right here about 2008 and the other crises I’ve invested through – as well as today – that I don’t reach my conclusions with confidence or act without trepidation. There’s absolutely no place for certainty in the world of investing, and that’s particularly true at turning points and during upheavals. I’m never sure my answers are right, but if I can reason out what’s most logical, I feel I have to move in that direction. The Uncertain Outlook In my February memo 2024 in Review, which went only to clients, I said the word to describe the Trump administration was “uncertainty.” President Trump’s thinking seems less predictable than that of most presidents, largely because it doesn’t necessarily hew to a consistent ideology, and it’s very much subject to being applied and revised tactically. It should be noted, however, that Trump has complained about how the U.S. is treated in world trade and argued in support of tariffs since at least 1987. Having said that, and even though we knew he was going to hike tariffs, no one anticipated the magnitude of the increases. Clearly the markets hadn’t. Last week’s events remind us of the events of 2008 and the Global Financial Crisis they produced. All norms have been overthrown. The way world trade has operated for the last 80 years may be of little relevance to the future. The impact on economies and the world at large is entirely unpredictable.

Because so few stocks are bought today for asset values, we essentially can disregard them. The vast majority of stocks are bought for the stream of earnings the companies produce. But how do those earnings affect investors – get through to investors – if not in the form of dividends? That's the question that drove me in the 1960s. It almost verges on metaphysical. If a company has great earnings but those earnings aren't ever paid out in dividends, are they still of value to investors? If it makes a bunch of money but just hoards it, or reinvests it in new products and facilities that generate future earnings that also are not paid out, in what way are its profits of value to investors? That's kind of like the old question, "if a tree falls in the forest but there's no one around to hear it, does it still make noise?" There are two possible answers:  Eventually, earnings must be paid out. Common sense tells us that, sooner or later, every company will run out of good reinvestment opportunities, and the cash will then go to dividends, or to stock buy-backs, which have the same effect but better tax treatment. (Of course, the record suggests that when they run out of good reinvestment opportunities, companies often prefer bad reinvestment opportunities to giving the money to the shareholders.)

UPositive Arguments One of the strongest arguments for buying now cites the market's departure from one of those historic patterns referred to above. The New York Times stated it clearly on July 21: Using history as a guide, the stock market should be higher now than it was a year ago. Since 1948, six months after a recession's trough, stocks have jumped an average of 24 percent from the previous year. But at the end of June, six months from the recession's probable end, stocks were down 18% from last year. That means the market has underperformed its typical post-recessionary move by 40 percentage points. [Emphasis added] Supporting this is the widespread and not unreasonable belief that the economy is no longer in decline and a modest recovery is underway. While it is difficult to identify many pockets of great strength in the economy, there is no evidence that the aggregates are still trending down. Buttressing the economic outlook are recent movements in currency exchange rates. The dollar has stopped appreciating relative to other currencies and in fact has moved 10% lower. This means, for example, that it now takes fewer euros to buy a dollar and more dollars to buy a euro. Thus, everything being equal, U.S. goods are now cheaper than foreign goods. This should serve to increase U.S. manufacturers' sales to Americans and foreigners alike.

© Oaktree Capital Management, L.P. All Rights Reserved Second-Level Thinking I always thought that when I retired, I would write a book pulling together the elements of investment philosophy discussed in my memos. But in 2009, I got an email from Warren Buffett saying that if I’d write a book, he’d give me a blurb for the jacket. It didn’t take me long to move up my timing. Columbia Business School Publishing had been talking to me about a book, and when I told them I was ready, they asked to see a sample chapter. For some reason, I was able to sit down – without previously having given the topic any organized thought – and knock out a chapter about the importance of something I labeled “second-level thinking.” This is a crucial subject that has to be understood by everyone who aspires to be a superior investor. And yet I’ve never covered it explicitly for the readers of my memos. I want to correct that now. In what ended up being the book’s first chapter, I introduced the subject as follows: Remember your goal in investing isn’t to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level. Since others may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss, or bring insight they don’t possess. You have to react differently and behave differently.

”) For Fund A, shown above, the three-year IRR is 21%. This is far more reflective of the amount of wealth created than is the 45% time-weighted return. The difference arises because the IRR calculation gives relatively little weight to the 100% return achieved in the third year, whereas the time-weighted return gives it as much weight as the first-year gain of 10%. To fully understand the importance of this distinction, consider Fund B, which achieves the same annual returns as Fund A – and thus the same compound annual return – but holds on to all of its capital through the end of the third year. Fund B Annual Return Dollar Gain Distribution Portfolio Value Initial Investment $1,000 Year 1 10% $ 100 0 1,100 Year 2 40 440 0 1,540 Year 3 100 1,540 $3,080 -- Comp. Ann.45

That brings me to the subject of one of today’s greatest stumbling blocks, the absence of that elusive ideal: bipartisanship. Let’s discuss this issue in principle. It’s likely that the “ins” always think the fact that voters gave them control means they should mostly get their way, and that “bipartisanship” consists of the “outs” going along with them. The outs, on the other hand, don’t take the election results to mean the minority has no rights, and they feel perfectly within their rights to use Congress’s rules and processes to fight for their point of view (which, on us-versus-them issues, equates to thwarting the efforts of the ins). The Times article points out ironically that when control of government is divided between the two parties, they both feel some responsibility for solving problems, while today, with full control seemingly in the hands of the Democrats, the Republicans are free to view their only role as dissenting and obstructing. And as the party in control, the Democrats evidently feel no obligation to yield on their positions. Frankly, I wouldn’t be so unhappy if I were sure today’s battles were being fought over principles. What worries me most is the appearance that, instead, they’re being fought for personal and political advantage and to win elections. Today I think few legislators from either party will vote for anything that would let members of the other party claim to have accomplished something.

Most raging bull markets are abetted by an upsurge in the willingness to provide capital, usually imprudently. Likewise, most collapses are preceded by a wholesale refusal to finance certain companies, industries, or the entire gamut of would-be borrowers. Then, in “You Can’t Predict. You Can Prepare.” I described this expand-and-contract process in detail, along with its ramifications:  The economy moves into a period of prosperity.  Providers of capital thrive, increasing their capital base.  Because bad news is scarce, the risks entailed in lending and investing seem to have shrunk.  Risk averseness disappears.  Financial institutions move to expand their businesses – that is, to provide more capital.  They compete for share by lowering demanded returns (e.g., cutting interest rates), lowering credit standards, providing more capital for a given transaction, and easing covenants. © Oaktree Capital Management, L.P.Reserved

While searching the Internet for the source of the quote above about professions, I came across something that I think supports my view that most people reach conclusions for reasons that are questionable: An ignorant mind is precisely not a spotless, empty vessel, but one that’s filled with the clutter of irrelevant or misleading life experiences, theories, facts, intuitions, strategies, algorithms, heuristics, metaphors, and hunches that regrettably have the look and feel of useful and accurate knowledge. This clutter is an unfortunate by- product of one of our greatest strengths as a species. We are unbridled pattern recognizers and profligate theorizers. Often, our theories are good enough to get us through the day, or at least to an age when we can procreate. But our genius for creative storytelling, combined with our inability to detect our own ignorance, can sometimes lead to situations that are embarrassing, unfortunate, or downright dangerous – especially in a technologically advanced, complex democratic society that occasionally invests mistaken popular beliefs with immense destructive power (See: crisis, financial; war, Iraq). (“We Are All Confident Idiots,” David Dunning, Professor of Psychology, University of Michigan, Pacific Standard magazine, October 27, 2014) In other words, we may not be able to know the future, but that doesn’t keep us from reaching conclusions about it and holding them firmly.

com” I related several old jokes about the businessman who sells below cost, but I never expected to see life imitate art so precisely. Anyway, WebHouse's backers lost their enthusiasm for absorbing the losses (the fall of their Priceline stock from $170 to $3 may have had something to do with it), and the company ceased doing business on October 5. I find it reassuring that entrepreneurs (and, more significantly, the investors expected to fund them) are realizing that profitless “business models” are untenable. Internet retail firms are shutting down, especially those in overpopulated “spaces.” Now, I'm told, the newest “b-to-c” among Silicon Valley employees is “back to consulting.” Last year, Goldman Sachs had trouble recruiting the MBA it needed; this year the interview rooms are overcrowded again. UWhat Can Reasonably Be Expected from Equities? In a little drama that I'm sure has played out at thousands of organizations in the last year, a charitable organization investment committee that I chair began to question its conservative portfolio and ask whether it should have more in equities. As a result, we commissioned some bond/stock allocation work from our consultants. Its conclusions were most curious.

For a final example, what about the asset-class return on private equity? This strikes me as an even more unreliable concept. The return on a private equity investment will come from the combination of (a) the potential of the underlying company and (b) the ability of the manager to identify the opportunity, buy the company at a good price, make it a better company, and sell it at higher valuation parameters than it was bought for. Certainly all of the elements included in “b” are highly dependent on the manager’s skill and have little or nothing to do with the fact that the investment belongs to a given asset class. UAbsolute-Return Investing My memos are often sparked by something I stumble on, and this one is no exception. The prompt came from “The Myth of the Absolute-Return Investor” by M. Barton Waring and Laurence B. Siegel (Financial Analysts Journal, March/April 2006). Many people talk today about absolute-return investing and say they want to put money with absolute-return funds and managers. But as Waring and Siegel indicate, there’s no broad agreement on what that means. They start their article by citing a few popular definitions for absolute-return investments, which seem to be distillable to investments possessing the potential for positive returns regardless of general market conditions. In my opinion, if you’re interested in absolute return investing, you should be looking for a steady outcome rather than responsiveness to market conditions.

© 2023 Oaktree Capital Management, L.P. All Rights Reserved Follow us: • The recognized losses helped hasten the spread of negative rumors throughout the tight-knit venture capital community, which led to further withdrawals. An unusually large percentage of SVB’s deposits – 94% – exceeded $250,000 and thus weren’t fully insured by the FDIC. This meant they were more “institutional” than “retail.” Additionally, SVB’s customers were highly interconnected: They had many backers in common, lived and worked near each other, and could exchange information almost instantaneously through social media. The sum of the above rendered SVB particularly vulnerable to a bank run if adverse circumstances developed – and they did. However, many of the above factors were peculiar to SVB. Thus, I don’t think SVB’s failure suggests problems are widespread in the U.S. banking system. What Did SVB Have in Common with Other Banks? I talked above about some things that distinguished SVB from other banks. But it’s as important to consider the elements they shared: • Asset/liability mismatch – Financial mismatches are dangerous, and banks are built on them. Deposits are banks’ primary source of funds, and while some have longer terms, most can be withdrawn on any day, without prior notice. On the other hand, making loans represents banks’ main use of funds, and most loans have lives ranging from one year (commercial loans) up to 10- 30 years (mortgages).

Mainstream economics, also known as mechanical economics, which partners the unlikely bedfellows of Neoclassical and Neo-Keynesian economics, views and treats the market as some automaton, in a way, that can be centrally engineered, planned, and steered. If instead we view the market as embodying our collective extended mind, acknowledging its warts and all, which obviously is our thesis, which two episodes in your career would be best suited to study the market mind? HM: Russell’s question about the two episodes, contained in your last sentence, would limit me too much. So, if you don’t mind, I’m going to go way beyond that, because I think my answer to this question is central to our whole discussion today. Your first few words, when you discussed what Russell said, refer to the economy as mechanical, and I think that isn’t helpful. Applying the word “mechanical” (again, as with the first question) suggests that it’s governed by the rules of physics, the laws of nature, that it’s a science, that it performs the same each time, that it’s repeatable, studiable and extrapolable. And I think these are all wrong. And in fact, I aggressively remind people that I’m not an economist, but also that economics is called the “dismal science.” And I’m not sure it’s a science at all, but if it is, it’s certainly dismal, in the sense that it’s not like physics, where if you do A, you always get B. Sometimes you get C or sometimes nothing at all.

This was a delicate balancing act, but for years it seemed to go quite well. It was a requirement for success that all the nations share fiscal policy. However, as in most economic alliances, there were incentives to nibble at the rules. And, believing more is better, the E.U. admitted nations with less uniform values. The desire to create a common currency and expand the reach of the union – to achieve a scale more comparable to economic powers like the United States – colored decisions regarding expansion and ultimately led to trouble. To get a feeling for what happened, let’s say you and I are such good friends that we decide to combine our economic strength to apply together for a credit card with better terms and a higher limit. We agree we’ll each (a) refrain from spending more than we earn and (b) receive and pay that part of the bill that relates to our own charges. All goes well, and eventually we agree to admit a third member to our association. But the new member doesn’t share our commitment to thrift and integrity, wants to live a better life than he can afford, and thus charges more on the card than he earns. Our strong combined credit rating enables him to do so, and his balance on the credit card starts to swell. When it comes out that our association is heavily indebted, we chip in to pay off the unpaid balance, even though only one of us ran it up.

There's a whole profession built around doing so. Academics try to understand the economy, and professionals try to predict its course. Personally, I'd stick to the former. I think we can gain a good grasp of how the economy works, but I do not think we can predict its fluctuations. I have written ad nauseam on this subject, but I will repeat a few of the observations I consider relevant:  There are hundreds, or more likely thousands, of people out there trying to predict the movements of the economy, but no one has a record much better than anyone else. Certainly no one who was consistently capable of accurately predicting the economy's movements would be among those distributing their forecasts gratis.  The markets already incorporate the views of the consensus of economists, and thus holding a consensus view can't help you make above-average returns (even if it's right).  Non-consensus views can make money for you, but to do so they must be right. Because the consensus reflects the efforts of a large number of intelligent and informed people, however, it's usually the closest we can get to right. In other words, I doubt there's anyone out there with non-consensus views that are right routinely.

So the second-level thinker wonders how bad the outlook is, how much worse it might have gotten without the rate cut, and whether the cut will be sufficient to avert a slowdown. In 2006, on the way to the Global Financial Crisis, delinquencies on sub-prime mortgages began to rise. The trend became more noticeable in mid-2007, leading to falling prices for mortgage-backed securities; margin calls for mortgage-backed-securities funds (from banks that had given them leverage); and, eventually, fund meltdowns. Most prominently, on July 31, 2007, two mortgage- backed-securities funds managed by Bear Stearns filed for bankruptcy. Investors wanted help, and the Fed rode to the rescue. On September 18, it cut the fed funds rate by 50 basis points, from 5.25% to 4.75%, and issued a statement that included the following: Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time. . . . Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. The rate cut and message were warmly received, with the S&P 500 rising more than 6% over the next two weeks.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us:  Europe – Will Europe move forward in terms of cohesion, coordination and productivity? What happens if it doesn’t? Will the ECB be able to engineer an economic recovery? Will the departure from the European Union of Greece – or new Greeces – return as a worry in the future? (And now, will the coming referendum mandate Great Britain’s departure? Will there be a new referendum in Scotland with regard to remaining in the UK? Will Catalonia vote to leave Spain, and what will that mean for its membership in the EU?)  Leadership – For years I gave speeches using PowerPoint slides listing sources of uncertainty, but where it was supposed to say “dearth of leadership,” someone had mistakenly typed “death of leadership” . . . and nobody quibbled. Throughout the world, few countries if any have leaders on par with history’s best. Certainly that’s true in the U.S. You may think it’s a good thing, or you may not, but it’s clear that Washington is too gridlocked to accomplish much. As I wrote in “On Uncertain Ground,” “. . . U.S. politicians seem to value things like ‘ideological purity’ (i.e., toeing the party line) and being reelected above real attempts at problem solving. Partisanship and open warfare has surely reached a new zenith.”  Entitlements – Social Security is a locomotive rumbling down the track to ruin.

Clients – We felt going in that if we stuck to the rules we’d followed previously and delivered the same level of performance, the rest would come: we’d have a successful business on our hands. Happily, that’s what happened. We are thrilled by the caliber of the investors we’re able to call our clients – the term “gilt-edge” seems inescapable: Twenty-four of the fifty largest corporate pension plans as of year-end 2004. The pension funds of twenty-two of the fifty states (plus many counties, cities and police and fire departments). Eighty-one college and university endowments. Many of the world’s leading charitable foundations and most sophisticated insurers. A Vanguard mutual fund. And a growing complement of high net worth investors. Here’s a fact for you: of the 25 pension plans with the biggest commitments to distressed debt according to Pensions & Investments, (a good indicator of investment sophistication, we think), 23 participate in at least one Oaktree strategy. Oaktree’s client roster represents the ultimate validation of our efforts as investment professionals. And it expands every year. In fact, we feel most ten-year-old money management firms would be happy to have a clientele consisting of just the accounts that join Oaktree in a typical year. Even more important than the number of our clients is the quality of the relationships.

As I wrote in “Risk and Return Today,” in recent years investors did things they’d never done before – or hadn’t done as much of – because they wanted more than the 4-5% they could get in high grade bonds and the 6-7% they felt they could expect from U.S. equities. They put more into hedge funds, for example, and their commitments expanded the largest buyout funds from $3-5 billion to $20 billion-plus in just a year or two. Investors succumbed to the siren song of leverage. They borrowed cheap short-term funds – the shorter the cheaper (you can get money cheap if you’re willing to pledge assets and promise repayment monthly). And they used that money to buy assets that offered higher returns because they entailed illiquidity and/or fundamental risk. And institutional investors all over the world took Wall Street up on the newest promises of two “silver bullets” that would provide high returns with low risk: securitization and structure. On the surface, these investments made sense. They promised satisfactory absolute returns, as the returns on the leveraged purchases would more than pay the cost of capital. The results would be great . . . as long as nothing untoward happened. But, as usual, the pursuit of profit led to mistakes. The expected returns looked good, but the range of possible outcomes included some very nasty ones.many

© 2018 Oaktree Capital Management, L.P. All Rights Reserved Follow us: U.S. companies have been holding abroad. The results will generally be very positive for corporate profits, cash flows and perhaps capital investment (see below).  The unemployment rate is down to 4.1%, nearly the lowest level in 60 years, meaning we’re nearing “full employment” (albeit with an unusually low percentage of adults participating in the workforce). With so little employment slack remaining, it seems reasonable to think near-term GDP growth will translate into wage gains, and thus back into further increases in demand.  Although low, today’s prospective returns are described as being reasonable in the context of low interest rates.  The low levels of inflation worldwide mean central bankers needn’t rush to raise interest rates to restrain it. There’s no obvious reason to predict hyperinflation.  Thus the near-term rise in interest rates – while probable – can be expected to be gradual and limited in scope.  Except in pockets, investor psychology can’t be described as euphoric and imprudent (although it has been strengthening of late). For years the markets have been “climbing a wall of worry,” an old-fashioned phrase used to describe a healthy ascent that’s occurring not because of euphoria and risk-obliviousness, but rather despite a catalog of perceived ills.

” If the consensus of investors feels the same, that’s what the spread will be. What if we depart from investment grade bonds? “I’m not going to touch a high yield bond unless I get 600 over a Treasury note of comparable maturity.” So high yield bonds are required to yield 12%, for a spread of 6 percent over the Treasury note, if they’re going to attract buyers. Now let’s leave fixed income altogether. Things get tougher, because you can’t look anywhere to find the prospective return on investments like stocks (that’s because, simply put, their returns are conjectural, not “fixed”). But investors have a sense for these things. “Historically S&P stocks have returned 10%, and I’ll only buy them if I think they’re going to keep doing so.” So in theory, the common stock investor determines earnings per share, earnings growth rate and dividend payout ratio and inputs them into a valuation model to arrive at the price from which S&P stocks will return 10% (although I’m not sure the process is nearly that methodical in actuality). “And riskier stocks should return more; I won’t buy on the NASDAQ unless I think I’m going to get 13%.” From there it’s onward and upward. “If I can get 10% from stocks, I need 15% to accept the illiquidity and uncertainty associated with real estate. And 25% if I’m going to invest in buyouts . . . and 30% to induce me to go for venture capital, with its low success ratio.

That amount will be a function of (a) how companies or assets fare in fundamental terms (e.g., how their profits grow or decline) and (b) how people feel about those fundamentals and treat asset prices. • On average, all investors will do average. • If you’re happy doing average, you can simply invest in a broad swath of the assets in question, buying some of each in proportion to its representation in the relevant universe or index. By engaging in average behavior in this way, you’re guaranteed average performance. (Obviously, this is the idea behind index funds.) • If you want to be above average, you have to depart from consensus behavior. You have to overweight some securities, asset classes, or markets and underweight others. In other words, you have to do something different. • The challenge lies in the fact that (a) market prices are the result of everyone’s collective thinking and (b) it’s hard for any individual to consistently figure out when the consensus is wrong and an asset is priced too high or too low. • Nevertheless, “active investors” place active bets in an effort to be above average. o Investor A decides stocks as a whole are too cheap, and he sells bonds in order to overweight stocks. Investor B thinks stocks are too expensive, so she moves to an underweighting by selling some of her stocks to Investor A and putting the proceeds into bonds.

Instead, it said things like this: “The price of natural gas is always higher in the winter than in the summer, as is proper, because cold weather causes the demand for gas to increase. But right now, we think the price discrepancy is wider than it should be: January gas is too high relative to July gas. So we’ll short January gas and buy an equal amount of July gas.” Under this approach, there’s no net exposure to the overall direction of gas prices, just a bet (if you will) on the wideness of the spread. The fund won’t gain if the price of gas rises or lose if it falls. Instead, it’ll gain if the spread narrows in a reversion to the mean, or it’ll lose if the spread anomalously widens further. This is a true hedged position: an arbitrage. I define arbitrage as taking largely offsetting positions in the same or closely related assets exhibiting a price discrepancy, with the goal of profiting, with very little risk, when the mispricing corrects. Its aim is to profit from the movement of asset prices relative to each other (the relationship between which usually can be counted on to stay within a normal range), not from the movement of the price of a single asset (which can behave any way at all in the short run). This is a very valid approach for a hedge fund to take. It epitomizes hedging, something that most hedge funds now seem to engage in infrequently or not at all. So where did Amaranth’s risk – and the possibility of catastrophic loss – come in?

* * * At any rate, Greenspan's warning receded into memory without meaningfully slowing the market's rise, and his place in the pantheon of popular heroes appeared diminished. After all, a record 49% of Americans now had a stake in the stock market, and their heroes were people who helped them make money, not scolds warning about excess and pushing prices lower. Having voiced concerns and diminished confidence, Greenspan was no longer the day trader's pin-up. When Greenspan began to raise rates on June 30, 1999, no one seemed to care. The Nasdaq Composite rose practically unabated from 2,686 at the time of the first of five rate increases to 5,049 just 8% months later. Thus Greenspan joined the roster of those whose genius was downgraded in recent times - almost comically, I think (unless you're one of the people so affected). Another prime example is Julian Robertson, who compiled an incredible record through mid-1998, with a return averaging 31.7% a year for 18 years. Then losses and capital withdrawals knocked his Tiger Fund from $22.8 billion to $5.2 billion over the next 18 months. Every day the stock market was ridiculing both value investors like Robertson and the Old Economy companies they specialized in. Robertson announced a few weeks ago that he was closing up shop, saying, “we are in a market where reason does not prevail” and “there is no point in subjecting our investors to risk in a market which I frankly do not understand.”

I feel at any given point in time it runs on fear UorU greed. As 1991 began, everyone was petrified of high yield bonds. Only the very best bonds could be issued, and thus buyers at that time didn't have to do any credit analysis -- the market did it for them. Its collective fear caused high standards to be imposed. But when investors are unafraid, they'll buy anything. Thus the intelligent investor's workload is much increased. 7. Gresham's Law says "bad money drives out good." When paper money appeared, gold disappeared. It works in investing too: bad investors drive out good. When undemanding investors appear, they'll buy anything. Underwriting standards fall, and it gets hard for demanding investors to find opportunities offering the return and risk balance they require, so they're forced to the sidelines. Demanding investors must be willing to be inactive at times.

We saw a similar turn in Britain under the leadership of Margaret Thatcher; the collapse of the USSR and a resounding victory for capitalism; and the ascendance of free market adherents Alan Greenspan and George W. Bush. With the economy and financial system generating prosperity, people wanted more of the same. And with manufacturing in decline, we relied heavily on the financial sector for an increased contribution to GDP, job creation and standards of living. The prevailing view was that the less regulation we had, the more productive business and finance could be. And what was there to be feared from an unregulated economy, anyway? The result in the past decade, according to a great newspaper quote that sadly I can’t locate, was “the kind of regulation you get from an administration that doesn’t believe in regulation.” Thus, coming full circle from the 1930s, starting in 1999 we saw revocation of Glass-Steagall; elimination of the up-tick rule limiting short sales to instances when stock prices were rising; a pivotal decision to exempt derivatives from regulation; increased permitted leverage at investment banks; and starvation of regulatory agency budgets. These developments were followed by the global financial crisis of 2007-08. Coincidence or causality? Free Markets Are Dangerous – Regulation is Essential The free-market, capitalist system runs on self interest and the desire for profit. We need regulation to ensure those things are kept within reasonable limits.

Usually, when either set of polar extremes is in the ascendancy, that fact is readily observable, and thus the implications for investors should be obvious to objective observers. But of course, the swing of the market pendulum to one set of extremes or the other occurs for the simple reason that the psyches of most market participants are moving in the same direction in a herd-like fashion. Few of the people involved actually are objective. To continue a thread from my last memo, “Everyone Knows,” expecting widespread clinical observation during a market mania makes about as much sense as saying “everyone knows the market has gone too far.” If many people recognized that it had gone too far, it wouldn’t be there. Between the two sets of cyclical extremes, I have no doubt that the environment of the last few years has been marked by the elements listed first above, not second: euphoria, greed, optimism, risk tolerance and credence; not depression, fear, pessimism, risk aversion and skepticism. Certainly it’s been the recent consensus of investors that, “It’s all good.”

To predict the path of the economy, you have to forecast the behavior of these people – if not for every participant, then at least for group aggregates. A real simulation of the U.S. economy would have to deal with billions of interactions or nodes, including interactions with suppliers, customers, and other market participants around the globe. Is it possible to do this? Is it possible, for example, to predict how consumers will behave (a) if they receive an additional dollar of income (what will be the “marginal propensity to consume”?); (b) if energy prices rise, squeezing other household budget categories; (c) if the price for one good rises relative to others (will there be a “substitution effect”?); or (d) if the geopolitical arena is roiled by events continents away? Clearly, this level of complexity necessitates the frequent use of simplifying assumptions. For example, it would make modeling easier to be able to assume that consumers won’t buy B in place of A if B isn’t either better or cheaper (or both). And it would help to assume that producers won’t price X below Y if it doesn’t cost less to produce X than Y. But what if consumers are attracted to the prestige of B despite (or even because of) its higher price? And what if X has been developed by an entrepreneur who’s willing to lose money for a few years to gain market share?

How can these isolated developments have jumped the rails to affect commercial real estate? How could they possibly have led to difficulty for the private equity industry, which does no mortgage lending? And how can these specific linkages have been generalized into widespread repercussions on the economy and the credit and equity markets? UContagion Among the many cyclical phenomena that recur regularly, one of the most interesting is the attitude toward contagion. When the environment is rosy and market participants are optimistic, negative developments are described as “isolated incidents.” Market participants find it easy to maintain their equilibrium, and the possibility of repercussions is easily dismissed. This is no more realistic than what we see at the pessimistic end of the pendulum’s swing, where negatives are generalized into epidemics, contagion is overstated and participants totally lose their cool. Early in June, I met with Marty Fridson of FridsonVision. Marty is a longtime friend and one of the deans of the high yield bond business – by any standard an expert on credit. In his discussion of the subprime crisis, Marty referenced a complex flowchart labeled “Possible Paths to Contagion.” It showed a number of ways in which the subprime problem could affect high yield bonds. Linkages like these can be foreseen if you’re thoughtful and willing to look ahead.

The words that came to mind were "subdued," "somber" and "enervated," and they stayed with me all week. Stress and tension were everywhere. Some things were very different, and some that were the same felt different. The absence of airliners overhead was obvious, and the effect was dramatic when fighter jets replaced them. Sirens were heard more clearly in the absence of competing noise, and they seemed more ominous – as was the case in Los Angeles during the riots and earthquakes. Pedestrian and vehicular traffic was light the first night, and it grew only gradually. Grocery stores were crowded; sidewalk restaurants were populated; it was clear life would go on. Each of us found his or her individual limit on how much we wanted to read, watch and talk about these events. At the same time, however, it seemed inappropriate to talk about or do anything else. In my limited sample, the kids found it easier to move on to other topics – and I was so glad to see that their lives, albeit probably changed forever, would rebound. UCommunicationU – My cell phone and Blackberry wireless e-mail device were absolutely essential. I was again reminded to ask "How did we ever get along without these things?" It was very hard to make phone calls on Tuesday, but that, too, got a little better each day. My Blackberry always worked and made it possible for me to keep in contact with my Oaktree colleagues. Spam e-mail was absent that first day, but it also came back.

The answer usually takes the form of a schedule that says: “We could sell off x% of the portfolio in a day, y% in a week, and z% in a month, etc.” But that’s a terribly simplistic answer. It doesn’t say anything about how the price received would compare with the last trade or the price at which the assets were carried on the previous valuation date. Or about how changing market conditions might make the answer different a month from now. Bottom line: to the statement “we could sell off z% in a month” one should add “but who knows what the price will be, or what effect changing market conditions might have on that percentage?” Anything else requires an assumption that the assets’ liquidity is constant. That’s often far from the case. Usually, just as a holder’s desire to sell an asset increases (because he has become afraid to hold it), his ability to sell it decreases (because everyone else has also become afraid to hold it). Thus (a) things tend to be liquid when you don’t need liquidity, and (b) just when you need liquidity most, it tends not to be there. (In the 2014 Berkshire Hathaway Annual Letter, released early this month, Warren Buffett expresses his dislike for “substitutes for cash that are claimed to deliver liquidity and actually do so, except when it is truly needed.”) The truth is, things often seem more liquid when you buy than when you go to sell.

© Oaktree Capital Management, L.P. All Rights Reserved can’t be quantified a priori. Another of their advisors, a professor from a business school north of New York, insisted it can. This is something I prefer not to debate, especially with people who’re sure they have the answer but haven’t bet much money on it. One of the things the professor was sure could be quantified was the maximum a portfolio could fall under adverse circumstances. But how can this be so if we don’t know how adverse circumstances can be or how they will influence returns? We might say “the market probably won’t fall more than x% as long as things aren’t worse than y and z,” but how can an absolute limit be specified? I wonder if the professor had anticipated that the S&P 500 could fall 57% in the global crisis. While writing the original memo on risk in 2006, an important thought came to me for the first time. Forget about a priori; if you define risk as anything other than volatility, it can’t be measured even after the fact. If you buy something for $10 and sell it a year later for $20, was it risky or not? The novice would say the profit proves it was safe, while the academic would say it was clearly risky, since the only way to make 100% in a year is by taking a lot of risk. I’d say it might have been a brilliant, safe investment that was sure to double or a risky dart throw that got lucky.

 A boom in home prices and a belief that they couldn’t fall back en masse.  Securitization and selling onward of debt – which eliminated lenders’ hesitance to lend and led to a process in which everyone profited when a loan was made.  Thus an increased willingness to lend higher percentages of the skyrocketing prices of homes, even where the borrower couldn’t demonstrate creditworthiness.  Widespread use of leverage (because the risks were underrated) and complexity in fashioning mortgage-backed securities.  Massive shortcomings at rating agencies that erroneously described the resulting securities as investment grade, and sometimes even “super senior.” In this way, enormous amounts of overrated securities came to the market. They went to financial institutions that didn’t understand the riskiness of what they were buying and thus permitted themselves to become vastly overleveraged. I’ll keep it simple. Suppose you have $1 million in equity capital. You borrow $29 million and buy $30 million of mortgage loans. Twenty percent (or $6 million) of the mortgages go into default, and the recovery on them turns out to be only two-thirds ($4 million). Thus you’ve lost $2 million . . . your equity capital twice over. Now you have equity capital of minus $1 million, with assets of $28 million and debt of $29 million. Everyone realizes that there’ll be nothing left for the people who’re last in line to withdraw their money, so there’s a run on the bank.

I think it's important to remember, though, the symmetrical nature of most investments: almost every sword is two-edged, and he who lives by a risky strategy may die by it. Investments which will make you a great deal of money when things go well but not lose you a lot when things go poorly are very rare, and their existence must presuppose extremely inefficient markets. With the average stock or bond returning 10-15% last year, how did some hedge funds make 70% or more? It was through bold and heavily- leveraged plays on macro-developments such as currency movements. What would have happened if the managers' calculations had proved wrong? The hedge fund manager I know with the best performance last year, up more than 100%, is said twice in his life to have lost 30% in one day! Do the hedge fund aficionados know how much risk they are taking? For how long are they tying up their money? How much do they know about the strategies being employed? As the Forbes article pointed out, the sum of the "information" most hedge fund investors receive is a quarterly paragraph reporting the rate of return. I am not complaining about the fact that there are hedge funds, or about their popularity. My point is simply that the level of risk borne by investors is being systematically raised, often unknowingly and at a time when many valuations are quite high.

(The New York Times, September 20, 2011) And here’s another reference from just a month ago: In proposing a 5 percent surtax on incomes of more than $1 million a year to pay for job-creation measures sought by President Obama, Senate Democratic leaders on Wednesday escalated efforts to strike a more populist tone and to draw Republicans into a confrontation over how much affluent Americans should pay to help others cope with a struggling economy. . . . “It’s interesting to note that independents, Democrats and Republicans and even the Tea Party agree it’s time for millionaires and billionaires to pay their fair share of taxes,” [Senate Majority Leader] Reid said Wednesday. (The New York Times, October 6, 2011) © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Our active distressed debt funds gained 20% that month, and the markets never looked back. Investors in all asset classes forgot the panic that had gripped them just a few months earlier and became preoccupied with making money. Because only modest returns were expected from high grade bonds (with their 4-5% yields) and U.S. common stocks (following the 2000-02 bear market), investors sought solutions in non-traditional investments with brief track records at best, and thus little or no clarity regarding the risks involved. Vast sums flowed to hedge funds, and thousands of new ones were formed. High yield bonds and leveraged loans began to be issued again . . . because now there were buyers. This enabled buyouts to be financed and then recapitalized, and quick payouts to equity holders resulted in eye-popping IRRs, attracting more capital to buyout funds. Real estate attracted vast amounts of capital, too, even when “cap rates” – current cash yields – sunk below 5%; what could be better than a tangible asset providing inflation protection? Borrowing power became virtually unlimited, as is often the case when providers of capital are eager to put money to work. Thus the financial environment reflected (1) a vast ability to leverage, (2) an uninhibited search for return, and (3) investors competing to make investments by accepting lower returns and decreased safety. This combination supported new investment techniques, which grew rapidly despite being untested.

It wanted to avoid consolidation with its own financial statements, but it feared that vigilance on the part of outside investors would prevent Enron from doing all it wanted in the partnerships. Investors with capital at risk would care about how much debt was taken on, what the partnerships bought with the borrowed money, and at what prices. They might even worry about having Enron executives running the partnerships, which did business with Enron. So outside equity capital had to be attracted to satisfy GAAP, but truly self-interested investors had to be avoided if Enron was to maintain its flexibility. How could outsiders be enticed to invest capital without caring? Simple: guarantee the results. The key was for Enron, not the investors, to absorb the risk. This is accomplished by promising a full return of capital, and returns up to 30% a year in some cases, and backing the promise with Enron stock. Certainly the security provided by this investment-grade company's soaring stock would be solid. Enron also guaranteed some of the loans to these entities. So with the "outside" investors' risk covered by Enron and the "independent" partnerships squarely under its control, they could be used any way Enron chose. When assets declined in value, the partnerships would buy them at Enron's cost, hiding the losses. When profits seemed likely to disappoint in a quarter, assets could be sold to the partnerships at inflated prices, covering the shortfall.and

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: The main job of an investment analyst – especially in the so-called “value” school to which I subscribe – is to (a) study companies and other assets and assess the level of and outlook for their intrinsic value and (b) make investment decisions on the basis of that value. Most of the change the analyst encounters in the short to medium term surrounds the asset’s price and its relationship to underlying value. That relationship, in turn, is essentially the result of investor psychology. Market bubbles aren’t caused directly by technological or financial developments. Rather, they result from the application of excessive optimism to those developments. As I wrote in my January memo On Bubble Watch, bubbles are temporary manias in which developments in those areas become the subject of what former U.S. Federal Reserve Chairman Alan Greenspan called “irrational exuberance.’’ Bubbles usually coalesce around new financial developments (e.g., the South Sea Company of the early 1700s or sub-prime residential mortgage-backed securities in 2005-06) or technological progress (optical fiber in the late 1990s and the internet in 1998-2000). Newness plays a huge part in this. Because there’s no history to restrain the imagination, the future can appear limitless for the new thing.

– To date, only 20% of those contracting the virus have experienced something described as more than “mild,” and the fatality rate has been only 2-3% of those infected. Will these percentages hold? Will the fatalities continue to be primarily among people who are elderly and/or compromised? 2% of Dr. Lipsitch’s 40-70% suggests a million deaths in the U.S. On the other hand, according to Dean Jamison, a global health economist and professor emeritus at University of California, San Francisco: . . . the U.S. has a superior health system to China, where the outbreak is centered, and months of warning. . . . “I think we’re unlikely to see a really large outbreak in the U.S. — meaning thousands of deaths,” he said. (The Wall Street Journal, March 2)  What countermeasures will be taken? – Will schools and offices be closed? Will people be told to stay in their homes? Will food be delivered to homes as in China? Will large public events be canceled? Will a vaccine be invented, and when?  What will be the effect on the economy? – If people are shut in at home and unable to go to work, shop, eat out or travel as usual, how will GDP be impacted? How will a negative wealth effect impact people’s propensity to spend? “Zero GDP growth” means the same thing as “same as last year” – is that an optimistic expectation or a realistic one?  How will the markets react?

That is, the attractiveness of x is in part a function of the price of y. If bonds cheapen and thus come to promise higher prospective returns, stocks (or any other asset) will appear relatively less attractive at their old prices and thus must cheapen as well in order for their prospective returns to regain competitiveness versus those of bonds. - Further, it used to be, for example, that Americans determined the prices of U.S. stocks based on U.S. economic developments and Europeans determined the prices of European stocks based on European developments. These were local markets then, and they behaved differently. Today, investing is more globalized, and the prices of assets in different countries are determined by many of the same people, who may respond in common to fundamentals and psychology. - The last reason many assets have moved together is that in this particular episode, many hedge funds managers (who, as we will discuss later, appear to have had a disproportionate impact on recent events) were forced by their increased capital to invest aggressively in macro-trends spanning national borders. This small group of hyper-active investors may have hooked markets up to an unusual degree. For these reasons and others, asset prices may prove more highly interconnected than one had expected.

Yet investors, normally quick to snap up anything offering better yields than CDs and money-market funds are staying away. Assets of convertible funds stood at $2.36 billion on June 30, up just $ 100 million since the start of the year, and way below their peak of $5.3 billion just before the 1987 crash. Reaction was negative, and convertible mutual fund assets dropped to $3.2 billion at year-end 1989 and only $2.2 billion today, down 62% from the 1987 level. If strong inflows are, as I believe, a precursor of poor performance (and vice versa), then the outlook today should be excellent. Convertibles are getting no respect and attracting no inflows. That leaves bargains for those willing to act as contrarians. We hope you will consider convertibles an attractive way to hold an increased portion of your commitment to equities. October 8, 1992 Between 1977 and 1984, the number of convertible mutual funds was constant at seven, and at the end of that period their total assets stood at the princely sum of $452 million. By the end of 1987 there were thirty funds with assets of $5.8 billion, for a thirteen-fold increase. It can clearly be seen in retrospect that the strong flow of capital into convertibles in 1985-87 “poisoned the well” and led to a loss of price discipline, to purchases of over-priced securities, and to poor performance.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: why they’re walking in upscale neighborhoods. The workers who don’t have the luxury of ensuring safety by socially isolating, but have to go to work in proximity to others and then come home to close quarters and possibly infect their children or parents. The parents who have to send their children out into the world each day without confidence that they’ll come back. These thoughts break my heart. I feel deeply for every individual forced to live under these conditions. But I know I must do more than simply feel. I have talked in my memos of the fact that in the latter half of the 20th century, there was an economic “tide that lifted all boats.” That tide may have enriched nations but not all people in those nations; instead, the benefits went to some but not others. Today the economic tide is no longer rising as strongly and the distribution is still more uneven; the advantages enjoyed by those with education or capital are being magnified; and the inequality of outcomes is simply no longer acceptable – hopefully to society and certainly to those getting less. It’s a shame that it has taken so long for many of us to articulate that. Our nation cannot endure for long if some people are denied basic human rights and opportunities simply because they belong to groups defined by color or race.

Unless both of those things are true, any time, effort, transaction costs and management fees expended on active management will be wasted. Active management has to be seen as the search for mistakes. Behavioral Sources of Investment Error As described above, investment theory asserts that assets sell at fair prices, and thus there’s no such thing as superior risk-adjusted performance. But real-world data tells us that superior performance does exist, albeit far from universally. Some people find it possible to buy things for less than they’re worth, at least on occasion. But doing so requires the cooperation of people who’re willing to sell things for less than they’re worth. What makes them do that? Why do mistakes occur? The new field of behavioral finance is all about looking into error stemming from emotion, psychology and cognitive limitations. If market prices were set by a “pricing czar” who was (1) tireless, (2) aware of all the facts, (3) proficient at analysis and (4) thoroughly rational and unemotional, assets could always be priced right based on the available information – never too low or too high. In the absence of that czar, if a market were populated by investors fitting that description, it, too, could price assets perfectly. That’s what the efficient marketers theorize, but it’s just not the case. Very few investors satisfy all four of the requirements listed above.

© 2016 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Importantly, until 2000, most Americans felt their children would live better than they did. Now this is no longer true: When asked if “life for our children’s generation will be better than it has been for us,” fully 76 percent said they do not have such confidence. Only 21 percent did. That was the worst ever recorded in the poll; in 2001, 49 percent were confident and 43 percent were not. . . . virtually all polling shows a steep decline in optimism since the late 1990s and early 2000s. (The Washington Post, August 12, 2014) Here’s a quote from Thomas Friedman in The International New York Times of June 30 that I used to sum up in “Political Reality” (August 2016). As I wrote there, I think it does a great job of capturing the situation: It’s the story of our time: The pace of change in technology, globalization and climate have started to outrun the ability of our political systems to build the social, educational, community, workplace and political innovations needed for some citizens to keep up. We have globalized trade and manufacturing, and we have introduced robots and artificial intelligent systems, far faster than we have designed the social safety nets, trade surge protectors and educational advancement options that would allow people caught in this transition to have the time, space and tools to thrive. It’s left a lot of people dizzy and dislocated.

© Oaktree Capital Management, L.P. All Rights Reserved In a supreme irony, the April week in which Robertson announced his departure turned out to be one of the best of his career, but the damage had already been done. I often think about the corrosive effect of being on the wrong side of a market judgment for prolonged periods, and the phenomenon through which those who resist trends the longest can finally capitulate at just the wrong time. Robertson, 67, had an approach that failed to work for two painful years and enough wealth to allow him to say “why put up with this?” The pressure to quit obviously hit its apex just as his timing in quitting was at its worst. Last week saw a pullback from risk on the part of George Soros, head of the remarkable Quantum Fund (up 32%/year after fees for 30 years), and the resignation of Stanley Druckenmiller, its portfolio manager since 1989. Why? Druckenmiller had resisted tech stocks until mid-1999, but then he invested and made a bundle in the second half. When he held on to most of them in 2000, they brought him heavy losses. The New York Times reported, “... he had known by December that the explosion in technology stock prices had gone beyond reason. But he expected it would go longer than it did ... ‘We thought it was the eighth inning, but it was the ninth.’” Or as Soros admitted, “Maybe I don't understand the market. Maybe the music has stopped but people are still dancing.

He’s probably far better known for the things he said:  It’s like déjà vu all over again.  When you come to a fork in the road, take it.  You can observe a lot by just watching.  Always go to other people’s funerals, otherwise they won’t come to yours.  I knew the record would stand until it was broken.  The future ain’t what it used to be.  You wouldn’t have won if we’d beaten you.  I never said most of the things I said. I’ve cited Yogi’s statements in previous memos, and I borrowed the Yogi-ism at the top of the list above for the title of one in 2012. “Out of the mouths of babes,” they say, comes great wisdom. The same was true for this uneducated baseball player, and many of Yogi’s seeming illogicalities turn out to be profound upon more thorough examination. “Baseball is ninety percent mental and the other half is physical.” That was another of Yogi’s dicta, and I think it’s highly useful when thinking about investing. Ninety percent of the effort to outperform may consist of financial analysis, but you need to put another fifty percent into understanding human behavior. The market is made up of people, and to beat it you have to know them as well as you do the thing you’re considering investing in. I sometimes give a presentation called, “The Human Side of Investing.” Its main message surrounds just that: while investing draws on knowledge of accounting, economics and finance, it also requires insight into psychology. Why?

Many have become true partners who extend a warm welcome, give our proposals the benefit of the doubt, believe us when we say something is true, provide their valuable counsel, and continue to broaden the list of things they do with us. As a result, on average our twenty largest client relationships encompass more than four of Oaktree’s twelve strategies. The reception we receive from our clients is truly one of our greatest sources of satisfaction. Performance – Of course, we realize that these relationships stem only in part from the fact that our clients like us as people or share our philosophy. We’d be no place without performance. Thus we’re proud to be able to say we’ve achieved what we set out to do. We’d love to deliver great results every year, but that’s simply not possible. Instead, in short, it’s our goal to eliminate disasters, so that every year is either good or great. If a money management firm can do nothing other than produce returns that are at least decent every year, it’s sure to have an excellent long-term record. I truly can say my colleagues have done so, and that we’ve made money for our collective clientele every year since Oaktree opened its doors. Including our time spent at TCW, we have well over 100 full calendar years of AIMR-compliant performance records: 19 years in high yield bonds, 18 years in convertibles, 16 years in distressed debt, and so forth.

© Oaktree Capital Management, L.P. All Rights Reserved Their model called for higher equity allocations, predicting that they would lead to higher overall returns on the portfolio UandU lower risk. Why? Because equities were projected to return 14% and risk was defined as the probability of failing to average 8% over a five- year period. First, I said, I would never have any part in a process that equated higher equity allocations with lower risk. I suggested that risk be defined as overall portfolio volatility, and that took care of that. But second, I questioned the 14% projected return from equities. Equities returned 28% in 1995-99, I said; did someone think halving that made for a conservative projection? No, I was told, the support mostly came-from the 13% long-run return on equities:--(I always thought it was 10% or so, but it seems the last five years have changed all that.) I could only think of one way to respond: I offered to put up my money against that of the consultant's researchers and “take the under.” I doubt strongly that equities will return 14% or anything like it in the next decade. Corporate earnings have traditionally grown at single-digit rates, and I don't feel that's about to change substantially. With p/e ratios unlikely to rise further and dividends immaterial, single-digit earnings growth should translate into single-digit average equity performance at best for the foreseeable future.

© Oaktree Capital Management, L.P. All Rights Reserved techniques and structures depended on the future looking like the past. And many of the “modern miracles” that were relied on were untested. UA Dearth of Skepticism Unlike market bottoms, where investors are too skeptical, during upswings most people believe too much, worry too little and fail to apply enough skepticism. Since all investors want a good deal – and see the people around them making money so easily – they tend to jump aboard. They want to see the good times roll on, not to pour cold water on the party by questioning what’s going on. Everyone dreams of easy riches – of high returns earned without risk. Wall Street comes up with surefire solutions to which the hopeful flock, such as portfolio insurance in the 1980s and dot-com IPOs in the 1990s. In the current decade, investors became convinced that securitized mortgages and highly leveraged entities offered the magic solution. People who long ago stopped believing in Santa Claus jumped aboard, and now they’re disappointed. But past results never deter new generations of dreamers from chasing the next silver bullet. In the last few years, people accepted myths that now have been exposed. Let’s review a few:  In 2006-07, we heard a lot of talk to the effect that disintermediation had reduced risk.

” That’s the way it’s supposed to work, and in fact I think it generally does (although the requirements aren’t the same at all times). The result is a capital market line of the sort that has become familiar to many of us, as shown on the next page.

And futures that are perceived to be limitless can justify valuations that go well beyond past norms – leading to asset prices that aren’t justified on the basis of predictable earning power. The role of newness is well described in my favorite passage from a book that greatly influenced me, A Short History of Financial Euphoria by John Kenneth Galbraith. Galbraith wrote about what he called “the extreme brevity of the financial memory” and pointed out that in the financial markets, “past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.” In other words, history can impose limits on awe regarding the present and imagination regarding the future. In the absence of history, on the other hand, all things seem possible. The key thing to note here is that the new thing understandably inspires great enthusiasm, but bubbles are what happen when the enthusiasm reaches irrational proportions. Who can identify the boundary of rationality? Who can say when an optimistic market has become a bubble? It’s just a matter of judgment. Something that occurred to me this past month is that two of my best “calls” came in 2000, when I cautioned about what was going on in the market for tech and internet stocks, and in 2005-07, when I cited the dearth of risk aversion and the resulting ease of doing crazy deals in the pre-Global Financial Crisis world.

© 2019 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Today, large numbers of bonds – the vast majority being government bonds from Europe and Japan – carry negative yields to maturity. They constitute roughly two-thirds of the bonds in Europe and 25- 30% of all the investment grade debt in the world. A few corporate bonds also offer negative yields, however, and there’s even a handful of negative-rate high yield bonds (the ultimate oxymoron). Further, on September 4 Bloomberg pointed out the prevalence of negative real rates: While over $17 trillion of the global stock of debt trades at nominal yields below zero, the figure jumps to $35.7 trillion when inflation is taken into account. . . . In the U.S., more than $9 trillion of the nation’s government debt carries yields lower than the CPI rate. With a negative-rate instrument, the price you pay for a bond today exceeds the sum of the face amount that will be repaid when it matures plus the interest you’ll receive in the interim. That means if you buy a negative-yield bond and hold it to maturity, you’re guaranteed to lose money. Why, then, would anyone want to buy a negative-yield bond? Here are some reasons that make sense:  Fear regarding the future (relating to recession, market declines, credit crisis or further declines in interest rates, among other factors) that causes investors to engage in a flight to safety, in which they elect to lock in a sure but limited loss.

This was still very low by historical standards, but, according to the suddenly popular “Sahm Rule” (don’t complain to me; I’d never heard of it either), since 1970, an increase in the three-month average unemployment rate of 0.5 percentage points or more from the low of the prior 12 months has never occurred without the economy already being in recession. Around the same time, Warren Buffett’s Berkshire Hathaway announced that it had sold off a good part of its massive holding of Apple shares. In all, this news constituted a triple whammy. The resulting flip-flop from optimism to pessimism set off a significant stock market rout. The S&P 500 fell on three consecutive trading days – August 1, 2, and 5 – by a total of 6.1%. The replay of the mistakes I’ve witnessed for decades was so obvious that I can’t resist cataloging them below. What’s Behind the Market’s Volatility? On the first two days of August, I was in Brazil, where people often asked me to explain the sudden collapse. I referred them to my 2016 memo On the Couch. Its key observation was that in the real world, things fluctuate between ‘pretty good’ and ‘not so hot,’ but in investing, perception often swings from ‘flawless’ to ‘hopeless.’ That says about 80% of what you need to know on the subject. If reality changes so little, why do estimates of value (that’s what security prices are supposed to be) change so much? The answer has a lot to do with changes in mood.

© Oaktree Capital Management, L.P. All Rights Reserved So now we find financial institutions that endangered themselves by using extensive short-term borrowings or deposits to make investments that turned out to be enormously risky when an unlikely disaster – a nationwide decline in home prices – occurred. In many ways, changes in the environment contributed as well. They crept up one by one, unnoticed, but their combined effect is significant. For example,  The Glass-Steagall Act was repealed, permitting banks and investment banks to combine. (It had been enacted in 1933 to outlaw such combinations because they were felt to have contributed to the Crash of ‘29. It’s ironic – and certainly not irrelevant – that it was repealed in 1999, in time to contribute to the current credit crunch.)  The rule limiting short sales to up-ticks was revoked in July 2007, enabling short selling to force stock prices down unabated.  Derivatives were created whose prices were determined by the price of their “real” underlying securities; now we see that in an Alice-in-Wonderland way, they’re able to influence the price of real securities (see below).  And mark-to-market accounting exposed precariously leveraged institutions to the risk that technically-driven declines in asset values might leave them too weak to make it through to a better day. It was during my working lifetime that the phrase “too big to fail” was coined.

Reagan will raise taxes, and so will I. He won’t tell you. I just did. The result? Mondale lost in a landslide, with the popular vote of 59% to 41% representing the seventh- biggest percentage deficit in presidential election history. Far worse, of the 538 electoral votes, he won only 13 (the District of Columbia and his home state of Minnesota). That stands as the second-lowest electoral total for a presidential runner-up since 1824. So much for the benefits of candor. Today many politicians promise to safeguard the Social Security system, but rarely do we hear anyone talk about (a) reduced benefits, (b) higher Social Security tax rates, (c) a higher ceiling on wages taxed, (d) delayed onset of benefits, or (e) means-testing for recipients. And yet, either some combination of these or the insolvency of the system is an actuarial certainty. Instead, we get the candidate’s mantra: more for all, with no cost or consequences . . . and, in the case of Social Security, a complete absence of progress. Brexit: Political Reality in Action Being in Europe at the time of the Brexit vote gave me an opportunity to see the imperfections of political reality in action. I’ll review a few:  The decision to conduct the referendum was a matter of political expediency (defined as “the quality of being convenient and practical despite possibly being improper or immoral”).

Would it really save us money to not trade with China? After all, who pays tariffs? They’re a tax paid by exporters and presumably passed on to consumers in the countries into which goods are imported. So it’s not enough to say “exporters are paying increased tariffs.” It’s also likely that U.S. consumers are paying increased prices for the goods they consume. If tariffs are paid by consumers in the importing nations, what’s to be accomplished by imposing them? In short, it’s done to raise the cost of foreign goods and thus discourage their consumption. But that leads us to the knock-on effects: what else happens? © 2019 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

And just like the support for rent control – there’s a lot of that in California, too – the government sought to help out homeowners by limiting the premiums companies could charge for fire insurance. In a sign of the times, I’ll let my new (and AI-powered) editorial assistant, Perplexity, fill you in on the background. I’ve simplified the format and added emphasis, but I haven’t changed a word. What follows below is pretty close to what I would have produced in an hour or two: Before the devastating fires of 2025, California’s fire insurance market was already in a state of crisis, shaped by a combination of regulatory constraints, insurer withdrawals, and mounting wildfire risk. Insurers were prohibited from using forward-looking catastrophe models to set rates for wildfire risk. Instead, they were required by law to base their rates on historical average losses over the previous 20 years. This approach became increasingly problematic as wildfires grew more frequent and severe, making historical data a poor predictor of future risk. Regulations also prevented insurers from raising premiums to reflect increased reinsurance costs, further limiting their ability to price policies according to actual risk. Major insurers began withdrawing from the California market or ceasing to write new policies in fire-prone areas.

What we have is a country – in fact, a world – that is changing rapidly and in ways that are unpleasant and disorienting for large segments of the population. The present is different from the past, and the future looks worse than it used to. Slower economic growth is producing less opportunity overall, and a number of forces are supplementing slow growth in diminishing the outlook. Rising income inequality is directing an increasing share of the gains to top earners. Older people lacking higher education are particularly ill-equipped to deal with the changes. I think this is an apt description of conditions in the U.S., but it seems equally applicable to much of the developed world. In an opinion piece on October 26, starting from the German point of view, Jochen Bittner of the International New York Times described a broad group he called Wutbürgers, or “angry citizens.” I think they’re rising everywhere: It is a relatively new expression, with a derogatory connotation. A Wutbürger rages against a new train station and tilts against wind turbines. Wutbürgers came out in protest after the Berlin government decided to bail out Greece and to accept roughly one million refugees and migrants into Germany. Wutbürgers lie at both ends of the political spectrum; they flock to the right-wing Alternative für Deutschland and the socialist Linke (Left) Party. The left wing has long had a place in German politics, and the Linke has deep roots in the former East Germany’s ruling party.

And when they fail, particularly at number four – being rational and unemotional – it seems they all err in the same direction at the same time. That’s the reason for the herd behavior that’s behind bubbles and crashes, the biggest of all investment mistakes. According to the efficient market hypothesis, people study assets, assess their value and thereby decide whether to buy or sell. Given its current value and the outlook for change in that value, each asset’s current price implies a prospective return and risk level.engage

This is true today and will become even truer as we move toward being a nation where the majority are members of minorities. Millions of minority group members suffer as a result of the supposedly “human” tendency – which certainly is inhuman – to search for someone to look down on and thus impose a hierarchy based on race, skin color or ethnicity. Whether for reasons of history, economic insecurity, upbringing, the attractiveness of us-versus-them as an organizing principle, or their own bad luck or shortcomings, many people try to make themselves feel better by subjugating or abusing others, or at a very minimum they are indifferent to and unmoved by the suffering, deprivation and unequal lives of others. One of the lessons of recent weeks is that we must not tolerate the damage done by racists. They say we should “walk a mile” in the shoes of others. And yet we can’t. Fortunate folks like me can think about injustice and inequality as much as we like, but we can’t live the constant sadness, fear or rage of those who are victimized by it. I and many others have come to understand those feelings more deeply because of the events surrounding the death of George Floyd. Now I believe the truth will finally be seen and something will be done about it – because it’s the right thing to do and because of the growing realization that a civilization cannot long endure with people living lives of excessively different quality.

© Oaktree Capital Management, L.P. All Rights Reserved supply the "arms-length" aspect that would be present in dealings with a truly independent entity. Less often discussed, but equally questionable, were the transactions that gave Enron mark-to-market profits. For example, Enron Energy Services was a highly-touted division that contracted to deliver electricity, gas and energy management services to commercial customers, sometimes for periods of up to a decade. Under mark-to-market accounting, anticipated profits from those contracts were reflected immediately. Mark-to-market accounting is based on the view that because contracts signed today can greatly influence a company's value, the future profits or losses they imply should be recognized. Based on the terms of the contracts and the likely cost of fulfilling them, management projects the profit that will arise and runs it through the income statement. Obviously, the appropriateness of these profit projections depends on the reasonableness of the cost estimates. If I have agreed to supply gasoline six months from now at $2 per gallon, you can probably depend on the profits I say I'll make. But the accuracy of profit figures for supplying electricity in 2010 is another story. Although that technique is standard in commodities trading, problems emerge when there is no liquid market that can establish with a degree of certainty what future market values will be.

© Oaktree Capital Management, L.P. All Rights Reserved * * * The most noteworthy feature of the recent correction may be the role of some prominent hedge fund managers. It was reported on February 25 that George Soros's Quantum Fund had lost $600 million on its yen position in one day. On April 1, we read that Michael Steinhardt had lost $1 billion of his $5 billion under management, due largely to the drop in bond prices, and that in the last two months, investors in Askin Capital Management's Granite Funds may have lost 100% of their $600 million capital in mortgage backed securities. Hedge funds occupied a meaningful part of our February 17 memo because they were felt to exemplify (to a power of ten) the risk-tolerant behavior of investors in general. Thus their subsequent experience can offer us some valuable and highly magnified insights. The important observations, applicable to all investment behavior, are as follows: - Words alone mean very little. Just as "portfolio insurance" turned out in the 1987 Crash not to insure much, today's startling losses indicate that many "hedge funds" don't really hedge enough to make a difference, and that the Granite Fund, which described itself as "market neutral," was anything but. - Following from the above, we are reinforced in the belief that some investors don't know what their managers are doing, or how much risk they're taking.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. But what is the fair share? How is it to be determined, and by whom? When Senator Reid says, “it’s time for millionaires and billionaires to pay their fair share,” he implies they haven’t been doing so thus far. How does he know? What’s the standard? If there’s an objective standard for one’s fair share, why does it only seem to be those from the left side of the political spectrum who say it’s not being paid? And if there isn’t an objective standard, how can the fair share be determined? The truth is, fairness is almost entirely in the eye of the beholder, and “get them to pay their fair share” seems like just another way to say “raise their taxes.” There’s probably only one element of fairness that’s beyond discussion: those with higher incomes should pay more in taxes. After that, everything is up for grabs.  For example, we have a progressive system of taxation, meaning that higher earners don’t merely pay more in terms of dollars; they generally pay a higher percentage of their incomes in taxes. Most people agree that this is fair. But is it? Why should success be penalized through greater taxation? And if the tax rate for those who earn more should be higher, how much higher? Should the top marginal tax rate be double that applicable to lower-income taxpayers? Triple? What’s fair?  Are some forms of income more desirable to society and thus deserving of taxation at lower rates?

In my view, a bubble not only reflects a rapid rise in stock prices, but it is a temporary mania characterized by – or, perhaps better, resulting from – the following: • highly irrational exuberance (to borrow a term from former Federal Reserve Chair Alan Greenspan), • outright adoration of the subject companies or assets, and a belief that they can’t miss, • massive fear of being left behind if one fails to participate (‘‘FOMO’’), and • resulting conviction that, for these stocks, “there’s no price too high.” “No price too high” stands out to me in particular. When you can’t imagine any flaws in the argument and are terrified that your officemate/golf partner/brother-in-law/competitor will own the asset in question and you won’t, it’s hard to conclude there’s a price at which you shouldn’t buy. (As Charles Kindleberger and Robert Aliber observed in the fifth edition of Manias, Panics, and Crashes: A History of Financial Crises, “there is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.”) So, to discern a bubble, you can look at valuation parameters, but I’ve long believed a psychological diagnosis is more effective. Whenever I hear “there’s no price too high” or one of its variants – a more disciplined investor might say, “of course there’s a price that’s too high, but we’re not there yet” – I consider it a sure sign that a bubble is brewing. Roughly fifty years ago, an elder gave me the gift of one of my favorite maxims.

The bottom line is that it can be wrong to assume it’ll be easy and painless to get out of your holdings, and especially to exit a position after its price has begun to drop. Liquidity and Opportunities We watch TV, listen to radio or read newspapers. I’m always amused when the pundits say, “stocks went up today because several companies beat analysts’ earnings forecasts” or “the market dropped because of increased uncertainty regarding the price of oil.” How do they know? Where do buyers or sellers register their motivations, such that the media can discern them so definitively? There’s only one indisputable explanation for why the market went up on a given day: there were more buyers than sellers. When buyers have greater influence in the market than sellers – because would-be © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved consumer incomes, propelling the economy ahead but rendering households increasingly leveraged. As this process moved onward, it depended on a continued supply of the underlying ingredients: confidence, liquidity, leverage, risk tolerance and acceptance of untested structures. The resulting “virtuous circle” was described in glowing terms just as its perpetuation was growing increasingly unlikely. Bust It took five years or so for the bullish background described above to be established in full. As usual, far less time was required for the excesses to be exposed and the process of their unwinding to begin. The air always goes out of the balloon a lot faster than it went in. Regular readers know that if there’s one thing I believe in, perhaps more strongly than anything else, it’s the fact that cycles will prevail and excesses will correct. For the bullish phase described above to hold sway, the environment had to be characterized by greed, optimism, exuberance, confidence, credulity, daring, risk tolerance and aggressiveness. But these traits will not govern a market forever. Eventually they will give way to fear, pessimism, prudence, uncertainty, skepticism, caution, risk aversion and reticence. A lot of this has happened. Busts are the product of booms, and I’m convinced it’s usually more correct to attribute a bust to the excesses of the preceding boom than to the specific event that sets off the correction.

© Oaktree Capital Management, L.P. All Rights Reserved Because of the high regard in which financial institutions were held; because of the implied government backing of Fannie Mae and Freddie Mac; and because permissible leverage increased over time, financial institutions’ equity capital was permitted to become highly inadequate given the riskiness of the assets they held. Or perhaps I should say institutions took on too many risky assets given the limitations of their equity capital. That, in a nutshell, is why institutions have disappeared. The second fundamental factor leading up to the current mess was the creation of the vast market in derivatives, especially credit default swaps (CDS). In the current decade, CDS came into broad use as a mechanism for insuring against defaults. For an up-front fee and an annual premium, holders of debt could get someone else to promise that they’d buy that debt at face value in the case of a default or other “credit event.” The buyers of CDS accepted at face value that the writers of the insurance would pay if there was a default. For this reason, because Bank A had bought insurance on Company X’s debt from Hedge Fund B, it considered it safe to sell insurance to Bank C. But what if X defaults and A has to pay C but can’t collect from B? There’s over $60 trillion of CDS outstanding, and a lot of it is well hedged in theory; thus the net exposure to defaults if everyone pays might be rather small.

© Oaktree Capital Management, L.P. All Rights Reserved URetaliationU – Armed response was, of course, one of the first issues to arise after the crashes. The President promised it Tuesday evening, and it is on the minds of us all. But no one should underestimate the challenges involved. The terrorists are amorphous, as I said, and pervasive. They exist everywhere but have no headquarters. They are dedicated but wear no uniform and fly no flag. They will not be easy to find or deal with. In the past we believed in the invincibility of the U.S., and thus in our ability to root out evil and prevail. There is still positive evidence on this subject, but also evidence to the contrary. The Gulf War was one of our swiftest and most decisive triumphs. We were also able to calm the hostilities in the Balkans. On the other hand, Vietnam showed how hard it is to deal with a guerilla enemy who melts into the scenery, and last week's events strongly call into question the efficacy of our intelligence effort. The nations of the world – even most of those in Middle East – have been quick to express horror and swear their support of the U.S. How many mean it, and how many have done it falsely to avoid our wrath? I certainly hope it's the former. The swiftness and forcefulness of our response will depend to a great deal on how willing we are to diverge from some American ideals, and thus will require some difficult decisions. How sure will we have to be before we take action?

© Oaktree Capital Management, L.P. All Rights Reserved UAnimal, Vegetable or Mineral? These were the categories into which things fell on the old TV quiz show “Twenty Questions,” and they were always the subject of the panelists’ first question. In the case of the subprime crisis, the factors contributing to contagion can be sorted into three other categories: fundamental, psychological and technical. Here are some examples: Fundamental influences are those with tangible consequences for business. When mortgage delinquencies rise sharply, first there are the obvious direct effects:  Lenders lose money, and some go bankrupt.  Real estate brokers’ commissions dry up.  Homebuilders see less demand for their product.  Building materials companies see lower volumes. Then there are the second-order consequences, or what the British would call the “knock- on effects”:  Home prices fall. Mortgages based on the old, high prices cannot be refinanced, and simple economics makes it smarter to default rather than service a $500,000 mortgage on what is now a $400,000 house. Thus delinquencies rise further.  Lower home prices at the bottom of the ladder ripple through other sectors of the housing market.  All consumers feel poorer due to the negative wealth effect and curtail their expenditures, crimping revenues at retailers and then manufacturers.  Borrowing declines, depressing the level of business at financial institutions.

Is it possible for a model to anticipate the consumer’s decision to pay up and the entrepreneur’s decision to make less (or even lose) money? Further, a model will have to predict how each group of participants in the economy will behave in a variety of environments. But the vagaries are manifold. For example, consumers may behave one way at one moment and a different way at another similar moment. Given the large number of variables involved, it seems impossible that two “similar” moments will play out exactly the same way, and thus that we’ll witness the same behavior on the part of participants in the economy. Among other things, participants’ behavior will be influenced by their psychology (or should I say their emotions?), and their psychology can be affected by qualitative, non-economic developments. How can those be modeled? How can a model of an economy be comprehensive enough to deal with things that haven’t been seen before, or haven’t been seen in modern times (meaning under comparable circumstances)? This is yet another example of why a model simply can’t replicate something as complex as an economy. © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved Comparison against low interest rates makes low earnings yields and dividend yields seem tolerable. Likewise, low rates increase the discounted present value of companies' future earnings as calculated by valuation models. For these reasons and others, many valuation indicators are at levels today which have proved dangerous and unsustainable in the past. Just as today's low interest rates are pushing investors toward riskier securities all along the "food chain" described above, however, this sword can also cut the other way. Warren Buffet said, in one of my favorite adages, "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs." Another adage I'm fond of is, "What the wise man does in the beginning, the fool does in the end." No course of investment action is either wise or foolish in and of itself. It all depends on the point in time at which it is undertaken, the price that is paid, and how others are conducting themselves at that moment. When everyone shrinks from a security because it's "too risky," the few who will buy it can do so with confidence, secure in the knowledge that the price has not been bid up, and in the likelihood that others will eventually outgrow their fear and jump on the bandwagon. Today, many prices have been bid up, and the bandwagon is already crowded with wild-eyed investors.

© Oaktree Capital Management, L.P. All Rights Reserved UUnusual Breadth In the past we’ve seen bull markets in equities, commodities and real estate. And we’ve seen bull markets in the U.S., Japan and the emerging markets. But this time around, we’ve been seeing a near-global bull market, where the participating sectors vastly outnumber those left out. In his April letter to investors, entitled “The First Truly Global Bubble,” Jeremy Grantham summed up the worldwide nature of the good times. Never before have UallU emerging countries outperformed the U.S. in GDP growth over a 12-month period until now, and this when the U.S. has been doing well. Not a single country anywhere – emerging or developed – out of the 42 listed by The Economist grew its GDP by less than Switzerland’s 2.2%! Amazingly uniform strength, and yet another sign of how globalized and correlated fundamentals have become, as well as the financial markets that reflect them. Bubbles, of course, are based on human behavior, and the mechanism is surprisingly simple: perfect conditions create very strong “animal spirits,” reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism. Sustained strong fundamentals and sustained easy credit go one better; they allow for continued reinforcement: the more leverage you take, the better you do; the better you do, the more leverage you take.

Thus the goals of financial regulation are roughly as follows:  to limit risk, especially risk to the overall financial system,  to restrict the concentration of economic power,  to protect customers, especially “the little guy,”  to prevent error, fraud, misrepresentation and theft, and  to democratize finance and make it a tool of social policy. © Oaktree Capital Management, L.P.Reserved

Few people, I think, questioned whether this really was good news. Shortly after that first cut, I considered the following question: If you went to the doctor for an ailment and he pulled out a huge hypodermic needle, would you take that as good news or bad? Since the vast majority of Fed actions consist of 25-basis-point interest rate cuts or increases, doesn’t a cut of 50 basis points mean the Fed finds the outlook particularly worrisome? If a rate cut of 25 basis points is good news for the markets, is a cut of 50 basis points better or worse? © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

 The known catalysts for a market downturn – recession, ballooning inflation, much-higher interest rates, major central bank missteps, a governmental breakdown in Washington, and war – can’t be assigned probabilities that are more than modest. Negatives – As opposed to the positives listed above, most of the negatives surround either (a) positive fundamental factors that have the potential to deteriorate or (b) the high prices being paid for those macro-positives, and the investor behavior creating those prices.  While the outlook isn’t dire, a number of subjects do represent genuine uncertainties and provide basis for concern: the possibility of slow long-term economic growth, the potential for rising interest rates and inflation, the impact of reversing stimulative monetary policy and the Fed switching to being a net seller of securities, the implications for employment as automation increases, the world’s dependence on China’s growth, and political and geopolitical tail risks. As the markets have risen, talk of all these things seems to have gone quiet.  We know interest rates are likely to rise (creating competition for most asset classes and arguing for lower asset prices). We just don’t know by how much.  Some of the elements characterizing the macro-economic environment can be described as “long in the tooth” or “unusually elevated.

Richard Feynman, the great physicist, once said, “Physics would be much harder if electrons had feelings.” You walk into a room, you throw the light switch, and the light goes on. It always goes on, because every time you throw the switch, the electrons flow from the switch to the light. They never forget to flow; they never decide to flow in a different direction; they never flow from the light to the switch. They never go on strike or complain that they’re underpaid. So, the point is that economics is not a science, in my opinion. You know, science is all about causality and predictability, and if A happens, then B is sure to happen. Well, that’s certainly not true in economics. If A happens, B might tend to happen most of the time. That doesn’t make it a science. Now let’s talk about using these concepts to refer to investing, not economics. I have a presentation that I give, called The Human Side of Investing, or the Difference between Theory © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

The cost of health care programs is growing rapidly, as drugs become more expensive and Americans live longer. Defined-benefit pensions have been promised to public employees but not fully funded. How will federal, state and city governments meet their obligations? Not only does no one know, but also few people in government (certainly not in Washington) seem to care.  China – As the world’s second-largest economy, China plays a very important role in determining global growth. Its GDP advanced at double-digit rates over the last 20+ years – without recessions – on the basis of (a) millions of people moving from farms to cities (and to more productive roles in manufacturing), (b) the low-cost exports they produced and (c) readily available capital and the heavy fixed-asset investment it permitted. Henceforth China will gain less from the above and will have to transition to domestic consumption of goods and services, as well as a slower-growing economy . . . perhaps with ups and downs like the rest of the world. Will this result in a near-term hard landing? And what will be the impact on nations that sell commodities and finished goods to China?  Geopolitical hotspots – From the fall of the Soviet Union at the end of 1991 until the 9/11 attacks in 2001, investors’ positive feelings were abetted by the presence of peace in the world.

© Oaktree Capital Management, L.P. All Rights Reserved  Most of the time, the consensus forecast extrapolates current observations. Most predictions for growth, inflation and interest rates bear a strong resemblance to the levels prevailing at the time they're made. Thus they're close to right when nothing changes radically, which is the case most of the time, but no prediction can be counted on to foretell the important sea changes. And it's in predicting radical changes that extraordinary profit potential exists. In other words, it's the UsurprisesU that have profound market impact (and thus profound profit potential), but there's a good reason why they're called surprises: it's hard to see them coming!  Each time there's a radical change, there's an economist who predicted it, and that person gets to enjoy his fifteen minutes of fame. Usually, however, he wasn't right because of a superior ability to see the future, but rather because he tends to hold extreme positions (or perhaps he's a dart thrower) and this time the phenomenon went his way. Rarely if ever is that economist right twice in a row. So forecasts are unlikely to help us foresee the movements of the economic cycle. Nevertheless, we must be aware that it exists and repeats. The greatest mistakes with regard to the economic cycle result from a willingness to believe that it will not recur. But it always does – and those gullible enough to believe it won't tend to lose money.

So, while most depositors can demand their money back at any time, (a) no banks keep enough cash on hand to pay back all their depositors, (b) their main assets don’t pay down in a short timeframe, and (c) if they need cash, it can take them a long time to sell loans – especially if they want a price close to par. Maintaining solvency requires bank managements to be aware of the riskiness of the assets they acquire, among other things. But liquidity is a more transient quality. By definition, no bank can have enough liquidity to meet its needs if enough depositors ask for their money all at once. Managing these issues is a serious task, since it’s a bank’s job to borrow short (from its depositors) and lend long. This mismatch, like most other mismatches, is encouraged by the upward slope of the typical yield curve. If you want to borrow, you’ll find the lowest interest rates at the “short end” of the curve. Thus, you minimize your costs by borrowing for a day or a month . . . but you expose yourself to the risk of rising interest expense, since you haven’t fixed your rate for long. Similarly, if you want to lend (or invest in bonds), you maximize your interest income by lending long . . . but that subjects you to the risk of capital losses if interest rates rise. If you follow the yield curve’s dictates, you’ll always borrow short and lend long, exposing you to the possibility of an SVB-type mismatch. • High leverage – Banks operate with skinny returns on assets.

Getting Back to Normal One of the greatest uncertainties we face today surrounds the outlook for the economy. The optimists expect a V-shaped recovery, and a great deal is riding on the question of whether it’ll materialize. It depends on when America will go back to work, and that, in turn, depends to a great extent on the trend in infections. Early on, we were told the growth of the disease would be “exponential.” We learned what that meant – the number of new cases would grow from one day to the next by a constant percentage – and about the idea of “flattening the curve.” Thus, in the language of investing, the number of cases © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

When this point is reached, the up-leg described above is reversed.  Losses cause lenders to become discouraged and shy away.  Risk averseness rises, and with it, interest rates, credit restrictions and covenant requirements.  Less capital is made available – and at the trough of the cycle, only to the most qualified of borrowers, if anyone.  Companies become starved for capital. Borrowers are unable to roll over their debts, leading to defaults and bankruptcies.  This process contributes to and reinforces the economic contraction. Of course, at the extreme the process is ready to be reversed again. Because the competition to make loans or investments is low, high returns can be demanded along with high creditworthiness. Contrarians who commit capital at this point have a shot at high returns, and those tempting potential returns begin to draw in capital. In this way, a recovery begins to be fueled. . . . Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on. The bottom line is that the willingness of potential providers of capital to make it available on any given day fluctuates violently, with a profound impact on the economy and the markets. There’s no doubt that the recent credit crisis was as bad as it was because the credit markets froze up and capital became unavailable other than from governments.

In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others . . . which by definition means your thinking has to be different. . . . For your performance to diverge from the norm, your expectations – and thus your portfolio – have to diverge from the norm, and you have to be more right than the consensus. Different and better: that’s a pretty good description of second-level thinking. Second-level thinking is what immediately pops into my mind when I think about Charlie’s observation. And it’s a good general heading under which to discuss the great many things that make superior investing a challenge. In short, to borrow from Charlie, anyone who thinks it’s easy must be a first- level thinker. Let me use some simple examples from the book to illustrate the difference.  First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”  First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.” Second-level thinking says, “The outlook stinks, but everyone else is selling in panic. Buy!”  First-level thinking says, “I think the company’s earnings will fall; sell.

© Oaktree Capital Management, L.P. All Rights Reserved present value of the cash flows it will produce in the future, and eventually the market will price the asset to reflect that value, because there are ways to reap it. USo What Makes Stocks Worth More? The equation defining the price of a share of stock is a very simple one: P = E x P/E The price of a share of stock is equal to the earnings per share times the ratio of the stock price to the earnings. On one hand this explains how prices are set, and on the other hand it's just tautological: divide both sides of the equation by E and you get P/E = P/E. Even I can't argue with that one. This gives rise to another simple equation: ∆P = ∆E + ∆P/E Change in price is powered by one or more of the following factors:  increased earnings eventually are turned into Uincreased dividendsU,  the undistributed earnings are reinvested to power future Uearnings growthU, and/or  the likely stream of future earnings comes to be viewed as being worth more than the last price paid, causing an Uincrease in the P/E ratioU. "Growth investors" pursue companies whose earnings are growing the fastest. As per the equation, if the P/E ratio holds, earnings growth will be translated directly into stock price appreciation. And if there's an increase in investor recognition of the company's growth potential, the P/E ratio can expand as well, producing appreciation at a rate that exceeds the rate of earnings growth.

But then Jack Bogle formed the Vanguard Group in 1974, and Vanguard’s First Index Investment Trust went operational on the last day of 1975. At the time, it was heavily derided by competitors as being “un-American” and the fund itself was seen as “Bogle’s folly.” Fidelity Investments Chairman Edward Johnson was quoted as saying that he “[couldn’t] believe that the great mass of investors are going to be satisfied with receiving just average returns.” Bogle’s fund was later renamed the Vanguard 500 Index Fund, which tracks the Standard & Poor’s 500 Index. It started with comparatively meager assets of $11 million but crossed the $100 billion milestone in November 1999. (Wikipedia) The merits of index investing are obvious: vastly reduced management fees, minimal trading and related market impact and expenses, and the avoidance of human error. Thus index investing is a “can’t lose” strategy: you can’t fail to keep up with the index. Of course it’s also a “can’t win” strategy, since you also can’t beat the index (the two tend to go together). Index or passive investing got off to a relatively slow start. In the early years, I feel it was treated as a bit of an oddity or sideline: perhaps a candidate to take the place of one or two of an institutional investor’s active managers.

If you make an investment in 2012, you’ll know in 2014 whether you lost money (and how much), but you won’t know whether it was a risky investment – that is, what the probability of loss was at the time you made it. To continue the analogy, it may rain tomorrow, or it may not, but nothing that happens tomorrow will tell you what the probability of rain was as of today. And the risk of rain is a very good analogue (although I’m sure not perfect) for the risk of loss. People Smarter Than Me Peter Bernstein, who passed away in 2009, was one of the smartest people I ever met: a real investment sage. He combined a brilliant and learned mind, great common sense, and the ability to express himself with incredible clarity. I found a great deal of inspiration in his newsletter “Economics and Portfolio Strategy,” in his book “Against the Gods: The Remarkable Story of Risk,” and in our correspondence. One of the newsletter’s best issues, from June 2007, was titled “Can We Measure Risk with a Number?” It provided Peter’s answer to that question, buttressed by the words of a number of great thinkers. It’s so good that I want to share parts here (with all emphasis added but the first). This memo is greatly enhanced by their inclusion: In life – and in investing – the biggest risks cannot be reduced to a hard number. As Bill Sharpe put it to me recently, “It’s dangerous, at least in general, to think of risk as a number . . . .

We’re faced with large-scale decisions, yet again there are no facts or prior experiences on which to base those decisions. Truly nobody knows, and a lot of this memo will be about things we can’t know for sure. But I hope it’ll help you organize and evaluate the issues. I want to point out that there are no experts on the subject at hand. Economists have analytical tools and theories to apply, but no economist and no tool will produce a conclusion in this instance that we can follow with confidence. There have been no large-scale trade wars in the modern era; thus, the theories are untested. Investors, businesspeople, academics, and government leaders will all give advice, but none of them is much more likely to be right than the average intelligent observer. The things on which everyone will agree are obvious, like the likelihood of higher prices. The less obvious truths will be harder to discern. One of the things I insist on is that even for someone who deals with the future via forecasts, a forecast isn’t enough. In addition to a forecast, you have to have a good sense for the probability your forecast is correct. In this case, under these circumstances, it must be accepted that forecasts are even less likely to prove correct than usual. Why? Primarily because of the vast number of unprecedented unknowns involved in the current matter, which has the potential to turn into the biggest economic development in our lifetimes.

© Oaktree Capital Management, L.P. All Rights Reserved The annual returns are the same for Fund B as for Fund A (and thus so is the three-year compound annual return). But Fund B’s IRR is 45% (the same as its compound annual return, since there weren’t any interim inflows or outflows), while Fund A’s is 21%. The difference arises because Fund B achieved its 100% return in year three with beginning capital of $1,540, as compared with just $50 for Fund A. Fund B produced total distributions of $3,080, while Fund A’s distributions totaled only $1,350. Certainly Fund B’s performance should be considered superior – even though the two funds’ time-weighted returns are the same. Fund B’s superiority is captured by its higher IRR. UBig Percentage Gains on Small Dollars – Real-Life Example #1 I would find it hard to invent examples as extreme as some of those provided by real life. Let’s look at the results for our first distressed debt fund – Special Credits Fund I – in 1996, its last year in business. This fund was formed in October 1988 with committed capital of $96.5 million, which was fully drawn and invested by the end of 1990. It achieved annual before-fee returns ranging between 29% and 89% in 1991-94 and made large distributions in 1992-93. By the end of 1995, its since- inception time-weighted return had reached 23.7%, its IRR stood at 24.0%, and it was down to one asset carried on the books at $1.9 million. So far, a simple picture.

© Oaktree Capital Management, L.P. All Rights Reserved When one of the investment committees I’m on decided to increase the portfolio’s commitment to “absolute-return hedge funds” several years ago, the general consensus was that we wanted funds that would reliably deliver 9-10% or so. We wouldn’t expect to do much worse regardless of how badly the markets performed, and we wouldn’t be surprised if we failed to do much better when the markets rose. In other words: a steady, healthy return (implying good relative performance in bad times), but consequently with the likelihood of lagging the markets when they do well. Raise your hand if you agree. But problems arise. Most hedge funds do better in good years than bad, implying that they’re not really insensitive to market developments. Most hedge fund managers would acknowledge that their returns are derived from a combination of beta and alpha (that is, from market return plus the skill they bring to the investment process). And as long as beta plays a meaningful part, an investment’s return can’t really be described as “absolute.” Waring and Siegel argue that there’s no such thing as absolute investing, in that the alpha it aims to capture arises from relative decisions that are the basis for all active management.

© Oaktree Capital Management, L.P. All Rights Reserved before. Collateralized loan obligations and collateralized debt obligations, for example, grew practically unchecked. These debt factories bought up vast amounts of raw material – in the form of underlying portfolio assets – in order to generate a salable product. The bottom line of it all: high leverage, untested vehicles and inadequate preparedness for adverse developments. Little awareness of risk, low credit standards, slender risk premiums and little margin for error. In short, a recipe for possible disaster. UThe Vicious Circle It’s easy to explain what happens at this point in the typical market cycle: eventually, everything goes the other way. That’s exactly what happened this summer. There’s a bump in the road. It doesn’t matter what it is, and it’s usually different each time. This year the problem occurred in the field of subprime mortgages. There was a surprising rise in delinquencies, the immediate effect of which was limited to a small segment of the economy and the few investors who’d bought securities backed by these loans. In the months leading up to July, the impact went largely undetected outside the subprime arena. But from time to time in the investment world, a chain reaction is set off – maybe you’d say a “tipping point” is reached – which causes one sort of problem to create others and to cascade from one asset class, market or region to others.

Today, many people apparently fail to understand the role of capitalism in creating the wealth that Americans share. Others may feel the capitalism that got us here may have been fine in its time but isn’t needed anymore; thus, we should shift our attention to more equal distribution instead. And a last cohort may consider equal sharing more important than the creation of more prosperity. Socialism superimposes socio-political considerations on an economic system, such that equality is elevated relative to self-interest and individual motivation. Capitalism omits that emphasis. In this © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

For some reason, in 2016 pollsters in all three countries either failed to talk to a representative sample of voters, failed to elicit honest responses, or failed to accurately interpret the data. Thus their opinions may be accorded less weight in the future. So Much for the Experts I’m struck by how dramatically opinion can flip-flop:  During the run-up to the election, Clinton’s campaign organization and “ground game” were considered sophisticated, efficient and unstoppable, and Trump’s were thought of as rag-tag, underfunded and uncoordinated. Now Trump’s machine is described as having been highly effective, and Clinton’s as having missed important signs and opportunities.  Clinton’s message was thought likely to carry a lot of weight with a broad swath of the electorate, while Trump’s was viewed as appealing deeply to a few fervent but narrow fringe constituencies without enough voters for him to win. After the fact, Trump is described as having had “perfect pitch” and Clinton as having a “tin ear.”  In particular, now it’s considered to have been a big mistake for Clinton to fail to address the concerns of white men and set out a solution for those who lost jobs and were omitted from economic progress. But during the campaign, no one pointed to this error. * It should be noted – to his credit – that Silver insisted repeatedly that Trump could win.

© Oaktree Capital Management, L.P. All Rights Reserved In short, there are two primary elements in superior investing:  seeing some quality that others don’t see or appreciate (and that isn’t reflected in the price), and  having it turn out to be true (or at least accepted by the market). It should be clear from the first element that the process has to begin with investors who are unusually perceptive, unconventional, iconoclastic or early. That’s why successful investors are said to spend a lot of their time being lonely. As I wrote in “Dare to Be Great,” non-conformists don’t get to enjoy the warmth that comes with being at the center of the herd. But it should be clear that when you’re one of many buying something, it’s unlikely to be a special opportunity. It’s only when few others will buy that you can get a bargain. That’s the thinking behind a brilliant observation that I heard in the 1970s, describing the three stages of a bull market:  the first, when a few forward-looking people begin to believe things will get better,  the second, when most investors realize improvement is actually underway, and  the third, when everyone believes things will get better forever. The loners who buy from a crowd of dispirited sellers can get a good deal – and high returns – because they’re few in number and early.

© Oaktree Capital Management, L.P. All Rights Reserved insight, however, for them to comprehend that their switching will be, in itself, among the things that change performance. When people switch to the better-performing group, their buying bids up the prices of those securities. That bidding-up prolongs the outperformance somewhat, but it also reduces the prospective return and increases the probability of a correction. (The higher the price you pay, the worse your prospects for profit. This seems like a simple concept, but it's forgotten once in a while – as it was in the tech bubble.) At the same time, the switchers will sell worse-performing securities to finance their move into the hot group. That will lower the prices of the laggards, and at some point they'll be so cheap that they become destined to outperform. UFor How Long Will the Fast Lane Go Fast?U – The pedal-to-the-metal momentum crowd saw the tech and telecom stocks moving fastest in 1999 and extrapolated their outperformance to infinity. In essence, they assumed one lane could go faster forever. Of course, they ignored the fact that the stocks were being bid up to prices from which collapse would be inevitable. They also failed to notice that the "slow lane" value stocks they were selling would eventually become primed for acceleration. How long can outperformance continue? How long can one lane be the fastest, one strategy be the best? Clearly, there's no rule.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. performance. While we can’t know these things with certainty, specialized expertise can help us do a better job of assessing prospects and estimating intrinsic value.  We can try to find bargains and avoid overpriced securities. By applying a disciplined approach to security selection, a manager should be able to judge the relationship between the price of each security and its intrinsic value. This can’t be done flawlessly, of course, and at any rate the impact of this relationship on performance is often outweighed in the short run by trends in investor psychology and perception. Thus, like everything else, this won’t work every time. But on balance the superior manager should be able to assemble portfolios whose holdings have a higher collective probability of moving in the right direction.  We can limit risk. The risk in investing increases along with the degree to which the future is unknowable. Recognizing this, managers who acknowledge the limits on their foresight tend to incorporate a good measure of risk control in their portfolios. They try to make fewer investments whose success is heavily dependent on knowing what the future holds, thereby creating an increased margin of safety. This approach to investing shouldn’t be expected to maximize return – especially in good times – but rather to maximize risk-adjusted return. This is a mission-critical part of the investment manager’s job.

about losing money. Fear of missed opportunity drove most investors, and Citibank’s Chuck Prince famously said, “. . . as long as the music is playing, you've got to get up and dance. We're still dancing.” Although he worried about a possible decline in liquidity, he worried more about falling behind in the manic race to provide capital. Recent History – on the Downside The events from mid-2007 through late 2008 or early 2009 demonstrate the reverse in operation. The upward trend in home prices ground to a halt and subprime mortgages began to default in large numbers. Leveraged vehicles melted down. Credit became unavailable, and financial institutions needed rescuing. Recession caused spending to contract, and corporate profits declined. Bear Stearns, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, Wachovia and Washington Mutual all required rescues. Bank capital, commercial paper and money market funds needed federal guarantees. After the bankruptcy of Lehman Brothers, people began to ponder the collapse of the financial system. As often happens in scary times, “possible” morphed into “probable,” or at least something very much worth worrying about. Now a vicious circle replaced the virtuous one of just a few months earlier. And with its arrival, the fear of losing money replaced the fear of missing opportunity. As I’ve said before, I imagine most investors’ cry was, “I don’t care if I ever make a penny in the market again; I just don’t want to lose any more. Get me out!

© Oaktree Capital Management, L.P. All Rights Reserved comparable educational institutions of their own. That day seems far off – institutions like these don’t arise in an instant – but it isn’t an impossibility. Many newcomers to the U.S. have found success in engineering, where their technical skills could be put to good use and language skills may have been less critical. Now, however, we hear from Silicon Valley that engineers are harder to attract and retain because of the trends described above. I’m told that in certain fields (like aerospace), U.S. engineers are declining in number and their average age is rising. America’s preeminence depends in part on continuing to attract the world’s best and brightest, but the outlook for doing so is not all it was in the past. Standard of Living In many ways, including materially, Americans have enjoyed a wonderful standard of living over the last hundred years. Considering creature comforts such as housing, food, sanitation, healthcare, leisure and luxuries, ours may have been the highest standard of living in the world. That raises three questions: 1. Why should we continue to enjoy the highest standard of living? 2. Why should it continue to improve? 3. And why should the rate of improvement outpace that of the rest of the world? We often see poll results showing that increasing numbers of Americans doubt their children will live better than they do. We’d like them to, but why should they?

” (Financial Times, November 12-13) No austerity here! Trump’s statements regarding business and the economy contain some real positives and are the best part of his platform . . . if he and his administration are up to the task of putting them into practice. © 2016 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Thus, you don’t forgo much interest by withdrawing money from the bank to buy a house or boat (or make an investment), which makes doing so seem painless. For example, if someone’s thinking about taking $1 million out of savings for a purchase at a time when savings accounts pay 5% interest, they’re likely to understand that doing so will cost them $50,000 per year in forgone income. But when the rate is zero, there is no opportunity cost. This makes the transaction more likely to occur. iii. Low interest rates lift asset prices In finance theory, the value of an asset is defined as the discounted present value of its future cash flows. We discount future cash flows when calculating present value because we must wait to © 2024 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

” All of these things were the result of thirteen years of rapid inflation and ten years of returns on equities averaging less than 3% per year. “The Labor Department ruling is just one more in a nearly endless string of unhealthy things that have happened to the stock market over the past decade.” “This „death of equity‟ can no longer be seen as something a stock market rally – however strong – will check.” “For better or for worse, then, the U.S. economy probably has to regard the death of equities as [a] near-permanent condition – reversible some day, but not soon.” © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

They made level payments that included a substantial principal component that grew over time, eventually extinguished their debt, invited their friends over for mortgage-burning parties, and owned their homes free and clear in time for retirement. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved Understanding this, companies face great pressure to emphasize short-term results. What might they do in response?  Maximize revenues (perhaps by stuffing pipelines and offering discounts that accelerate future sales into the present).  Minimize expenses in slow-to-bloom areas like research and development.  Borrow to buy back stock, because debt capital is cheap and equity is expensive (despite the fact that equity provides safety and leverage amplifies risk). Do you want your companies doing these things? Probably not. But do the collective external pressures force companies in these directions? Absolutely. The things that maximize profits in the short run often serve to decrease profits and increase risk in the long run, but they can be mandatory these days. Investors are increasingly short-sighted, and none more so than some hedge funds, with their emphasis on year-by-year incentive fees. The average stock might deliver a return roughly in line with the growth in corporate profits, and the stocks of better companies should outperform in the long run, but hedge funds (and their investors) expect more. They’re strongly motivated to hold a subset of stocks that will be the best near-term performers. One approach is to take positions and then pressure companies to “maximize shareholder value.

Many took out “no-doc loans” at interest rates above those charged on loans requiring documentation of income. Why? I assume they wanted to be free to lie. And many agreed to terms they couldn’t decipher. But why worry, if the result is a great house at a low initial monthly payment (and maybe cash taken out in the process)? I hate to see the borrowers’ suffering, but each one willingly participated in a deal that was too good to be true.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. importance to reaching a solution if it required compromising on their positions. In the process, a disappointing number gave the impression that they didn’t understand or care much about the significance of deficits, defaults and downgrades. On July 27, The New York Times ran an article on political negotiating. Its mention of the game of chicken reflected what was going on in Washington: “two players [drive] toward each other, each wanting the other to swerve. The one who does, loses. The trick to winning is for one player to convince the other that under no circumstances will he or she veer off course.” One way to do that, The Times suggested, is to unscrew your car’s steering wheel and toss it out the window. I must say I found that an accurate metaphor for what we were watching. While that may have been an effective tactic for winning the political game, however, it didn’t do much to reassure onlookers hoping for a reasonable solution. Instead, it gave the strong impression that reason couldn’t be counted on to prevail. Nevertheless, the situation played out as expected. We saw the short-term problem papered over; little movement toward meaningful spending cuts or revenue increases; and the formation of a bipartisan commission to come up with a solution to the long-term problems.

” Beyond that, the key to further improving your probability of winning lies in the fact that, unlike most games of chance, in blackjack the outcomes of future hands aren’t independent of the outcomes of past hands. This is so because in blackjack the dealer deals several hands in succession without returning the cards that have been played to the “shoe” from which he deals. Thus, which cards have already been dealt directly determines which cards remain to be dealt. If you can track the former through “card-counting,” you can have an idea about the latter. But since the dealer’s shoe can contain six or eight 52-card decks, keeping track of the cards played in itself requires exceptional skill. © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved magnitude of the hedge fund movement, a memo on the subject has become inevitable. First, what are hedge funds? Briefly put, they’re unregulated private partnerships that commingle the assets of institutions and wealthy individuals in pursuit of superior investment results. They’re evergreen vehicles that offer periodic withdrawal opportunities to their investors, as opposed to closed-end entities such as private equity funds that promise no option to withdraw but begin to liquidate after a certain date and return money as they do. Except for one other factor, they can have very little else in common. Hedge funds operate in a great many ways. There are arbitrage funds in fixed income, mergers, convertibles and “stat arb”; long/short funds in stocks in general, tech stocks and emerging markets; macro funds which place bets on currencies and world markets; and funds which make mostly-long bets in specialized market niches such as distressed debt. There are small hedge funds and enormous hedge funds. Some hedge funds hedge – go short or otherwise take offsetting positions designed to reduce risk – and others don’t. Thus some aim for steady returns with little volatility and market exposure, and some make massive, unhedged bets in pursuit of massive returns. Some hedge funds can fairly be described as pursuing “absolute return,” and in the rest the returns are anything but absolute.

Projects started in good times often open in bad, meaning their space adds to vacancies, putting downward pressure on rents and sale prices. Unfilled space hangs over the market. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved 5BUSo What’s The Point? I don’t begrudge people wanting to make money by expressing views that are beyond their ken and of no value. I guess it’s human nature. My complaint, however, is that it’s misleading and injurious to bystanders when people use serious platforms to state their unfounded views. They make it seem so easy to understand economic and market developments, and thus to profit from them. Just as no one should give legal advice or medical diagnoses on TV, the media should desist from providing economic and market analysis as well. I think some of the greatest contributors to the 1998-99 bubble were the talking heads of the media. For every event they provided a without-a-doubt explanation and quantified its profit implications. These “experts” were free with recommendations and exuded 100% certainty. As I’ve said before, there are a few things they never said: “darned if I know,” “it’s hard to predict these things,” and “but I could be wrong.” Nobody was well served by the veneration of the “I know” school in the late 1990s: Main Streeters were lured to invest in Wall Street without an understanding of the skills required or the risks entailed. The market and thus the economy were put through an extreme boom-bust cycle. Risk- taking investment gunslingers were anointed, and cautious value seekers were rendered irrelevant.

When you choose on the basis of a manager’s track record, it’s the same record that everyone else sees. In order to make superior choices, clients have to do in-depth analysis; get to know more than the record, reputation and printed word; fully understand managers’ approaches; make judgment calls based on that knowledge; © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

In general (albeit with some prominent exceptions), the last half of the twentieth century was marked by the rise of a cult of equities, and the last quarter century was probably the best ever. From 1979 through 1990, the S&P 500 averaged an annual return of 15.4% and showed losses in only two years (4.8% in 1981 and 3.1% in 1990). Economic prosperity, rising corporate profits, a trend among consumers toward borrowing to spend, and the subsidence of inflation and interest rates all made for a most hospitable environment. When the stock market’s performance improved even further in 1991-99, with an average return of 20.6% and no down years, the fawning kicked up a notch. From the low of 7 reached in 1980, the p/e ratio on the S&P 500 eventually exceeded 33 in 1999. The market’s dramatic © Oaktree Capital Management, L.P.Reserved

The strong demand for CLOs and the profits available from structuring them created a need for loans to securitize, leading to increased issuance of broadly syndicated loans. Many of the same banks packaged subprime mortgage loans extended to questionable borrowers into residential mortgage-backed securities, or “RMBS.” Remarkably, the bankers were able to obtain thousands of triple-A ratings on RMBS backed by “liar loans.” When the highly flawed nature of these loans and structures came to light, the result was the Global Financial Crisis of 2008-09. The GFC ended with the banks poorer, chastened, and re-regulated, and as a result there weren’t enough bank loans available to meet the needs of the burgeoning private equity industry. Investment managers moved to fill the vacuum through non-bank lending or “private credit.” The fastest-growing component was “direct lending”: private loans to mid-market, private-equity-sponsored portfolio companies with sub- investment grade ratings. (Please note: “private credit” and “direct lending” aren’t synonymous; the latter is a subset of the former. The many stories mentioning private credit these days are really about direct lending. I’ll try here to be conscientious about making the distinction; most who comment aren’t.) Most recently, it has become popular to market investment vehicles holding direct loans to individual investors and retirement accounts.

© Oaktree Capital Management, L.P. All Rights Reserved portfolio will venture. How much emphasis should be put on diversifying, avoiding risk and ensuring against below-pack performance, and how much on sacrificing these things in the hope of doing better? In the memo I mentioned my favorite fortune cookie: “the cautious seldom err or write great poetry.” Like the title Dare to Be Great, I find the fortune cookie thought-provoking. It can be taken as urging caution, since it reduces the likelihood of error. Or it can be taken as saying you should avoid caution, since it can keep you from doing great things. Or both. No right or wrong answer, but a choice . . . and hopefully a conscious one. It Isn’t Easy Being Different In the 2006 memo, I borrowed two quotes from Pioneering Portfolio Management by David Swensen of Yale. They’re my absolute favorites on the subject of institutional behavior. Here’s the first: Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom. “Uncomfortably idiosyncratic” is a terrific phrase. There’s a great deal of wisdom in those two words. What’s idiosyncratic is rarely comfortable . . . and in order for something to be comfortable, it usually has to be conventional. The road to above average performance runs through unconventional, uncomfortable investing.

© Oaktree Capital Management, L.P. All Rights Reserved “arrangements under which fund firms direct trades to . . . brokerages in returns for its (sic) funds staying on their ‘preferred list.’” Sometimes funds allocate commissions to brokerage firms in order to pay off the revenue sharing obligations described above.  Sales incentives – In its article on Jones, the Journal also reported “more than half of the firm’s brokers are invited on [Caribbean cruises and African-wildlife tours paid for by fund companies on the preferred list], based on meeting certain overall sales targets.” At some brokerage firms, brokers have received higher commission rates for selling funds that generate revenue sharing. Elsewhere, the commissions for selling funds managed by the brokerage’s in-house money management arm have been higher than those on third-party-managed funds. On January 13 the Securities and Exchange Commission said that 14 out of 15 broker- dealers it examined had received cash payments from mutual fund companies. Is it wrong for brokerage firms and/or their brokers to receive compensation for emphasizing a company’s funds? After all, supermarkets accept compensation from food companies for giving them more desirable “shelf space.” Isn’t that a valid analogy? The answer lies in the significant distinction between an ordinary businessman and a trusted adviser.

Further, we’re so close to the upcoming election – less than a month away – that neither side wants to give the other anything that might be described as a victory. But this is not an academic matter. The trillions of dollars paid out thus far were not stimulus payments, but support. They weren’t made to get the recipients to spend so much as to keep them and the economy alive. In short, the amounts distributed – to the unemployed, families with incomes below $100,000, companies and institutions – were designed to replace lost income and maintain, rather than stimulate, the economy. Individuals got money so they could buy the necessities of life. Companies got money to replace lost revenues, so they could continue to employ people. These needs have not dried up, even as the disease has ground on and the supplemental unemployment benefits have expired. As one of my Oaktree colleagues wrote me last week, “I was chatting today with the owner of a small movie theater chain. One wouldn’t trade places. All of their theaters in California are closed; the ones out of state are operating with high costs and no patrons; and there is virtually no product to attract audiences. And the lenders and landlords are banging on the door.” Individuals have problems, too. According to Morning Brew on September 25: With the economy still in the basement, people are straining to pay their mortgages.

The chapter I didn’t plan to write – and the one that became the most important chapter in the book and one of the longest – was the one titled “The Cycle in Attitudes Toward Risk.” Security prices fluctuate much more than do the intrinsic value and prospects of the underlying companies, and the main reason for this is the extreme volatility in the way people feel about risk. When the economy is humming, companies are reporting growing earnings, security prices are rising, and profits are piling up, people say things like: “Risk is my friend. The more risk I take, the more money I make. And anyway, I don’t see anything to worry about.are

The only thing we can be sure of today is that stock prices, for example, are a lot lower in the absolute than they were two weeks ago. Buy, sell or hold? I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be. What I would do is figure out how much you’ll want to have invested by the time the bottom is reached – whenever that is – and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds. But no one can tell you this is the time to buy. Nobody knows. An Update – March 12 (to Oaktree clients only) A week and a half later, after we cancelled the Oaktree client conference and livestreamed instead, after Nancy and I had begun the social distancing that is still going on full-bore, and with the S&P 500 down 29%, I emphasized a contrarian theme, concluding that the damage done had created pronounced opportunities. As always, it’s important to be conscious of the investment environment and behave like a contrarian. For years, investors thought conditions were good, and we at Oaktree believed that consequently, prices were high and markets were characterized by risky behavior. That’s what made us cautious.

© Oaktree Capital Management, L.P. All Rights Reserved UIPOs no longer a sure thingU – If you ask me, the most important single contributor to the tech stock bubble was the mania for Initial Public Offerings. When new issues began to double, triple and more on their first day of trading - and then triple again from there - a gold rush started. When the stock market valued profitless new ventures, only months after their formation, at multiples of their sales (and, illogically, at multiples of the price at which founders were gladly to sell), anything was possible. The lottery was on, and the improbable but huge payoffs going to the winners made every ticket valuable. Later, investors ignored the odds against success and acted as if all of the companies - even head-to-head competitors-would be winners. The perpetual motion machine eventually lost its momentum, of course, and it turned out that there's no sure thing. Although the IPOs of 2000 averaged a first-day gain of 55%, about two-thirds of them are now trading below their issue price. UVenture capital rendered mortal U– 1999 witnessed the wildest single market phenomenon I've ever seen: an asset class with a triple-digit annual return. The overheated IPO market provided an exit for the venture capitalists and contributed greatly to their fabulous profits.

And yet, when I was about two-thirds of the way through writing that book, a question dawned on me that I hadn’t considered before: Why do we have cycles? For example, if the S&P 500 has returned just over 10% a year on average over the 65 years since it assumed its present form in 1957, why doesn’t it just return 10% every year? And updating a question I asked in my memo The Happy Medium (July 2004), why has its annual return been between 8% and 12% just six times during this period? Why is it so far from the mean 90% of the time? After pondering this question for a while, I landed on what I consider the explanation: excesses and corrections. If the stock market was a machine, it might be reasonable to expect it to perform consistently over time. Instead, I think the substantial influence of psychology on investors’ decision-making largely explains the market’s gyrations. When investors turn highly bullish, they tend to conclude that (a) everything’s going to go up forever and (b) regardless of what they pay for an asset, someone else will come along to buy it from them for more (the “greater-fool theory”). Because of the high level of optimism: • Stock prices rise faster than company profits, soaring well above fair value (excess to the upside). • Eventually, conditions in the investment environment disappoint, and/or the folly of the elevated prices becomes clear, and they fall back toward fair value (correction) and then through it.

The bonds will be paid off at par upon maturity, and if the other assumptions above are met the 5% return will be achieved. While we believe spreads are attractive given the risks we see in our portfolios, it is true that there is little room for price upside, making the reward for risk taking limited. (This is in essence what Howard concluded in his most recent memo, “Ditto.”) In this type of environment, superior returns are more likely to be earned through minimizing mistakes than through stretching for yield. Rather than behaving aggressively, the search for return should involve risk control, caution, discipline and selectivity. Of course, this is what we emphasize in our portfolios. Considering these factors, should investors sell their high yield bonds and wait for a better time to invest? We don’t think so, as market timing is next to impossible to do right and costly to attempt in less liquid markets like high yield bonds. February 21, 2013© OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved the fact that I have found the bears convincing and the bulls Pollyanna, and then move on to discuss the effect on the market of technology as we move into a new millennium. In short, I find the evidence of an overheated, speculative market in technology, Internet and telecommunications stocks overwhelming, as are the similarities to past manias.  Changing the world -- Of course, the entire furor over technology, e-commerce and telecom stocks stems from the companies' potential to change the world. I have absolutely no doubt that these movements are revolutionizing life as we know it, or that they will leave the world almost unrecognizable from what it was only a few years ago. The challenge lies in figuring out who the winners will be, and what a piece of them is really worth today. The graph at the left shows the stock price performance of the leading company in an industry that was thought capable of changing the world. For that reason, the stock followed the explosive price pattern that has become typical for technological innovators. The predictions were correct: the industry did change the world, and the company was its big winner. The industry was radio. In the 1920s it was expected to change the world, and it did. Its ability to communicate without wires created entertainment in the home, electronic advertising and the live delivery of events.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: In recent years observers have made a big thing out of the fact that a large percentage of Americans would be unable to respond to a $400 emergency. There’s some disagreement as to whether it’s true, but clearly many people don’t have much money in the bank. Where will they get money to buy essentials if they lose their jobs? The government is highly likely to distribute cash, but the speed and adequacy remain to be seen. In coming weeks we are likely to see over-taxed hospitals; shortages of beds, ventilators and supplies; triage of care based on patients’ age and health; infection among health professionals; and rising numbers of fatalities. There’s no question that the health system is underprepared; the question is how much preparedness can be improved. I find it hard to believe the short-term news will be good. In all these ways and more, the early news is bound to be bad. I think that’s indisputable. The only good news in this regard would be if it doesn’t reach the levels people expect and fear. Fiscal and Monetary Actions  The Fed has cut the short-term interest rate to zero – including a record emergency cut of 100 basis points on Sunday, March 15 – but unfortunately the total reduction has been only 150 basis points, whereas past rate-cut programs have amounted to roughly 500 basis points.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved. For me, this cartoon frames the question precisely: Should we do the thing that’s right in principle, or should we alter our behavior to reflect today’s real-world conditions? There’s no one right answer; it goes back to expectations. If it’s important to track the competition, you should start to make the portfolio less idiosyncratic, regardless of price attractiveness. But if you care more about absolute performance, achieved with risk under control, you should refuse to buy sky-high assets. The latter is my preference, and it was reflected in my decision. Penn held off from buying tech and growth stocks. But I had declared my intention before taking the job. To put it in horribly mixed metaphors, having missed the boat for six years, I said I wouldn’t jump on the bandwagon just in time to ride it over the cliff. I hoped making this clear would condition expectations and provide cover in case our actions initially proved wrong. Offense or Defense? The dilemma just discussed relates to the biggest single issue facing anyone tasked with structuring a portfolio: whether to stress offense – trying for high returns – or defense – reducing the likelihood of losses. Of course most investors balance these two things. The question is in what proportion. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

With our mantra in that period of “move forward, but with caution,” our portfolios were as fully invested as we could make them while maintaining the highest possible standards within the context of the market realities. When the markets fell sharply in March, our prior caution allowed 10 of our 14 open-end strategies to avoid part of their benchmarks’ declines (before fees). This enabled us to remain calm under fire, hold onto positions that warranted doing so, and increase aggressiveness at the margin where appropriate. Of course, these were the right things to do. A year ago, in my 2019 review, I included a table showing how little of our closed-end funds’ capital we had invested, taking pride in our portfolio managers’ discipline, and writing: Investors’ aggressive pursuit of return – and the strong resulting cash flows into alternative and private investments – has made it challenging to put money to work in these fields. . . . In each case, our insistence on good value and controlled risk resulted in a moderate pace of investment that was somewhat below our historic norms. In 2020, in contrast, many of our closed-end strategies turned highly aggressive, starting in the worst of the March declines. This allowed them to make great progress.

© Oaktree Capital Management, L.P. All Rights Reserved  Some invested on the recommendation of people claiming to be hedge fund consultants. But in many cases these “advisers” disclosed that they were being paid by the funds they recommended. How could investors have relied on what so obviously could be biased advice? In the case of Bayou – as in other scams before and others to come – it’s clear that a drawerful of cash provides a strong incentive to steal. But if that’s so obvious today, shouldn’t it have been obvious to people before they became investors? Shouldn’t that have encouraged caution? As The Wall Street Journal wrote on September 30 regarding Bayou’s founders, “Such tidbits from the duo’s business backgrounds were easy to find via Internet research and other inquiries.” Thus the bottom line is a simple one, and instructive. Which of Bayou’s limited partners would have invested if they had known the above facts? And why didn’t they know them? UStocks for the Long Run Going from the micro to the macro, another subject that suddenly looks a lot different in retrospect is the likely return on U.S. stocks. When I was in graduate school at the University of Chicago in 1967-69, I learned that its Center for Research in Security Prices had input the closing price for every stock every day since 1929 and computed that the average yearly return on U.S. equities had been a shade over 9%.

© Oaktree Capital Management, L.P. All Rights Reserved Because of his conviction that markets are efficient, Charley recommended passive investing as the best way to end up the winner – let others try the tough shots and fail. Oaktree’s view is a little different. Although we believe in the existence of inefficient markets as well as efficient ones, we still view the avoidance of losers as a wonderful foundation for investment success. Thus we diversify our portfolios, limit the fundamental risk we’ll take, try to buy things that provide downside protection, and emphasize senior securities. We, too, try to win by not losing. U Which Team Do You Want Out There? I recently came up with a new sports metaphor that handily illustrates a crucial choice each investor has to make. It goes like this: Think about a football game. The offense has the ball. They have four tries to make ten yards. If they don’t, the referee blows the whistle. Off the field goes the offense and on comes the defense, whose job it is to stop the other team from advancing the ball. Is football a good metaphor for your view of investing? Well I’ll tell you, it isn’t for mine. In investing there’s no one there to blow the whistle; you rarely know when to switch from offense to defense; and there aren’t any time-outs during which to do it. No, I think investing is more like the “football” that’s played outside the U.S. – soccer. In soccer, the same eleven players are on the field for essentially the whole game.

Consumer debt, default and bankruptcy are all at high levels. Prices being paid in acquisitions are once again high. There's too much money chasing too few deals. The stock market is exhibiting unusually narrow "breadth" (e.g., with the Dow up 76 points today to 6547, another record, half of all stocks were unchanged or down). Every cocktail party guest and cab driver just wants to talk about hot stocks and funds. And there's a final factor I want to mention: capitulation. This is the word I use to describe investor behavior late in cycles.jump

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: • The U.S.’s effective private sector will supplement the public health efforts of government, producing massive amounts of supplies and equipment, and developing testing, treatments and vaccines. • The price declines of securities will draw in buyers, and ample capital is available in the form of dry powder in funds. When I read the more positive views regarding the current episode, I can’t help but think back to my favorite newspaper headline, which included the phrase “Bankers Optimistic.” Usually the case, perhaps, but it’s worth noting that the story in question was published on October 30, 1929, reporting on the prior day’s stock market crash. On that day of optimism, the Great Depression still had eleven years to run. The Negative Case I always say we have to be aware of and open about our biases. I admit to mine: I’m more of a worrier than a dreamer. Maybe that’s what made me a better credit analyst than equity analyst. On average I may have been more defensive than was necessary (although somehow I was able to shift to aggressive action when crisis lows were reached during my career). Thus it shouldn’t come as a surprise today that my list of cons is longer than my pros (and I will elaborate on them at greater length). • I’m very worried about the outlook for the disease, especially in the U.S. For a long time, the response consisted of suggestions or advice, not orders and rules.

© Oaktree Capital Management, L.P. All Rights Reserved attitudes that are the furthest apart of those regarding any potential investment. The “gold bugs” think it’s ideal and dependable, and the naysayers think it’s unanalyzable and anachronistic. Due to the trauma and uncertainty introduced by the financial crisis, the subject of gold has attracted increased attention and the debate has heated up. It has doubled in price over roughly the last two years. And I’ve been asked about gold more in those two years than in all the rest put together. I didn’t think about gold very much during my first 39 years in the money management business. First I was an equity guy, and then I became a bond guy. I never had a client who held gold (as far as I knew) and no one asked for my views on it. In a world in which people thought they knew how things worked and everything went smoothly most of the time, gold was considered largely irrelevant. For the last few years, I’ve advised a Swiss charitable foundation that, as is customary in its home country, holds substantial amounts of precious metals. Thus I’ve had to think about gold – which I never had to do before – and come to a conclusion. My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists . . . or that God doesn’t exist. The believer can’t convince the atheist, and the atheist can’t convince the believer. It’s incredibly simple: either you believe in God or you don’t.

CONFIDENTIAL © Oaktree Capital Management, L.P. All Rights Reserved declines: 6.4% in 1977, 4.2% in 1981, and 2.8% in 1990. In order to have experienced a bear market, an investor had to have been in the industry by 1974, when the index lost 24.3%, but the vast majority of 1999’s investment professionals doubtless had less than the requisite 26 years of experience and thus had never seen stocks suffer a decline of real consequence.  Second, the human mind seems to be very good at suppressing unpleasant memories. This is unfortunate, because unpleasant experiences are the source of the most important lessons. When I was in army basic training, I was sure the memories would remain vivid and provide material for a great book. Two months later they had disappeared. After the fact, we may remember intellectually but not emotionally: that is, the facts but not their impact.  Finally, the important lessons of the past have to fight an uphill battle against human nature, and especially greed. Memories of crises tell us to apply prudence, patience, moderation and conservatism. But these things seem decidedly outdated when the market’s in a bull phase and risk bearing is paying off, and if practiced they appear to yield nothing but opportunity costs. Charlie Munger contributed a great quote to my recent book, from Demosthenes: “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.

This may happen because markets and systems don't work (in the Crash of 1987, portfolio insurers couldn't get their stop-loss sales off), because external events aren't fully anticipated (inverse floaters tanked in 1994 because interest rates rose at annual rates of 600 or 700 basis points that had been considered impossible), or simply because of the unreliability of the human participants (scared people often fail to step forward with cash at the times that matter most). A relationship's failure to hold often comes just when faith in it has reached an excessive level and huge sums have been bet on it. For whatever reason, we have seen m any instances when probabilistic models turned out not to have made sufficient allowance for an “improbable disaster.” As Long-Term's Meriwether wrote in his September 2 letter to investors, “the Fund added to its positions in anticipation of convergence, yet ... the trades diverged dramatically.” In other words, sometimes things that are cheap just get cheaper and things that are dear get dearer.

Ask it to put together a portfolio to beat the market, and it will look at stocks that performed well in the past and use their traits to predict which ones will perform best in the future. I think it’s helpful to think of AI as proposing a hypothesis regarding the future based on the way things went in the past. I’ll return to this later. What follows from the above is my question: Can AI have a new idea? Maybe it can perform every knowledge task we assign to it. But can it think of things we haven’t told it to think of? Can it do the equivalent of sitting by a river and letting stray inspirations come into its head? Can it see an apple fall from a tree and develop the notion of gravity? Can it muse, daydream, or ideate? Can it have intuition? This is where the debate around AI gets complicated.follows:

© Oaktree Capital Management, L.P. All Rights Reserved intrude into our regular existence? Are chemical and biological weapons a real threat? 2. About our response. Can we find bin Laden? Can we capture him and his henchmen? Will our military actions be successful, and can they be undertaken without extensive collateral damage? Can we pursue justice without alienating people and nations? Will terrorists move to punish our actions? Will their doing so shake our resolve, or that of our allies? 3. About the economy. How deep a recession are we in for? How long will it last? What will prompt a recovery, and what shape will it take? Will industries like airlines and hotels be permanently depressed, or will they return to pre-9/11 normalcy? When will liquidity and a desire to buy things return? Can we rely on normal cyclical patterns in these things? Will these elements be set back again if there is further terrorism? Who among us can say he knows the answers to these questions? And who can say the future is foreseeable without those answers? Many of these questions take us into uncharted territory where no one can say what will happen. The possible answers include some that could profoundly affect the economy and the markets, and they worry me. Some of the greatest dilemmas in investing surround highly unlikely events with highly negative implications. It's hard to know what to do about them, but we should at least be aware of their existence.

The events that built up to it included:  massive subprime mortgage defaults and the failure of mortgage backed vehicles,  meltdowns at funds that had invested in those vehicles, notably two Bear Stearns funds,  the collapse of Bear Stearns, necessitating its purchase by JPMorgan for almost no consideration,  rescues of Merrill Lynch by Bank of America; Wachovia by Wells Fargo; and Washington Mutual by JPMorgan (after it was first seized by the Office of Thrift Supervision),  decisions on the part of BofA and Barclays not to acquire Lehman Brothers, and on the part of the U.S. Treasury not to bail it out, leading to Lehman’s bankruptcy filing,  the appearance that Morgan Stanley would be next if it couldn’t secure additional capital, and  widespread speculation regarding other firms that might follow. © 2016 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

I came along three years later, and I remember my parents picking me up from summer camp in 1956 and telling me about a new singing sensation, Elvis Presley, and a new kind of music called rock and roll. The three men listed above were born at the right time to become leaders of the newly minted rock and roll industry. It’s a good thing they weren’t born a few decades later, since cheap downloads and file sharing have now decimated the profitability of the record business. The bottom line is simple: it’s great to be in the vanguard of a new development. Talent and hard work are essential, but there’s nothing like getting there early and being pushed ahead by the powerful trends in demographics and taste that follow. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Bruce has since become well known for his investing acumen, and, certainly, his returns since 1988 can’t be attributed to the mere avoidance of losses. When you aspire to returns well above those available on bonds, it’s not enough to avoid losers; you actually have to find (or create) winners from time to time. The returns generated by Bruce and his group show that they’ve done so. Oaktree now has a number of what I call “aspirational strategies,” meaning they need winners. So why do we still use the above phrase as our motto, and why is “the primacy of risk control” still the first tenet of our investment philosophy? The answer is we want the concept of risk control to always be top of mind for our investment professionals. When they review a security, we want them to ask not only “How much money can I make if things go well?” but also “What will happen if events don’t go as planned? How much could I lose if things get bad? And how bad would things have to get?” Risk control is still number one at Oaktree. Seventy-plus years ago, UCLA football coach Henry Russell “Red” Sanders said, “Winning isn’t everything, it’s the only thing.” (The saying is also attributed to Vince Lombardi, legendary football coach of the Green Bay Packers.) While I haven’t figured out © 2023 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

” It’s also called a “risk premium,” which is what it is: the incremental return you’re offered to accept incremental default risk. Thus, it’s the equivalent of an insurance premium: what policyholders pay to get auto insurers to shoulder the risk that they’ll crash their cars. Yield spreads primarily fluctuate with trends in, and investor psychology regarding, defaults. When more companies are defaulting and investors expect elevated defaults in the future, they’ll demand more protection in the form of wider spreads. They’ll do so to a lesser degree when they’re optimistic about creditworthiness. Thus, the spread is a good barometer of investor psychology, or a “fear gauge.” It’s worth noting the obvious: the spread doesn’t tell you what the actual default rate will be, as some mistakenly say. It tells you what investors think the default rate will be. The thoughtful investor has to evaluate that expression of opinion against what the reality is likely to be and assess whether investors are being too optimistic or too pessimistic. Are Today’s Yield Spreads Adequate? This is the question of the day. Let’s say high yield bonds yield 8% and a Treasury note of the same maturity offers 5%, for a yield spread of 3%, or 300 basis points. Which is the better deal? It all depends on the likelihood of default.

The frog doesn’t detect the danger – just as people fail to perceive the significance of the interest rate decline – because of its gradual, long-term nature. It’s not an abrupt development, but rather a drawn out, highly influential trend. Second, in Sea Change, I compared the 40-year interest rate decline to the moving walkway at an airport. If you stand still on the walkway, you’ll move effortlessly; but, if you walk at your normal pace, you’ll move ahead rapidly – perhaps without being fully conscious of why. In fact, if everyone’s walking on the moving walkway, doing so can easily go unnoted, and the walkers might conclude that their rapid progress is “normal.” Finally, there’s what John Kenneth Galbraith called “the extreme brevity of the financial memory.” Relatively few investors today are old enough to remember a time when interest rates behaved differently. Everyone who has come into the business since 1980 – in other words, the vast majority of today’s © 2023 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved collective interpretation of the information into a market price. While that price is often wrong, very few investors can consistently know when it is, and by how much, and in which direction. The evidence is clear: most investors underperform the market. They (a) can't see the future, (b) make mistakes that keep them at a disadvantage, (c) accept high risk in their effort to distinguish themselves, and (d) spend money trying (in the form of market impact and transaction costs). Of course, there are individuals who beat the market by substantial margins, and they become famous. The mere fact that they attract so much attention proves how rare they are. (That's the meaning of the adage "it's the exception that proves the rule.") Adding to return without adding commensurately to risk requires rare understanding – of how money is made and what constitutes value – and far more managers promise it than have it. I was recently on a panel that was asked what gave our firms their edge. One panelist responded "we have 160 analysts around the world." To me, that response demonstrated a total lack of insight. Unless those 160 analysts are more astute than the average investor, they'll contribute nothing. Certainly another 160 wouldn't double the manager's ability to add value. (If they could, everyone would be an analyst.)

Ownership assets (things like common stocks, whole companies, real estate, private equity, and real assets) and debt (bonds, loans, mortgage backed securities, and other streams of promised payments) should be thought of as entirely different, not variations on a theme. They have different characteristics and potential, and the choice between them is one of the most basic things investors must decide. The Essential Choice At the outset of this memo, I listed some of the decisions that comprise the asset allocation process. But how can those decisions be approached? What’s the framework for making them? The next piece that clicked into place in my thinking “down under” was with regard to the basic characteristics of a portfolio. In my opinion, one decision matters more than – and should set the basis for – all the other decisions in the portfolio management process. It’s the selection of a targeted “risk posture,” or the desired balance between aggressiveness and defensiveness. The essential decision in investing is how much emphasis one should put on preserving capital and how much on growing it. These two things are mostly mutually exclusive: © 2024 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved My point here, and my reason for reproducing part of Taleeb’s table, is my belief that there are people who see the things on the left, and there are people who see the things on the right, but few who see some of each. Some people think their ability to infer causality and analyze data makes them skilled investors capable of producing consistent outperformance. Others understand that luck plays a big part; that a lot of apparent causality is really coincidence; and that the person crowned the most skilled investor in a given year might be nothing more than a “lucky idiot.” Very few people mix aspects from both columns. I can think of many qualities that seem to go together to define one of the two main types of investor but not the other. I’ll discuss them below and attribute them to either the “Oaktree-style” investors with whom I tend to associate – “us” – or the other sort of investor – “them.” 1BUPersonality Type It would be great to either be middle-of-the-road and dispassionate all the time or, better yet, bullish or bearish at just the right time. But few people can achieve either of those ideals. Most investors are congenitally either bullish or bearish, and I’ve never seen anyone capable of flipping in an adroit and timely manner from one to the other. For most of us, it’s either bullish most of the time or bearish most of the time – right or wrong.

© 2020 Oaktree Capital Management, L.P. All Rights Reserved Follow us: Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do – and nothing is more unpredictable. The unpredictability of politicians is only one of the many variables complicating the future today. Not only can’t we predict people’s actions and the many other things that will determine the course of the virus and its impact on the economy, but we also certainly can’t predict when they’ll take those actions – and that will count just as much. Which Expert to Follow? In the memo Uncertainty, I quoted at considerable length from an article by Erik Angner. One of its most interesting points was as follows: People who lack the cognitive skills required to perform a task typically also lack the metacognitive skills required to assess their performance. Incompetent people are at a double disadvantage, since they are not only incompetent but also likely unaware of it. (Behavioral Scientist, April 13) By definition, people who lack the expertise in a given field required for superior judgments also lack the expertise required to assess their level of expertise. As I mentioned, they qualify as John Kenneth Galbraith’s forecasters “who don’t know they don’t know.” While re-reading my memo, I realized I had left out an important further ramification.

When worry is in short supply, risky borrowers and questionable schemes will have easy access to capital, and the financial system will become precarious. Too much money will chase the risky and the new, driving up asset prices and driving down prospective returns and safety.

That means worrying about what one may not know, about what can go wrong, and about losing money. If you're worried, you'll tend to build in greater margin for error. Worriers gain less when everything goes right, but they also lose less – and stay in the game – when things return to earth. All of Oaktree' s activities are guided more by one principle than any other: if we avoid the losers, the winners will take care of themselves.about

© Oaktree Capital Management, L.P. All Rights Reserved.  Will “structural unemployment” in the future remain stubbornly above the 5% or so of the last few decades?  Will profit margins retreat from their current record levels, and if so, what will be the effect on corporate profits?  Longer term, can progress ever be made on cutting the budget deficit and reducing the unfunded entitlement obligations?  What will be the social ramifications of slow growth, high unemployment and increased income disparity?  Will the U.S. devalue the dollar, the usual path to dealing with excessive national debt?  Will slow growth lead to Japan-style deflation? Or will high-volume money printing to make it easier to repay the debt bring on chronic inflation? (The mere fact that intelligent people worry simultaneously about both these polar opposites is in itself an indicator of the high level of uncertainty that is present.) In Europe:  Can the seeming downward spiral in peripheral Europe’s economies be arrested?  Can Europe’s excessive indebtedness be brought down, and can the chronic deficits that led to that level of indebtedness be trimmed through austerity?  Will richer nations continue to support poorer without insisting on the latter applying painful austerity?  In practical terms, can austerity be undertaken at a time of economic weakness? If austerity is continued, are recession, suffering and unrest unavoidable?

The policy measures described above traditionally would be expected to produce the following: • a stronger economy than would otherwise have been the case; • higher corporate profits; • tighter labor markets and thus higher wages; • more money chasing a limited supply of goods; • an increase in the rate at which the prices of goods rise (i.e., higher inflation); and, eventually, • a tightening of monetary policy to fight inflation, resulting in higher interest rates. © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

There’s no reason a recovery can’t go beyond ten years; no gate will come down on June 30, foreclosing further progress. And it’s important to note that since this has been the most sluggish U.S. recovery since World War II, it hasn’t been characterized by excesses to the upside, meaning there needn’t be a recessionary correction on the usual schedule. © 2019 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

• The foolhardiness of youth, who were misled by early statistics into believing they were immune. • “National hubris and belief in American exceptionalism,” according to Martha L. Lincoln, a medical anthropologist and historian. As one of our elected leaders stated on March 11, “The virus will not have a chance against us.” © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

• What will the fatality rate be relative to age, gender and pre-existing conditions? Will the impact of the disease on young people worsen? • Will people who’ve had it and recovered be immune? Will their immunity be permanent? • Will the virus mutate, and will immunity cover the new forms? • Will it be possible to inject antibodies to prevent infection? • How many people have to be immune for herd immunity to effectively stop the further spread? • Will social distancing delay the achievement of herd immunity? Is the Swedish approach better? • Will a vaccine be invented? When? How long will it take to produce and deliver the needed doses? Where will the U.S. stand in the line to get it? • How many people will refuse to be vaccinated? With what effect? • Will vaccination have to be renewed annually? • Will the virus succumb to warm weather and humidity? • Will the virus be with us permanently, and will it be controllable like “just another seasonal disease”? Where am I going with this? My point is that very few people can balance all these considerations to figure out our collective risk. And that’s just Covid-19. Now think about the many questions that pertain to each of the three other factors. Who can respond to this many questions, come up with valid answers, consider their interaction, appropriately weight the various considerations on the basis of their importance, and process them for a useful conclusion regarding the virus’s impact?

 Past Returns Are a Good Guide to Future Returns – The greatest bubbles stem from the belief that high returns in the past foretell high returns in the future. The most successful investors – the longest-term survivors – believe in just the opposite: regression to the mean.(or

Investors can become expert regarding a few companies and their securities, but no one is likely to know enough about macro events to (a) be able to understand the macro expectations that underlie the prices of securities, (b) anticipate the broad events, and (c) predict how those securities will react. Where can a prospective buyer look to find out what the investors who set securities prices already anticipate in terms of inflation, GDP, or unemployment? Inferences regarding expectations can sometimes be drawn from asset prices, but the inferred levels often aren’t proved correct when the actual results come in. Further, in the short term, security prices are highly susceptible to random and exogenous events that can swamp the impact of fundamental events. Macro events and the ups and downs of companies’ near- term fortunes are unpredictable and not necessarily indicative of – or relevant to – companies’ long-term prospects. So little attention should be paid to them. For example, companies often deliberately reduce current earnings by investing in the future of their businesses; thus, low reported earnings can imply high future earnings, not continued low earnings. To know the difference, you have to have an in-depth understanding of the company. No one should be fooled into thinking security pricing is a dependable process that accurately follows a set of rules.

© Oaktree Capital Management, L.P. All Rights Reserved does that imply for P/E ratios (and stock prices) if interest rates were to rise from today's historic lows?  Lastly, we have to wonder where the energy for a more bullish market will come from, and specifically whether a generation of investors who've been burned is lost from the stock market forever. My own take is that even if the 9-11% historic long-term return on stocks remained relevant with regard to the future, (and certainly that's the best anyone could hope for), the above-average gains of the last two decades have borrowed from the future, and the high resulting P/E ratios imply an average return in single digits over the next few years. At the same time, I think some good individual opportunities may be found among orphaned small and mid-cap stocks. Because investment banks are no longer supposed to recommend stocks just to get investment banking business, their coverage lists might contract. The financial pressures and resulting layoffs at the big research firms are leaving many companies without coverage. Many un-researched companies will likely emerge from financial restructurings and corporate spin-offs. Put it all together, and expert stock pickers probably will find some good opportunities in the newly less efficient market. UThe Market Cycle at Its Wildest In a memo on cycles entitled "You Can't Predict. You Can Prepare."

The bottom line for me is that, although the more efficient markets often misvalue assets, its not easy for anyone person – working with the same information as everyone else and subject to the same psychological influences – to consistently hold views that are different from the consensus UandU closer to being correct. That's what makes the mainstream markets awfully hard to beat – even if they aren't always right.

” Its thrust was that (a) history tends to repeat, (b) thus my memos often return to the same topics and (c) if I’ve handled them well in the past, rather than re-invent the wheel, I might as well borrow from what I’ve written before. Ergo, “ditto.” Few topics are more susceptible to this treatment than the process through which (a) investment fundamentals fluctuate cyclically; (b) investors overreact to the fluctuations; (c) the level of risk aversion incorporated in investor behavior fluctuates between excessive and inadequate; and thus (d) market conditions swing from depressed to elevated and treacherous. Here’s how I summed up on this topic in “There They Go Again” (May 2005): Given today’s paucity of prospective return at the low-risk end of the spectrum and the solutions being ballyhooed at the high-risk end, many investors are moving capital to riskier (or at least less traditional) investments. But (a) they’re making those riskier investments just when the prospective returns on those investments are the lowest they’ve ever been; (b) they’re accepting return increments for stepping up in risk that are as slim as they’ve ever been; and (c) they’re signing up today for things they turned down (or did less of) in the past, when the prospective returns were much higher. This may be exactly the wrong time to add to risk in pursuit of more © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved 2) Most accounts of the developments in Asia touch on overcapacity, on stiffened competition from Asian exporters whose prices are now lower in dollar terms because of devaluations, and on the possibility of deflation in the U.S. Even Chairman Greenspan thought enough of deflation to mention it last Saturday. And yet, who really knows what these things might mean for economies and companies around the world? In short, is deflation good or bad? How can you feel comfortable if you can't answer these questions? 3) A reading of the newspapers in the last few months discloses a steady drumbeat of earnings disappointments and revived restructurings and layoffs. How strong is our economy? Are cost increases putting pressure on profits? How much will earnings growth slow down? These are all questions that indicate that negatives are present in our investment environment. But they're always there -- sometimes obvious and sometimes not. Prices near highs and optimism in bloom -- that's a dangerous combination, especially with perceived risk on the rise. Peter Bernstein wrote around 1979 that "The great buying opportunities ... are never made by investors whose happiest hopes are daily being realized." And yet many of today's investors have only known success, and few appear seriously chastened by recent developments.

© Oaktree Capital Management, L.P. All Rights Reserved now they should build some savings. But whereas in the recent past consumer spending grew faster than incomes, a rising savings rate means spending would grow slower than incomes, just at a time when incomes are falling and spending is needed.  Likewise, with tax revenues down, states and cities have to balance their budgets. One way to do so is to raise income tax and sales tax rates, but this will further depress local economies and increase the burden on their beleaguered citizens.  We want to recapitalize the banks, but we don’t want to reward past mistakes.  We’re thinking about buying the banks’ “toxic” assets. But if we pay above-market prices, that’s a subsidy to the reckless (see above), and if we pay market or below- market prices, that will further erode bank capital through write-downs.  We know suspending mark-to-market accounting would end write-downs, but doing so might also reduce confidence in balance sheets and postpone the day of reckoning needed for our financial institutions to reach bottom and recover.  We want the banks to lend, but we can’t – and shouldn’t – make them extend loans to non-creditworthy borrowers.  We want to reduce the incidence of home foreclosure, but we don’t want to reward people who speculated by buying multiple homes or lied on mortgage applications. And we’d rather not treat people who bought more house than they could afford better than those who acted prudently.

In working on my new book, I divided the things an investor can do to achieve above average performance into two general categories: • selection: trying to hold more of the things that will do better and less of the things that will do worse, and • cycle adjustment: trying to have more risk exposure when markets rise and less when they fall. Accepting that “there is no better or worse time” simply means giving up on the latter. Whereas Buffett tells us to “be fearful when others are greedy and greedy when others are fearful” – and he’s got a pretty good track record – this commentator seems to be saying we should be equally greedy (and equally fearful) all the time. © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved million . . . your equity capital twice over. Now you have equity capital of minus $1 million, with assets of $28 million and debt of $29 million. Everyone realizes that there’ll be nothing left for the people who’re last in line to withdraw their money, so there’s a run on the bank. And you slide into bankruptcy. Suppose you set up your leveraged portfolio as described but only 2% of your mortgage holdings go bad, not 20%. Then, you only lose $200,000 (not $2 million) of your $1 million of equity, and you’re still solvent. Or suppose 20% of your mortgages default as in the original example, but you only levered up ten times, not 30. You lose the same 6.7% of your assets, but based on $10 million, so it’s just $670,000, or two-thirds of your equity. You’re still alive. The problem lies entirely in the fact that the institutions combined highly risky assets with a large amount of leverage. By now, everyone recognizes (a) how silly it was for the financial modelers to be so sure there couldn’t be a nationwide drop in home prices (they felt that way because there never had been one – but did their data include the Depression?) and (b) the terrible job the agencies did of rating mortgage-related securities. So the risk was underestimated, permitting the leverage to become excessive: end of story. Reason number one for today’s problem, then, is the mismatch institutions turned out to have made between asset risk and leverage.

This statement was made at 6,000 and 7,000 on the Dow, and it was made in July at 8,200. But it can't be right regardless of the level of stock prices. Inflation is important because it determines interest rates, and rates are important because they determine valuation multiples for stocks. Thus, for every level of inflation and interest rates, there's a "right" level for stocks. What's the right level for stocks given today's conditions? Might it be below the current level? © 1997 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

The first reason is that the multiples in the late 1960s were far too high, and they were gutted in the subsequent market correction. But, perhaps more importantly, many of these “forever” companies turned out to be vulnerable to change. The companies of the Nifty Fifty represented the first flowering of change in the new world, and many of them went on to be its early victims. At least half of these supposedly impregnable companies have either gone out of business or been acquired by others. Kodak and Polaroid lost their raison d’etre when digital cameras appeared. Xerox ceded much of the dry copying business to low-priced competition from abroad. IBM proved vulnerable when decentralized computing and PCs took over from massive mainframes. Seen any door-to-door salespeople lately? No, and we don’t hear much about “Avon ladies.” And what about one of the darlings of the day: Simplicity Pattern? Who do you know today who makes their own clothes? The years since then have seen a massive shift in our environment. Today, unlike in the 1950s and ’60s, everything seems to change every day. It’s particularly hard to think of a company or industry that won’t either be a disrupter or be disrupted (or both) in the years ahead. Anyone who believes all the firms on today’s list of leading growth companies will still be there in five or ten years has a good chance of being proved wrong. For investors, this means there’s a new world order.

© Oaktree Capital Management, L.P. All Rights Reserved The problem is that extraordinary performance comes only from correct non- consensus forecasts, but Unon-consensus forecasts are hard to make, hard to make correctly and hard to act onU. When interest rates stood at 8% in 1978, most people thought they'd stay there. The interest rate bears predicted 9%, and the bulls predicted 7%. Most of the time, rates would have been in that range, and no one would have made much money. The big profits went to those who predicted 15% long bond yields. But where were those people? Extreme predictions are rarely right, but they're the ones that make you big money. UMost Forecasts are Extrapolations The fact is, most forecasters predict a future quite like the recent past. One reason is that things generally continue as they have been; major changes don't occur very often. Another is that most people don't do "zero-based" forecasting, but start with the current observation or normal range and then add or subtract a bit as they think is appropriate. Lastly, real "sea changes" are extremely difficult to foretell. That's why some of the best-remembered forecasts are the ones that extrapolated current conditions or trends but were wrong. Business Week may never live down "The Death of Equities" and "The Death of Bonds." At the mid-1990 lows, the press suggested that no one would ever buy a high yield bond again.

On the one occasion, in 1994, when the consensus of forecasters was bold enough to venture a prediction for short rates which differed substantially from the then-current levels, they got even the direction of the subsequent change wrong. The problem is that, rather than extrapolate the year-end 1994 level, they extrapolated the 1994 trend, which reversed in 1995. In general, we can say with certainty that these forecasters were much better at telling us where things stood than where they were going. This bears out the old adage that "it's difficult to make accurate predictions, especially with regard to the future." The corollary is also true: predicting the past is a snap. And using the prevailing levels to predict the future would have been just about as effective as the average forecast. The prevailing levels differed from the future levels by 16% on average, while the consensus prediction erred by 15%.

Like the lesson of the Schlesinger story, the rest of economics is also pretty straightforward, and its laws are quite reliable. If you buy for $50 and sell for $40, you won’t make money . . . period (or stay in business long). That reminds me of a joke I used in “bubble.com” in January 2000, one my father told me roughly 60 years ago: “I lose money on everything I sell.” “Then how do you stay in business?” “I make it up on volume.” © 2016 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

market value test and triggers a margin call, which can be met only through the posting of additional collateral (which usually isn’t available) or sales of assets (which add to market weakness).  Further, with the world suddenly feeling much riskier, lenders demand increased risk premiums, raising the cost of borrowed funds and further impairing borrowers’ economics.  Equity investors – panicked by the combination of asset price declines, leveraged equity losses and margin calls – withdraw equity capital to the extent they can. The sight of investors lining up at the withdrawal window, and often being told they can’t have their money, adds to the negative climate.  The need to raise cash with which to satisfy the demands of lenders and equity investors places further downward pressure on asset prices, reinforcing what is suddenly a vicious circle. Fire sales of collateral add to this pressure.  In particular, think what happens to banks. In this negative environment, it’s hard to imagine these highly leveraged entities extending credit, given that (a) banks’ equity is shrinking, (b) they feel they may need the money themselves, and (c) they fear further losses on loans and assets. It shouldn’t come as a surprise that this vicious circle seems as obvious and inescapable as did the virtuous one just a short time earlier. This is the point at which we may start to hear talk about the unstoppable downward spiral and thus the pending collapse of the financial system.

 The combination of the need for return and the willingness to bear risk caused large amounts of capital to flow to the smaller niche markets for risk assets offering the possibility of high returns in a low-return world. And what are the effects of such flows? Higher prices, lower prospective returns, weaker security structures and increased risk. In the current financial environment, the number “ten” has taken on particular significance:  This month marks the tenth anniversary of Lehman Brothers’ bankruptcy filing on September 15, 2008, and with it the arrival of the terminal melt-down phase of the Crisis. © 2018 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

And a lot of money being made, but most of it by the few most optimistic and aggressive investors. The "rational" value investors have been decrying the excesses of the market for years – myself included. I've never felt more strongly the truth of the saying I picked up in the 1970s: "being too far ahead of your time is indistinguishable from being wrong." But as they say, "that's my story and I'm stickin' with it."1999

o Investor X decides a certain stock is too cheap and overweights it, buying from investor Y, who thinks it’s too expensive and therefore wants to underweight it. • It’s essential to note that in each of the above cases, one investor is right and the other is wrong. Now go back to the first bullet point above: Since the total dollars earned by all investors collectively are fixed in amount, all active bets, taken together, constitute a zero-sum game (or negative-sum after commissions and other costs). The investor who’s right earns an above average return, and by definition the one who’s wrong earns a below average return. • Thus, every active bet placed in the pursuit of above average returns carries with it the risk of below average returns. There’s no way to make an active bet such that you’ll win if it works © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

© Oaktree Capital Management, L.P. All Rights Reserved “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” Imagine we ran into a visitor from Mars who observed, “I see your economy and markets have been doing well for years. Everyone’s making a ton of money. No one’s expressing worry or a desire to avoid risk. P/E ratios, buyout prices and private equity leverage ratios are all high. Stock buybacks and dividend recaps are adding to leverage and reducing creditworthiness. Conferences on hedge funds and private equity are sold out. Top-performing funds are closed to newcomers and new ones start up every day, fully subscribed. The Greenwich Ferrari dealer has a waiting list a year long.” Nothing in our favorite Martian’s statements sounds like a prediction. In fact, he hasn’t said one word about the future. But there’s a lot of helpful information there. My guess is valuable inferences could be made about what’s likely to happen next. If he can see it, so should we. And having seen it, we should take appropriately cautious action. And the reverse can also be true (although it’s not something I dwell on most of the time or at what I think is today’s point in the cycle).

In fact, since the prodigal third member spent more than he made, he has nothing to contribute to paying off the debt; thus you and I – despite having behaved more responsibly – are stuck with the burden. Greece is that new member of the arrangement, and it (like a number of other countries) wanted to give its people a better life than they can afford, financed from the public treasury. Without membership in the E.U. – or if the rules on deficits had been enforced – Greece’s economic reality would have limited what it could do for its citizens. But E.U. membership enabled it to borrow and spend to excess. Here’s what the Bank of Spain’s governor said in April 2007: “The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous” (Telegraph.co.uk, May 30). The same was true of Greece. © Oaktree Capital Management, L.P.Reserved

That may be an exaggeration, but I think it’s more true than false. And I think that’s behind the recent decisions by a number of senior legislators not to run for re-election. I’ve had the privilege of getting to know Byron © Oaktree Capital Management, L.P.Reserved

© Oaktree Capital Management, L.P. All Rights Reserved Ireland Mortgages and Bristol and West to increase standard salary multiples from four to 4.5 times. In other words, there had been a traditional rule of thumb saying that borrowers can safely handle mortgages with a face amount equal to three-plus times their salaries. But now they can have five times – roughly 50% more. What inference should be drawn? There are at least four possibilities: 1. The old standard was too conservative, and the new one’s right; 2. Conditions have changed, such that the new standard is as conservative for today as the old one was for its times; 3. It’s reasonable for mortgage lenders to accept higher default experience, and thus lower net returns, because their cost of capital has declined; or 4. The rush to place money has caused a supplier of capital to loosen its standards. Now, I am no expert on the UK mortgage market, and it’s my intention in this memo to comment on general capital market trends, not any one sector. Further, it’s certainly true that today’s lower interest rates mean a given salary can support a bigger mortgage (and that’s likely to hold true so long as (1) borrowers keep their jobs and (2) their mortgages carry fixed rates). But if you think Abbey’s reason for taking this step might be a logical one like that, the question to ask is “why now?” Logical reasons and sober decision making might be involved here.

Further, the development of derivatives, in particular, vastly increased the ease with which risk could be shouldered (often without a complete understanding) as well as the amount of risk that could be garnered per dollar of capital committed.  While not a novel development, there was an enormous upsurge in buyouts. These included the biggest deals ever; higher enterprise values as a multiple of cash flow; increased leverage ratios; and riskier, more cyclical target companies, such as semiconductor manufacturers.  There was widespread structural deterioration. Examples included covenant-lite loans carrying few or none of the protective terms prudent lenders look for, and PIK-toggle debt on which the obligors could elect to pay interest “in kind” with additional securities rather than cash.  Finally, there was simply a willingness to buy riskier securities. Examples here included large quantities of CCC-rated debt, as well as debt issued to finance dividend payments and stock buybacks. The last two increase a company’s leverage without adding any productive assets that can help service the new debt. Toward the end, my 2007 memo included the following paragraph: Today’s financial market conditions are easily summed up: There’s a global glut of liquidity, minimal interest in traditional investments, little apparent concern about risk, and skimpy prospective returns everywhere.

The payment of these costs, even with interest rates below LIBOR+2%, is a permanent net negative for the fund: since the fund isn’t becoming levered, it won’t be offset by an increase © 2017 OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

spoke fluent German at the time and extended the trip with a home stay and Gymnasium experience in Kulmbach. During his college years at !"#$, David was on the Student Senate and actively involved in campus issues. An article in The Student Voice, the college publication, featured Student Senator David Swensen as some- thing of a muckraker. “From someone who worked in the university food service,” Steve recalls, “he found out that the cafeteria hamburgers had a soy meal additive. He called them on it. It wasn’t that he was against ‘extenders’, but he objected to the fact that they hadn’t been transparent about it. So, he appeared on the college magazine’s front page, holding a ‘tainted’ burger.” Stephen Swensen sees that sense of justice and honesty as a hallmark of David’s approach to investing, in his career and “in his book on personal investing, in which he didn’t hesitate to call out abuses like conflicts of interest and disgusting ‘piggery.’” In college, Swensen decided to change majors in his freshman year. Charles H.C. Kao, a former professor and head of the Economics Department at !"#$, remembers the strong impression made by Swensen, a freshman in an introductory course in %&'%-'(. “He consis- tently scored highest in every exam,” Kao stated, “and he was excited about discovering macroeconomics. After the introductory economics course, he announced he was changing his major from Math and Chemistry—to Economics.

– Since the markets’ reaction ultimately will be a function of both economics and emotion, it seems impossible to quantify how far it’ll go. I want to stress that the purpose of the above discussion isn’t to give answers or to appear to be complete or authoritative. If anything, it’s to indicate the degree of uncertainty. If it’s true, as I think, that these things are currently unknown and unknowable, then clearly there can be no such thing as a reliable statement regarding the implications of the virus.

This process boosted economic growth in the emerging nations where the work was done, increased savings and competitiveness for manufacturers and importers, and provided low-priced goods to consumers. But the supply-chain disruption that resulted from the Covid-19 pandemic, combined with the shutdown of much of the world’s productive capacity, has shown the downside of that trend, as supply has been unable to keep pace with elevated demand in our highly stimulated economy. At first glance, these two items – Europe’s energy dependence and supply-chain disruption – may seem to have little in common other than the fact that they both involve international considerations. But I think juxtaposing them is informative . . . and worthy of a memo. Russian Energy In 2019, Russia’s top four exports were crude petroleum, refined petroleum, petroleum gas, and coal briquettes. These totaled $223 billion, or 55% of Russia’s total exports of $407 billion, according to the Observatory of Economic Complexity. As shown in the following table, Russia is exceptionally well positioned to wield influence over Europe through exports of energy commodities. Europe Russia Produces Consumes Net Produces Consumes Net Oil (bbl/day) 3.6 mm 15.0 mm (11.4 mm) 11.0 mm 3.4 mm 7.

Now it gets more interesting. Although we can calculate the amount by which stocks outperformed bonds or cash in the past (assuming you were looking at periods prior to 2000), I don‟t think that‟s the same as saying what risk premium was demanded by investors in the sense of definition number two above. If stocks outperformed by 5% over a ten-year period, that doesn‟t mean people demanded a 5% higher return to buy equities rather than bonds or the risk-free asset. They might have “demanded” more or less. It‟s just that they got 5%. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Psychology plays a huge role – perhaps a dominant and self-fulfilling one – in influencing economic growth. In short, if people think things will be good in the future, they’ll spend and invest, and things will be good. But if they turn pessimistic regarding the future and go into their shells, refusing to spend and invest, growth will slow down. Consumers were traumatized by the crisis of 2008: laid off, forced out of their houses, made poorer by market declines, and denied credit. Those who didn’t feel these influences directly © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

When there’s only greed and no fear, for example, everyone wants to buy, no one wants to sell, and few people can think of reasons why prices shouldn’t rise. And so they do – often in leaps and bounds and with no apparent governor.

and thus are not reflected in the security prices underlying the NAV set at that time. Consider the example of a mutual fund that has 4% of its portfolio in a stock that closed today at $40. An hour after the close, the company announces startlingly good earnings. A "late trader" may conclude that the stock will trade tomorrow at $50, and thus that, everything else being equal, tomorrow's NAV will be higher by 1% (the 25% stock price increase multiplied by the 4% position in the stock).trusting

Assets can be tangible or intangible, and an asset’s earning power can produce earnings today and also in the future in amounts that might be higher or lower than today. Together, an asset’s current earnings, plus its power to produce earnings in the future, constitute its key fundamentals. Some investors emphasize paying a reasonable price for today’s earning power, and others are willing to bet on what they see as potential growth in earning power. Regardless, I think prudent investing has to be based on judgments regarding an asset’s present and future earning power. Once an investor has determined an asset’s intrinsic value in this way, he will have a basis for establishing a “right” price that will allow for good returns in the future. Price While value can seem theoretical and ephemeral, price is concrete. It’s the amount you pay to obtain something. Ultimately, as indicated above, doing a good job of investing comes down to estimating value appropriately and purchasing that value at a reasonable price. As mentioned above, there are a great many things that combine to make up an asset’s fundamentals. Ultimately, they can be boiled down to its earning power, and it’s from earnings that value is derived.In

The answer’s simple: Positions that are low in risk can be rendered quite risky with the help of leverage. Back in ancient history (1998), a fixed income hedge fund called Long-Term Capital Management pursued arbitrage transactions like Amaranth’s (on a much more diversified basis but with more leverage) and experienced a similar meltdown.things

© Oaktree Capital Management, L.P. All Rights Reserved  Lower rates also provide a direct subsidy to financial institutions, which can borrow cheaply and lend at higher rates. (If a bank can borrow $100 from the government at 1% and lend it out at 6%, it’s as if the government wrote the bank a check for $5 – but more subtle and perhaps less vexing to Main Street, and with potentially positive multiplier effects.) Given the state of financial institutions in 2008, it’s clear this element was essential.  There’s a third, less direct effect. Rock-bottom rates on Treasurys push people to chase high returns by undertaking riskier investments. A year ago, the pensioner living on interest opened his year-end mutual fund statement and saw that the return on his T-bill or money market fund was close to zero. He grabbed the phone and called the company to say, “Get me out of that fund and into the one that’s paying 15%” . . . and so became a high yield bond investor. It’s clear from the behavior of the markets that something has been goosing investment performance, since the best gains have been seen in the fundamentally riskiest assets. Part of it is general easing of the excessive risk aversion and fear of a year ago, and part is a justified rebound from too-low prices. But certainly near-zero interest rates have played a major part.

© Oaktree Capital Management, L.P. All Rights Reserved The improving environment seems to have taken the downward pressure off profits and slowed the flow of earnings disappointments. As reported by the Wall Street Journal on July 22, "Nobody wants to hear it, but companies are beating their numbers again . . . Of the 208 companies from the S&P 500 that have reported [midyear results] so far, 58%, or 120 companies, earned more per share than analysts had estimated . . . Only 14%, or 29 companies, have missed estimates." (Bear in mind, however, that "earnings ahead of estimates" is not necessarily the same thing as "earnings ahead of last year." This data could simply mean that the comparisons are against estimates that had become too pessimistic.) I see technical indicators that are encouraging. There are a number of signs that optimism is being wrung out of the market and fear is replacing greed. For example, when the Dow fell 390 points on Friday, July 19, the NYSE saw:  new lows outnumber new highs by almost fourteen to one (386 vs. 28),  more than three times as many stocks decline as advance (2,467 vs. 766),  all of the 30 Dow Industrial stocks decline, and  an all-time record number of shares change hands (2.63 billion shares, only to be exceeded in the rally of July 24). In addition, there have been several days this year when 80% or 90% of the trading volume took place on downticks, and cash outflows from equity mutual funds have been substantial.

Li moved to Singapore and became a naturalized citizen in 2018; during the COVID-19 pandemic, his net worth was estimated to have grown substantially, per Wikipedia (specific dollar figures were truncated in the fetched content and not independently confirmed in this pass).

Decision — Tweeted on GameStop (“I was early”), then deleted; SEC subpoena followed. Context: Bloomberg coverage of the deleted tweets; subpoena reported Sep 24, 2021. Outcome (known): Account deleted Nov 2021 after Musk spat; documented in press.

© Oaktree Capital Management, L.P. All Rights Reserved  Willingness to bear risk is up.  Insistence on high risk premiums is down.  Skepticism is down, and there’s widespread willingness to suspend disbelief.  Demand for t-crossing and i-dotting is in retreat.  Quantity can replace quality as the sine qua non for portfolio construction. I’ll provide a few examples below to illustrate what I think is going on in the alternative markets. UBuyouts: Where’s the Magic? A startling revolution has taken place among buyout funds in the last year or so. Let’s take a look at how we got here. So many of the big-name, highly leveraged buyouts of the late 1980s went bankrupt in 1990 – Macy’s, Federated, National Gypsum, etc., etc. – that the industry had to recreate itself, dropping the discredited word “leveraged” and the previously ubiquitous acronym LBO. Instead, the industry began to call what it does “buyouts” or “private equity.” It switched its model from loading massive leverage on venerable, multi-billion dollar companies to the mantras of “platform and buildup” and “consolidate the industry.” In the 1990s, the low levels of leverage permitted by chastened lenders kept the buyout boys from closing any landmark acquisitions, but also from loading on enough debt to render their companies vulnerable to distress. In order to lose huge amounts of capital, buyout funds had to venture into the tech and telecom arenas, and relatively few rose to the occasion.

Further, history clearly showed that major central bank tightening has almost always led to economic contraction rather than a “soft landing.” And yet, no recession has materialized. Instead, late in 2022, the consensus among market observers shifted to the view that (a) inflation was easing, and this would permit the Fed to start cutting interest rates, and (b) rate cuts would enable the economy to avoid recession or ensure that any contraction would be mild and short-lived. This optimism ignited a stock market rally in late 2022 that persists today. And yet, the anticipated rate reductions in 2023 that undergirded the rally didn’t transpire. Then, in December 2023, when the “dot plot” of Fed officials’ views called for three interest rate cuts in 2024, the optimists driving the market doubled down, pricing in an expectation of six. Inflation’s stubbornness has precluded any rate cuts thus far, with 2024 more than half over. Now the consensus has coalesced around the idea of a first cut in September. And the stock market keeps hitting new highs. The optimists today would likely say, “We were right. Look at those gains!” But, regarding interest rate cuts, they were simply wrong. For me, all this does is serve as another reminder that we don’t know what’s going to happen or how markets will react to what does happen. Conrad DeQuadros of Brean Capital, my favorite economist (how’s that for an oxymoron?)

Growth Over the last 80-90 years, two important developments occurred with regard to investing style. The first was the establishment of value investing, as described above. Next came “growth investing,” targeting a new breed of companies that were expected to grow rapidly and were accorded high valuation metrics in recognition of their exceptional long-term potential. It seems likely that the label “value” was applied to the value school because one of its greatest early popularizers, Ben Graham, practiced a low-valuation style. Deemed “cigar butt” investing by his protégé Warren Buffett, Graham’s style emphasized the search for pedestrian companies whose shares were selling at discounts from liquidation value based on the assets on their balance sheets, which Buffett likened to searching the street for used cigar butts that had one last puff left in them. It is this style that Graham preached in his Columbia Business School classes and his books, Security Analysis and The Intelligent Investor, which are considered the bibles of value investing. His investment style relied on fixed formulas to arrive at measures of statistical cheapness. Graham went on to achieve enviable investment performance although, funnily enough, he would later admit that he earned more on one long- term investment in a growth company, GEICO, than in all his other investments combined.

This seemingly unstoppable upward spiral kindled strong inflationary expectations, which in many cases became self- fulfilling, as is their nature. The year-over-year increase in the Consumer Price Index, which was 3.2% in 1972, rose to 11.0% by 1974, receded to the range of 6-9% for four years, and then rebounded to 11.4% in 1979 and 13.5% in 1980. There was great despair, as no relief was forthcoming from inflation-fighting tools ranging from WIN (“Whip Inflation Now”) buttons to price controls to a federal funds rate that reached 13% in 1974. It took the appointment of Paul Volcker as Fed chairman in 1979 and the determination he showed in raising the fed funds rate to 20% in 1980 to get inflation under control and extinguish inflationary psychology. As a result, inflation was back down to 3.2% by the end of 1983. Volcker’s success in bringing inflation under control allowed the Fed to reduce the fed funds rate to the high single digits and keep it there over the rest of the 1980s, before dropping it to the mid-single digits in the ’90s. His actions ushered in a declining-interest-rate environment that prevailed for four decades (much more on this in the section that follows). I consider this the second sea change I’ve seen in my career.

Thanks to the way incentives interact with people’s different abilities, some people do considerably better than others. Some also prosper thanks to good luck and/or inherited advantage, rather than innate ability. The free-market system doesn’t necessarily produce “fair” outcomes in all circumstances, but economic systems designed to do so generally don’t provide the incentives needed to encourage economic productivity for the collective good. That’s what accounts for their record of failure. On August 15, the media reported that the next day, Vice President Harris would announce her economic policies. The bulk of the attention went to her promise to ban price gouging in the grocery industry. “Grocery prices … have jumped 26 percent since 2019, according to Elizabeth Pancotti, director of special initiatives at the Roosevelt Institute, a left-leaning think tank” (The Washington Post, August 15), and many voters say inflation is their greatest concern. For this combination of reasons, Harris’s targeting of grocery prices is entirely predictable. (Ironically, August 15 was also the day U.S. inflation was reported to have fallen below 3% for the first time since March 2021.) I’m certain, however, that this falls under the heading of simplistic economic solutions that are designed to appeal to voters but are unsoundly based and likely to fail. What Is Price Gouging?

Alternatively, they may understand (consciously or unconsciously) that it’s not knowable but believe they have to act as if it is in order to make a living as an economist or investment manager. On the other hand, I’m solidly convinced the future isn’t knowable. I side with John Kenneth Galbraith who said, “We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.” There are several reasons for this inability to predict:  We’re well aware of many factors that can influence future events, such as governmental actions, individuals’ spending decisions and changes in commodity prices. But these things are hard to predict, and I doubt anyone is capable of taking all of them into account at once. (People have suggested a parallel between this categorization and that of Donald Rumsfeld, who might have called these things “known unknowns”: the things we know we don’t know.)  The future can also be influenced by events that aren’t on anyone’s radar today, such as calamities – natural or man-made – that can have great impact. The 9/11 attacks and the Fukushima disaster are two examples of things no one knew to think about. (These would be “unknown unknowns”: the things we don’t know we don’t know.)  There’s far too much randomness at work in the world for future events to be predictable. As 2014 began, forecasters were sure the U.S. economy was gaining steam, but they were confounded when record cold weather caused GDP to fall 2.

© Oaktree Capital Management, L.P. All Rights Reserved investment was facilitated through the extension of credit at all levels, contributing to economic expansion but also sowing the seeds for the current situation. Popularization of Investing – Back in 1968, working in investment management was no different from entering banking or insurance. Investing wasn’t the high-profile area it’s been the last two decades. “Famous investor” was an oxymoron; none were household names, like Warren Buffett, George Soros and Peter Lynch would become. Investment firms weren’t the B-school employer of choice, and investment managers didn’t dominate magazine covers and the top income brackets. But over the last forty years, increased attention was paid to equities, mutual funds, hedge funds and alternative niche markets. Even homes came to be viewed as investment vehicles. Investor Psychology – Attitudes morphed over time. Instead of a generation scarred by the Great Depression, people became increasingly confident, optimistic and venturesome. Experience convinced prospective investors that stocks could be counted on for high returns. In the last few decades, there’ve been times when people concluded the business cycle had been tamed. During Alan Greenspan’s reign, people came to believe inordinately in his ability to keep the economy growing steadily.

Took over management of the failing Qingdao Refrigerator Plant in 1984 and began transforming it through quality-control discipline and eventual diversification into TVs, washing machines, and air conditioners after formally establishing Haier Group in 1991.

This is an example of how hard it can be to appropriately factor all of the relevant considerations into complex real-world analysis.  Turning to the second aspect of “the failure of imagination” and going beyond the inability of most people to imagine extreme outcomes, the current situation with oil also illustrates how difficult it is to understand the full range of potential ramifications. Most people easily grasp the immediate impact of developments, but few understand the “second-order” consequences . . . as well as the third and fourth. When these latter factors come to be reflected in asset prices, this is often referred to as “contagion.” Everyone knew in 2007 that the sub-prime crisis would affect mortgage-backed securities and homebuilders, but it took until 2008 for them to worry equally about banks and the rest of the economy. The following list is designed to illustrate the wide range of possible implications of an oil price decline, both direct consequences and their ramifications: o Lower prices mean reduced revenue for oil-producing nations such as Saudi Arabia, Russia and Brunei, causing GDP to contract and budget deficits to rise. o There’s a drop in the amounts sent abroad to purchase oil by oil-importing nations like the U.S., China, Japan and the United Kingdom. o Earnings decline at oil exploration and production companies but rise for airlines whose fuel costs decline.

• The Fed and Treasury demonstrated their dedication to doing absolutely everything they could think of. Fed Chairman Jay Powell and Treasury Secretary Steve Mnuchin acted © 2020 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Su remained chairman of Kuaishou with unchanged voting rights, while Cheng Yixiao assumed CEO responsibilities for company operations.

© Oaktree Capital Management, L.P. All Rights Reserved Oaktree follows a clearly defined route that it trusts will bring investment success: If we avoid the losers, the winners will take care of themselves. We think the most dependable way for us to generate the performance our clients seek is by avoiding losing investments. We don’t claim that this is the only way to invest well; others may choose more aggressive approaches, and they may work for them. This is the way for us. Investing defensively can cause you to miss out on things that are hot and get hotter, and it can leave you with your bat on your shoulder in trip after trip to the plate. You may hit fewer home runs than another investor . . . but you’re also likely to have fewer strikeouts and fewer inning-ending double plays. The ingredients in defensive investing include (a) insistence on solid, identifiable value at a bargain price, (b) diversification rather than concentration, and (c) avoidance of reliance on macro-forecasts and market timing. Warren Buffett constantly stresses “margin of safety.” In other words, you shouldn’t pay prices so high that they presuppose (and are reliant on) things going right. Instead, prices should be so low that you can profit – or at least avoid loss – even if things go wrong. Purchase prices below intrinsic value will, in and of themselves, result in larger gains, smaller losses, and easier exits. “Defensive investing” sounds very erudite, but I can simplify it: Invest scared!

What could cause an investor more self-recrimination than watching a big gain evaporate? And what about the professional investor who reports a big winner to clients one quarter and then has to explain why the holding is at or below cost the next? It’s only human to want to realize profits to avoid these outcomes. © 2022 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

When the Resolution Trust Corporation took failed properties from S&Ls and sold them off, “opportunistic” real estate investing was born.  Mainstream investment managers made the big time, with Peter Lynch and Warren Buffett becoming famous for consistently beating the equity indices.  In the 1990s, emerging market investing became the hot new thing, wowing people until it took its knocks in the mid- to late 1990s due to the Mexican peso devaluation, Asian financial crisis and Russian debt disavowal.

© Oaktree Capital Management, L.P. All Rights Reserved Democrats who controlled the White House for 28 of the 36 years from 1933 to 1969, and the Senate for 44 of the 48 years from 1933 to 1981. (In America, regulation is generally associated with Democrats and liberalism, and deregulation with Republicans and conservatism.) The last 28 years have been very different, however, thanks primarily to Ronald Reagan and Margaret Thatcher, bolstered by centrist Clinton and Blair administrations, and helped along by Bush, Bush and Brown. For much of that time, the Fed was under the leadership of Alan Greenspan, who is philosophically indebted to Ayn Rand, a strong believer in free markets. Free-market solutions were deemed certain to yield optimal economic decisions. Deregulation, privatization and market pricing went into full swing. Government involvement in policy making and control was disrespected. In short, it was assumed that the profit motive – Adam Smith’s “invisible hand” – would maximize capital efficiency and, therefore, societal welfare. This trend reached its apogee in the last ten years. The Glass-Steagall Act was nullified; this allowed, for example, the combination of Citibank and Salomon Brothers. Other than lowering interest rates and providing liquidity to fend off weakness, the Fed employed a hands-off approach. Investment managers and investment bankers gained fame and huge fees for performance that showed which of them were the most talented.

© Oaktree Capital Management, L.P. All Rights Reserved Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story. The idea being marketed by an investment banker or broker has been prettied up for presentation. And usually it’s been doing well, making the tale more credible. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity. UThe White Swan Most people probably took away from The Black Swan the same lessons I did (and the lessons mentioned in “The Aviary”): “unlikely” isn’t the same as “impossible,” and it’s essential for investors to be able to get through the low spots. Of course, it’s improbable events that brought on the credit crisis. Lots of bad things happened that had been considered unlikely (if not impossible), and they happened at the same time, to investors who’d taken on significant leverage. So the easy explanation is that the people who were hurt in the credit crisis hadn’t been skeptical – or pessimistic – enough. But that triggered an epiphany: USkepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessiveU. I’ll write some more on the subject, but it’s really as simple as that.

In each case, the two are inseparable. As Ashley says, no risk, no reward. No pain, no gain. The risk inherent in not taking enough risk is very real. Individual investors who eschew risk may end up with a return that is insufficient to support their cost of living. And professional investors who take too little risk may fail to keep up with their clients’ expectations or their benchmarks. Like chess (and most card games), backgammon requires the calculation of when to take risk and when to avoid it. In backgammon, two players move their checkers around the board based on throws of a pair of dice. One player moves clockwise and the other counterclockwise. When players’ checkers come near each other, the player who’s moving often has a choice between (a) landing on one of the other player’s checkers, sending it back to the start (but at the risk of leaving the moving checker in a vulnerable position), and (b) avoiding doing so to play it safe. No one wants to be exposed and get hit. But most beginners play it too safe, and because they put so much emphasis on avoiding getting hit, they rarely win. Relevant lessons from sports (included in past memos) are easily accessed and also very helpful: • “You miss 100% of the shots you don’t take.” – Wayne Gretzky, NHL Hall of Famer • “You have to give yourself a chance to fail.” – Kenny “The Jet” Smith, two-time NBA champion I’ll sum up with a paragraph from my memo of last September, Fewer Losers, or More Winners?

In 1966 a snake bit one of the Poonawallas' horses. The Haffkine lab had anti-venom serum but needed government permission to administer it — permission that took four days to arrive from Bombay because telephone lines were unreliable. The mare died, and the bureaucratic delay that caused her death gave Cyrus Poonawalla the idea of making the serums himself.

Kohli earned a job at Canadian General Electric after his Queen's BSc, then won a scholarship to MIT for a master's in electrical engineering in 1950 — using the Western educational ladder to acquire credentials and exposure he could not then have obtained at home, before returning to India in 1951 with a Tata Group offer.

The 2018-20 drawdown was further aggravated by the Covid lockdowns. Our performance from April 2020 onwards has been robust. All three funds 1 The only exceptions being PIF2 and PIF4 underperforming the erratic Nasdaq over 10 years.

Thus, it’s efficient to use it in lieu of equity. In casinos, I’ve heard the pit boss say, “The more you bet, the more you win when you win.” Likewise, for a given amount of equity capital, (a) the more debt capital you use, the more assets you can own and (b) the more assets you own, the greater your profits will be . . . when things go well. But few people talk about the downside. The pit boss never says, “. . . and the more you lose when you lose.” Likewise, when your assets decline in value, the more leverage you’ve employed, the more equity loss you’ll suffer. The magnification of gains and losses stemming from leverage is typically symmetrical: a given amount of leverage amplifies gains and losses similarly. But levered portfolios face a downside risk to which there isn’t a corresponding upside: the risk of ruin. The most important adage regarding leverage reminds us to “never forget the six-foot-tall person who drowned crossing the stream that was five feet deep on average.” To survive, you have to get through the low points, and the more leverage you carry (everything else being equal), the less likely you are to do so. . . . it’s important to recognize the role of volatility.

In summary, the Federal Reserve was engaging in accommodative monetary policy – taking the fed funds rate to new lows – to battle the potential ramifications of the TMT bubble’s bursting. Thus, in my memo Risk and Return Today from late 2004, I observed that (a) prospective returns on most asset classes were unusually low and (b) risk-seeking on the part of investors looking to improve on those low returns had led them to embrace higher-risk and “alternative” investments. I identified some of these alternatives in the memo There They Go Again (May 2005), spending most of my time discussing residential real estate, as that was where investors were embracing the most glaring fallacy: the belief that home prices only go up. I also discussed the tendency of investors to (a) ignore the lessons of past cycles, (b) fall for new developments, and (c) pile into risky investments, guided by time-honored platitudes such as “it’s different this time,” “higher risk means higher returns,” or “if it stops working, I’ll just get out.” Many of these logical errors were being committed by investors in the housing market. The driving force behind Oaktree’s behavior in that period wasn’t any of the above.

The problem with all of this, however, is that I just don’t think volatility is the risk most investors care about. There are many kinds of risk, and I’ll discuss some of them below. But volatility may be the least relevant of them all. Theory says investors demand more return from investments that are more volatile. But for the market to set the prices for investments such that more volatile investments will appear likely to produce higher returns, there have to be people demanding that relationship, and I haven’t met them yet. I’ve never heard anyone at Oaktree – or anywhere else, for that matter – say, “I won’t buy it, because its price might show big fluctuations,” or “I won’t buy it, because it might have a down quarter.” Thus it’s hard for me to believe volatility is the risk investors factor in when setting prices and prospective returns. In addition, volatility has a number of shortcomings that aren’t often addressed in the literature but are obvious to investment practitioners:  A stock that meanders from $50 to $80 is likely to have the same statistical volatility as one that goes from $50 to $20. However, most of us would have trouble saying that proves the former was as risky as the latter.

The article notes that Kohli's family had to flee Peshawar for India during Partition's violence and start over — a personal upheaval that preceded his Tata career and that the piece frames as part of the determination he brought to building institutions in his adoptive country.

Contrarianism – doing the opposite of what others do, or “leaning against the wind” – is essential for investment success. But as the credit crisis reached a peak last week, people succumbed to the wind rather than resisting. I found very few who were optimistic; most were pessimistic to some degree. Some became genuinely depressed – even a few great investors I know. Increasingly negative tales of the coming meltdown were exchanged via email. No one applied skepticism, or said “that horror story’s unlikely to be true.” Pessimism fed on itself. People’s only concern was bullet-proofing their portfolios to get through the coming collapse, or raising enough cash to meet redemptions. The one thing they weren’t doing last week was making aggressive bids for securities. So prices fell and fell – the old expression is “gapped down” – several points at a time. The key – as usual – was to become skeptical of what “everyone” was saying and doing. One might have said, “Sure, the negative story may turn out to be true, but certainly it’s priced into the market. So there’s little to be gained from betting on it. On the other hand, if it turns out not to be true, the appreciation from today’s depressed levels will be enormous. I buy!” The negative story may have looked compelling, but it’s the positive story – which few believed – that held, and still holds, the greater potential for profit.

NPR notes Serum has partnered with the Bill & Melinda Gates Foundation and several United Nations agencies including UNICEF and the World Health Organization. By the time of the report, the company said it would ramp Oxford-AstraZeneca vaccine production to 100 million doses per month by April 2021.

o Investment in oil drilling declines, causing the earnings of oil services companies to shrink, along with employment in the industry. o Consumers have more money to spend on things other than energy, benefitting consumer goods companies and retailers. o Cheaper gasoline causes driving to increase, bringing gains for the lodging and restaurant industries. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

Buffett, the patron saint of value investors, also practiced cigar butt investing with great success in the first decades of his career, until his partner, Charlie Munger, convinced him to broaden his definition of “value” and shift his focus to “great businesses at fair prices,” in particular because doing so would enable him to deploy much more capital at high returns. This led Buffett to invest in growing companies – such as Coca-Cola, GEICO and the Washington Post – that he could purchase at valuations that were not particularly low in the absolute, but that he found attractive given his understanding of their competitive advantages and future earnings potential. While Buffett has long understood that a company’s prospects are an enormous component of its value, his general avoidance of technology stocks throughout his career may have unintentionally caused most value investors to boycott those stocks. Intriguingly, Buffett allows that his recent investment in Apple has been one of his most successful. © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Page 6 are up 57-67% since April 2020 – almost keeping up with the Nasdaq even with no high-flyer tech names in the mix. Our long-term results didn’t look good in 2009 and the same is true of 2020. Given our current wide discount to underlying intrinsic value, it would not surprise me to see Pabrai Funds meaningfully outperform the indices over the next several years. Learnings from Nick Sleep I owe a great deal of the 2020 epiphanies to my good friend Nick Sleep. Nick went through his own evolution from Graham to Munger and the results speak for themselves. “Oh, and note, the truly brilliant investors weren’t investors; they were entrepreneurs that didn’t sell.” - Nick Sleep (in an email to me in August 2020) I have mentioned Nick’s modus operandi a few times in my sessions with students. I am not sure how thrilled Nick is about it, but the Financial Times recently published a link to the full set of his letters to partners: The complete letters of Nomad Investment Partnership | Financial Times (ft.com) I cannot recommend reading these letters strongly enough. They should be read and reread. Download them while they are still online. I have no idea if they’ll still be there in the future. I’d suggest reading them oldest to newest (versus the order in the PDF of newest to oldest). You’ll also enjoy this piece by John Garrett: Learning from Nicholas Sleep — Investment Masters Class (mastersinvest.com) The big evolution I had in 2020 was: 1. Go back to buy and hold. 2.

© 2025 Oaktree Capital Management, L.P. All Rights Reserved Follow us: the late 1960s, I was taught at the University of Chicago Graduate School of Business that the right price for an asset is the discounted present value of its future cash flows or earnings. You might object: What about all the other things listed above, such as a company’s plant and equipment, intellectual property, and management, and even its reputation? Don’t they have value? The value of all of these things is derived from their ability to contribute to the company’s earning power, and thus it’s captured in the earnings calculation. The key part of a security analyst’s job consists of arriving at earnings projections. Then those projections have to be converted into a fair price. At the University of Chicago, the discounting process was purely mathematical: you divide the earnings for each year in the future by (1+r) n, where r is the appropriate discount rate and n is the number of years out into the future the earnings are, and then you total up the yearly results. But in the real world, price is set by a different discounting process, which consists mostly of people applying their subjective opinions and attitudes about what the asset and its earning power are worth. So that’s what an asset’s price is: the consensus view of investors regarding its underlying fundamental value.