FADE IN:
THE MEMO
“Experience is what you got when you didn't get what you wanted.” — Howard Marks
ONE
SECOND-LEVEL THINKING
INT. APARTMENT — QUEENS, NEW YORK — DAY — 1960
A modest apartment in Queens. Young HOWARD MARKS (14), bookish and serious, sits at the kitchen table doing math homework. His FATHER, an accountant, sits across from him, reviewing tax returns.
FATHER
Howard, what's the most important number on a tax return?
YOUNG HOWARD
Taxable income?
FATHER
No. The most important number is the one that's missing. The deduction they didn't take. The income they didn't report. The things people don't show you tell you more than the things they do.
Young Howard considers this. He looks at the tax return with new eyes.
HOWARD (V.O.) (breaking the fourth wall)
My father was an accountant in Queens. He taught me the first lesson of investing without knowing it: the most important information is always the information that isn't there. He called it “reading the white space.” I later called it second-level thinking. Same idea. Different paycheck.
INT. WHARTON SCHOOL — UNIVERSITY OF PENNSYLVANIA — DAY — 1967
A lecture hall at Wharton. Howard (21), now at one of the world's premier business schools, listens to a professor explain efficient market theory.
PROFESSOR
If markets are efficient, then all available information is already reflected in prices. No investor can consistently outperform the market.
HOWARD
(raising hand)
Professor, if that's true, then why do some investors consistently outperform? Benjamin Graham. Warren Buffett. Are they just lucky?
PROFESSOR
The theory suggests that outperformance over time is statistically consistent with random chance. Yes.
HOWARD
With all due respect, I don't think Warren Buffett is random chance. I think there's something the theory misses. Markets aren't efficient because people aren't rational. They're emotional. And emotions create mispricings. Especially in the things nobody wants to own.
The professor raises an eyebrow. Howard has just articulated, at twenty-one, the thesis that will define his entire career.
INT. CITICORP INVESTMENT MANAGEMENT — NEW YORK — DAY — 1978
A corner office at Citicorp. Howard (32) is a portfolio manager. His boss drops a file on his desk labeled “HIGH-YIELD BONDS.”
BOSS
Howard, nobody wants this portfolio. High-yield bonds. Junk bonds. The name alone scares people. I need someone to manage it who won't complain.
HOWARD
(picking up the file)
What's the return profile?
BOSS
High yield, high risk. That's why they call them junk.
HOWARD
Do the defaults actually justify the name? Or is the market overpaying for safety and underpaying for risk?
BOSS
Nobody's done the analysis.
HOWARD
(smiling slightly)
Then I'll do the analysis.
Howard Marks built one of the first high-yield bond portfolios on Wall Street. He discovered that so-called “junk” bonds, when purchased at the right price, offered superior risk-adjusted returns to investment-grade bonds.
INT. CITICORP CONFERENCE ROOM — DAY — 1985
Howard presents to THE INSTITUTIONAL INVESTOR, a pension fund manager responsible for billions of dollars. She sits stiffly, suspicious.
THE INSTITUTIONAL INVESTOR
Mr. Marks, you want me to put pension fund money into junk bonds. Into the bonds of companies that might go bankrupt.
HOWARD
I want you to consider that the word “junk” is a marketing term, not an investment judgment. These bonds offer yields of twelve to fifteen percent. The actual default rate is three to four percent. The spread between yield and default is where the opportunity lives.
THE INSTITUTIONAL INVESTOR
What if defaults spike?
HOWARD
Then we buy more. Defaults spike because people panic. When people panic, they sell indiscriminately. The bonds of strong companies get sold alongside the bonds of weak companies. Our job is to know the difference.
THE INSTITUTIONAL INVESTOR
That requires a lot of research.
HOWARD
That's the whole point. In efficient markets, you can't add value through research. In inefficient markets — and high-yield is deeply inefficient — research is everything. That's our edge.
INT. HOWARD'S HOME OFFICE — NEW YORK — NIGHT — 1990
Howard sits at his desk, writing longhand on a legal pad. The first page is titled: “Memo to Oaktree Clients.” He pauses, crosses out a line, rewrites it. Then rewrites it again.
The first Oaktree memo. The beginning of the most influential investment writing in history.
HOWARD
(V.O., reading as he writes)
The most important thing in investing is not what you buy. It's what you pay. A great company at the wrong price is a bad investment. A mediocre company at the right price can be a great investment. Price is the universal variable. And price is determined not by quality, but by psychology.
He stops writing. Reads it back. Nods. This is the beginning of something that will take decades to fully articulate.
CUT TO:
TWO
THE THINGS NOBODY WANTS
INT. OAKTREE CAPITAL OFFICES — LOS ANGELES — DAY — 1995
A new office. BRUCE KARSH, Howard's co-founder, stands at a whiteboard listing distressed companies: airlines, steel mills, retailers, all in bankruptcy or near it.
Oaktree Capital Management. Founded 1995. The world's largest distressed debt investor.
BRUCE
Howard, we've identified forty-seven distressed situations. Twenty of them have bonds trading below thirty cents on the dollar. The market thinks they're worthless.
HOWARD
What do you think?
BRUCE
I think fifteen of them will recover to par. The other five will restructure and we'll get equity in the reorganized company. Our downside is twenty to thirty percent. Our upside is two hundred to three hundred percent.
HOWARD
Asymmetric returns. That's the whole business model, Bruce. Buy the things that nobody wants. Wait for the world to change its mind. Collect the difference.
BRUCE
It requires patience.
HOWARD
Patience is the cheapest form of alpha.
INT. OAKTREE CAPITAL — CONFERENCE ROOM — DAY — 2001
Post-dot-com crash. Howard and Bruce sit with THE DISTRESSED DEBT TRADER, a young portfolio manager who is learning the Oaktree way.
THE DISTRESSED DEBT TRADER
The telecom sector is in freefall. WorldCom bonds are trading at twelve cents. Enron debt is at eight cents. Should we buy?
HOWARD
What does first-level thinking say?
THE DISTRESSED DEBT TRADER
Don't touch it. These companies are frauds. The bonds are toxic.
HOWARD
Good. Now what does second-level thinking say?
The trader thinks. Howard waits patiently.
THE DISTRESSED DEBT TRADER
Second-level thinking says... the telecom infrastructure still exists. The fiber optic cables are still in the ground. The customers still need bandwidth. Someone will buy these assets in bankruptcy. The question is: what will the recovery value be?
HOWARD
(nodding slowly)
Now you're thinking like an Oaktree investor. First-level thinking says “this is bad, sell.” Second-level thinking says “everyone thinks this is bad, so the price already reflects bad. The question is: is it as bad as the price says?” Usually, it's not.
INT. HOWARD'S HOME — NEW YORK — NIGHT — 2008
The financial crisis is unfolding. Lehman has fallen. Howard sits at his desk writing what will become his most famous memo. His wife brings him tea. He barely notices.
He types the title: “The Limits to Negativism.”
HOWARD
(V.O., reading)
Investors make the most money when they buy things that everyone else is desperate to sell. The greatest investments of my career were all made when the prevailing mood was terror. When people couldn't sell fast enough. When the word “safety” was on everyone's lips. That is when you buy. Not because you're brave. But because you've done the work.
Between September 2008 and February 2009, Oaktree Capital deployed over $6 billion into distressed assets. These investments would generate some of the highest returns in the firm's history.
INT. OAKTREE CAPITAL — TRADING DESK — DAY — OCTOBER 2008
The trading desk is frenetic. Screens flash red. Bruce Karsh is on the phone buying distressed bonds. Howard stands behind him, calm as a surgeon.
BRUCE
(on phone)
We'll take the entire block. Five hundred million at forty cents. Yes, the entire block.
He hangs up. Another phone rings. He answers.
BRUCE
(to Howard)
We're deploying five hundred million a week. There's so much to buy I can't type fast enough.
HOWARD
This is what we prepared for. Every year that we sat on cash, every quarter that our returns lagged because we were cautious, every client who complained that we were too conservative — this is why. You can only be aggressive when others are fearful if you were defensive when others were aggressive.
BRUCE
The clients who wanted us to be more aggressive in 2006 are very grateful we weren't.
HOWARD
That's the cycle. They hate our caution on the way up. They love our dry powder on the way down. Our job is to be right about the cycle, not popular within it.
CUT TO:
THREE
THE MOST IMPORTANT THING
INT. COLUMBIA BUSINESS SCHOOL — LECTURE HALL — DAY — 2011
Howard stands at a podium at Columbia Business School. Behind him: the cover of his book, “The Most Important Thing.” The auditorium is packed with students and investors.
HOWARD
I titled my book “The Most Important Thing” because every chapter identifies a different “most important thing.” Risk control. Contrarianism. Patient opportunism. Market cycles. Knowing what you don't know. Each one is the most important thing — depending on the moment.
STUDENT
Mr. Marks, if everything is the most important thing, then nothing is the most important thing.
HOWARD
(smiling)
Now you're getting it. Investing is not about having one answer. It's about knowing which question to ask at which moment. The investor who applies the same framework in every market is guaranteed to be right sometimes and catastrophically wrong at other times. The goal is to know where we are in the cycle and adapt accordingly.
STUDENT
How do you know where you are in the cycle?
HOWARD
You take the market's temperature. When people are greedy, be fearful. When people are fearful, be greedy. Warren said it first. I just wrote it down more slowly.
INT. OAKTREE CAPITAL — HOWARD'S OFFICE — DAY — 2019
THE OAKTREE CLIENT sits across from Howard. She represents a foundation with a multi-billion dollar endowment.
THE OAKTREE CLIENT
Howard, we've been with Oaktree for twenty years. Your returns have been exceptional. But I need to ask: what happens when you retire? Is Oaktree still Oaktree without Howard Marks?
HOWARD
Oaktree was never about me. It was about a philosophy. Buy when others are selling. Sell when others are buying. Control risk at all times. Think in decades, not quarters. That philosophy doesn't retire when I do.
THE OAKTREE CLIENT
But the memos — your memos are what brought me to Oaktree. Warren Buffett says he reads them first thing.
HOWARD
Warren is very kind. But the memos aren't magic. They're just a discipline. Writing forces clarity. Clarity forces honesty. Honesty forces you to admit when you don't know something. And admitting what you don't know is the most important thing in investing.
INT. OAKTREE CAPITAL — DAWN — 2024
Early morning. Howard arrives at the office before anyone else. He's 78. He sits at his desk and opens a blank document. At the top, he types: “Memo to Oaktree Clients.”
The same ritual he's performed for over thirty years. He pauses. Thinks. Then begins to write.
HOWARD
(V.O.)
Cycles are the central truth of investing. Prices rise until they fall. Optimism grows until it becomes delusion. Pessimism deepens until it becomes opportunity. The investor who understands cycles will never be surprised. He may be early. He may be late. But he will never be surprised.
THE WALL STREET LEGEND appears at the door. Old friends now, two men who have watched markets rise and fall for fifty years.
THE WALL STREET LEGEND
Another memo?
HOWARD
Always another memo. The market never stops giving me something to write about.
THE WALL STREET LEGEND
You've been writing these for thirty-four years. Do you think anyone actually changes their behavior because of what you write?
HOWARD
(thoughtful pause)
No. But I change mine. The writing forces me to think clearly. And clear thinking is the only edge that lasts.
FADE TO BLACK.
Howard Marks co-founded Oaktree Capital Management in 1995. The firm manages approximately $190 billion in assets. His client memos, distributed free of charge, are read by virtually every major investor in the world, including Warren Buffett, who has said: “When I see memos from Howard Marks in my mail, they're the first thing I open and read.” His book “The Most Important Thing” is considered one of the essential texts of investing. He still writes the memos. He still arrives at the office first. He still reads the white space.
THE END