TLDW

Howard Marks, co-founder of Oaktree Capital and the author of the memos every serious investor reads first, sat down with Nikhil Kamath for a wide-ranging conversation on his 50+ year career, the philosophy of Mujo (the inevitability of change), why he chose bonds over stocks, the difference between drifting down the river and seeing it, where we sit in the current cycle, AI as both threat and opportunity, why active management lost to indexation, and why the only way to outperform in a world full of smart, motivated, computer-literate competitors is “superior insight.” His core message: investing is a puzzle that cannot be solved by formula, and the only edge that lasts is being more right than the other person, more often, with the discipline to stay calm when everyone else is panicking or partying.

Key Takeaways

• Mujo is the operating system. Marks took Japanese literature at Wharton and walked away with one idea that shaped his whole career: change is inevitable, unpredictable, and uncontrollable. You cannot predict the future, but you can prepare for it.
• Cycles are excesses and corrections, not ups and downs. The S&P 500 has averaged about 10% per year for 100 years, but it is almost never between 8% and 12% in any given year. The norm is not the average. Greed and fear push the pendulum past equilibrium every time.
• The recovery is two years older. When asked where we are in the cycle, Marks notes the bull market continued from April 2024 through January 2026, so by definition we are deeper into the cycle, with a recovery distorted by the unique man-made COVID recession.
• Drifting versus seeing the river. Marks describes the first 35 years of his career (roughly age 14 to 49) as drifting. Starting Oaktree in 1995 was the first truly intentional decision he made. Entrepreneurship forced proactivity on him.
• Why bonds over equities. The contractual, predictable nature of debt suited his conservative temperament (his parents were adults during the Depression). He was not voluntarily moved to bonds in 1978; a boss reassigned him just in time for the birth of the high-yield bond market.
• Distressed debt is the bigger story. Bruce Karsh joined in 1987 and has run roughly $70 billion in distressed debt since 1988, with profits well over 90% of the total profit and loss.
• Excess return is getting paid more than the risk warrants. If the market thinks a borrower has a 5% default probability and you correctly conclude it is 2%, you collect interest priced for 5% risk while taking 2% risk. That gap is the alpha.
• Oaktree’s default rate is about a third of the market. Over 40 years, roughly 3.6% to 3.7% of high-yield bonds default each year. Oaktree’s rate is roughly one-third of that, achieved through process discipline, institutional memory, and analysts who stay analysts for life.
• If you are starting a career today, understand AI. Marks says the investor who will make the most money over the next 10 years is the one who best understands AI and its capabilities, whether they bet for or against it.
• AI is excellent at pattern matching, but cannot create new patterns. Can AI pick the Amazon out of five business plans? The Steve Jobs out of five CEOs? Marks bets no. Most humans cannot either, which means there is still a role for exceptional people.
• Indexation won because active management lost. Passive did not become dominant because it is brilliant. It dominated because most active managers failed and charged high fees for the privilege.
• Bad times create openings for active managers, but most cannot take them. Panic drives prices down, but the same panic prevents most investors from buying. Wally Deemer: when the time comes to buy, you will not want to.
• The job is simple but not easy. Find the best managers, the best companies, the best ideas. Charlie Munger told Marks: anyone who thinks it is easy is stupid.
• Where is the $10 bill nobody picked up? Marks thinks it is around AI, but only for those with insight above the average. If you are average and you crowd into AI, you get average results in a bull case and worse in a bear case.
• Quantitative information about the present cannot produce alpha. Andrew Marks (howards son) pointed this out to his father during the COVID lockdown. Everyone has the same data. Outperformance has to come from somewhere else.
• Buffett’s edge was reading Moody’s Manuals when nobody else would. The pre-internet research process favored those willing to do tedious work alone. The format of the edge changes; the fact that edge requires doing what others will not, does not.
• You cannot coach height. Marks can tell you that second-level thinking, contrarian insight, and the ability to evolve at 80 are essential. He cannot tell you how to acquire any of them.
• India: Marks declines to opine. He has deployed roughly $4 billion in India but refuses to claim expertise on the Indian stock market or recommend a sector.
• History rhymes. Marks credits Mark Twain. The lessons that repeat are lessons of human nature, which changes incredibly slowly.
• Investing is a puzzle, not dentistry. Quoting Taleb, Marks observes that engineers and dentists succeed by repeating the right answer. Investors face a problem with no certain solution. If you need to be right every time, do not become an investor.

Detailed Summary

From Queens to Wharton: The Accidental Investor

Howard Marks grew up in Queens, New York, in a middle-class family. Neither of his parents went to college, but his father was an intelligent accountant. Marks discovered accounting in high school, fell in love with its orderliness, and chose Wharton because he was told it was the best undergraduate business school in America. Wharton required a literature class in a foreign country and a non-business minor. For reasons he no longer remembers, Marks chose Japanese studies, then took Japanese civilization and Japanese art. He calls it the most important academic decision of his life because of one concept he encountered: Mujo.

Mujo, Independence of Events, and Why You Cannot Predict

Mujo, the turning of the wheel of the law, teaches that change is inevitable, unpredictable, and uncontrollable, and that humans must accommodate it rather than try to control it. Marks pairs this with his deep belief in the independence of events: ten heads in a row do not change the odds on flip eleven. Roughly 20 years ago he wrote a memo titled “You Can’t Predict. You Can Prepare.” A portfolio cannot be optimized for both extreme upside and extreme downside, but it can be built to perform respectably across many possible futures, if you suboptimize for the middle of the probability distribution.

Why Cycles Exist

If GDP averages 2% growth, why is it never simply 2%? Marks’s answer is excesses and corrections. Optimism leads producers to overbuild and consumers to overspend, growth runs above trend, then satiation and oversupply pull it back below trend. The S&P 500 averages 10% per year over a century, but the return in any given year is almost never between 8% and 12%. The norm is not the average because human beings are not average; they are alternately greedy and fearful.

Where Are We Now?

Two years ago Marks told the Norwegian Sovereign Wealth Fund’s Nicolai Tangen that we were near the middle of the cycle. Two years later, the bull market in stocks continued through January 2026, so by simple math the recovery is older. The COVID recession was a man-made anomaly: one quarter of negative growth followed by the best quarter in history, triggered by a deliberate global shutdown rather than by accumulated excess. That distorts every traditional cycle metric.

Drifting Versus Seeing the River

One of the most personal moments in the conversation is Marks’s confession that he drifted for the first 35 years of his career. He did not pick his career, his first job, or his transition from equities to bonds in any deliberate way. Other people pushed him; he said yes. The first proactive decision of his life was co-founding Oaktree in 1995 at age 49, and even that came largely because his wife and his partner Bruce Karsh pushed him into it. Once he had to lead, he had to be intentional. Leadership cannot be passive.

The Bond Decision

Marks did not choose bonds; bonds chose him. In May 1978 his boss at Citibank moved him to the bond department to start a convertible fund. Three months later another phone call asked him to figure out something called high-yield bonds being run by a guy in California named Milken. Marks said yes both times. He arrived at the front of the line for high-yield in 1978 and has been there for 48 years.

The conservative temperament fit. Marks’s parents were adults during the Depression, so he grew up hearing “don’t put all your eggs in one basket” and “save for a rainy day.” Bonds offered contractual, predictable returns. The phrase “junk bonds” was a bias that made the asset class cheaply available to anyone willing to do the analytical work.

Distressed Debt and Excess Return

When Bruce Karsh joined in 1987, Oaktree launched what Marks believes was the first distressed debt fund from a mainstream institution. Karsh has managed about $70 billion since 1988 with well over 90% of the total being profit. The core skill is predicting default probability better than the market. If consensus prices a borrower at a 5% default risk and you correctly assess 2%, the interest you receive is overpaid relative to actual risk. Marks calls this “excess return” and credits Mike Milken with the foundational insight: lend to borrowers others will not, demand interest beyond what compensates you, and the math works.

Over 40 years, roughly 3.6% to 3.7% of high-yield bonds default annually on average. Oaktree’s default rate has been roughly one-third of that. Marks credits institutional culture (analysts who stay analysts for life), psychological stability in volatile periods, and a process that forces every analyst to ask the same eight questions of every company every time. In equity research, you can buy a stock for great management without examining the product, or for a great product without examining the management. In Oaktree’s bond process, you cover every base every time.

Beginning a Career Today: The AI Question

Asked what he would do today, Marks says the front of the line is AI. The investor who will succeed most over the next decade is the one who best understands AI, whether they bet for or against it. He notes that he was shocked by his own experience using Claude, but adds that he has not fired a single person and does not intend to.

His view: AI excels at extracting patterns from history and applying them with discipline and without psychological wobble. But investing also requires creating new patterns. Can AI sit with five business plans and identify the future Amazon? Can it sit with five CEOs and pick Steve Jobs? Marks bets not. Then he adds the killer line: most humans cannot either. Which means the role for exceptional humans survives, but the bar gets higher.

Why Indexation Won

When Marks went to graduate school at the University of Chicago in 1968, his professor pointed out that most mutual funds underperformed the S&P after fees. Index funds did not exist yet; Jack Bogle launched the first one in 1974. Today, most equity mutual fund capital is passive. Marks’s controversial take: indexation did not win because it is great. It won because active management was so bad and so expensive. Even at equal fees, if active decisions are inferior, passive wins.

Bad times create openings for active managers because panic drives prices down, but the same panic prevents most people from buying. Marks quotes the old trader Wally Deemer: when the time comes to buy, you will not want to. The advantage of an AI nudge that says “this is one of those moments, get your ass in gear and buy something” might genuinely add value, because it removes the emotion.

Second-Level Thinking and Why You Cannot Coach It

Marks’s first book, The Most Important Thing, has 21 chapters, each titled “The Most Important Thing Is…” Each one is different because so many things matter. The chapter on second-level thinking came to him spontaneously while writing a sample chapter for Columbia University Press. The argument is simple: if you think like everyone else, you act like everyone else, and you get the same results. To outperform, you must deviate from the herd and be more right than the herd. Different is not enough. Different and better is the bar.

Can AI become a contrarian thinker? You can prompt Claude to give you only non-consensus answers, but the catch is that consensus is often close to right because the people building consensus are intelligent, educated, computer-literate, and motivated. Forcing non-consensus often forces wrong. The real edge is being non-consensus AND correct, which is a much narrower target.

The $10 Bill That Nobody Has Picked Up

Marks references the joke about the efficient market hypothesis: there is no $10 bill on the sidewalk because if there were, somebody would have already picked it up. He then concedes that the bill is probably around AI today, but only for those whose insight rises above the average. If you are average and you crowd into AI, you go along with the tide if it works and get crushed if it does not. Quoting Garrison Keillor’s Lake Wobegon, “where all the children are above average,” Marks notes that the math does not allow it. Most investors will not be above average, and acknowledging that is the first step toward becoming one of the few who are.

Learning From Andrew, Buffett, and Onion-Skin Manuals

Marks lived with his son Andrew during COVID and wrote a memo about it called “Something of Value” in January 2021. Andrew’s most important contribution was a near-revelation: readily available quantitative information about the present cannot be the source of investment alpha because everyone has it. Buffett’s edge in the 1950s was reading Moody’s Manuals (giant books printed on onion-skin paper with tiny type and zero narrative) when nobody else would. The medium changes; the principle that edge requires doing what others will not, does not.

India

Kamath asks Marks directly about India. Marks has deployed roughly $4 billion there but politely declines to claim any expertise on the Indian stock market or recommend a sector. He cautions Kamath about taking advice from people who do not know what they are talking about, and includes himself in that category on the question of India. The honesty is striking and is itself an investment lesson.

History Rhymes, and Final Advice

Marks reads Andrew Ross Sorkin’s 1929 and references it in an upcoming memo on private credit. He likes Mark Twain’s reputed line that history does not repeat but it rhymes, and Napoleon’s line that history is written by the winners of tomorrow. The lessons that rhyme are lessons of human nature, which evolves incredibly slowly. Fight or flight from the watering hole still drives behavior in financial markets.

His final advice: investing is a puzzle, not engineering. A civil engineer calculates steel and concrete, builds the bridge, and the bridge stands. Every time. A dentist fills the cavity correctly and it stays filled. Every time. If you need that kind of reliability in your work, become a dentist. Investing is the act of positioning capital for a future that cannot be predicted accurately. You will be wrong sometimes. If something in your makeup cannot tolerate being wrong sometimes, do not become an investor. The puzzle has no final solution, which is exactly what makes it endlessly interesting.

Thoughts

The most useful thing Marks does in this conversation is admit, repeatedly and without ego, what he does not know. He does not know whether AI models differ in real intelligence. He does not know which sector in India to bet on. He does not know how to teach second-level thinking. He drifted for 35 years and only began making intentional decisions at 49. This honesty is the inverse of every guru selling certainty, and it is the actual content of the lesson he is trying to convey: epistemic humility is the precondition for superior insight, because you cannot acquire what you already think you have.

The deepest insight in the conversation might be the one Andrew Marks (Howard’s son) gave his father during COVID: readily available quantitative information about the present cannot produce alpha because everyone has it. This is devastating in the AI era. If everyone is asking the same large language model the same question, the answers converge, and convergence is consensus, and consensus does not pay. The arms race for proprietary data, novel framings, and unconventional questions is the only thing that can break the convergence.

Marks’s framing of cycles as excesses and corrections rather than ups and downs is genuinely useful. It reframes volatility from something to fear into something to expect, and reframes the question from “where are we going?” to “how far past trend have we already gone?” The 8 to 12 percent observation about the S&P (that the average return is almost never the actual return) is the kind of fact that should be taught in every introductory finance class but is almost never mentioned.

The most contrarian claim in the conversation is the one about indexation: that it won because active was bad, not because passive is great. This is a useful inversion. Most defenders of passive investing argue from efficient market theory; Marks argues from the empirical failure of active managers. The implication is that if you can find the small population of active managers who genuinely outperform, the indexation argument falls apart for that subset. Most cannot. The hardest job in investing is the meta-job of identifying the few who can.

The exchange about AI as a contrarian engine is one of the most clarifying short discussions of AI’s investment limits I have read. Different from consensus is easy. Different and better is the actual goal. Forcing different gets you wrong more often than right because consensus, built by smart, motivated, educated competitors, is usually close to correct. This is why “use AI to find non-consensus ideas” is a worse strategy than it sounds.

Finally, the Buffett-Moody’s-Manual story is the most quietly profound moment in the interview. The edge in 1955 was the willingness to read tiny type on onion-skin paper alone in an office in Omaha when no one else would. The edge in 2026 is whatever the modern equivalent of that is, and the only honest answer is: nobody knows yet, which is precisely why finding it is worth so much money.