The IPO Frenzy Has Begun — ft. Howard Marks

SUMMARY

Howard Marks, co-founder and co-chairman of Oaktree Capital Management, joins Scott Galloway and Ed Elson to discuss the current wave of high-profile IPOs, including SpaceX, Anthropic, and OpenAI, and the challenges of investing amid unprecedented uncertainty. The conversation covers historical market cycles, the impact of technological disruption, valuation metrics, and advice for investors navigating today's rapidly evolving landscape.

MAIN POINTS

• Howard Marks discusses the exuberance surrounding the SpaceX IPO and the difficulty of valuing AI companies. [2:00]
• Marks compares the current AI-driven market cycle to past technological bubbles such as railroads, radio, and the internet. [6:01]
• He emphasizes the challenge of forecasting AI's impact and the speculative nature of investing in these companies. [13:00]
• Marks explains how disruption has broadened uncertainty, making traditional moats less reliable for investors. [17:01]
• He identifies sectors like energy, food, and homebuilding as more predictable and less likely to be disrupted by AI. [25:02]
• The discussion turns to valuation indicators, such as the Schiller PE ratio, and how traditional metrics may not fully capture today's market dynamics. [28:02]
• Marks outlines a spectrum of AI investment opportunities, from established hyperscalers to highly speculative startups. [32:00]
• He critiques the current trend of prioritizing revenue growth over profitability in high-profile tech IPOs. [37:02]
• Marks reflects on the consolidation of the asset management industry and the rise of passive investing and alternative assets. [46:02]
• He addresses concerns about the private credit market, suggesting that fears are likely exaggerated and most loans will perform. [51:01]
• Marks offers career advice to young professionals, highlighting the importance of embracing uncertainty and intellectual challenge in investing. [55:01]
• The episode concludes with Marks' background, his published works, and closing thanks from the hosts. [57:01]

DETAILED ANALYSIS

The episode centers on the surge of high-profile IPOs, notably SpaceX, Anthropic, and OpenAI, and the broader implications for investors navigating an era marked by both technological innovation and extreme uncertainty. Howard Marks, a veteran investor and co-founder of Oaktree Capital Management, provides a historical and analytical perspective on the current market environment. He draws parallels between today's AI-driven exuberance and previous technological revolutions, such as the railroads in the 19th century, radio in the 1920s, the rise of the automobile, and the internet boom of the late 1990s and early 2000s.

In each of these cycles, Marks notes, excessive capital flowed into new technologies, infrastructure was overbuilt, and many investors ultimately suffered losses when the initial exuberance faded.

Marks highlights that the current wave of IPOs is characterized by companies with valuations that are difficult, if not impossible, to justify through traditional analytical methods. He points out that while AI is widely acknowledged as a transformative force, its future applications, profitability, and market winners remain highly uncertain. This lack of clarity makes it challenging for value-oriented investors to apply conventional valuation techniques, such as projecting future earnings and discounting them to present value.

Instead, investing in these companies is closer to speculation, though Marks does not use the term pejoratively. He urges investors to recognize where their decisions fall on the spectrum between analytical investing and speculative investing and to calibrate their risk accordingly.

The conversation delves into the concept of 'moats'—competitive advantages that historically protected companies from disruption. Marks explains that the rise of the internet and now AI has eroded many traditional moats, making it increasingly difficult to identify industries or companies immune to technological upheaval. He uses the example of newspapers, once considered unassailable due to their local monopolies, which were ultimately disrupted by digital communications.

This broadening of uncertainty means that investors must accept a wider range of possible outcomes and be prepared for rapid change.

Despite the challenges, Marks identifies certain sectors as more predictable and less susceptible to disruption by AI. Industries such as energy, food, timber, homebuilding, and basic materials are cited as areas where traditional investment analysis remains more reliable. These sectors are less reliant on intellectual property and more on tangible assets, making them less vulnerable to the rapid advances seen in AI and software.

On the topic of valuation, Marks discusses the limitations of traditional metrics like the price-to-earnings (PE) ratio in the current environment. He notes that while current PE ratios are elevated compared to historical averages, they are not unprecedented. However, he cautions that the unique characteristics of today's leading companies—such as lower capital intensity and higher incremental profitability due to software and digital products—complicate direct comparisons with past market cycles.

Furthermore, the unprecedented growth rates of some AI and tech companies add another layer of complexity to valuation.

Marks outlines a spectrum of investment opportunities in AI, ranging from established hyperscalers like Amazon, Google, Meta, and Microsoft, which offer lower risk but potentially lower upside, to pure-play AI companies like Anthropic, OpenAI, and Nvidia, which are riskier but have significant growth potential. At the far end of the spectrum are startups, which resemble lottery tickets—most will fail, but a few could deliver extraordinary returns. He cautions against conflating speculative investments with safer bets, especially when companies are unprofitable but command high valuations based on rapid revenue growth.

The discussion also touches on the asset management industry's evolution, with Marks reflecting on the shift from active to passive investing and the proliferation of alternative assets such as private equity and private credit. He notes that the long period of declining interest rates since the global financial crisis has created favorable conditions for these strategies, but warns that tougher times will eventually reveal which managers possess genuine skill versus those who benefited from a benign environment.

Addressing concerns about the private credit market, Marks believes that fears are likely overstated. While some managers may struggle in a less favorable environment, the majority of loans are expected to perform, provided investors understand the illiquidity and terms of these products. He emphasizes that disillusionment often follows periods of unwarranted optimism, but that the fundamentals of private credit remain sound for those who exercise due diligence.

In closing, Marks offers advice to young professionals considering a career in investing. He underscores the importance of intellectual curiosity, comfort with uncertainty, and the willingness to accept a less-than-perfect batting average. Investing, he argues, is not about achieving success every time but about making informed judgments in an unpredictable world.

He references Warren Buffett's career, noting that even the most successful investors achieve their results through a handful of exceptional decisions amid many moderate outcomes. Marks encourages those drawn to the intellectual challenge and ambiguity of investing to pursue it, but cautions against entering the field solely for its financial rewards.

LINKS

• Prof G Markets newsletter subscription page
• Order Notes On Being A Man
• Scott Galloway's Instagram profile
• Ed Elson's Instagram profile
• Ed Elson's X (Twitter) profile
• Ed Elson's Substack newsletter
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• Prof G Media homepage
• Cohere AI enterprise solutions
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• ODO all-in-one business software
• Vanguard bonds and financial adviser resources
• VCX by Fundrise, public ticker for private tech

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