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in the 60s there arose something which is called growth investing and growth investing was considered to be investing in great companies fast-growing companies which sell expensively but are worth it and that grew into something called the nifty 50 and in the late 60s by the time that i joined the business in 1969 or uh the banks which were the main investors of the time many of them practiced nifty 50 investing the 50 greatest and fastest growing companies companies that were so wonderful that a nothing bad could happen and number two so wonderful that there was no price too high and as a consequence they sold at extremely high prices mainly expressed as p e ratios price to earnings ratios the normal p e ratio since world war ii has been 16 times earnings and many of the nifty 50 sold at a multiple of 16. 30 50 70 times earnings some cases 90 times earnings but of course it was worth it because they were such great companies well if you bought them the day i started work in 1969 and if you held them for five years you lost almost all your money in the greatest companies in america because the stock market roughly halved and the the nifty 50 did even worse because they fell from their elevated valuations number one it was a very educational experience for me as i said it was the experience of my first 10 plus years in the business and as i said if you bought and held the stocks of the best 50 companies in america you lost almost all your money in a very short time and in 1978 because i was part of the effort that invested in the nifty 50 i would imagine i should have come close to losing my job but rather i was asked to start portfolios and convertible bonds and high yield bonds which worked out very good and is the core of oaktree but now i'm buying the securities of the worst public companies in america making a lot of money safely and steadily so the lessons i learned that number one it's not what you buy it's what you pay for it it determines whether you'll be successful or or not and number two successful investing is not a matter of buying good things it's a matter of buying things well and i think that's a very important distinction which has guided the rest of my career and i guess a you only learn lessons from failure you don't learn much from success and b it's great if you learn those lessons early in your career so that they can have a positive influence on your career when i was a young man the world felt like an unchanging place the world didn't change much from year to year not that much from decade to decade it felt like the environment was a stage set in a play stable static not changing and changes in companies and economic and market cycles played out in front of that backdrop today the world changes every day and the companies that were successful 10 years ago many are not successful today many of the companies that are successful today didn't exist 10 years ago and this is a great change and we can't ignore this we have to factor it in uh we have to change you mentioned earlier that the old companies were capital intensive and asset intensive they produced a physical product and they produced it in a physical setting of factories and equipment which was expensive and so if they were going to expand double triple their sales they had to add double triple their machinery and access a lot of money to do so we've never had companies as profitable as today's with growth potential of today's and with a reliance on code and digitization engineers rather than equipment if a software company develops a desirable app piece of software and they produce 100 it costs several million the next 100 costs almost nothing so incremental profitability is extremely high reliance on assets extremely low just the other day two days ago i was looking through charts and i saw a chart of the ratio of price to book value of the average tech company and this is one of the things that uh people looked at book value is the net of your balance sheet it's the assets minus liabilities and the ratio of price to book value of the tech companies and software companies was extremely high in other words they looked expensive and a value investor wouldn't buy them because the multiple is so high but the truth is they don't need assets so they have few assets as a result they have this high ratio of price to assets but it's meaningless because their potential profitability is not asset based it's idea based it's code based so the rules of the past and certainly the rules that constrain the value industry for which low valuation multiples like price to book price to earnings price of sales those ratios are are the scenarion of value investing but not as relevant in the new world so i think that's a great example of how our thinking has to modernize and a great example of what i learned from being cooped up with andrew uh for much of the pandemic so far i want to make two points the most important is that i'm not saying forget value investing you have to invest in growth forget mundane companies you have to invest in technology what i'm saying is you have to have an open mind you have to consider using all the tools in your toolbox i'm not saying that fast-growing companies are important and inexpensive companies are unimportant anything could be overvalued and thus likely to produce a poor return or undervalued and likely produce a good return it's certainly possible for high growth tech and biotech companies to be so overpriced that they represent poor investments remember it's not what you buy it's what you pay for it and i'm not making a commentary on the current market i'm not saying that tech stocks are inexpensive or likely to produce high returns or should be bought what i'm saying is that investors should not rule out things i mean there's no reason why a fast-growing company can't be good value or why a low multiple company can't be a good investment but rather than say which is attractive today my message is that investors should be broad-minded and open-minded um i'm uh naturally a skeptic i think that's the big part of the value investor mentality is to be skeptical about things that are promoted as being uh panaceas and uh you know a lot of my success has come from turning a negative when i thought the environment was too uh optimistic my general conclusion uh and my general experience over my life has been that financial innovation whether it be portfolio insurance in the 80s or mortgage-backed securities in the arts is only possible in optimistic times because in pessimistic times people won't adopt the new they adopt it when everything's going well and people are optimistic and it is because it doesn't have to stand muster scrutiny that much of financial innovation has ended in tears and so my knee-jerk reaction to cryptocurrencies when they first became prominent a few years ago was to be skeptical and uh to say some categorically negative things about them and the reason i mentioned them in the memo was because number one that is an illustration of how we our biases can affect our conclusions and number two it's clear to me with andrew's help our children help clarify things for us it's clear that my knee-jerk reaction was based on natural skepticism rather than information i didn't know that much about them but they seemed to me to be not investable because they didn't have tangible value which is what a value investor looks for andrew has taken me through a course of education with regard to cryptocurrencies and i understand now the case for them which is based on supply and demand demand may grow from investors or from users for these currencies because of their qualities and the supply is limited by the technology and in excess of uh demand over supply can produce a rising price well they don't have tangible value there's no earnings behind them no cash flow no assets but isn't that true of currencies uh is not true of the euro or the dollar the the dollar used to be backed by gold and silver today of course it's not backed by anything well why isn't the dollar or the pound sterling desirable because other people accorded value and will accept it in exchange for goods for example if that's true of bitcoin too if if it's desirable and acceptable then bitcoin may have a role so i've switched from knee-jerk skepticism to trying to understand the other side i haven't concluded yet whether that makes it a good investment or desirable or whether it justifies the price increase that has taken place or whether it's worth much more uh than today's price but what i'm talking about here is process and again open-mindedness and i think andrew's most important point is not that x is good or b is bad or j is undesirable his basic point is that we shouldn't generalize we shouldn't have a knee-jerk reaction we shouldn't say that a company is not attractive because the pe is high or that another company is compelling because the price is low but look at the whole thing based on a deep understanding