The 80s on Wall Street: Howard Marks and Bruce Karsh Cultivate Cycles (Part 5)

The final chapter in our 80s on Wall Street series bridges the story from the rise of high yield bonds and leveraged buyouts to the birth of modern distressed debt investing. At the center of it are two legendary investors: Howard Marks and Bruce Karsh.Howard Marks grew up in Queens, studied finance at Wharton, and trained under the Chicago School’s efficient market hypothesis before watching the Nifty 50 collapse early in his career. He learned that it’s not what you buy, it’s what you pay. He eventually moves into high yield bonds and becomes one of the first institutional investors in the market.Bruce Karsh was a rising star as a lawyer before stepping out to work for Eli Broad analyzing investments and structuring transactions. His work on the Johns-Manville asbestos bankruptcy planted the seed of an idea that would evolve into distressed investing.By 1988, the two had found each other at TCW in Los Angeles with a shared philosophy around investing at the right price, tracking the market cycle, and finding good companies with bad balance sheets to invest in. By 1990, with high yield default rates above 10%, Drexel bankrupt, and collapsing demand for bonds, Howard and Bruce were on their way to building a reputation as legendary credit investors.Chapters(02:50) Context on Howard Marks and Bruce Karsh(06:45) Howard’s early career: Wharton, the Chicago School, and the efficient market hypothesis(10:32) The Nifty 50: one-decision stocks and their collapse(15:26) Howard moves to bonds and Bruce Karsh goes from law to investing(19:47) Howard meets Milken and discovers high yield bonds(25:22) Howard builds Citi’s high yield portfolio and moves to TCW(30:34) Bruce Karsh’s distressed debt thesis and joining TCW(39:42) The Howard Marks investment philosophy: market cycles and probabilistic thinking(42:39) The 1989-91 crisis: S&L collapse, FIRREA, and the high yield market meltdown(52:18) Deploying capital in the crisis, TCW’s 45% returns, and founding OaktreeReferencesHoward Marks Investor Series with Bruce Karsh (link)Howard Marks Memos, The Complete Collection (1990-2025) (link)The Most Important Thing by Howard Marks (link)Mastering The Market Cycle: Getting the Odds on Your Side by Howard Marks (link)Acquired with Howard Marks and Andrew Marks (link)Junk Bonds: How High Yield Securities Restructured Corporate America by Glenn Yago (link)Beyond Junk Bonds: Expanding High Yield Markets by Glenn Yago, Susanne Trimbath (link)SponsorsBig thanks to EQT Corporation for helping us bring you the stories of market history and how they apply today. To learn more and explore the latest data on energy affordability, go to eqt.com/energy-affordability.Note: this show is for informational purposes only and isn’t investment advice. Backtest hosts and guests may have investments in the companies discussed. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit www.backtestpodcast.com