Introducing Howard Marks
a thorough understanding of how investors’ minds work is essential if one is to figure out where a market is in its cycle, why, and what to do about it.
- 2012-14 was an uncertain period, with low growth, China slowing, oil price halving, Middle East problems, and uncertainty about Fed rate hikes – and yet the S&P500 rose a cumulative 74%!
- As 2014 closed, with a litany of macro risks, fully priced assets, and little likelihood of returns compensating for these risk, psychology and prices were high given the fundamentals
2015 the negatives built up, and reached a tipping point, where investor psychology changed from risk tolerant to risk averse
- Oil: “I think low energy prices today will contribute to better economic growth tomorrow. It’s just that everybody’s interpreting everything negatively these days”
- Interest Rates: “There’s something wrong if an event that has been widely anticipated for years – and considered a near certainty for months – can be thought capable of significantly impacting the market when it becomes a fact. I think people may have jumped to an unwarranted – and negatively tinged –conclusion”
- Third Avenue: “In terms of investor reaction, I find the announcement that Third Avenue’s Focused Credit Fund would liquidate to be the most interesting recent event. There isn’t much to be in doubt about in the meltdown of the Focused Credit Fund; clearly it reflected problems peculiar to that fund alone”
- His prescription: Whereas Oaktree had previously recommended to “move forward with caution”, the recommendation is now to do so with less caution i.e. to take more risk. He then adds, that this recommendation comes with trepidation
Now, as discussed above, investors’ optimism has deflated a bit, some negativity has come into the equation, and prices have moved lower. Depending importantly on which market we’re talking about and how it has fared in recent months, we consider it appropriate to move forward with a little less caution.
- Implications of China’s weakness? He quotes Paul Krugman suggesting that China is in trouble, but the consequences for the rest of us are manageable
- Are we heading for a 2008 event? “The bottom line for me is that a rerun of the Global Financial Crisis isn’t in the cards”