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Howard Marks: ‘The greatest time to sell is when everybody says nothing could go wrong'

Stock market performance has been ugly over the past few months, with all three major indices tumbling to corrective levels. Concerns about anemic global growth, peak earnings, monetary policy uncertainty and an escalating trade war are at the top of investors’ minds.

But investors hastily cashing out as a knee-jerk reaction to these worries should think again, Howard Marks, a prominent market commentator, said on Yahoo Finance’s The Final Round on Tuesday.

“The time to sell is not now, when everybody has a long list of problems and stocks are down 10, 11, 12%,” Marks said. “The time is sell is when everybody says, ‘I can’t imagine anything that could go wrong.’”

According to Marks, “The greatest source of risk is the belief that there is no risk. When it’s obvious that the outlook is perfect, that’s a source of great risk.”

Marks, co-chair of investment firm Oaktree Capital, with about $124 billion in assets under management, is well-regarded for his prescient “Race to the Bottom” memo that predicted the financial crisis. His latest book, “Mastering the Market Cycle: Getting the Odds on Your Side,” calls for investors to pay attention to recent history, human emotion and asset pricing in order in order to interpret volatile market cycles and more informed investment decisions.

The S&P 500 closed at its lowest level in 14 months on Monday, and the index is down about 4.8% for the year. But just three months ago in September, the S&P 500 closed at its highest price of 2018 before erasing more than $2 trillion in market capitalization by the end of October.

“In the real world, things fluctuate between pretty good and not-so-hot, but in the market they fluctuate between flawless and hopeless,” Marks said.

At the beginning of October, “Most people thought the outlook was flawless,” he added. “What a lot of people said to me in the first 10 months of this year was, ‘I know it can’t go on forever but I can’t think of anything that could make it stop.”

But that optimism has taken a U-turn recently. “Now everyone has a long list of things that could go wrong in the future,” Marks said. “The interesting thing to note is how many of those things were existent 11 weeks ago. It’s just that nobody paid attention, because when things are going well, everybody looks at the favorable developments, everybody interprets things positively, and then when things go down for a while they do the opposite.”

Marks advocates for investors to fight the urge to make snap judgements based on short-term stock performance or to put too much weight on investment strategies that may have worked in the past. He cited the common mantra of “buying the dip,” in which investors try to time the markets to buy when stock prices are low and sell as they go up to see a positive return. And this strategy has tended to work – until it didn’t. Analyst Michael Wilson of Morgan Stanley pointed out in a note from November that the buy-the-dip strategy has not worked in 2018 for the first time since 2002.

“In the investment world there is no formula for success. There’s nothing that always works,” Marks said. “The market doesn’t tell you what to do, or you shouldn’t let it tell you what to do. The market’s movements have no intelligence – they’re just random noise. What matters is the long-run.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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