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Howard Marks: Market booms are characterized by these three things

Myles Udland
Markets Reporter

Howard Marks is one of the most respected market commentators alive. And when Marks expresses some caution on financial markets, it behooves investors to pay attention to what Marks has to stay.

On Yahoo Finance’s live show The Final Round on Wednesday, Marks was asked about his recent memo — “The Seven Worst Words In The World” — which outlined the case for caution in the market right now.

“I’ve been doing this for 50 years,” Marks said. “When I’ve seen booms invariably they were characterized by three things: too much optimism, too little risk aversion and caution, too much money chasing too few ideas.”

“To some extent, those things are present today,” Marks added. “So it’s time to start thinking about caution.”

Howard Marks of Oaktree Capital on Yahoo Finance’s live show The Final Round on Wednesday, October 3, 2018. (Source: Yahoo Finance)

Marks also recalled his 2007 memo — “The Race to the Bottom” — which outlined the case for caution some 18 months before the most acute days of the financial crisis. And while Marks notes that he and his team at Oaktree did not foresee subprime mortgages and products tied to these going bust all at once as the trigger for a crisis, they did see a theme that is present today — too much money chasing too few deals. These are the seven worst words.

A time for caution, Marks notes, is not a time for investors to panic or sell everything, but merely exercise more discipline. In his latest book, “Mastering the Market Cycle,” Marks discusses how investors can cope with market cycles and told Yahoo Finance and how the two key risks investors face appear to be tilted today.

“There are two risks in investing,” Marks said. “The risk of losing money, and the risk of missing opportunity. You can eliminate either one, but it puts your firmly in the crosshairs of the other. So how should you balance them at this time? Should you worry more about losing money or more about missing opportunity? I would say the former… Today is a time to overweight defense.”

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland