On November 7, Howard Marks (Trades, Portfolio) appeared in an interview on Bloomberg. Marks is the chairman of Oaktree Capital (NYSE:OAK) and the author of great investment books like "Mastering the Market Cycle." He is an expert on cycles and distressed debt. Here's a summary of what he said.
Marks believes that after 10 or 11 years of economic and market gains, you can't say we are at the beginning of a bull market. You also can't say that there are bargain-priced assets that are languishing. With interest rates low, institutional investors that need returns are pursuing alternative assets and risk assets aggressively. As a result, Marks believes that most assets have been bid up and are trading above their intrinsic value.
Marks doesn't think we are in a bubble, or that things are crazy. However, even if we are in a bubble, it doesn't mean it will puncture tomorrow. Marks has seen bubble behavior in his career; in every bubble, people are saying things like, "there is no price too high for XYZ".
You can't say for sure when it is time to get out. In the interview, Marks asks whether one should have more risk than usual today versus any other day. The question is rhetorical, as he firmly believes you should have less risk when you invest compared to your normal risk-allocation.
Ultra-low interest rates of zero and below have warped calculations in the financial world. Capital has flowed to the alternatives market, which is one excess, but there are others. Companies have taken on more debt because it is so cheap, but the more debt you have, the less likely you are to get through an environment of economic difficulty.
Thus, this is not a time to be aggressive in your investing. The biggest challenge it to get a decent return in this low-return environment. The biggest risk is that you and others take big risks because you feel you have too in a highly competitive envrionment, leading investors to exhibit herd behavior in this respect. What will cause the herd to change its mind? The herd is subject to turning. Last year we had one of the worst 4th quarters and one of the worst Decembers in history.
The market doesn't know anything. Don't take your cues from the market. You should watch for unemployment rising and reductions in earnings expectations. A lot of people believe as long as the Fed support it, the market value will go up. Marks believes that this is true.
Disclosure: no positions
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This article first appeared on GuruFocus.