Not The Time To Be Buying: Howard Marks

[Garpal Gumnut]

Howard Marks is a very well respected investor, adviser and fund manager. He is associated with Oakridge which he founded.

His advice in the latest memo is not good for those piling in to the market at present. It applies as much to Australia as to the US markets.

He makes sense. Many of his thoughts and conclusions have been discussed on ASF since March 2020. It's good to have it all in one document.

https://www.oaktreecapital.com/insights/howard-marks-memos/

gg

 

[Dona Ferentes]

Marks has written nine memos to investors so far in 2020; he wrote just eight for all of 2018 and 2019.

Marks doesn’t have a prediction for where the market goes next. Instead, he suggests investors need to consider whether asset prices reflect only the positives and not enough of the negatives.

It’s the old question of risk versus reward.

“As such, it seems to me that the potential for further gains from things turning out better than expected, or valuations continuing to expand doesn’t fully compensate for the risk of decline from events disappointing or multiples contracting,” Marks says.

“In other words, the fundamental outlook may be positive on balance, but with listed security prices where they are, the odds aren’t in investors’ favour.”

 

[Garpal Gumnut]

Howard Marks is a very well respected investor, adviser and fund manager. He is associated with Oakridge which he founded.

His advice in the latest memo is not good for those piling in to the market at present. It applies as much to Australia as to the US markets.

He makes sense. Many of his thoughts and conclusions have been discussed on ASF since March 2020. It's good to have it all in one document.

https://www.oaktreecapital.com/insights/howard-marks-memos/

gg

Of course that should be Oaktree not Oakridge.

A meaty memo.

gg

 

[Dona Ferentes]

Howard Marks is a very well respected investor, adviser and fund manager. He is associated with Oakridge which he founded.

His advice in the latest memo is not good for those piling in to the market at present. It applies as much to Australia as to the US markets.

He makes sense.

- and now, suiting the times, he is saying macro events, short-term performance and even volatility shouldn’t matter to most investors, but focus on fundamentals such as earnings potential, and buy stocks and bonds that look cheap relative to this.

Howard Marks’ 10 elements for investors​

1. Forget the short run – only the long run matters.
2. Decide whether you believe in market efficiency. If so, is your market sufficiently inefficient to permit outperformance, and are you up to the task of exploiting it?
3. Does your investment style match your personality? Do you tend more towards aggressiveness or defensiveness? Will you try to find more and bigger winners, or focus on avoiding losers, or both? (Hint: “both” is much harder to achieve than one or the other.)
4. Think of your normal balance between aggressiveness and defensiveness based on your financial position, needs, aspirations, and ability to live with fluctuations. Will you vary this balance depending on what happens in the market?
5. Adopt a healthy attitude towards return and risk. Understand that higher returns are usually accompanied by increased risk, while avoiding risk usually leads to avoiding return as well.
6. Insist on an adequate margin of safety, or the ability to weather periods when things go less well than you expected.
7. Stop trying to predict the macro; study the micro like mad in order to know your subject better than others. Understand that you can expect to succeed only if you have a knowledge advantage, and be realistic about whether you have it or not.
8. Recognise that psychology swings much more than fundamentals, and usually in the wrong direction or at the wrong time. Understand the importance of resisting those swings and profiting if you can by being counter-cyclical and contrarian.
9. Study conditions in the investment environment – especially investor behaviour – and consider where things stand in terms of the cycle. Where the market stands in its cycle will strongly influence whether the odds are in your favour or against you.
10. Buy debt when you like the yield, not for trading purposes. In other words, buy 9 per cent bonds if you think the yield compensates you for the risk, and you’ll be happy with 9 per cent. Don’t buy 9 per cent bonds expecting to make 11 per cent thanks to price appreciation resulting from declining interest rates.

 

[Garpal Gumnut]

- and now, suiting the times, he is saying macro events, short-term performance and even volatility shouldn’t matter to most investors, but focus on fundamentals such as earnings potential, and buy stocks and bonds that look cheap relative to this.

Howard Marks’ 10 elements for investors​

1. Forget the short run – only the long run matters.
2. Decide whether you believe in market efficiency. If so, is your market sufficiently inefficient to permit outperformance, and are you up to the task of exploiting it?
3. Does your investment style match your personality? Do you tend more towards aggressiveness or defensiveness? Will you try to find more and bigger winners, or focus on avoiding losers, or both? (Hint: “both” is much harder to achieve than one or the other.)
4. Think of your normal balance between aggressiveness and defensiveness based on your financial position, needs, aspirations, and ability to live with fluctuations. Will you vary this balance depending on what happens in the market?
5. Adopt a healthy attitude towards return and risk. Understand that higher returns are usually accompanied by increased risk, while avoiding risk usually leads to avoiding return as well.
6. Insist on an adequate margin of safety, or the ability to weather periods when things go less well than you expected.
7. Stop trying to predict the macro; study the micro like mad in order to know your subject better than others. Understand that you can expect to succeed only if you have a knowledge advantage, and be realistic about whether you have it or not.
8. Recognise that psychology swings much more than fundamentals, and usually in the wrong direction or at the wrong time. Understand the importance of resisting those swings and profiting if you can by being counter-cyclical and contrarian.
9. Study conditions in the investment environment – especially investor behaviour – and consider where things stand in terms of the cycle. Where the market stands in its cycle will strongly influence whether the odds are in your favour or against you.
10. Buy debt when you like the yield, not for trading purposes. In other words, buy 9 per cent bonds if you think the yield compensates you for the risk, and you’ll be happy with 9 per cent. Don’t buy 9 per cent bonds expecting to make 11 per cent thanks to price appreciation resulting from declining interest rates.

I saw that.

Good advice.

gg

 

[divs4ever]

Howard Marks is a very well respected investor, adviser and fund manager. He is associated with Oakridge which he founded.

His advice in the latest memo is not good for those piling in to the market at present. It applies as much to Australia as to the US markets.

He makes sense. Many of his thoughts and conclusions have been discussed on ASF since March 2020. It's good to have it all in one document.

https://www.oaktreecapital.com/insights/howard-marks-memos/

gg

WHOOPS !!!

i didn't so much 'pile in ' as buy opportunistically ( but carefully ) right through March to late December 2020 ,

could i have done better ?? sure but i did do OK just the same

 

[Dona Ferentes]

two years on....

To spot a bubble, Marks says, you first need to know what one is. And here he is quick to emphasise a market bubble is more a state of mind over any quantitative measure. Here, the veteran investor reckons there are telltale signs when the bubble territory is reached.

Along with a rapid rise in stock prices, bubbles represent “temporary mania” fuelled by the same few ingredients. There’s “highly irrational” exuberance of markets. There’s outright adoration of companies or innovations in the belief they can’t miss – anyone remember Pets.com, eToys.com, or 360Networks?

Thirdly, there’s also the sense of FOMO for investors that they’ll get left behind. And finally, Marks says bubbles are driven by a firm belief “there’s no price too high” for certain stocks.

With the S&P 500 up 26 per cent and 25 per cent in each of the past two years, and the Mag7 powering most of the gains of the broad Wall Street benchmark, this leads to the five warning signs that Marks now sees ahead for 2025.

First: Market optimism has clearly prevailed for at least two years.

Second: The above-average valuation on the S&P 500 is currently closer to 27-times earnings than its long-term average of 16 times, and the fact that Wall Street stocks in most industrial groups sell at higher price-to-earnings multiples than stocks in the same industries in the rest of the world.

Third: Nothing but enthusiasm is being applied to the “new thing” of artificial intelligence.

Fourth: There’s the implicit presumption that the top seven companies, from Apple to Nvidia, will continue to be successful.

Fifth: The possibility that index investors have simply being momentum buying of some stocks without regard for their intrinsic value.

While not directly related to shares, bitcoin can’t be dismissed as a warning sign, Marks adds.

 

[Dona Ferentes]

he's back

Marks suggests six INVESTCON levels that investors can use as markets get bubbly.

6. Stop buying.
5. Reduce aggressive holdings and increase defensive holdings.
4. Sell off the remaining aggressive holdings.
3. Trim defensive holdings as well.
2. Eliminate all holdings.
1. Go short.

Marks says it’s typically unwise to go to extremes, “but I have no problem thinking it’s time for INVESTCON 5. And if you lighten up on things that appear historically expensive and switch into things that appear safer, there may be relatively little to lose from the market continuing to grind higher for a while – or anyway, not enough to lose sleep over.”
.
the meaty bit:

...With a new breed of tech giants pushing Wall Street to record levels in the past 12 months, Marks has been back on bubble watch.

In January, with the S&P 500 trading at 22 times forward earnings, Marks concluded that the market looked “lofty but not nutty” and called out the absence of the “extreme investor psychology” that usually marks genuine bubbles.

But with the market swooning after US President Donald Trump’s infamous “liberation day” tariff announcements and storming back to set a series of fresh record highs, Marks has dusted off his bubble measure for a second look.

His conclusion? “The stock market has moved from ‘elevated’ to ‘worrisome’.”

It’s the combination of two factors that contribute to that view. The first is that valuation remains elevated, having come back to about 23 times forward earnings; as Marks points out, historical data shows that when you buy the index at this level, your average return over the next decade will probably be plus or minus 2 per cent. That’s hardly brilliant compensation for risk, given 10-year US Treasury yields are sitting a touch above 4.2 per cent.

Clearly, Wall Street has been pushed higher by the big tech stocks. But these aren’t the stocks that necessarily worry Marks, given their average price is 33 times earnings.

“This is certainly an above-average figure, but I don’t find it unreasonable when viewed against what I believe to be the companies’ exceptional products, significant market shares, high incremental profit margins, and strong competitive moats,” Marks says, noting that when he arrived on Wall Street in 1969, several members of the so-called Nifty 50 – a group of stocks whose market dominance and earnings potential seemed unimpeachable – traded on prices of between 60 and 90 times earnings.

So what does concern Marks?

“I think it’s the average price-earnings ratio of 22 on the 493 non-Magnificent companies in the index – well above the mid-teens average historical P/E for the S&P 500 – that renders the index’s overall valuation so high and possibly worrisome.”

That’s because he sees a set of macroeconomic conditions that “appear to me to be less good overall than they were seven months ago”, including the threat of tariffs, rising inflation that could derail interest rate cut bets, slower growth that may dull multiyear earnings power, and America’s unresolved problem with huge fiscal deficits and national debt.

These are the fundamentals. But as Marks says, a bubble is less a diagnosable condition and more a state of mind, so the psychology of investors is important. And here, Marks sees signs of a shift.

There’s the market’s willingness to treat bad news as good news and the rationalisations for the bull market to keep running, including the TACO (Trump always chickens out) trade. There’s the creeping sense of FOMO, which is being compounded by a wealth effect from gains in stocks, property, crypto and gold. And of course, there’s “the excitement surrounding today’s new, new thing: AI”.

This is where Marks, to his credit, is willing to explore the idea that this time could indeed be different; as he points out, even the legendary investor Sir John Templeton, who was one of the first to warn of the dangers of “this time it’s different”, conceded it was still true about 20 per cent of the time.

The argument, Marks says, that technology is creating a new breed of companies that can grow faster, are less cyclical, are less capital intensive and have wider economic moats is logical – even if history says it’s very difficult for a firm to maintain this position for a long time.

Further, Marks agrees the likelihood that AI and related developments can change the world looks enormous, even if the investors have an unfortunate habit in periods like this of treating “far too many companies – and often the wrong ones – as likely to succeed”.

Marks says overvaluation is impossible to prove and there’s nothing to suggest a correction is imminent.

 

[divs4ever]

Marks says overvaluation is impossible to prove and there’s nothing to suggest a correction is imminent.

to that i would reply , today i bought my first ( small ) parcel of BEAR this cycle ( am NOT considering BBUS .. yet )

call that a contrarian indicator ( pun intended ) if you like

overvaluation to me , is a price i would not consider buying at ( more than 20% higher than my maximum target price

 

[divs4ever]

i would veer towards more 'defensive stocks ' but i consider ( most of ) them over-valued as well OR have unacceptable levels of debt

so far all i can find worthy ( of buying ) are a few unloved value stocks having a rough time

 

[StockyGuy]

i would veer towards more 'defensive stocks ' but i consider ( most of ) them over-valued as well OR have unacceptable levels of debt

so far all i can find worthy ( of buying ) are a few unloved value stocks having a rough time

Don't you think likely pending interest rate cuts in US and also Aus are bullish for the markets? More easily accessible credit for investors and also the businesses they invest in. More atrocious interest offerings for the debt free with cash in the bank leading them to increase risk by deploying more funds in the markets. I appreciate the foil to all that is that presumably the expected interest rate cuts are already more or less baked into stock market prices.

 

[divs4ever]

Don't you think likely pending interest rate cuts in US and also Aus are bullish for the markets? More easily accessible credit for investors and also the businesses they invest in. More atrocious interest offerings for the debt free with cash in the bank leading them to increase risk by deploying more funds in the markets. I appreciate the foil to all that is that presumably the expected interest rate cuts are already more or less baked into stock market prices.

bullish yes , IF you discount the extra risk you are taking on , ( TINA has been the word for a few years now )

it is no coincidence that 3 of my top ten holdings are REITs ( 4 if you count APE as a property investor )

yes the risk in REITs is the illiquidity of the underlying assets . , and the lack of franking is a buzz-kill as well

of those top ten holdings only REP ( No. 10 ) is close to target range to buy more of , NIC ( No. 11 ) is somewhere close to target range as well

the other 9 are well above a tempting price

( top 10 at the beginning of this month )

1. PME

2. WES

3. CLW

4. MQG

5. CMW

6. BHP

7. APE

8. CUP

9. SGLLV

10. REP

 

[finicky]

of those top ten holdings only REP ( No. 10 ) is close to target range to buy more

REP imo is a decent prospect for a turnaround chart:
W shaped low, momentum rising. A pullback to 60c or a bit lower would preserve symmentry before another tilt at 65c. A 9% unfranked yield looks predictable near term. I won't be buying however.

WEEKLY

 

[divs4ever]

the only stock in my top ten that i class as 'defensive ' is SGLLV ( which i was buying around $6 )

BHP is probably 'too big to fail ' , but is way less than a $40 to me , WES is way over-priced as well

as weird as the top ten list looks there are some monster profits in there ( PME , MQG , and APE )

even WES is up over 100% ( not counting the freebie COL )