Marks: The Biggest Mistake An Investor Can Make Is ‘Emotionality’

Howard Marks, co-chairman of Oaktree Capital who predicted the dotcom bubble, discusses potential risks for investors in the future.

Q2 hedge fund letters, conference, scoops etc


Marks: The Biggest Mistake An Investor Can Make Is ‘Emotionality’


Well you know they’re one of the things the book says is that the consistent threads through all the booms are a lot of optimism a low level of risk aversion and a lot of money chasing deals. And I think we have most of those things now when a lot of money tries to enter a market there’s an auction that takes place and when the auction gets heated the prospective returns go down and the risk goes up.

And some of that has been taking place in the credit markets where the credit markets I mean are you talking about the billions of dollars in emerging markets that are you. I mean what sorts of credits are you concerned about. And of.

Them. Well we’ve seen it all in all the credit markets public and privateU.S. and foreign. And you mentioned the emerging markets in 2017 are Argentina which has a terrible credit record was able to issue hundred year bonds people loan money to Argentina for a hundred years. And you know that was because they were optimistic at the time they were able to it willing to grant that things would go well today. Not so much the downs the bonds are down 15 percent and just over a year.

What triggers the trouble Howard. I mean we’re just listening to Jay Powell and Jay Powell are saying that he believes in the gradual rate path when it comes to hiking rates but you know there are some investors believe that that the Fed could overshoot does that overshooting does the feds have an overlay with this other problem and spark that crisis.

Well you know we never know for sure what’s going to be the problem we can enumerate some possibility. That’s one of them. The the interest rate tightening overshoots the contraction-ary monetary actions of the Fed are excessive. They cool the economy too much. On the other hand the you know the tax cut and stimulus measures kick in and the and the economy overheats we get too much inflation requiring them to raise interest even more. The higher interest rates start to bind on companies that are highly levered and not prepared to to cover a high interest payments so there are a lot of possibilities. You know I’m not I’m not ringing the bell to say that we’re we’re approaching an end. It’s just that on the one hand there are the opportunities that you allude to. And on the other hand you know markets are rather high in their cycle valuations are somewhat stretched. And and I just believe this is a time for caution.

You know Howard the title of your book is mastering the market cycle and if you just looked at it quickly you might think you were getting a book that’s going to tell me ahead of time the market but that’s not what this book does. So my question is what what is the message the fundamental message of the book. Number one and what is fundamentally the worst mistake that smart but maybe not professional investors make with respect to mastering the market cycles. Well look. You could go out and you could buy every security. And you could hold it all the time.

And you would be guaranteed to have average results. And the question is would you like to improve upon that. Not many people do that in order to improve upon that. There are two things you can do. You can try to have better selection that is buy more of the things that do better and less of the things that Dewars or you can try to have better cycle positioning which is to say have the more fully committed when things are going to go well and lighter commitment when things are going to go poorly. The theme of the book is that we can help do the latter two to help investors have better results and if we are aware of what goes on in the world if we are aware of things how things work how fundamentals interact with investor psychology then I think we can improve upon the average results. So you asked what’s the biggest mistake and the biggest mistake is. Emotionality. People get excited when things are going well. We all like to see things go well. But when things are going well people get excited and they tend to pay more for perhaps than than they should. So you know you have to realize that good news is not necessarily the same as good results. If prices are too high then good news may produce bad results. We have to have a feeling for when the market is demonstrating excesses and we cannot succumb to our emotions and get excited and buy when things are terrific and depressed and sell when things are down.

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