Oaktree's Howard Marks: What's Ahead for the Bull Market--Knowledge@Wharton

There's only one intelligent form of investing, and that's to figure out what something is worth and trying to buy it for less.

Below are some thoughts, in no particular order...

1. No such thing as timing the market

"I’ve been saying, ‘we’re in the eighth inning’ — for a little while, [but] I realized [...] that there’s one problem with that locution, which is this isn’t baseball and we don’t know how long the game is going to go."

No one knows when the market will crash and the boom will end. You can, however, become more weary when the market has been rising for long and valuations become high. Although this is worth noting, it would still be relatively immaterial for any given investment, if you follow the principle of estimating the value of the business (incorporating a margin of safety) and then buy shares in the company at a discount to value.

2. Random walk down Wall Street

"The current economic recovery is the third longest in history, and if it goes on another year, it will be the longest in history — there’s nothing to say it can’t [keep rising]"

History is important and must be used as a starting point, but occurrences on the market are random. This is because the market is driven by emotions.




3. Corrections not crashes

"Over the previous decade that I lived through, we had lots of minor boomlets and then corrections. Don’t automatically think bubble-crash."

Bubbles don't have to result in a crash. There could just be a stagnation for a very long period of time, or even relatively minor corrections. 

4. Price is king

"People took that grain of truth and they expanded it to mean that … if you invested in an internet or e-commerce company, you’ll probably make a fortune because the internet is going to change the world. And as a consequence, it didn’t matter what price you paid."

"[People said, about the nifty-fifty stocks' prices in 1968,] "if it [is] a little too high, so what? It [is] growing so fast it will just grow into the price,” said Marks. But it turned out that investors who bought these stocks in 1968 and held them for five years lost 97% of their investment. The lesson? “Price does matter"

A bubble is a consequence of excessive excitement which is founded in but not justified by facts. Remember that money is not made during the selling, but during the buying, and if you buy at the right price, the market price will (eventually) converge with that price, provided you were correct. Remember, price always matters.

5. Fantastical and Mythical Stocks

"The anointing of a group of “super-stocks” is a sign of the state of the market. “You can’t have a group treated like the FAANGs have been treated in a cautious, pessimistic, sober market.” That means it’s not a market with good bargains.

Effectively, this refers back to the idea of a grain of truth being taken and then being overused in investment hypotheses. A 'super-stock' is essentially one which the crowd thinks is less subject to the negative cycle of the market, or a company which is revolutionary. However, in most cases, it is a consequence of weaknesses being underestimated or ignored, and the growth story being wolfed down by starving and raving investors. At this point, the market is not pessimistic, and is definitely optimistic or entering euphoria. Although this does not mean you should not invest if you can find a bargain, it means that really good bargains are rare, and that a generous helping of caution would be advisable.

6. Turbulent boons

"Warren Buffett once told Marks that he likes to buy companies when they’re 'weeds, not flowers.' Oaktree also believes in this dictum of investing in troubled assets and selling them for a profit once they recover. 

Often the best bets are struggling companies, because they may be undervalued due to excessive pessimism. Here, it is perhaps important to distinguish between the short and long time horizons. Ideally, you would look for a good company experiencing temporary turbulence. This is because strong underlying economics would allow you to keep the investment in your portfolio for a long, long time. It is important to remember, when making such an investment, that "turnarounds seldom turn". However, if a company is valued below the value you associate with its concrete assets, then it may be a good short term investment as you may be able to make a significant profit when these assets were sold.  The latter of the two is probably less likely to occur, but probably still can.




7. Be willing to lose money to make money

Often people may say, "But shouldn’t investors wait for the price drop to stabilize before jumping in so they won’t be, in Wall Street parlance, catching a falling knife? 'The trouble is that once that happens, then the price would have rebounded,' Marks said. 'We want to buy at a time of upset and while the knife is still falling. I think the refusal to catch a falling knife is a rationalization for inaction.' "

This is why you can't time the market. Determine the value of a company, make sure you know what you don't know, allow for a margin of safety, and when a bargain presents itself, take it! No one can call the top or the bottom. You don't know when the knife will stop falling, and want to get in before it has bounced back and converged with-or surpassed-what you think the fundamental value is.

8. Cycles are love Cycles are life

"Cycles are one of the most important things in the world." (Remember, everything is cyclical!!!)

9. Forecasting Liars

"People who depend too much on cycles coming at set times 'tend to get in trouble because they either anticipate too much or they miss things'."

Remember, NO ONE knows what will happen when or why (what the trigger will be). This is why you cannot time the market and must invest based upon a fundamental analysis of intrinsic value relative to the value indicated by the market price.




10. Easy to understand, but NOT simple to abide by

"Not being very emotional is very useful in the investing world. … You make the really big money in this world by unhooking from the market when it gets up [high], when everybody’s happy and nobody could think of anything that could ever go wrong and everybody thinks that trees could grow to the sky.” That’s the time to sell. When the market collapses and everyone’s pessimistic, it’s time to buy."