Howard Marks: The Seven Worst Words in the World

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Howard Marks has just released his latest memo which focuses on today’s economic environment compared to 2008 saying:

“Thus the idea for this memo came from the seven worst words in the investment world: “too much money chasing too few deals.”

Here’s an excerpt from that memo:

I have a new book coming out next week titled Mastering the Market Cycle: Getting the Odds on Your Side. It’s not a book about financial history or economics, and it isn’t highly technical: there are almost no numbers in it. Rather, the goal of the book, as with my memos, is to share how I think, this time on the subject of cycles. As you know, it’s my strong view that, while they may not know what lies ahead, investors can enhance their likelihood of success if they base their actions on a sense for where the market stands in its cycle.

The ideas that run through the book are best captured by an observation attributed to Mark Twain: “History doesn’t repeat itself, but it does rhyme.” While the details of market cycles (such as their timing, amplitude and speed of fluctuations) differ from one to the next, as do their particular causes and effects, there are certain themes that prove relevant in cycle after cycle. The following paragraph from the book serves to illustrate:

The themes that provide warning signals in every boom/bust are the general ones:
that excessive optimism is a dangerous thing; that risk aversion is an essential ingredient for the market to be safe; and that overly generous capital markets ultimately lead to unwise financing, and thus to danger for participants.

An important ingredient in investment success consists of recognizing when the elements mentioned above make for unwise behavior on the part of market participants, elevated asset prices and high risk, and when the opposite is true. We should cut our risk when trends in these things render the market precarious, and we should turn more aggressive when the reverse is true.

One of the memos I’m happiest about having written is The Race to the Bottom from February 2007. It started with my view that investment markets are an auction house where the item that’s up for sale goes to the person who bids the most (that is, who’s willing to accept the least for his or her money). In investing, the opportunity to buy an asset or make a loan goes to the person who’s willing to pay the highest price, and that means accepting the lowest expected return and shouldering the most risk.

  • Like any other auction, when potential buyers are scarce and don’t have much money or are reluctant to part with the money they have, the things on sale will go begging and the prices paid will be low.
  • But when there are many would-be buyers and they have a lot of money and are eager to put it to work, the bidding will be heated and the prices paid will be high. When that’s the case, buyers won’t get much for their money: all else being equal, prospective returns will be low and risk will be high.

Thus the idea for this memo came from the seven worst words in the investment world: “too much money chasing too few deals.”

You can read Howard Marks’ latest memo here – Howard Marks Memo 2018 – The Seven Worst Words In The World.

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