Howard Marks is the Co-Founder and the Co-Chairman of Oaktree Capital management.
This man knows the market.
1/ Howard Marks is the Co-Founder and the Co-Chairman of Oaktree Capital management. He is managing more than $200 billion and has a robust understanding of the market, he wrote a book called "Mastering The Market Cycle" in 2018. In 2021, he called the bubble before anyone
2/ He recently published a new paper: "On Bubble Watch" and made ominous forecasts... He starts with a definition of a bubble: "Bubble is more of a state of mind than a quantitative calculation." He says it was euphoria around a dozen stocks that led to the dot-com bubble.
This happens when investors believe a business is so disruptive that it'll completely dominate the future.
He gives Cisco as an example.
It went up 20x and declined 88% later.
Marks flags four words as the second most accurate indicator of euphoria: "It's different this time." He had articulated many times before why this is a very dangerous state of mind:
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He says:
- People care about price, but they are willing to pay up.
- There is no general "this time is different" mania.
Yet, he says there are warning signs appearing...
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This is dangerous because it assumes prolonged persistence of leading stocks.
He reminds us that of 20 most overweighted stocks of 2000, only 6 of them are still among the top 20 today.
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7/ He thinks the US market has become too overvalued and overweighted compared to the world markets.The US market now makes up 70% of the world index and magnificent 7 stocks make up 39% of the US market.
Marks says this is unsustainable and it'll have two potential outcomes:
- Severe market correction.
- Prolonged periods of very low returns.
If the overvaluation persists, he says, we will get 3-4% annual returns in the next 10 years.
- Looking at forward valuation ratios.
- Rising concentration in the US market.
- Record share of the US market in the world.
He says this will either take us to a bubble or a long period of very low returns.
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Well, there is no definitive prescription, only some suggestions:
- Avoid popular sectors.
- Don't overpay for growth.
- Overweight defensive businesses.
- Diversify into different asset classes.
You can't time the crash but you can prepare.
