Howard Marks’ 5 biggest market calls – and 7 tips on how he made them

You might think that picking macro moves is all in a day’s work for the likes of investing legend Howard Marks. But it says a lot about the futility of trying to time such events when even Marks – the world’s most active investor in distressed securities – concedes he’s only successfully called five major market moves in 50 years. This is a point Marks reflects on in his latest memo (though at 8,000 plus words, perhaps “tome” is a more apt description).

In the letter, titled, “Taking The Temperature,” Marks trawls through some of his previous writing and casts back to the events that underpinned the five big calls of his investing career so far.

You can read about each of them in detail on the Oaktree Capital website here, but I've summarised his latest letter below.

January 2000

Marks recalls a memo, titled “bubble.com,” that he wrote in early 2000:

“To say technology, Internet and telecommunications stocks are too high and about to decline is comparable today to standing in front of a freight train. To say they have benefited from a boom of colossal proportions and should be examined very sceptically is something I feel I owe you,” he wrote at the time.

Not long after, the tech bubble burst – spectacularly – with the S&P 500 and NASDAQ Composite indexe diving 46% and 80% between 2000 and 2002.

“And the word “bubble” became part of everyday speech for a new generation of investors,” Marks says.

Late 2004 to mid-2007

Marks describes this period as a “slow-developing train wreck” characterised by:

• Accommodative monetary policy from the US Fed
• Unusually low returns on most asset classes
• Risk-seeking by investors looking to achieve decent returns.

He also recalls something that might resonate particularly loudly for Australians: “Investors were embracing the most glaring fallacy – the belief that home prices only go up.”

How did Marks and the Oaktree Capital team respond? They did the opposite to what most investors were doing and doubled down on their defensiveness.

Eight months after he published a memo with the tongue-in-cheek title It’s All Good (a nod to the prevailing view among investors at the time, that asset prices would simply keep rising), Bear Stearns melted down – followed by the rescue of Merrill Lynch by Bank of America.

Late 2008

After what Marks recalls was a strangely “tranquil” period in September 2008, Lehman Brothers filed for bankruptcy and the GFC kicked off properly.

Oaktree Capital, after careful consideration, decided to trade through it.

“We ran into very few people outside Oaktree who were putting money to work or willing to grant that we might be doing the right thing. I told a reporter friend we were buying, and he said – incredulously – “You are!?!” recalls Marks.

At one point later in the market meltdown – what he terms the third stage – Marks reasoned that though everyone was anticipating things could only get worse, he was encouraged that the “negatives are on the table” and that the “greater long-term risk probably lies in not investing.”

Marks says that this period was – contrary to public opinion – “the epitome of a buying opportunity.” His reasoning at the time was that:

• investor expectations are low;
• asset prices probably aren’t excessive;
• there’s little possibility of investors being disappointed; and thus,
• there’s little likelihood of lasting loss and a good chance prices will work their way higher.

March 2012

Marks refers to this period as one where investor psychology remained weighed down by the fear of financial sector meltdown, resulting in the S&P 500 returning an average of only 0.55% a year for the 12 years between 2000 and 2011.

He describes a prevailing view that “equities were dead” – but Oaktree’s contrarian view that this was actually a good thing.

“What if the lows in optimism and enthusiasm for equities meant things couldn’t get any worse? Wouldn’t that mean they could only get better?” Marks wrote.

“And in that case, wouldn’t it be reasonable to assume that low stock prices presaged future gains, not continued stagnation?”

Again, Marks’ foresight proved correct, the S&P 500 returning 16.5% a year between 2012 and 2021.

“Once again, excessively negative sentiment had resulted in major gains. It’s as simple as that,” he says.

March 2020

Marks’ most recent big call was during the early stages of the global COVID-19 pandemic.

“We didn’t know anything about what the future held. But whereas some people think ignorance regarding the future means they mustn’t take any action, someone who thinks the matter through logically and unemotionally should recognise that ignorance doesn’t mean the position they’re in is necessarily the position they should remain in,” he says.

Again, Marks deployed his cool reasoning at the same time as much of the financial market was in panic mode. 

He wrote at the time: “We’re never happy to have the events that bring on chaos, and especially not the ones that are underway today. But it’s sentiment like [this] that fuels the emotional selling that allows us to access the greatest bargains.”

Seven lessons for investors

Marks emphasises the importance of stepping back and taking a dispassionate view to figure out:

• What happened
• Is there a pattern that has been repeated?
• What are the lessons to be learned from the pattern?

“So, one key is to avoid making macro calls too often…You have to pick your spots – as Warren Buffett puts it, wait for a fat pitch,” says Marks.

Marks also highlights the importance of understanding investor psychology and how it drives decision-making. He sums up his advice in the following points:

1. Engage in pattern recognition.
2. Understand that cycles stem from what Marks calls “excesses and corrections"
3. Watch for moments when most people are so optimistic that they think things can only get better
4. Remember that in extreme times, the secret to making money lies in contrarianism and not conformity.
5. Bear in mind that much of what happens in economies and markets doesn’t result from a mechanical process, but from the to and fro of investors’ emotions
6. Resist your own emotionality
7. Be on the lookout for illogical propositions.

This article is based on the memo published by Howard Marks on the Oaktree Capital website, which you can find in full here.