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By Jason Stipp | 06-13-2012 01:00 PM

Marks: Move Forward With Caution

With asset prices that are not terribly elevated or depressed, and the potential for further bad news, Oaktree Capital Chairman Howard Marks says his firm is still investing, but with caution.

Jason Stipp: There are all sorts of forecasts for what's going to happen in Europe. You mention in your book that most forecasts turn out not to be true, some happen to be true sometimes, but forecasters are rarely consistently true.  You say forecasting really is a very difficult thing to get right all of the time.

However, you do say that astute investors can be very good at figuring out where we are now, in other words, analyzing the present situation by looking at valuation trends or psychological trends or the fundamentals that are out there.

As you are looking at the market today--what's going on today, how investors are behaving right now--what's the market temperature when you take it?

Howard Marks: Well, that's a great question. I don't think that forecasting, what's going happen a year or five years from now can be done consistently or can be the basis for successful investing. But I think it is possible to do so-called market-timing to know when to invest more or less, through the process you described, which as you know, I call taking the temperature of the market.

So, what are some of the things you would look for: How is the economy doing? How are companies doing? What are the attitudes of investors? Have stocks been going up or down? Are the commentators on TV and in the press bullish or bearish? Are there headlines that are favorable to investing? Are new issues oversubscribed? Are funds oversubscribed? Do the people you know, are they talking about how much they are going to make through their investing, or are they bemoaning how much they've been losing? All of these things give you a hint about whether people are bullish or bearish and how much optimism or pessimism is incorporated in prices.

By the way, all of the things I mentioned have to do with today. They are all observations with regard to the present. None of them says anything about the future, or requires a guess about the future. Warren Buffett put it best, as always; he said, "The less prudence with which other people conduct their affairs, the greater prudence with which we must conduct our own affairs." So, when other people are carefree and enthusiastic, we should be very cautious because that usually connotes an elevated market. When other people are terrified and refusing to invest, we should turn aggressive, because that usually suggests a depressed market. And again, Jason, none of these things have anything to do with predictions about the future.

Stipp: So, when you are taking that temperature today, you described the factors we should look at. Is it your sense that we are leaning more toward the pessimistic side versus the optimistic side, given some of the headlines that we are seeing, some of the economic concerns that we are seeing, and the market volatility we've seen recently?

Marks: Yes, thanks for reminding me, because you did ask that question and I got so carried away with my message that I failed to answer it.

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