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Marks: Move Forward With Caution

Jason Stipp

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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Where are we today? Well, the good news for those of us who want value, is that very few people are what I would call carefree. Very few people are ignorant of the risks or blind to the risks.

If you go back to '05 and '06 and early '07--the years before the crisis when the foundation was laid for the losses in the crisis--you had an environment, as I recall it, in which people couldn't think of a way to lose money. They were convinced that the Fed was adroit, they were convinced that risk had been reduced through securitization and tranching and selling onward, and so forth. One of the things I believe strongly is that the riskiest thing in the world is the widespread belief that there is no risk. That's really what prevailed in that pre-crisis day. That's what brought on the crisis. That's what gave rise to the behavior that produced the crisis.

Today, I don't think anybody is blind to the risks. And in fact, there is always a chance that people are being too conservative. So, what I would say to you is that we are on a much healthier footing psychologically today. In '07, five years ago today--June of '07--most people said, there is nothing to worry about; I can't think of way to lose money. Terribly frightening. Today, most people say they can't think of a way to make money. They can't get over this litany of macro uncertainties that are out there. And for those of us who look for values, that's bullish.

So you take today's, I would say, modest or moderate investor sentiment, and you add in moderate security prices, and these things are the good news today. Now, they are balanced out by bad news, and the bad news is, as I said before, the list of macro worries, and it is substantial, and it is unknowable what the outcomes would be.

But when I take the temperature of the market today, I do not see bullish excesses, which is not to say that it's depressed and a raving buy, because I also don't see highly motivated sellers, I don't see forced sellers, I don't see people getting margins calls, I don't see leverage structures melting done, and so forth.

So I think that my best answer to you is that the temperature of the market today is moderate--certainly not unhealthy, in my opinion, from the standpoint of bargain-hunters.

Now, it's possible that from the probability distribution of future events, we'll get some bad outcomes. And if we get some bad outcomes, the worst of outcomes, then maybe moderate psychology today will turn out to have been too optimistic. But on balance, I think the psychology of today is appropriate, given the future possibilities.

Stipp: So, Howard, as an investor now, instead of as a present-market analyst, what does that translate to as far as your investments?

Are you finding any areas, then, where maybe the pessimism is too high and you're seeing some opportunities? Have you been putting money to work? Or are you sort of sitting back and not seeing as many opportunities as you'd like to invest right now?

Marks: Well, there certainly aren't as many investment opportunities as we would like. So in the same way that things are not elevated and flying high, they are also not depressed and on the bargain-basement counter today, in my opinion.

So, in addition to psychology being moderate, I think prices are moderate, and there is usually a connection between the two. We're finding some things to buy, most of them are not the investments of a lifetime, but they are worth taking.

You know, Sid Cottle, who is the editor of the later editions of Graham and Dodd, the famous book on Security Analysis, which is the bible of value investors--Sid Cottle once told me that investment is the discipline of relative selection. Most of us are going to make investments most of the time, and so the point is that through relative selection, we should get rid of the worst ones and try to emphasize the better ones, and there are better and worse ones today. We are moving ahead. I think that's the most important thing. At Oaktree today, we don't feel that the outlook is so bad or that the psychology is so elevated or that the asset prices are so high that we shouldn't make investments, and most of our portfolios are fully invested, and the ones that aren't fully invested, we're trying to get that way. We're trying to make investments every day. But to complete our mantra for today, Jason, we're moving ahead, but with caution. We don't think that the outlook is so untroubled or that things are so cheap or that investors are so depressed that it's time for aggression. So we're moving forward, but with caution.

What does that mean? Safer company, safer industries, value today more than growth tomorrow, companies that are not terribly levered, companies which are not riding high on optimism. This is where we're putting our money today, and I think that those are the cornerstones of moving forward with caution.