Back in late 2008, in the deepest throes of the financial crisis, everyone in the market was running scared.
Not Howard Marks.
As the cofounder and cochairman of Oaktree Capital, which now oversees $122 billion, Marks smelled opportunity.
He and his partner, Bruce Karsh, came up with a daring plan — one that would fly in the face of investors who refused to touch the market with a 10-foot pole. They were going to start buying cheap assets. Billions of dollars’ worth.
They began purchasing distressed corporate debt at a clip of about $650 million a week, something they continued throughout the last 15 weeks of the year, Marks told Business Insider in an exclusive interview. When all was said and done, Marks and Karsh had amassed a whopping $10 billion position.
Their approach proved prudent — and wildly profitable. That debt rebounded, and the trade made about $6 billion for Oaktree investors and $1.5 billion for Marks, Karsh, and their partners, according to a New York Times report.
But summarizing the trade so neatly hardly does it justice. At the time, it was a massive risk for Marks and his associates to make a wager of that size, considering the dire market environment.
Marks and his team did loads of diligence around the value of the debt they were buying and considered it to have considerable upside potential. But what ultimately sold him on the trade was how overwhelmingly negative sentiment was across the market.
He recalls a conversation he had with a chief investment officer. Every time he posed a negative assumption, the CIO would ask about an even worse scenario.
“I could not propose a scenario negative enough to satisfy her,” Marks told Business Insider.
That signaled to Marks that the market cycle was bottomed out and that it was time to start buying.
“Psychology was absolutely as negative as it could’ve been,” he said. “When you can’t come up with a scenario negative enough on the downside, you know that pessimism is rampant. That’s important. It really exemplified our strategy at its best.”
It’s this investment strategy — assessing where we are in the market cycle and investing accordingly — that’s the focal point of Marks’ new book, “Mastering the Market Cycle,” which was released October 2.
Simply put, when emotions are riding high at either extreme, that’s when it’s best to take immediate action.
If confidence is oozing out of investor pores and risk-taking is abundant, it may be time to get defensive. And if nobody can fathom conditions getting any worse — as in late 2008 — perhaps buying is the right move.
It certainly was for Marks.
Why Marks is continuing to buy
It’s well-established that Marks made a career-defining call back in 2008. But what is he doing right now?
“We’re adding to positions,” he told Business Insider. “We’re buying every day. We’re endeavoring to be fully invested, but with caution.”
This may seem surprising, considering many experts across Wall Street have been calling for an imminent market collapse on a seemingly weekly basis.
We’re buying every day. We’re endeavoring to be fully invested, but with caution.
But Marks doesn’t see it that way. In his mind, conditions aren’t overstretched to a degree that requires extreme defensiveness — at least not yet.
“The future is not so bad and prices are not so high that you should be in cash,” he said. “On the other hand, I don’t think the prices are so low, and the outlook is so good, that you should be aggressive.”
His decision to keep buying is informed by what he refers to as his internal investment speedometer. He knows what his normal position is and adjusts how deeply he’s invested based on market conditions.
Marks said every investor should develop a baseline like this, based on such factors as age, financial position, plans, aspirations, and employment. Once that’s established, it becomes much easier to tweak risk-taking behavior as market sentiment gyrates.
With that said, Marks acknowledges that conditions are edging ever closer to overoptimism.
He explained: “When you have a lot of optimism, not much risk aversion, and a lot of money in the hands of eager buyers, what are you going to get? High prices, high risk, and low perspective returns. We have those things today.”
What could push Marks into defensive mode
Those last comments prompt the question: What would have to transpire for Marks to shift into a fully defensive mode?
He says it would take more risk-embracing behavior — the kind of confidence that prompts investors to blindly continue piling into expensive assets.
“The main thing for me would be an increase in optimism,” Marks said. “If I see an upturn in optimism, pushing prices up even further, that would be important.”
The main thing for me would be an increase in optimism … that would be important.
He continued: “If rates go up a great deal more, and if inflation catches on and starts accelerating, and that necessitates the Fed raising rates even more, that would be tough for the economy and certainly tough on leveraged companies.”
Marks’ view is interesting in the sense that it flies in the face of an increasingly loud chorus of bears across Wall Street. To hear others tell it, sentiment is already far too overextended, and a reckoning is imminent.
In the end, Marks’ outlook is one that should lend encouragement to other traders who aren’t yet ready to throw in the towel on this market cycle. He literally wrote the book on the matter, and he’s saying the coast is still relatively clear.
It’s hard to argue with that.