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Friday, September 8, 2017


In late July, Oaktree Capital Management co-chairman Howard Marks issued several market warnings in "There They Go Again ... Again," which I extensively highlighted in my Diary.

 
 

"There is plenty more food for thought in this must-read 22 pages of observations. Howard closes his musings with this advice:

 

"If you refuse to fall into line in carefree markets like today's, it's likely that, for a while, you'll (a) lag in terms of return and (b) look like an old fogey. But neither of those is much of a price to pay if it means keeping your head (and capital) when others eventually lose theirs. In my experience, times of laxness have always been followed eventually by corrections in which penalties are imposed.

 

It may not happen this time, but I'll take that risk. In the meantime, Oaktree and its people will continue to apply the standards that have served us so well over the last [thirty] years."

 

From my perch, greed reigns today.

 

As Howard relates, investors make the most -- and safest -- money when they do things that other people don't want to do. But when most investors are unworried and taking unusually high risks, asset prices are typically elevated, risk premiums are low and markets are risky.

 

It's what happens when there is too much money and too little fear."

 

--Kass Diary, "There They Go Again ... Again," July 27, 2017

In that July memo Howard made these principal points in evaluating current conditions:

 
 

* The market uncertainties are unusual in terms of number, scale and insolubility.

 

* In the vast majority of asset sectors, prospective returns are about the lowest they have ever been.

 

* Asset prices are high and almost nothing can be purchased at a discount to intrinsic value. In general, the best we can do is find asset classes that are less overvalued than others.

 

* Pro-risk behavior is commonplace as most investors are embracing increased risk.

 

In the commentary Howard admitted he was likely issuing a premature warning because it is better to be cautious too early than to be too late in evaluating opportunities and conditions.

Howard is no stranger to cautionary memoranda. Back in 2005, in "There We Go Again," he shared some non-consensus concerns that were most prescient, as they would precede the worst economic contraction since The Great Depression. Reading that memo would have saved an investor a boatload of money.

 

I find most of Howard's commentaries as extraordinarily important in understanding market conditions and reward versus risk. His body of work always makes me think and it is invariably logical in argument and characterized by a heavy dose of analytical dissection.

Fast forward to yesterday's newest (and another value-added) memorandum from Howard Marks, "Yet Again?"

Howard starts his latest commentary with the following introduction:

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