Oaktree Capital Group LLC (NYSE:OAK) Chairman Howard Marks went on Bloomberg’s Market Makers today to talk to Stephanie Ruhle and Erik Schatzker about similarities between aggressive risk-taking today and the irresponsible investing that took place prior to the global financial crisis. While he doesn’t think we’ve reached the same level of risk-seeking as in 2007, he’s concerned that we are heading down that path.
Howard Marks’ memo to investors
People who don’t pay much attention to markets may know Howard Marks for a memo he made to investors, The Race to the Bottom, that identified the signs of a looming crash when most people were still bullish on growth. Asked if the race to the bottom has started again he said, “I think it’s on.”
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
The problem is that ‘undisciplined, undemanding’ investors are willing to pay top dollar for high-quality assets, making it impossible for more disciplined investors to find a good deal.
“When people compete to put money out as they are today to get away from the near zero returns on money markets and cash and Treasury… they bid for things like at an auction,” said Howard Marks. “So they bid a higher price. What form does that price take? Lower returns, less safety, weaker terms.”
Oaktree Capital interested in real estate
Even though companies like Oaktree Capital Group LLC (NYSE:OAK) see the problem, they still have to put their money somewhere. As Howard Marks says, their clients don’t pay them to sit on cash, so they have to buy something. Oaktree in particular is looking at secondary and tertiary real estate, emerging market debt, and “loans that European banks won’t make.” While other investment firms undoubtedly have different strategies, they are also looking into lower-quality asset classes to hit the returns their clients want.
“Nothing is compellingly cheap… today the choice is safety or income,” said Howard Marks. “We’re gonna stick to the things that other people want to do less.”
Questions on Howard Marks’ mind
The biggest question on Howard Marks’ mind is how much of rising prices are real, and how much are just people feeling good about the market.
“If I could know one thing when looking at investment it would be how much confidence, how much optimism, is in the price? I want to buy when confidence is low—that’s when price is low relative to value. When confidence and optimism are high then price is high relative to value and that’s a much more dangerous time.”