There’s been a lot of talk recently about where we are in the current economic cycle, especially since the bull market entered its tenth year. Investors and market watchers are increasingly wary about the future because the bull market is now the longest ever, and no bull market lasts forever.
Most are trying to guess what’s next so they can get out before the next market crash. However, renown value investor Howard Marks of Oaktree Capital says that’s the wrong way to look at things. He spoke at Value Invest New York earlier this week and offered some very simple advice for investors who are trying to forecast the market’s top.
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Don't be average
Marks noted that it's pretty easy to be average and it's OK to be average like everyone else, but value investors who want to be above average must think differently than everyone else. One of the key tenets of value investing is buying when an investment's popularity is understated and then avoiding buying when the popularity and emotions are overstated. He pointed out that value investors must learn how to read the market's psychology or the way most other investors feel. In many cases, successful value investors are running in the opposite direction of the market herd.
"When the knife is falling and when people are panicking and when they're near suicidal and they've lost all faith in the future and they all say, 'I don't want to ever lose any more money and I don't want to bear any more risk,' that's the time you can buy the most at the lowest prices," Marks said. "After it passes the bottom and starts up, now optimism is in the ascent, and you can't buy much anymore."
Another element of market psychology is investors' attitudes toward risk. He explained that value investors can learn a lot about risk by looking at how others feel about it.
"Other people's attitudes toward risk are what makes the market safe or risky for you," he explained.
Why Howard Marks doesn't believe in forecasts
Marks also emphasized that the one thing he doesn't do is guess about the future. He doesn't believe in forecasting what will happen next month, next year, or next quarter. He also referenced something Warren Buffett said once when he was having dinner with him.
Buffett said that for a piece of information to be desirable, it has to be both important and knowable. Marks explained that while macro forecasts are important, they aren't knowable, so he believes it's a waste of time to fixate on them. He bases all his investments on the present rather than the future and sees the future as simply a distribution of various probabilities.
"No one should ever fixate on knowing what's going to happen tomorrow because that's impossible," Marks said. "What that means is that no one should ever fixate on selling at the top and buying at the bottom... The only time you know when the top is is afterwards when the market starts down."
How to know when to buy and sell
Marks emphasized that to be successful, investors must worry less about trying to buy at the bottom or sell at the top. Instead, he said the focus should be on current valuations rather than on trying to time the market and predict the future.
"Everything which is predicated on a view of the future is folly," he said. "There's only one good reason to buy and that's because something is cheaper than it should be. And there's only one good reason to sell, and that's because it's more expensive than it should be. It could be overpriced and become more so, but overpriced is a good time to start selling."
He also advised investors not to worry too much about leaving returns on the table.
"If it's cheap you buy. If it gets cheaper, you buy more. If it's cheaper, you buy more, and if you run out of money, you ask your clients for more money," Marks joked as he hammered home his point.
This article first appeared on ValueWalk Premium