Billionaire Howard Marks co-chairman of Oak Tree Capital discusses his book, “Mastering the Market Cycle, Getting the Odds on Your Side” in 2018 with Julia Rogers and Myles Udland of Yahoo Finance.
Billionaire Howard Marks: Leverage Loans Are A Great Idea
Q4 hedge fund letters, conference, scoops etc
Transcript
Mastering the market cycle, what is the difference between mastering the market cycle and timing the market?
I think timing the market is guessing at what's going to happen tomorrow. In my opinion the key to mastering the market cycle is understanding where it is today. We never know what's going to happen tomorrow and the people who think they do tend to screw up. But if we have a sense for where it is. We know something about the probability distribution of returns that we're facing. And I think that's about the best we can do.
So with regards to the future I guess in your most recent memo you expressed some caution. I think on the overall market you just outlined some of your thinking right now and what are maybe the biggest red flags that you're seeing across assets.
Sure. Well I like your use of the phrase across assets because these factors affect basically everything. When I've been doing this 50 years. And when I've seen booms invariably they were characterized by three things too much optimism too little risk aversion and caution. Too much money. Chasing too few ideas. And. To some extent those things are present today. So it's time to start thinking about caution.
Keep talking about a few areas I suppose were as you call them the seven most dangerous words in investing are most present. I think what's interesting is also that most recently we put out last week.
You know I wouldn't say sanguine on the equity market and certainly not the red flag we're seeing perhaps in some debt markets Yeah I think that you know in this in the in recent years not a lot of money has been flowing into equities. A lot has been flowing into debt. People like the idea of having a debt instrument which is going to pay interest and then give the money back at a point in time. They are assured by that. So that makes the money flow. When the money flow in flows and that means the buyers at the auction have more money to spend. And that tends to put the prices up. And with securities price up. Future return down.
Safety down risk up. So credit is an idea. I want to borrow some money. Jen says I won 5 percent.
You say I'll take four. I say I'll take three. You say you need a full set of confidence you say I don't need money Covenant's I say I'll take it without covenants. I get to make good 3 percent covenant lite loan. But and I'm the winner of the OR AM I THE LOSER. That's the key. And this is a process I call the race to the bottom. I wrote a memo by that title back in February 07 famous memo and and to some extent it's happening now.
So I mean as you say and you quote ally know history doesn't repeat itself it rhymes. Maybe Mark Twain said that. So right now you've also written that it appears that debt instruments are going to be found at Ground Zero right when things go wrong this time. You know we've been talking about leverage loans a scene like the new bogeyman on Wall Street. What do you think of them. Well I mean that's.
The key for you and your viewers and everybody to understand is that there's no such thing as a good idea or a bad idea until we can talk about price. It's not what you buy. I always say it's what you pay. So I think that leverage loans are a great idea. They.
They pay interest.
They repay principal they're senior in the issuers and they are generally tied to floating rate loans so you don't have the interest rate risk. All good things. At what price. And no matter how good the merits are it's possible for things to become overpriced when money is flowing in strongly and it is to leverage loans than they can become overpriced and some are.
What's the average investor go to jail. I mean parts of it. You've read the book and I'm like I got to go under the desk here and move to cash.
You already have. No I don't. I don't want you to go on and I don't want you to move to cash.
So you know which I do. Because it's scary some time. Irving you you go through this and you hear oh my gosh he's thinks it's we're in a really bad time. Let me set the scene.
There are two risks in investing the risk of losing money and the risk of missing opportunity.
You can eliminate either one but it puts you firmly in the crosshairs of the other or you can balance the two. How should you balance them. At this time. Should you worry more about losing money or worry more about missing opportunity. And I would say the former. So the point is I'm not saying get out of the market I'm not saying go to cash. I'm not saying this is the worst thing I've ever seen. I'm just saying I would emphasize caution to avoid losses over aggressiveness and the risk of missing out.
What does that mean. Anything you want to do in the investment business invest in stocks bonds loans mutual funds money managers whatever it might be.
