Oaktree Capital's Howard Marks Is Cautious: Market Commentary ~ market folly

Friday, May 21, 2010

Oaktree Capital's Howard Marks Is Cautious: Market Commentary

Chairman of Oaktree Capital Howard Marks is out with his latest commentary entitled, 'Warning Flags.' You'll remember that last time we checked in with Marks he was frustrated with the government and openly voiced it in his missive. This time around, he revisits some of the predictions he made in his previous commentary where he wrote, "the uncertainties discussed above tell me today's distribution of possibilities has a substantial left-hand (i.e. negative) tail, probably greater than at most times in the past. The proper response should be to discount asset prices, allowing a substantial margin for error. Forecasts should be conservative, yield spreads should incorporate ample risk premiums, valuation parameters should be below the long-term norms, and investor behavior should be prudent."

Needless to say, he was prudent in his warning. He points out that regardless of the situation in Greece, investors had reason to be cautious as, "the recovery of 2009 in the face of significant fundamental uncertainty meant that the markets were reincorporating optimism and thus vulnerable to surprise and disappointment. This in itself should be sufficient to induce caution." The rest of his commentary focuses on how market sentiment is currently reminding him of pre-crisis levels. He wisely proclaims that it's time to be skeptical when optimism is omnipresent. Marks' cautionary stance is shared by investing legend Seth Klarman of Baupost Group who we highlighted recently stated that he is worried about the markets.

Marks' commentary is eleven pages worth of insight and quotable gems. As such, we recommend you read it in its entirety. Embedded below is the full commentary from Oaktree Capital's Howard Marks:

You can download a .pdf here.

Maybe the most valuable insight Marks shares is his reiteration that there are two risks in investing: the risk of missed opportunity and the risk of losing money. He says you can compromise between them, avoid one or the other, but you can't eliminate them both. People buy when they should be selling and sell when they should be buying because of emotion. Words of wisdom indeed.

For past commentary from Marks, be sure to check out his 2009 annual review for some great insight. Additionally, those interested in the topic of inflation would be wise to view Marks' ways to play inflation. Lastly, for more of our coverage of prominent investment managers, head to our collection of recent hedge fund investor letters.

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