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Rupert Hargreaves
Rupert Hargreaves
Articles (1127)  | Author's Website |

Howard Marks: Look for Select Bargains, but Beware of Further Declines

Thoughts from Howard Marks from 2008

March 09, 2020

As stock markets around the world plunge, investors have three choices, according to Howard Marks:

(1) Sell their investments, take their losses and go and hide away in the hopes that when this has all blown over, they will be able to buy back at appropriate valuations.
(2) Stand fast and ride out the storm.
(3) Buy more.

The last two of these three choices require a great deal of discipline, patience, and, above all, experience.

Market uncertainty

Regular readers of my articles will know that in times of volatility, I like to go back and read articles and invested correspondence from other periods of market uncertainty. One of the best ways to prepare yourself for the future is to learn from the past. Learning from others' mistakes is a lot easier and a lot less painful than learning from your own mistakes. Even if you've lived through several bear markets, there's never any downside to going back and refreshing your memory of how to act in such environments.

The most prominent issue investors have to deal with right now is uncertainty. We don't know how big the coronavirus outbreak will ultimately become, or the impact it will have on the global economy. This means decision-making is even harder than usual.

At the beginning of January 2008, Howard Marks (Trades, Portfolio) penned a memo to clients of Oaktree capital entitled "Now What?" At the time, the financial crisis was only just starting to unfold, and investors were faced with the same sort of uncertain environment that grips the market today.

Marks' advice for investors at the beginning of 2008 was to look for excellent bargains, but be wary of further market declines.

"I do think we're in the early going: the pain of price declines hasn't been felt in full, and it's too soon to be aggressive," he wrote in his memo. He went on to add, "things are somewhat cheaper," but they're not yet on the "bargain counter." With that being the case, Marks wrote:

"I'd recommend that clients begin to explore possible areas for investment, identify competent managers and take modest action. But still cautiously, and committing a fraction of their reserves...

"Don't try to catch a falling knife." That bit of purported wisdom is being heard a lot nowadays. Like other adages, it can be entirely appropriate in some instances, while in others, it's nothing but an excuse for failing to think independently. Yes, it can be dangerous to jump in after the first price decline. But it's unprofessional to hang back and refuse to buy when asset prices have fallen greatly, just because it's less scary to "wait for the dust to settle." It's not easy to tell the difference, but that's our job. We've made a lot of money catching falling knives in the last two decades. Certainly, we'll never let that old saw deter us from taking action when our analysis tells us there are bargains to be had."

Don't time the market

If there is one thing that always remains true in investing, it is that trying to time the market is impossible. Therefore, as Marks's comments suggest, trying to do that will not yield desirable results.

Instead, investors should concentrate on looking for value and buy this value when it becomes attractively priced.

There's no point trying to time the market to pick the precise moment when any particular asset has reached its lowest point. The energy spent doing this would be better used for researching new opportunities.

As Marks says, he's made a considerable amount of money over the years catching falling knives. There's no reason why it'll be different this time around. Quality businesses will always come out on top.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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