As someone who has more than 50 years of experience in the financial markets, Howard Marks (Trades, Portfolio) knows a thing or two about selloffs. Indeed, his value approach to credit investing is based around finding depressed assets that have sunk in price below their real value. A few days ago, Marks appeared on Bloomberg to discuss the current opportunities in the market in the wake of the coronavirus outbreak.
Time to go bargain hunting?
Marks was asked if now is a good time to go bargain hunting. While he has recently said that equities are expensive, and there are not many bargains available, there is a lot of risk-taking going on by investors trying to earn higher returns and that things were priced for perfection. Accordingly, he and his partners are cautious in deploying capital, as it is hard to buy things for less than they are worth.
A key problem with buying during an event like the current coronavirus outbreak is that it is not possible to know how much lower stocks will go. One thing investors do know, however, is that stocks are a lot cheaper today then they were two weeks ago:
âThere is panic [right now], and in times of chaos investors fail to make distinctions. Things tend to go down more than they should and less than they should. We have an opportunity to find the things that have gone down more than they should - itâs a better climate for getting bargains today than it was two months agoâ.
Of course, the issue with "buying the dip" is you donât know exactly when prices are going to bottom out, an issue that Marks addressed:
âThe bottom is the day before it starts going up. But how do you know? The bottom is only judged in retrospect. You never know when youâre at the bottom - but you might have the feeling that somethingâs cheap, and if itâs cheap you should buy it. If it goes down more, ie that wasnât the bottom, buy some more, and keep your nerveâ.
Marks said he and his partners were "certainly buying" in this environment. For distress investors, it makes sense to be more aggressive when the market is in distress. Shares of Warren Buffett (Trades, Portfolio)âs Berkshire Hathaway BRK.A BRK.B have fallen in lockstep with the broader market, despite the fact it has more than $120 billion in dry powder on its balance sheet that will surely be put to good use in the coming weeks.
Oil stocks look similarly undervalued. The price of oil was already trading near five-year lows even before the OPEC-Russia agreement fell apart, compounding the already significant problem of low demand caused by the virus. The thing is, neither party can afford to keep prices this low for long, as both Russia and Saudi Arabiaâs break-even points are higher than the current oil price. While it's impossible to know when the game of chicken might end, itâs also clear that in the long run, the current situation is unsustainable. Dividend yields for the energy sector as a whole have risen above 5%, and many blue-chip names have yields in excess of 7%. It might be time to follow Marksâ lead and go bargain hunting.
Disclosure: The author owns no stocks mentioned.
Read more here:
- More Investing Advice From 'Market Wizards'
- What Value Investors Can Learn From Jack Schwagerâs âMarket Wizardsâ
- 2 Important Investing Lessons From Howard Marks
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