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Stepan Lavrouk
Stepan Lavrouk
Articles (422) 

Howard Marks: How to Learn From History

Investors can learn a lot by examining past market crashes

March 18, 2020

I’m a believer in the idea that successful investors need to understand and study history. The Mark Twain quote that “history does not repeat itself, but it does rhyme” is definitely overused by financial commentators, but I think that just speaks to its enduring wisdom. Things will probably be different in the future, but not as much as you might expect.

I recently came across part of an excellent interview Oaktree Capital's Howard Marks (Trades, Portfolio) did with Michael Milken, in which he explains just what investors should do to learn from previous market crashes. I thought it was particularly appropriate given the current market panic.

Remember, this too will pass

Marks pointed out there were very few people who worked in the investment business both through the bear market of 1974 and the financial crisis of 2008 - few people work for more than 40 years in markets. This meant that when the crisis rolled around, not many people were prepared for the selloffs that ensued. Sure, there were some people who were around in 1987, but that was a crash that did not have far-reaching consequences for the wider economy.

“The overinvestment on high leverage in subprime products in 2005-06 caused the loss of some of the most important investment banks, and people started talking about the end of the world - security prices melted down, loan prices melted down - and activity froze, because everybody was uncertain: 'Will there be a tomorrow? If I buy anything today, will there be a market tomorrow, will it have any value tomorrow?' And liquidity dried up, and everyone was talking about the end of the world.”

Marks then quoted President Franklin D. Roosevelt, saying that “the only thing we have to fear is fear itself.” To him, in 2008, investors were not afraid of anything specific, they were afraid because they were surrounded by fear. He believes that if you understand cycles and know history, then you knew that this probably wasn’t the end of the world. After Lehman Brothers declared bankruptcy, Marks figured the financial world would not end, and even if it did end, then “it kind of doesn’t matter”.

Today, the memory of the financial crisis is still quite fresh in the minds of many investors as they watch the S&P 500 go down every other day. It’s understandable that many feel fear - we are only human, after all. But like the financial crisis of 2008, the coronavirus crisis of 2020 will have one of two outcomes: either it will lead to the end of the world, or it will not. In the former case, I would posit that your retirement portfolio will be the least of your worries. But, like Marks, I am optimistic this will not be the end of the world. And if it isn’t, then maybe it is time to think about putting your cash to work. For the last year or so, I have written a lot about how valuations are at unprecedentedly high levels. Now that they are finally coming down, rational investors have the opportunity to make some smart moves.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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