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Rupert Hargreaves
Rupert Hargreaves
Articles (1121)  | Author's Website |

We Might Not Be at the Bottom, but There Are Bargains

Thoughts from Howard Marks in the current market

March 25, 2020

Towards the end of last week, Howard Marks (Trades, Portfolio) sent out a special "memo" to the clients of Oaktree Capital.

Originally confidential, this note has since been made public, after giving the firm's clients a few days to digest its contents.

Marks'  memo contains some some interesting predictions and insights into the state of the market at present. These insights can be interpreted in two ways: either we are at the bottom of the market, or we're not. It is impossible to tell, but wherever we are in terms of market sentiment, Marks makes it clear that he thinks there are bargains to be had right now.

After outlining the medical challenges the world faces in its fight against Covid-19, Marks goes on to cover the fiscal response that policymakers had organized at the time. The federal government has since announced it has reached an agreement on a $2 trillion stimulus program for taxpayers.

The third section of Marks' letter is devoted to the market response. We should keep in mind that, at this stage, the message is a few days out of date. Nonetheless, even though the situation is changing daily, the experienced investor's insights into the market are just as relevant as they were at the end of last week.

Marks notes that substantial rallies have quickly followed significant market declines over the past few weeks.

"What this tells me," he wrote, "is that optimism still hasn't been entirely eradicated and replaced by capitulation. Typically, the bottom is reached on when optimism is nowhere to be found."

However, as the founder of Oaktree went on to explain, other indicators point to a potential bottom. There has been a "rush to cash," for example. This does not tell us anything about market fundamentals, but according to Marks:

"Outlook for eventual market performance is improved:

  1. The more people have sold
  2. The less they have left to sell, and
  3. The more cash they with which to buy when they turn less pessimistic."

Marks also used the letter to highlight the performance of gold, risk parity funds, Bitcoin and "the world's greatest algorithmic fund" over the past few weeks. All of these assets have lost money, which shows "there's no such thing in the investment world as a sure thing, magic potion or silver bullet."

Wrapping up his memo, Marks inserted a quote from one of Oaktree's debt traders, who was commenting on the recent trading environment:

"One of the brokers said it was flat-out mayhem... Besides immediate needs, investors sold to prepare for quarter-end redemptions, FX movements, and to fund margin calls...This ultimately ended up being the first real day of panic we have seen in a long time."

This sentiment, Marks declares, "fuels the emotional selling that allows us to access the greatest bargains."

Put simply, at this point, investors are in the dark about what the future holds for the economy and financial markets. However, what we do know is that asset holders' ability to remain cool has been breaking down, while selling has been picking up.

Moreover, Marks declares that "the conditions that make bargains available certainly are materializing. No one can argue that you should spend all your money today... but equally, no one can argue that you shouldn't spend any."

Ultimately, if you want to "garner potential gains and don't mind mark-to-market losses," now could be the time to start investing, according to Marks. On the other hand, if you're "able to live with missing opportunities for profit" and care about protecting against markdowns, the "less you should invest."

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.

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