Investors need to be prepared for the market situation to get much worse before it gets better - that's the main takeaway from Howard Marks (Trades, Portfolio)' latest memo to clients of Oaktree Capital Management.
Marks' memo, titled "Which Way Now," strikes a much more downbeat tone than his previous letter. Indeed, in his previous letter, he said that there were opportunities available for investors after recent market declines.
However, this time around, he warned of further declines and the possibility of significant negative repercussions from a prolonged economic shutdown and period of enforced social isolation.
There are many more risk factors present today that investors didn't have to worry about in the financial crisis. According to the seasoned value investor:
"In the Global financial crisis, I worried about a downward cascade of financial news, and about the implications for the economy of serial bankruptcies among financial institutions. But everyday life was unchanged from what it had been, and there was no obvious threat to life and limb.
Today the range of negative outcome seems much wider...Social isolation, disease and death, economic contraction, enormous reliance on government action, and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go."
Marks' reaction to all of the above, as he went on to explain, is to expect asset prices to decline further.
After spending virtually all of his 10-page memo explaining the risks investors now face, as well as the potential economic repercussions, Marks' best advice appears at the end of his letter.
While we do not know what the future holds for stocks, the global economy and society as a whole, at some point in the future, this will all be over:
"The most important thing is to be ready to respond to and take advantage of declines.
The world will be back to normal someday, although today it seems unlikely to end up unchanged. What matters most -- in terms of both health and finances -- is how we do in the interim."
This reminds me of a passage from Warren Buffett (Trades, Portfolio)'s 2008 letter to investors of Berkshire Hathaway BRK.A BRK.B:
"Never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years. America has had no shortage of challenges. Without fail, however, we've overcome them."
The world has always faced significant challenges, but in every case, the economy has eventually come back stronger. It is likely to be the same this time around.
While we do not know how long the current crisis will last, it will end. When it does, there will be plenty of opportunities. Investors need to prepare themselves to take advantage of these opportunities when they emerge.
Surviving the crisis is the first challenge. For advice on this, we can look to Charlie Munger (Trades, Portfolio). Munger has said several times in the past that he tries to be consistently "not stupid."
That's something to keep in mind over the next few weeks and months. Making knee-jerk investment decisions on limited data is never sensible. It makes even less sense when we don't know what the future holds for the global economy. Doing so could ruin your chances of a comeback when the recovery eventually comes.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Low Risk and High Uncertainty Bets in Uncertain Times
- What Warren Buffett's Irish Bank Investments Can Teach Us
- Investing in a Crisis: 5 Tips From Charlie Munger
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
Also check out:
