In one of his famous “memos” released earlier this week, Howard Marks (Trades, Portfolio), co-chairman of multibillion-dollar asset management firm Oaktree Capital, told investors that the time for playing defense is over.
The paper, titled “Calibrating,” starts with a discussion and breakdown of the four memos he wrote in March that outlined his views on the coronavirus pandemic. While he told investors a few months ago to use extreme caution, Marks now says a number of conditions have changed and that more risk-taking is necessary. He wrote:
“Given these new conditions, I no longer feel defense should be favored. Yes, the fundamentals have deteriorated and may deteriorate further, and the disease makes for risk (remember, I’m the one who leans toward the negative case). But there’s a big difference between a market where no one can find a flaw and one where people have given up on risk-taking. And there’s a big difference between one that’s priced for perfection and one that allows for bad outcomes.”
Marks continued that “cautious positioning” has served its purpose in recent years as investors who favored defense over offense have posted smaller losses this year and are able to spend more time looking for bargains.
“Thus, I feel it’s a time when previously cautious investors can reduce their overemphasis on defense and begin to move toward a more neutral position or even toward offense (depending on how sure they want to be of grasping early opportunities),” he wrote. “I’m not saying the outlook is positive. I’m saying conditions have changed such that caution is no longer as imperative.”
Marks concluded that while he is not calling for a market bottom now, it isn’t prudent to wait for sure signs of an end to the selloff that brought Wall Street into a bear market either.
“The bottom line for me is that I’m not at all troubled saying (a) markets may well be considerably lower sometime in the coming months and (b) we’re buying today when we find good value,” he wrote. “I don’t find these statements inconsistent.”
Read Marks’ full memo here.
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