In investing, it's not enough to just buy businesses that will do well - you also have to do so at a fair, or at a below-market, price.
Oaktree Capital founder Howard Marks (Trades, Portfolio) has made a name for himself by finding businesses that are perceived to be doing much worse than they actually are, and buying up their bonds. In a recent interview with CNBC, Marks voiced his opinion that it is hard to find well priced investment opportunities today.
Not an easy landscape to invest in
Marks began by pointing out that it's hard to find cheap stocks when asset prices are being bid up across the board by accommodative monetary policies:
"It's not easy to find opportunities today. We see interest rates being [close] to zero - the 2 year Treasury is 0.1% - that's pretty close to zero. And when rates on Treasuries go to zero, everything else looks very attractive, so stocks trade way up and bonds trade way up. And you get to a point where everything is selling at a fair price relative to the very low interest rates, but still at very low prospective returns, and that's where we are. What the low rates say is that it's fair to have low prospective returns - but it's not attractive".
So where are the opportunities today? Marks believes that they are to be found in the sectors and asset classes that have been out of favour over the last seven or eight months - real estate, office space, brick and mortar retailers and hotel and restaurant groups. In other words, there is a clear divide between the things that are expensive and are perceived to be successful - technology stocks, video conferencing companies, food delivery stocks - and the things that are cheap, out of favour and that have serious challenges to their business.
Marks believes that in the long term, money will be made in stocks that are perceived to be in decline, but that are able to pivot out of their present problems. With that being said, he also thinks that many of the big tech companies are quite likely to continue to compound shareholder capital. This seems uncontroversial - the problem here is in figuring out which ones are here to stay for a long time.
The standard argument for tech investing is that high valuations are justified by the promise of future earnings growth. There is no doubt that in some cases, this will prove to be a fair bargain. But, as many of us have come to realize this year, the future is much less predictable than we would like to think. For this reason, investing in expensive sectors does not feel like a particularly safe bet.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Aswath Damodaran: Are Markets Overvalued Right Now?
- Bill Ackman's Pershing Square Capital Books Gains With Chipotle and Starbucks
- Bill Ackman Thinks His Portfolio Is Well Positioned
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