Over the course of his long career, value investor Howard Marks (Trades, Portfolio) has seen it all. Marks, who began his career as an analyst with Citibank, founded Oaktree Capital in 1995. Oaktree invests primarily in high-yield bonds and distressed credit and boasts assets under management of $125 billion, making it one of the largest credit investors in the world. So it should go without saying that he knows a little something about finding underpriced securities. In an interview with Investec, he talked at length about how he makes the decision about whether or not to commit capital to an investment.
It's all about calibration
Marks quipped that whenever he goes on television, the interviewer or host always tries to pin him down to making a binary judgement call - is it time to buy or sell stocks today? Naturally, it's never that easy and the question is never black and white. There are different market environments - in some, bargains will be plentiful and in others, they will be scarce:
"What does it mean for the market to be precarious? This occurs when investors are optimistic, and there's not much risk aversion and there's a lot of money and a lot of eagerness to put it to work. When these things are true, it's likely that asset prices will be high relative to asset values. That's really the key determinant - where does the price of what you're considering holding stand, relative to its intrinsic value."
Of course, most investors shouldn't be trading in and out of the market in the way that an institutional investor like Oaktree does, but the basic point that Marks is making here is applicable to capital allocators of all stripes. If you are an average investor who wants to let their money work for them (and let's face it, in today's interest rate environment, you are unlikely to get enough from a savings account at a bank), the best thing that you can do is invest when markets are at historically low levels.
What does this mean in practical terms? It means that if you contribute a certain amount of money to your IRA (or other type of investment account), don't be in a rush to deploy it straight away. It's important to not give into the "fear of missing out" that can suck in so many people while valuations are rising. As Marks says, this tends to happen when other market participants are overly optimistic. Conversely, the best bargains are available when market participants are overly pessimistic. You just need to have the confidence and foresight to see past the dark clouds and trust in your own analysis.
Read more here:
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- Seth Klarman Explains Why Holding Cash Is Good
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