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Stepan Lavrouk
Stepan Lavrouk
Articles (318) 

Howard Marks: This Behavior Characterizes Almost Every Bubble

The veteran value investor offers some advice on spotting overvaluation

November 08, 2019

Value investor Howard Marks (Trades, Portfolio) has worked in the market for more than half a century, and at this point has seen it all. As someone who primarily deals in distressed debt, rather than equities, he has been able to view speculative activity in stocks from a somewhat detached vantage point - although there have, of course, been many credit bubbles in the last 50 years too! In a Nov. 7 interview with Bloomberg, Marks talked about the behavior that, in his opinion, characterizes almost all bubbles..

How to spot a bubble

Marks said that the difficulty with bubbles isn’t in seeing them, it’s figuring out when they might pop. Back in December 2017, the rapid increase in the price of bitcoin led almost every rational observer to conclude the cryptocurrency market was experiencing a bubble, but that didn’t stop many shortsellers from losing a lot of money betting against the rise. I personally recall a trader saying that bitcoin wouldn’t break the $10,000 level - he was stopped out of his trade the next day.

According to the renowned leader of Oaktree Capital, all bubbles are characterized by a belief that the asset being inflated is so good that any price is too low:

“I don’t think it is terribly hard to spot a bubble. There are certain forms of behavior which characterize bubbles. Now, if you correctly say we’re in a bubble today, that doesn’t mean it’s going to get punctured tomorrow because things can inflate further. I’ve been doing this now 50 years, and I’ve lived through a few bubbles, and I’ve seen some bubble behavior. Almost every bubble is characterized by people saying about a certain asset, or a certain asset class 'there’s no price too high.' I saw it in the ‘Nifty Fifty,’ 50 years ago, and I saw it in the techs 20 years ago. 'For XYZ, the merits are so strong that there’s no price too high.'"

Are we in a bubble now?

Given how far this latest bull cycle has extended, asset prices across the board have been bid up significantly. So are we in a bubble right now? Marks doesn’t think so:

“After 10 or 11 years of economic and market gains, you can’t say we’re at the beginning. You can’t say that we have bargain-priced assets that are languishing. The truth is, especially with low interest rates, institutional investors who need significant returns are pursuing risk-assets aggressively, and alternative assets - they have to. So I think that most assets have been bid up and are selling at prices above their intrinsic values. Most markets are full of capital and somewhat crowded. I don’t think we’re in a bubble - conditions aren’t crazy - but I do think we’re in the advanced stages of a very positive cycle.”

In other words, while the market is expensive right now, that is not the same as being in a full-blown bubble. That doesn’t mean the trend of institutional investors being forced to pursue riskier assets is not a worrying one. At a certain point, something will give.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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