No one knows for a fact exactly when the market will hit highs or lows, but Warren Buffett’s favorite expert, Oaktree Capital’s Howard Marks, says mastering the market cycle is the best way to make sure the odds are in your favor.
When Buffett says if he gets any mail from Marks, it’s always the first he reads, investors take notice. And Marks recently wrote “Mastering the Market Cycle: Getting the Odds on Your Side,” a book with market cycle strategies hailed by legendary investors like Buffett, Burton Malkiel, Ray Dalio and other market experts.
Per a recent article highlighting the book by the Chicago Tribune:
What most impressed these reviewers is Marks’ insight into understanding market trends. If you can predict market trends better, your investment results will improve. Marks argues that it is very important to be able to predict when to be defensive and when to be aggressive. He believes this instinct is more important than the selection of equities in your portfolio. If you can do a better job of predicting whether you are still in a bull market, despite small corrections, or in a bear market, in which case you should be defensive, and maintain a larger cash position, then your long-term performance will be better.
During a recent interview, Marks said he no longer believes we are in an “optimistic phase of the market,” but he’s unsure if we’re in another “wobble” or if it’s the start of a downturn.
Marks did however say it’s time for investors to be defensive — but not 100 percent.
- It’s time for caution on the market
- Worry more about losing money than missing opportunities
- Consider mutual funds that have outperformed other funds in down markets
In the book, Marks points out the importance of managing risk. He believes that the main determinant of risk is where you stand in the cycle. His graphs illustrate that as we rise in the cycle — which means that prices are higher relative to values, in general — the probability distribution of future returns shifts, meaning it is easier to lose money. He also points out that if you buy when we are low in the cycle — which means the prices of stocks are low in comparison to intrinsic value — then it is harder to lose and expected returns are higher.
Marks discusses the cycle we are in by examining a number of factors, such as how we react to news and how investors obsess over positives and ignore negatives.
He believes that “keeping your emotions under control” is crucial. He goes on to say that all the emotional cues in the investing environment can cause you to do the wrong thing: to buy when things are going well and to sell when things are going poorly, when prices are lower.
A good example is the bitcoin market. When the prices went sky high, many new investors jumped in at exactly the wrong time — and lost a considerable amount of money.
I recommend the book highly. Marks has succeeded in managing mutual funds because he understands market cycles. You will become a more successful investor if you learn how to understand these cycles better.
Editor’s note: Continue to scroll down to read more on Howard Marks and investment tips from Warren Buffett by Money & Markets.