About this video

• Video Title: Howard Marks Warning: Why I'm Getting Out Now
• Channel: My First Million
• Speakers: (The transcript does not explicitly name the speakers, but indicates two hosts discussing with Howard Marks.)
• Duration: 46:59

Overview

This video features an interview with legendary investor Howard Marks, who shares his insights on investment strategies, market cycles, and managing risk. He discusses the common approach of investing in S&P 500 index funds, the importance of emotional discipline in investing, and the historical patterns of market bubbles and crashes. Marks also touches on his personal investment philosophy, his career, and advice for listeners on avoiding common investor mistakes.

Key takeaways

• S&P 500 vs. Alternative Investments: While the S&P 500 offers a long-term average return of 10%, its annual returns are highly volatile. For investors seeking lower risk, bonds or other credit instruments can provide a more stable, albeit potentially lower, after-tax return.
• Emotional Investing: A core principle for successful investing is to manage emotions. Marks emphasizes that market risk stems from human behavior, and investors should be cautious when others are complacent and aggressive when others are fearful.
• Market Cycles and History: Understanding market cycles is crucial. Marks believes that history doesn't repeat but rhymes, and studying past speculative bubbles and panics can provide valuable lessons for navigating current market conditions.
• The "Fewer Losers" Strategy: Instead of aiming for a high number of winning investments, Marks advocates for a strategy focused on minimizing losses. This approach aims for consistent, above-average performance by avoiding significant downturns, rather than chasing exceptional gains.
• Avoiding Common Investor Mistakes: Key mistakes to avoid include believing one can accurately predict the future, assuming current market conditions will persist, and letting emotions dictate investment decisions.

Howard Marks points out that historically, when the S&P 500's Price-to-Earnings (P/E) ratio is high (specifically citing 23 as a historical benchmark), the annualized return over the subsequent 10 years tends to be between 2% and -2%. He shows a chart illustrating a negative correlation between the P/E ratio at purchase and the expected future return, meaning a higher P/E ratio implies a lower expected return.

According to Howard Marks, the riskiest thing in the world is the belief that there's no risk.

He explains that market risk doesn't originate from the companies, securities, or institutions themselves, but rather from the behavior of people. This human behavior, when it leads to imprudent actions or excessive optimism, unduly raises prices and creates precarious market conditions.

Howard Marks referenced several historical events to illustrate market bubbles and the importance of historical patterns:

• The Dot-com Bubble (circa 2000): He specifically mentioned his "bubble.com" memo from January 2, 2000, where he observed people quitting their jobs, becoming day traders, and companies with no profits or revenues being highly valued, sometimes with just an idea. He drew parallels to historical speculative behavior.
• The South Sea Bubble (1720): He discussed this historical event in Britain, where a company was granted a license to trade with the South Seas, leading to a major speculative bubble. He noted the parallels with the dot-com era, where people engaged in similar frenzied trading.
• The 2008 Financial Crisis: While not a bubble in the same vein as dot-com, he used the events surrounding the 2008 crisis, including the bankruptcy of Lehman Brothers, to discuss the importance of logic and acting decisively even when the future is uncertain and unprecedented.
• The Russian Ruble Devaluation, Southeast Asian Debt Crisis, and Meltdown of Long-Term Capital Management (1998): He brought these up as examples of crises where a portfolio manager expressed extreme pessimism, and Marks advised them to simply do their job, highlighting the need for action despite fear.