TOPIC • 23 CLAIMS
Cycles
Where in a cycle a market sits, and what that implies about forward returns.
HOWARD MARKS/
He splits bubbles into two kinds, which is the memo’s main contribution: inflection bubbles, built on technology that ultimately delivers, versus mean-reversion bubbles, financial fads that leave nothing behind.
IS IT A BUBBLE? →HOWARD MARKS/
He grounds the downside in what actually happened to earlier inflection bubbles, where the technology survived and the shareholders did not.
- RCA lost 97% after 1929
- aviation stocks fell 96% by 1932
HOWARD MARKS/
His central distinction is between something hardwired into the financial system, as counterparty risk was in the Global Financial Crisis, and a recurring behavioral failure — these clusters are the second, systematic rather than systemic.
COCKROACHES IN THE COAL MINE →HOWARD MARKS/
He reads the sell-off as the usual overshoot from flawless to hopeless, and says he does not think it is necessarily the beginning of a trend, and sets it against the base rate of default he has watched for decades.
- the stock prices of some prominent alternative asset managers were down 5-7% on October 16
- more than 2% of all high yield bonds by value default in a typical year, across 47 years in the market
HOWARD MARKS/
He returns to the chapter of his own book he had not planned to write: prices move far more than intrinsic values because attitudes toward risk are so volatile, so standards fall in good times and are raised only after the losses arrive.
COCKROACHES IN THE COAL MINE →HOWARD MARKS/
He revives Galbraith’s "bezzle" to explain why fraud is cyclical — plentiful money and relaxed diligence raise the rate of embezzlement while lowering the rate of discovery — and says it should not surprise anyone if the years just past turn out to have produced a crop of frauds not yet discovered.
- the last sixteen years of largely uninterrupted economic growth, rising markets, and profitable risk taking
HOWARD MARKS/
The consultant’s frame he found most useful sets a plan’s financial ability to bear risk against its willingness to bear it; the cell he dwells on is low ability with high willingness, labeled naive, which he thinks is a generous word for taking risk you might not survive. He reads his own decision at Penn through it: with the endowment lagging in 2000 after being underweight growth, tech, venture and buyouts through the 1990s, he argued against turning aggressive, because underperforming from an elevated market level was the smaller risk set against joining a bust having already missed the boom.
A LOOK UNDER THE HOOD →HOWARD MARKS/
The board he watched accepts that its conservatism will cost it in strong markets and prefers that to the alternative — and accepts that real diversification means there may well be laggards in the portfolio at all times.
- 100% of board members agreed — half strongly — that exposure to risk is necessary if the plan is to meet its objectives
HOWARD MARKS/
He is most struck that beating peers came last among the plan’s objectives, and argues that a defined benefit plan succeeds only by paying benefits at minimum cost to the sponsor — while a plan that does pay them has not thereby proved skill, since the environment that happened to unfold may have carried it.
- outperforming peers ranked fifth of five possible objectives
- the Sharpe ratio ranked last among six possible performance metrics
HOWARD MARKS/
His argument on volatility is that it is not the risk long-term investors should care about — permanent loss is — and that the reasons people fear price movement are situational, career-related and emotional. Since the same holding is risky for a daily-priced fund and not for a sovereign wealth fund, the risk sits in the investor’s circumstances rather than the asset; a public bond and a private loan from the same issuer carry identical default risk and only one marks to market.
- Buffett would rather earn a lumpy 15% return than a smooth 12%
HOWARD MARKS/
He lays out the paradox at the center of performance assessment: the actuarial return is the only thing that matters in the long run and tells you nothing in any single year, so the short-run yardstick has to be a relative one — yet matching peers in a frothy market may only prove you were as imprudent as they were, and the policy portfolio lets whoever set it off the hook.
- a 6¼% actuarial assumption
HOWARD MARKS/
His answer on the assessment period is that no fixed number of years will do — it has to span both good times and bad, because a stretch of uninterrupted good years hands the top marks to the most risk-prone portfolios and cannot distinguish skill from a standing bias.
- the last 16 years, save for a few relatively short dips, have been good times
HOWARD MARKS/
The collection is organized around two claims about his own work: that a handful of principles have not changed in 35 years, and that the events worth chronicling across three decades were the dot-com bubble, the Global Financial Crisis and the 2022 shift in rate policy.
- 35 years of memos
- the first, The Route to Performance, dated October 12, 1990
HOWARD MARKS/
One of the threads he traces furthest back is the pendulum — the swing between optimism and pessimism, greed and fear, risk tolerance and risk aversion, which he calls one of the most dependable features of the investment world, and which drives short-term prices from hopeless to flawless rather than any weighing of merit. Calling the market is not his practice, and the calls he does count were each made at one of those extremes, on a reading of psychology rather than of data.
- five main market calls, revisited in Taking the Temperature
HOWARD MARKS/
He roots value in earning power — the money an asset makes while you own and operate it, which means anything with no cash flow and none in prospect cannot be valued objectively at all — and treats price not as a calculation but as the outcome of a daily tug-of-war between optimists and pessimists. Since fundamentals barely move month to month while prices move constantly, short-run returns come almost entirely from changes in what people are willing to pay.
THE CALCULUS OF VALUE →HOWARD MARKS/
The conclusion is a posture rather than a forecast: overvaluation can never be proved and implies nothing about timing, but he grades defensiveness on a six-step scale running from stopping buying to going short, says it is time for the second step — trimming aggressive holdings in favor of defensive ones — and holds that reaching the three most extreme steps would take a degree of certainty he calls essentially impossible.
- the last sustained market correction ended in early 2009, so no one under about 35 has experienced a prolonged bear market
HOWARD MARKS/
He restates his 2008 logic: positioning for catastrophe is ruinous when catastrophe does not arrive, and usually it does not.
- $10 billion sitting uninvested in Opportunities Fund VIIb at the time
HOWARD MARKS/
A forecast needs a sense of how likely it is right; and declining to act is itself an act, to be scrutinized like any change.
NOBODY KNOWS (YET AGAIN) →HOWARD MARKS/
Buying at the all-time tight just before the crisis still worked over ten years, so a narrow entry spread is not destiny.
- the all-time tight of 241 bps on June 1, 2007
- high yield trailed Treasurys by 11.3 percentage points in the first year
- then beat them by about 3 points a year over the following 10 and 15 years
HOWARD MARKS/
Two straight 20% years have now happened five times, and three of the earlier four saw declines after — a small sample, he notes.
- the S&P 500 up 26% in 2023 and 25% in 2024, its best two years since 1997-98
- Bitcoin up 465% in the last two years
HOWARD MARKS/
One decision sets all the others — the offense-defense balance — which can be held constant or shifted as the market swings.
RUMINATING ON ASSET ALLOCATION →HOWARD MARKS/
The textbook risk-return line misleads by its linearity; his version widens the range of outcomes and deepens the bad tail.
RUMINATING ON ASSET ALLOCATION →HOWARD MARKS/
He counts only three regime shifts worth the name across a 53-year career, which is what gives the term its weight: the case for buying high yield at all, the 40-year rate decline Volcker set off, and the reversal he was writing into.
SEA CHANGE →
Claims are restated; figures are the authors' own. Each links to the document it came from, which in turn links to the original in full.