Howard Marks: Markets Richly Valued but You Don't Have a Choice
Howard Marks gave his opinion on the markets and I thought it succinctly captured the current state quite nicely. His area of expertise is the credit market but given how stocks and bonds are all at high valuations, the views are applicable across the whole investment universe in my opinion.
He basically says the market is richly valued but does not think it is overvalued or in a bubble. He thinks high-yield spreads--this is the spread between junk bonds and treasuries--needs to be smaller for it to be a bubble, at least in bonds.
I also like how he thinks about the market and talks about how it is what it is and you don't get to pick how you want it to be. He states the market can be highly valued, fairly valued, or undervalued and right now it is highly valued--but you don't really pick how it is.
If you are a professional investor or money manager, you kind of have to be invested in something so it comes down to earning the best out of the various possibilities. It will be difficult to earn high returns and investors will be reluctant to give money to managers (maybe that's one reason passive indexing is taking off?).
The current situation poses a bigger dilemma for small investors (who have more discretion on where and when to invest) and those nearing retirement (who can't afford to lose money; even if markdowns are temporary, they don't have enough time to "make it back"). It's kind of scary to be investing right now because you are basically locking in low future long-term returns. And if you tried going for higher returns, there is high likelihood you are reaching into lower quality securities and possibly increasing risk.
I see numerous amateur investors, including so-called value investors, who appear to be taking on much higher risk in order to aim for higher returns--the worst thing is that I don't think they realize they are doing that. Examples include some who are investing in preferred shares, which are generally poor investments (neither safe as bonds nor provide potentially high returns like stocks) and are better suited for corporations (depending on country, it can be tax-advantageous for corporations to own preferred shares of other companies) and certain special investing styles/strategies. I also see some investing in large-cap or mega-cap companies at P/Es over 20 even though those companies have low growth prospects (since they are so large) and questionable capital allocation (so many are buying back shares at seemingly high valuations).
It's really tough to invest right now. I have been researching a bunch of stocks and hardly anything seems cheap; and the ones that do appear cheap are cyclicals vulnerable to economic recession.
He basically says the market is richly valued but does not think it is overvalued or in a bubble. He thinks high-yield spreads--this is the spread between junk bonds and treasuries--needs to be smaller for it to be a bubble, at least in bonds.
I also like how he thinks about the market and talks about how it is what it is and you don't get to pick how you want it to be. He states the market can be highly valued, fairly valued, or undervalued and right now it is highly valued--but you don't really pick how it is.
If you are a professional investor or money manager, you kind of have to be invested in something so it comes down to earning the best out of the various possibilities. It will be difficult to earn high returns and investors will be reluctant to give money to managers (maybe that's one reason passive indexing is taking off?).
The current situation poses a bigger dilemma for small investors (who have more discretion on where and when to invest) and those nearing retirement (who can't afford to lose money; even if markdowns are temporary, they don't have enough time to "make it back"). It's kind of scary to be investing right now because you are basically locking in low future long-term returns. And if you tried going for higher returns, there is high likelihood you are reaching into lower quality securities and possibly increasing risk.
I see numerous amateur investors, including so-called value investors, who appear to be taking on much higher risk in order to aim for higher returns--the worst thing is that I don't think they realize they are doing that. Examples include some who are investing in preferred shares, which are generally poor investments (neither safe as bonds nor provide potentially high returns like stocks) and are better suited for corporations (depending on country, it can be tax-advantageous for corporations to own preferred shares of other companies) and certain special investing styles/strategies. I also see some investing in large-cap or mega-cap companies at P/Es over 20 even though those companies have low growth prospects (since they are so large) and questionable capital allocation (so many are buying back shares at seemingly high valuations).
It's really tough to invest right now. I have been researching a bunch of stocks and hardly anything seems cheap; and the ones that do appear cheap are cyclicals vulnerable to economic recession.
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