Howard Marks On Mastering Market Cycles

Nothing is permanent. As economic expansions grow longer—there have been only three recessions in the last 35 years—it becomes easier for investors to be seduced by the notion that the current cycle could continue in perpetuity.

That inconvenient reality was a primary reason that Oaktree Capital co-founder and co-chairman Howard Marks decided to write his latest book, Mastering The Market Cycle.

Long before he became the world’s largest distressed debt investor, Marks learned a few valuable lessons at the outset of his career. As a Citibank office equipment analyst straight out of the University of Chicago Booth School of Business, he was assigned to follow some of the great growth stocks of the 1960s’ Go-Go era. Companies like Xerox were considered one-decision stocks, the darlings of Wall Street’s Nifty Fifty. Then in the 1973-1974 bear market, many of these companies saw their market capitalization vaporized.

In 1978, his superiors asked Marks to move to Los Angeles where “there was this guy named Milken” and help the giant bank develop a presence in the emerging high-yield bond market. The contrast between Nifty Fifty companies and junk bonds left an indelible impression on Marks—the chasm between good and bad assets and their asset prices is vast. Equities of excellent companies could be bad investments and bonds of bad companies selling at big discounts could generate handsome returns.

Over the years, Marks’s insights have attracted a widespread following from luminaries like Warren Buffett, who has said Marks' memos are the first thing he opens when they appear in his in-box. His newly published book takes a deep dive in the different cycles that influence financial markets. Examining cycles ranging from the economy and the stock market to real estate, credit, distressed credit and psychology, the man considered the world’s biggest distressed debt investor explores each of them, both in isolation and as part of the larger economic backdrop.

Most of these cycles are deeply interconnected. The business cycle and consumer psychology, or the national mood, may be the most closely monitored by the public at large. When these two cycles are combined, the equity market becomes something of a proxy for how they are interacting.

It’s the distressed credit market where Marks is himself an acknowledged master. Oaktree Capital, which he and several other alumni of Trust Company of the West (TCW) established in 1995, now manages about $100 billion, most of it in distressed debt and other related sectors.

The “credit cycle in a micro sense is the most important,” he says. “No matter what else is going on in the world, when you flip the switch [off on credit], things change.”

Conditions in the credit market triggered the 2008 financial crisis and exacerbated the Great Recession. But the government “pried open the credit window” and Oaktree suffered very few bankruptcies, despite its strategy of investing in highly leveraged companies. Fifteen weeks following the Lehman Brothers bankruptcy, “we had the nerve to spend and had tons of capital sitting on the shelf.”