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I'm very pleased to say that joining us on this program, Howard Mark joins us for more. Howard, Welcome to the program, Sir. I want to start. We want to start with a central question that you pose yourself, why asset price is so strong in the face of what you view as negative developments? Howard, can you share your thoughts with us?
I'm glad to be with you this morning.
Of course, as the quote you just put on the screen indicates, you know, this is all just feeling and.
An opinion.
None of this is factual, but it does seem that stocks are expensive relative to what I call fundamentals or you might call reality. And you know, the outstanding reason, I think is that you know, there hasn't been a serious market correction in sixteen years, so people get out of the habit of thinking about market corrections. The biggest single mistake I've been thinking a lot what is the biggest single.
Mistake investors make?
And I've concluded that it is that they conclude that the way things are today is the way it will always be, and the things that have been happening will always continue to happen. Whereas reversion to the mean is much more likely. So I just think that it's worked very well. Being an equity investor has worked very well. Doing it on leverage has worked even better. Concentrating in a few stocks has gone very well. Investors are by
nature optimistic, and that optimism dies hard. And you know, I just think that the fluctuations of the market are mostly related to psychological fluctuations, and people go from neutrality to liking stocks, to liking them a lot, to liking them a ton, to liking them too much, and that's the continuation that creates.
Bubbles.
And you know, we're we probably in the early days of that when.
You talk about liking Howard, maybe liking these assets a little bit too much. Can you put into perspective the last time you saw this type of environment that left you thinking, maybe some of the opportunities aren't as great when it comes to buying some of these assets at the current valuations. Is there another time that this sort of reminds you of in any capacity?
Well, I guess, Lisa, the last time was probably around a ninety ninety seven when the market was kind of falling in love with tech stocks, and you know, the market was rocking the long People were not worried about the level of valuations. People are extremely optimistic about the opportunities for the Internet. And you know, Alan Greenspan famously cautioned that there might be irrational exuberance.
Now I picked ninety seven.
Because even though green Span was concerned about exuberance, the market went on to rise for another two and a half to three years. So remember I said, we're in the early days. We're not at a critical at a nutty.
Valuation.
I'm certainly not ringing the alarm bells, as the quote that you had on the screen said, no reason to think there'll be a correction soon. But the point is that things are expensive.
They may go on, they may go on to become.
More expensive, but the fact that they're expensive it should not be lost.
And Howard, I think a lot of people point to, in terms of the echoes of the late nineties, the tech sector of the market as being the most overvalued. What I thought was so interesting about your memo is that that wasn't your take, that that wasn't your bigger concern in the market at a time when people are counting on a certain robustness of growth and a certain kind of inflationary backdrop. Why is it that tech Is it the focus of your concern this time around?
A tech contributes to the aura that surrounds the markets, And a lot of people have been citing the fact that this so called magnificent seven stocks I, Amazon, and Alphabet have been contributing disproportionally to the rise, and they responsible for more than seven stocks. Their dollar gains have been responsible for more than half of all the gains in the five hundred stocks in the S and P seven out of five hundred.
But they're great companies, they're at high valuation. I think that I can't say those valuations are excessive.
But the other four hundred and ninety three stocks are quite highly valued, not as highly as the magniz as seven, but nobody says they're the same quality companies, quite.
Highly valued relative to history.
And it is the the fact that high valuations are being applied to more average companies that I think is more alarming than the fact that exceptional valuations are being applied to exceptional companies.
How there's a quote you use in this memo. I enjoyed this quote. He said, he who knows only his side his own side of the case knows little of that. And then I worked through the rest of the memo and there was a conclusion there about credit. And I just wonder whether you focus on equities in this note offers you a credit perspective on how much value is offered in credit right now?
Well, you know, it's it's as John Stewart Mill said, and I believe it was eighteen fifty nine, you have to know all the sides of the story to understand whether your side holds water. And I cite the bull case there for why the market isn't overvalued. I think that's that's part of the job. But as you say, you know, my conclusion is that it's it's not. As I said before, I'm not raising an alarm bell, but I do think it's time for some caution. And you know, this is a little bit of what we call on
Wall Street talking your own book. But you know what I do, what oak Tree does, is mostly something called credit buying the debts of companies, and debt is inherently more defensive than equities. And you have a promise of payment, you know what your return will be if they pay interest.
In principle has promised, and most of the time they do. So.
I just think that this is a time to put a little more defense into your portfolio, and investing in credit as opposed to equities is one way to do it.
Is it still defensive?
Howard?
If you're looking at credit spreads the tightest since nineteen ninety eight, I'm looking at investment grade credit spreads, you're thought to be a more defensive part of the credit market. I mean, is that sort of question what it means for it to be defensive where the evaluations are high there as well?
Well?
First of all, it's what you see debt or fixed income or bonds or what I call credit, all different words for the same thing. Is different in nature from equities because you do have a promised contractual rate of return. And you can say that the promised contractual return isn't as high as it has been historically, or the increment that it provides over treasuries to compensate for the credit risk isn't it as higher as high as it has
been historically. But you can't say that they don't promise seven and a half percent, and a promise of seven and a half percent, you're going to pay for some fees here once in a while, going to encourage encounter a credit loss. I think it's highly likely to provide let's say, a return in the sixties over the next ten years, a contractual guarantee approaching something in the sixes over the next ten years. Is I think more defensive than being in the stock market at these elevated valuations.
That's the point.
And you know you just said tighter than they have been since ninety eight. And if you looked at where they were in ninety eight, and you hypothesize that put an investment in a portfolio hyio bonds in ninety eight, how did you do over the last seventeen years, twenty seven years?
And I think you did fine. That's my point. It has a high.
Probability of doing fine, whereas stocks, if the valuations are elevated, have some reasonable probability of doing less than fine.
Is the United States still the focal point for defensive investments?
You know?
I think I said in the memo that I think the US is still the best place in the world to invest. The things that make the US exceptional the spirit of innovation, the free markets, the rule of law, the capital markets, the growth and dynamism, the great companies.
These things are still all true.
But as I said in the memo, we're the best place, we may be a little less best than we used to be. The world is thinking that maybe the US is a little best less best than it used to be, and I can't argue against that. I mean, fundamentally, as an investment environment, I think things are a little bit deteriorated.
Is there a place that you see has more opportunities right now just based on valuations and based on maybe affirming up of contract law and other aspects that really lead to a robust investment backdrop.
Well, as I say, I still think we're the best place in the world to invest.
And you know, we're a great car at a high price.
You can get some cars around the world that are not as great as ours cheaper.
Which do you prefer.
Less good at a cheaper price or better at a more expensive price.
So you know, other parts of the world do not have our.
Dynamism, and lots of places in the world are overregulated compared to the United States, But if they're on sale relative to the US, it's not unreasonable to want to have some representation there.
Howard wonderful to get your thoughts. As always so you've been generous with your time. We appreciate it. Thank you very much, the legendary Howard Marks there of O Tree Capital Management. Following the release of his latest memo in the last week or so,