Howard Marks says he’s made five great market calls in his career. Here’s how he did it.

Our call of the day comes from another legend, Oaktree Capital Management’s co-founder and co-chairman Howard Marks, who offers insight about how he made his best ever calls — five in 50 years — along with a key mistake for investors to avoid.

First, the latter. In a new note to investors, Marks addresses whether it’s worse for investors to buy at the top or sell at the bottom. “If you buy at what later turns out to have been a market top, you’ll suffer a downward fluctuation,” he says. If the long-term thesis on that stock is intact, the next top will usually beat the last so investors will usually come out ahead, he adds.

“But if you sell at a market bottom, you render that downward fluctuation permanent, and even more important, you get off the escalator of a rising economy and rising markets that has made so many long-term investors rich. This is why I describe selling at the bottom as the cardinal sin of investing,” he says.

As for his five good calls, Marks says the first was in January 2000, when he warned of a tech bubble that was about to burst because, simply, “stock prices had become unsustainably high.” The bursting came later that year.

In July 2007, he warned clients that “skepticism, fear and risk aversion” were in short supply as many were stuck believing the housing market would only go up. Oaktree made big defensive moves in its investment portfolio ahead of the crash that would arrive eight months later.

Another call came in late 2008, when Oakmark decided to invest aggressively, ignoring the aversion to put money to work as fallout from Lehman’s bankruptcy swept across the markets. “There was too much fear and too little greed, too much pessimism and too little optimism, and too much risk aversion and too little risk tolerance,” he says.

He also warned clients of excessive negativity around stocks in 2012, which worked in favor of those willing to take a contrarian stance. “Once again excessively negative sentiment had resulted in major gains. It’s as simple as that,” he said. The S&P 500 returned 16.5% a year from 2012 to 2021.

His last big call came in March 2020, when Marks cautioned about emotional stock selling fueled by panic over the COVID-19 pandemic. Indeed, equities eventually bounced. “When the knee-jerk reaction of most investors is to stand pat or sell, a contrarian decision to buy might be well called for,” he said.

Marks says a pattern emerges for investors, the main one being that they shouldn’t try to make too many big calls too often.

“You have to pick your spots — as Warren Buffett puts it — wait for a fat pitch,” said the investor. “Most of the time, you have nothing to lose by abstaining from trying to adroitly get in and out of the markets: you merely participate in their long-term trends, and those have been very favorable.”

Investors need to remember that in extreme times, “the secret to making money lies in contrarianism and conformity,” said Marks. But to be a successful contrarianist, one needs to “understand (a) what the herd is doing, (b) why it’s doing it, (c) what’s wrong with it, and (d) what should be done instead and why.”

More advice? Realize that much of what happens in markets and economies is not part of a mechanical process but really down to the back and forth of investor emotions. “Take note of the swings and capitalize whenever possible,” he said. With that, resist one’s own emotionality and finally look out for “illogical propositions.” For example, a view that stocks are down so much no one wants to buy.

The markets

Stock futures
YM00,
+0.14%

ES00,
+0.19%

NQ00,
+0.26%
are nudging higher, as Treasury yields
TMUBMUSD10Y,
3.985%

TMUBMUSD02Y,
4.876%
head the other way, with the dollar
DXY,
-0.12%
weak — the pound
GBPUSD,
+0.37%
hit a 15-month high above $1.29 on surging wage growth– and oil prices
CL.1,
+0.59%
modestly up.

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