Howard Marks on Turnarounds

The only thing we can be sure of today is that stock prices, for example, are a lot lower in the absolute than they were two weeks ago. Buy, sell or hold? I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be. What I would do is figure out how much you’ll want to have invested by the time the bottom is reached – whenever that is – and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds. But no one can tell you this is the time to buy. Nobody knows. An Update – March 12 (to Oaktree clients only) A week and a half later, after we cancelled the Oaktree client conference and livestreamed instead, after Nancy and I had begun the social distancing that is still going on full-bore, and with the S&P 500 down 29%, I emphasized a contrarian theme, concluding that the damage done had created pronounced opportunities. As always, it’s important to be conscious of the investment environment and behave like a contrarian. For years, investors thought conditions were good, and we at Oaktree believed that consequently, prices were high and markets were characterized by risky behavior. That’s what made us cautious.

What I would do is figure out how much you’ll want to have invested by the time the bottom is reached – whenever that is – and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left (and hopefully the nerve) to buy more. That’s life for people who accept that they don’t know what the future holds. But no one can tell you this is the time to buy. Nobody knows.2020

Efforts to avoid the pain would cause problems like unrecognized bad loans to linger, delaying a solution. I’m no expert, but it makes sense to me that the quantum of pain on the way down has to at least approach the pleasure everyone felt during the boom. Other than just through the passage of time, the solution to the credit crunch – to the extent there is one – might be found in short-circuiting the deleveraging process described on pages 2 and 3. Thus, the authorities will try to get people to:  face the music by recognizing and writing down problem assets,  borrow money, even though the possible uses for it may seem ill-fated,  make loans, despite the scarcity of capital and the risk of loss, and  buy assets that are underpriced, even though prices seem only to go lower. Interest rate cuts have made borrowing cheaper, and there will be more. Loans to banks will give them money they can turn around and lend. The government’s decision to let Fannie Mae and Freddie Mac make bigger loans should make capital available in the starved housing market. If necessary, a government backstop of the agencies would do even more (but it also would introduce moral hazard). A holiday from capital requirements would allow regulated financial institutions to take writeoffs and clear their balance sheets without having to worry about falling below minimums. They might even try suspending mark-to-market accounting. © OAKTREE CAPITAL MANAGEMENT, L.P. ALL RIGHTS RESERVED.

© Oaktree Capital Management, L.P. All Rights Reserved should suffice. In good times the greatest rewards are likely to go for risk bearing rather than for caution. Thus, to beat the averages in good times, we’d probably need to accept above-average risk . . . risk that could turn around and bite us in a minute. There is a time when it’s essential that we beat the market, and that’s in bad times. Oaktree and its clients don’t want to succumb to market forces in bad times and participate fully in the losses. And because we don’t know when the bad years will come, we insist on investing defensively all of the time. Our goal is to generate performance that is average in good times (although we’ll accept more) and far above average in bad times. If in the long run we can accomplish this simple feat (which time has shown isn’t simple at all), we’ll end up with (a) above-market performance on average, (b) below-market volatility, (c) highly superior performance in the tough times, helping to combat people’s natural tendency to “throw in the towel” at the bottom, and thus (d) happy clients. We’ll settle for that combination. The most important thing is facing up to the limits on your knowledge of the macro- future. Investing means dealing with the future – anticipating future developments and buying assets that will do well if those developments occur. Thus it would be nice to be able to see into the future of economies and markets, and most investors act as if they can.

One potential buyer will come off the sidelines and place an order; one worker will be hired to fill that order; and one manufacturer will buy a new machine in anticipation of increased business. And one person will decide to buy a share in a business, or even try to start one. And that's what gets the up-leg going. It's all based on the ebb and flow of psychology. In my opinion, the key question is "How long will it take to restore confidence?" I don't claim to have the answer, but I think it may be a while. UStimulative ActionsU – The federal government has acted boldly to combat economic weakness, as it has been doing all year. All economic trends start at the margin, and that's where the government's actions can help. They can keep things from getting as bad as they otherwise would have gotten – but they cannot call the tune. Immediately providing a record amount of liquidity to the financial system prevented some problems that otherwise would have arisen given the damage to our infrastructure. Difficulties in the movement of funds and settlement of securities transactions were avoided, enabling the system to work and Americans to maintain faith in it. Prompt monetary action worked again to avert a potential crisis, as it did in 1987 and 1998. Fiscal policy, which relates to taxing and spending, also will have an impact. Government spending is stimulative, in that it uses money to purchase goods or to pay people who may turn around and spend it.