market folly

Howard Marks of Oaktree Capital is out with a new memo entitled, "Deja Vu All Over Again." In it, he talks about how history often repeats itself and how investors can learn and take advantage of such situations. Additionally, he focuses on "the herd" and how they're often wrong at extremes.

At the heart of the matter, Marks' latest memo centers on contrarian signals. He references "The Death of Equities," a BusinessWeek magazine article from August, 1979. At the time, the article was supposed to signal a 'tectonic shift' in investing.

The irony, of course, is that the negative article actually signaled the beginning of the greatest bull market in history. Investors who utilize contrarian signals will of course point to that as a prime example of the media highlighting extreme negative sentiment that in actuality represents an opportunity.

Marks writes,

"Likewise, in this case, according to the writer, it will take a bull market to attract investor interest and confidence. That sounds reasonable. But isn't investor interest and confidence a prerequisite for a bull market? Without it, how can a bull market get started?

The answer is that when prices are low enough, stocks can begin to rise without help from a full-fledged bull market, just as when they're high enough, stock prices can collapse under their own weight.

The bottom line here is simple, and I'm thoroughly convinced of it: Common sense isn't common. The crowd is invariably wrong at the extremes. In the investing world, everything that's intuitively obvious is questionable and everything that's important is counter-intuitive."

This kind of timeless education is exactly why we highlight Marks' memos. For more insight from the manager, be sure to read his book: The Most Important Thing.

Embedded below is the full letter from the Chairman of Oaktree Capital:



We've also posted up a bevy of hedge fund letters if you missed them: Maverick Capital's letter, Third Point's letter, and Passport Capital's letter.