During his latest Insight Conversation, Howard Marks explains why the tide is going out and the unusually ‘easy’ period for risk-taking is over. Here’s an excerpt from the conversation:
The short answer is very simple. In the 10 years you’re talking about, Anna, 2010 through 2019, it was an easy period, safe period. There wasn’t much pain felt.
When there are no defaults, when it’s 99-1 instead of 90 to 10, you don’t have to worry too much about avoiding the losers. You can be soft on your credit analysis. And in a good environment, the potential defaulters don’t default and everybody looks the same.
The person who played golf instead of reading prospectuses does as well as the person who was glued to his green eyeshade. The bottom line is that risk taking was rewarded. And for the most part, if you dip down in quality, you made more money because there were so few defaults in bankruptcies in particular.
But that doesn’t mean it’s always the case. Sometimes the lower you dip down in quality, the more money you make. Sometimes the more you dip down in quality, the more you lose.
And now as Armen says, you’re going to have to do the work. Now, the period that we’re looking at ahead is going to be more of a normal period, I believe. Well, one of these days we’ll have a recession. And in those, the weak credits are exposed, the tide goes out.
And in that period, the person who did better credit analysis and maybe took less risk is rewarded. And I think that the period ahead is more like that. The period just behind us was an unusually easy period in which risk taking was rewarded, as I say. And if you learn the lesson that the more risk you take, the more money you make from time to time, that turns out to be a very dangerous lesson.
You can read a transcript of the entire conversation here:
Full Return World with Howard Marks and Armen Panossian
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