Howard Marks: Unlocking Opportunities: Spotting Undervaluation in the Cycle

In this interview with James Altucher, Howard Marks explain how markets don’t always reflect the intrinsic value of assets. During positive cycles, optimism pushes prices beyond what individual assets are worth. This leads to excesses like the pre-Enron boom. When bubbles burst (like Enron’s bankruptcy), pessimism sets in, causing prices to undershoot, even for fundamentally sound assets.

The Opportunity: Investors can profit by recognizing these cycles and acting unemotionally: buying when markets are undervalued (buying the dip) and selling when markets are overvalued. Here’s an excerpt from the interview:

Marks: That’s an extreme example James of a market cycle.

You think about it. There’s a secular trend, an upward trend that the economy is on, and the markets are on, and the economy and the markets.

They’re higher every decade than they were in the previous decade. There’s an upward underlying direction, but we have fluctuation around the underlying trend, and I describe those fluctuations as excesses.

So the point is rather than everything selling at the happy medium of what everything is intrinsically worth, sometimes it sells for much much more, and sometimes for much less.

The key is to figure out which is which.

So you were talking about pre the Enron bankruptcy they were all selling as if they were great. The truth is some of them were okay. Some of them were not so great. But some of them were terrific.

But in a period of positive attitudes they all sold as if they were great and then Enron goes bankrupt.

Now everybody says, oh I don’t trust any CEOs. I don’t trust any financial statements. I don’t trust Arthur Anderson. And by the way and now they’re all crap.

So now before some of them were not so great, some were okay, and some were terrific, now they’re selling like they’re all terrible.

Value, prices vastly undershoot intrinsic value, that’s a down cycle and we should be able to profit from that if we can see it objectively and move on it unemotionally.

You can listen to the entire discussion here: