At the opening of the Oaktree Conference 2024, Howard Marks argued that the economic environment is shifting from an unusually easy period for business, finance, and investing to one of increased normalcy.
As a result, economic growth may slow, profit margins could shrink, and investor optimism may decline. Borrowing costs are likely to rise, leverage may be less effective, and financing will become more challenging.
Marks warns that expecting the same results from past strategies in this new environment is misguided. He stresses that strategies that excelled during periods of declining and ultra-low interest rates may not perform as well in the future.
Here’s an excerpt from the conference:
The bottom line is that after a long period in which everything was unusually easy in the world of business, finance and investing, I think something to normalcy appears to be setting in. And as a consequence, I believe economic growth may be slower, profit margins may be lower. Interest investor psychology may not be as uniformly positive.
Ownership interest may not appreciate as reliably. The cost of borrowing will not trend down consistently. Leverage is unlikely to add as much to results as it did in the period of declining rates. Business may not find it as easy or as inexpensive to obtain financing, and default rates may head higher.
In terms of conclusions, Einstein said that insanity is doing the same thing over and over and expecting a different result. I think another version of insanity is doing the same thing in a different environment and expecting the same result. So if the environment for business and investing is so thoroughly different in the coming five or ten years, as it has been in the last, uh, 15 to 40 years, I think it’s folly to expect the same results.
The investment environment and the starting point has a huge impact on the success of specific strategies. I believe strongly that the strategies that produce superior performance in the period of declining and ultra low low rates may not be the ones that do so in the years ahead, or certainly not to the same extent.
You can find an excerpt from the conference here:
Navigating the Sea Change with Howard Marks at Oaktree Conference 2024
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
