In his book – Mastering The Market Cycle, Howard Marks discusses the difficulty of timing market bottoms and the risk of waiting too long to invest. He discusses the concept of “falling knives,” where investors fear buying before a market decline stops, leading them to wait for certainty.
However, by the time the market stabilizes and uncertainty is resolved, the best buying opportunities are often gone. Marks argues that bottoms can only be identified in hindsight, and that during downturns, larger quantities of assets are available at lower prices. Therefore, he prefers buying during market slides rather than waiting for a confirmed bottom.
Here’s an excerpt from the book:
The question I want to touch on here is, “When should one begin to buy?” I made reference in earlier chapters to “falling knives,” which constitute a very important concept. When a market is cascading downward, investors can often be heard to say, “We’re not going to try to catch a falling knife.” In other words, “The trend is downward and there’s no way to know when it’ll stop, so why should we buy before we’re sure the bottom has been reached?”
What I think they’re really saying is, “We’re scared—in particular of buying before the decline has stopped, and thus of looking bad—so we’re going to wait until the bottom has been reached, the dust has settled, and the uncertainty has been resolved.” But hopefully by now I’ve made it abundantly clear that when the dust has settled and investors’ nerves have steadied, the bargains will be gone.
At Oaktree, we strongly reject the idea of waiting for the bottom to start buying.
First, there’s absolutely no way to know when the bottom has been reached. There’s no neon sign that lights up. The bottom can be recognized only after it has been passed, since it is defined as the day before the recovery begins. By definition, this can be identified only after the fact.
And second, it’s usually during market slides that you can buy the largest quantities of the thing you want, from sellers who are throwing in the towel and while the non-knife-catchers are hugging the sidelines. But once the slide has culminated in a bottom, by definition there are few sellers left to sell, and during the ensuing rally it’s buyers who predominate. Thus the selling dries up and would-be buyers face growing competition.
You can find a copy of the book here:
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