Howard Marks: 2 Reasons Exiting the Market Will Cost You Big

During his recent interview with Bloomberg, Howard Marks discusses the importance of distinguishing between high and overpriced markets, suggesting that valuations should guide whether investors adopt a defensive or aggressive approach.

He advises against making drastic decisions, like exiting the market entirely, as it often leads to missed opportunities. Marks highlights the unpredictability of events and market reactions, stressing that foresight about world events often does not translate to successful market timing.

Instead, he recommends adjusting behavior moderately when valuations are high, as rigid “all-in or all-out” strategies fail to reflect the complexity of real-world investing.

Here’s an excerpt from the interview:

Marks: Well, you say it’s overpriced. I would say it’s high priced. Overpriced is a judgment call. And, you know, you think about what you think something is worth. You compare how it’s selling relative to that. And then, in my opinion that should determine whether or not you’re aggressive or defensive.

So I think we would agree that U.S. stock valuations, for example, are on the high side relative to history. That would tell me to be a little less aggressive than usual, a little more defensive, but not necessarily to get out.

You know, getting out is really a big step. Most of the time in my 55 years in this business, it has been a mistake. Either you get out and it goes up, or you get out, and it goes down, and you forget to get back in, and it goes up without you.

So, you know, it’s just a matter of calibrating, in my opinion, your behavior between aggressiveness and defensiveness. When things are a little high, as they are now, be a little more defensive than usual. But this notion of risk-on, risk-off, in or out, buy or sell—that’s too black-and-white and is not fitting for the world we live in.

You could have said, if you had great foresight, in 2019, “I think there’s going to be a pandemic; I’m going to get out.” In 2021, you could have said, “I think that Russia is going to invade Ukraine; I’m going to get out.”

In 2022, you could have said, “I think Hamas will attack Israel; I’m going to get out.” You would have been right about the events, but it would have cost you a lot of money.

Not only do we never know what’s going to happen in the bigger world, but we also don’t know how the market’s going to react. And so to be dogmatic and say, “It’s high; I’m getting out,” is a mistake.

Warren Buffett, who always says it best, says, “Don’t bet against the United States, for example.”

You can watch the entire interview here: