During this interview with Real Vision, Howard Marks discusses the risks of excessive optimism in financial markets, emphasizing how imprudent behavior drives prices too high based on overly favorable expectations, creating a risky environment.
He recounts the distressed debt opportunities in 2002 following the telecom meltdown and scandals, which presented great investment potential despite market turmoil. Marks highlights the period of 2005-2006, where reckless deals flourished due to investors suspending disbelief.
In prudent markets, skepticism prevents bad deals, but the lack of caution during that time signaled danger. Marks underscores the importance of recognizing such periods of exuberance to avoid costly mistakes and seize opportunities.
Here’s an excerpt from the interview:
Marks: What we want to know is when psychology is too high and optimism is too high, and as a consequence behavior becomes imprudent.
When behavior is imprudent, asset prices go too high based on favorable expectations, and the world becomes a risky place. We actually made the best purchases we ever made in the summer of ’02 in the world of distressed debt.
Because we had the meltdown of the telecoms who had over-borrowed to build fiber, and we had the scandal companies. That was incredible, but the world bounced back from that.
Actually, it wasn’t an event in the world; it was an event in a little corner of the credit market. But it came back, and everything was hunky-dory by ’03, and well into ’04, it just seemed to go on from there.
To me, the most important thing was that in ’05-’06, my partner Bruce Karsch and I spent the whole day complaining about the deals that were getting done. Any crazy deal could get done, you know.
When investors are practicing the willing suspension of disbelief, it’s dangerous.
In a prudent market, where people are appropriately skeptical and risk-averse, there are deals that can’t get done. But in that environment, they were, and so we just took that as a great sign of danger.
You can watch the entire interview here:
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