Billionaire investor Howard Marks has said that so far in 2020, the swing from "flawless to hopeless and back" has taken place in record time and the challenge is to figure out what was justified and what was an aberration.
Billionaire investor Howard Marks, in his recent memo, said the market's rise has been built on optimism but the odds are not in investors' favour.
"The fundamental outlook may be positive on balance, but with listed security prices where they are, the odds are not in investors' favour," Marks said.
Marks further said that the powerful rally we have seen, has been built on optimism; has incorporated positive expectations and overlooked potential negatives and has been driven largely by the Fed's injections of liquidity and the Treasury's stimulus payments, which investors assume will bridge to a fundamental recovery and be free from highly negative second-order consequences.
"A bounce from the depressed levels of late March was warranted at some point, but it came surprisingly early and quickly went incredibly far," Marks pointed out.
"As such, it seems to me that the potential for further gains from thing turning out better than expected or valuations continuing to expand does not fully compensate for the risk of decline from events disappointing or multiples contracting," Marks added.
He said even though there is no way to determine for sure whether an advance has been appropriate or irrational and whether markets are too high or too low, there are questions to be asked which can assist in that assessment.Some of the questions that Marks asks:
1. Are investors weighing both the positives and the negatives dispassionately?
2. What is the probability that the positive factors driving the market prove valid or the negatives will gain in strength?
3. Are the positives fundamental or largely technical, relating to inflows of liquidity? If the latter, is their salutary influence likely to prove temporary or permanent?
4. Is the market being lifted by rampant optimism?
5. Is that optimism causing investors to ignore valid counter-arguments?
6. How do valuations based on things like earnings, sales and asset values stack up against historical norms?
Marks said questions like these cannot tell us for a fact whether an advance has been reasonable and current asset prices are justified, but they can assist in that assessment.
"Thus far in 2020, the swing from flawless to hopeless and back has taken place in record time. The challenge is to figure out what was justified and what was an aberration," said Marks.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.