Should you buy or wait for bottom? Howard Marks' recent memos may help you decide

While the world is struggling to come out of the grip of COVID-19 and there is a cloud of uncertainty everywhere, billionaire investor Howard Marks said the uncertainty is much greater than usual.

"Whereas the future is always uncertain, today the uncertainty is much greater than usual. The probability distribution governing future events is much wider and the tails much fatter," Marks said.

"In fact, there are potential negatives and perhaps positives that few living people have faced before. Most of what we have is subjective opinion and interpretation," he added.

Even though Marks refrained from emphasising that it was time for buying stocks, he subtly said that it was "probably a time to buy" in his March 3 memo, titled as 'Nobody Knows II', when the outbreak of COVID-19 was in its initial phase in most parts of the world.

"There can be no unique time to buy that we can identify. No one can tell you this is the time to buy. Nobody knows. The only thing we can be sure of today is that stock prices, for example, are a lot lower in the absolute than they were two weeks ago," he had written.

"I think it’s okay to do some buying because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be," he added.

"It’s important to be conscious of the investment environment and behave like a contrarian," Marks wrote in his March 12 memo, titled as 'An Update'.

Marks underscored that for years, investors thought conditions were good, and he believed that consequently, prices were high and markets were characterised by risky behaviour. He said that’s what made him cautious.

"Now the flawless decade is certainly over, and asset prices have been cut. The great contrarian, Warren Buffett is famous for saying he likes hamburgers, and when hamburgers go on sale, he eats more hamburgers," Marks said.

"The best time to buy generally comes when nobody else will; other people’s unwillingness to buy tends to make securities cheap," said Marks.

However, he cautioned that the factors that render others averse to buying will affect you too.

But he added that the contrarian may push through those feelings and buy anyway, even though it’s not easy.

"All great investments begin in discomfort. One thing we know is that there’s great discomfort today," Marks said.

Marks said it is a mistake to wait for an ascertainable bottom. “The bottom is the day before the recovery begins. Thus, it’s absolutely impossible to know when the bottom has been reached. Oaktree explicitly rejects the notion of waiting for the bottom; we buy when we can access value cheap," Marks wrote this in his memo to clients on March 19 which was uploaded on Oaktreecapital website on March 24.

Marks pointed out that given the price drops and selling, this is a good time to invest, although it may prove not to have been the best time.

"The more you want to garner potential gains and don’t mind mark-to-market losses, the more you should invest here. On the other hand, the more you care about protecting against interim markdowns and are able to live with missing opportunities for profit, the less you should invest," he said.

"If investors want to buy, they should buy on the way down. That’s when the sellers are feeling the most urgency and the buyers’ buying won’t arrest the downward cascade of security prices," Marks said.

"The most important thing is to be ready to respond to and take advantage of declines," Marks wrote in his memo on March 31, titled as 'Which Way Now?'

"The most consistent observation was probably that not buying anything at the new low prices would be a mistake," he said.

"I no longer feel defence should be favoured," Marks said.

Marks highlighted that cautious positioning in recent years served its purpose and investors who favoured defence over offence experienced smaller losses this year.

However, he feels it is time to move from defence to offence.

"I feel it’s a time when previously cautious investors can reduce their overemphasis on defence and begin to move toward a more neutral position or even toward offence. I’m not saying the outlook is positive. I’m saying conditions have changed such that caution is no longer as imperative," Marks said.

Most of what we have today is an opinion, and much of it tilts either optimistic or pessimistic, said Marks.

"In my opinion, the difference between most people’s positive and negative views is likely to stem largely from their innate biases, and thus the data points they choose to overweight," Marks said.

Marks wrote that the gulf between the optimistic or pessimistic is massive and he elaborated it further that if someone reads just the optimistic pieces, he would think the coronavirus will soon be eradicated and the economy will be brought back to health. But if someone reads just the negatives, he would think we are all done for.

The future depends on a large number of variables and there is always an element of uncertainty.

"It’s relatively easy to build a spreadsheet listing the many things that will contribute to the future and rate them as likely to turn out well or poorly. But merely toting up the plusses and minuses won’t tell you whether the future will be favourable or unfavourable," said Marks.

In Mark's views, the most important element is figuring out which factors will be most influential and that’s where optimistic or pessimistic biases come in.

"The optimist takes cheer from the favourable outlook for the positive data points, and the pessimist is depressed by the unpleasant possibilities for the negative ones . . . even if they’re both working from the same underlying spreadsheet in terms of elements and ratings," Marks said.

Marks said there is rarely such a thing as knowing the future, but usually the future will be mostly like the past.

However, he added that this time, the near-term future is unlikely to show the trends of the recent past.

"We have to consider our situation in the context of unprecedented uncertainty and the total absence of guidance from analogies to the past,” said Marks.

Marks underscored he was unlikely to be a better predictor than anyone else.

"I don’t think I’m likely to have superior knowledge regarding the outlook for the virus, its impact on the economy, the success of Fed and government actions or the direction of oil prices. I’m unlikely to be a better predictor than anyone else," he said.

Disclaimer: This report is based on the matter available for the public on the website of Oaktree Capital Management and Moneycontrol does not claim for its exclusivity.