Through the lens of Howard Marks' investment philosophy, we will explore how to navigate different phases of the market, considering both aggressive and defensive approaches he has argued in the past. 

Howard Marks about why positioning is important than predicting the cycle? 

Howard Marks, who is known for his outstanding work about market cycles and investor phycology once said, “The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus, they have a profound collective impact on most investors and most markets.

This is especially true at the market extremes. The result is mistakes—frequent, widespread, recurring, expensive mistakes” The idea here is not to predict markets or call it a top or a bull market rally, or attach any other descriptions, but to ask right questions and think and act prudently, which is possibly, only if we exercise system two thinking or what Howard Marks suggests “second order thinking” 

   

How do we know where we are in the cycle? 

“I feel strongly that it’s possible to improve investment results by adjusting your positioning to fit the market, and Oaktree was able to do so by turning highly cautious in 2005-06 and highly aggressive in 1990-91, 2001-02 and immediately after the Lehman bankruptcy filing in 2008”.

He further highlighted: This was done on the basis of reasoned judgments concerning: 

•how markets have been acting 

•the level of valuations 

•the ease of executing risky financings 

•the status of investor psychology and behavior 

•the presence of greed versus fear, and 

•where the markets stand in their usual cycle. 

 

How to position? 

Finally, everything boils down to finding answers to the BIG questions. How do we position ourselves in a cycle and get major benefits? Or how do we apply what we know about typical market cycles and benefit from them? If we could foresee the future, we would exactly position our investment and trade in such a way that benefits us the most. But in reality, no one knows what the future holds. Then how can we position ourselves favourably in a cycle? Thankfully, there is a solution to this dilemma. 

Howard Marks says, “The future should be viewed not as a single fixed outcome that’s destined to happen and capable of being predicted, but as a range of possibilities and—hopefully on the basis of insight into their respective likelihoods—as a probability distribution. Probability distributions reflect one’s view of tendencies”. 

“I think there are two requirements, not one. In addition to an opinion regarding what’s going to happen, people should have a view on the likelihood that their opinion will prove correct”. The US based, Howard Marks of Oaktree Capital is considered as most influential investment thinkers. Warren Buffett once said, “When I see memos from Howard Marks in my mail, they're the first thing I open and read”. 

 

Aggressive OR Defensive 

Howard Marks suggests that investors can not only prepare catastrophic events, which falls at the extreme end of bell curve, but also take the advantage of them through portfolio adjustments. However, the key is to shift our attention from “where we are heading in the future and what we do not know or not knowable” to focus “where we are in the given cycle and what we know and knowable”. Now since we have a fair idea of where we are in the cycle and the probability of different scenarios, investors have a better grip.

Conclusion

Howard Marks’ investment philosophy emphasizes the importance of thoughtful positioning over futile attempts at predicting market cycles. By focusing on where we are in the cycle and assessing knowable factors like valuations, investor psychology, and market behavior, investors can make more informed and prudent decisions. Marks reminds us that the future is best understood as a range of probabilities rather than a fixed outcome. This approach not only helps mitigate risks but also capitalizes on opportunities during market extremes. Ultimately, the key lies in maintaining a balanced perspective—knowing when to be aggressive and when to be defensive—to navigate the ever-changing tides of the market.

 

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