Stay in market despite rising interest rates: Howard Marks

NEW YORK – Investors should stay in the financial market as rising interest rates have put the values of assets such as stocks and bonds at appropriate levels, Oaktree Capital Management co-founder and Co-Chairman Howard Marks said.

Marks also said on Oct. 6 that it is time to focus on high-yield bonds as the era of low-interest rates is over.

“It's more important to be in the market,” Marks said during a discussion with Michael Chung, the deputy global head of equities of Millennium Management LLC, a global hedge fund, at the Hankyung Global Market Conference NYC 2022, hosted by The Korea Economic Daily in New York. “I do think that this is a time to move forward.”

“I think that most assets are priced appropriately relative to the level of interest rates,” said Mark. “I think [assets are] priced roughly at equilibrium with everything else.”

The co-founder of Oaktree, a US asset management company that manages $159 billion in assets, advised to actively invest in bonds, especially high-yield debts.

The US Federal Reserve’s aggressive interest rate hikes have ramped up the yields of high-yield bonds to the 8% to 9% level, Marks said.

“That's a very substantial yield. And that's what I call a useful yield,” he said. “I think not being in the market is a mistake, especially in the credit market if you can get 8 or 9 percent on high-yield bonds.”

DON'T MAKE MISTAKE OF LEAVING MARKET NOW

Marks, a market cycle expert, underscores how important it is to determine whether or not to aggressively invest after diagnosing the current market cycle.

Recalling how investors bought too much and too aggressively a year and a half ago for fear of missing out, he stressed that investors should not make a similar mistake by leaving the market now. 

Marks’ call to stay in the market reflects his philosophy of contrarian investing, an investment style in which investors purposefully go against prevailing market trends.

“Human nature causes us to buy more at the high prices and sell more at the low prices, which of course is the opposite of what we should do,” he said. “But we know intellectually that we should sell more at the high prices -- put on more defense -- and buy more at the low prices -- put on more aggressiveness.”

Marks said investors should have been defensive about one and a half years ago when investments in tech shares and cryptocurrencies were excessive.

But he said most asset prices have returned to appropriate levels, noting that “now I don't see excesses in the market.”



STAY OPEN-MINDED

Marks said investors can succeed only when they think differently from others.

“You know, all my life I've made a lot of money doing the things that other people wouldn't do,” Marks said.

He hit the jackpot from investments in high-yield bonds, which 95% of investing organizations had a rule against investing in.

In equity markets, Marks said investors should not have a rigid division between value stocks and growth stocks, stressing the importance of open-mindedness and flexibility.

He cited the case of Warren Buffet, the king of value investment, saying “you know his investment in Apple was probably his second best.”

“And if he can open his mind to it, why shouldn't everybody else?”

HEYDAY OF LOW-INTEREST RATES OVER

Marks said interest rates have declined nearly 20 percentage points over the past 40 years, helping investors reap hefty profits with cheap money.

But that trend is over and investors should form completely new strategies, he said.

He cited his stepmother, who bought a one-year certificate of deposit (CD) with an interest rate of 16% per annum in 1988, noting that she should have invested in a 10-year CD with an annual interest rate of 10%.

“So 16% for one year or 10% for 10 years -- the answer is the latter,” he said. “You have to recalibrate your brain.”

Write to Chang-Jae Yoo and Sang-Mi An at yoocool@hankyung.com
Jongwoo Cheon edited this article.