Howard Marks is out with his latest memo and it is being passed around internally at Social Leverage so I thought I would share it.
In my 53 years in the investment world, I’ve seen a number of economic cycles, pendulum swings, manias and panics, bubbles and crashes, but I remember only two real sea changes. I think we may be in the midst of a third one today
Howard goes on with ..'you lucky bastards'...
The long-term decline in interest rates began just a few years after the advent of risk/return thinking, and I view the combination of the two as having given rise to (a) the rebirth of optimism among investors, (b) the pursuit of profit through aggressive investment vehicles, and (c) an incredible four decades for the stock market. The S&P 500 Index rose from a low of 102 in August 1982 to 4,796 at the beginning of 2022, for a compound annual return of 10.3% per year. What a period! There can be no greater financial and investment career luck than to have participated in it.
An Incredible Tailwind
What are the factors that gave rise to investors’ success over the last 40 years? We saw major contributions from (a) the economic growth and preeminence of the U.S.; (b) the incredible performance of our greatest companies; (c) gains in technology, productivity and management techniques; and (d) the benefits of globalization. However, I’d be surprised if 40 years of declining interest rates didn’t play the greatest role of all.
We’ve gone from the low-return world of 2009-21 to a full-return world, and it may become more so in the near term. Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets. Lenders and bargain hunters face much better prospects in this changed environment than they did in 2009-21. And importantly, if you grant that the environment is and may continue to be very different from what it was over the last 13 years – and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in the years ahead.
That’s the sea change I’m talking about.
I am with Howard at least with our personal capital. I have been 'bond boy' for months now and while I would rather be 30 years old than 57, I have the luxury today of the conditions Howard Marks describes. I no longer have to rely on riskier investments to achieve my overall return targets (I am closer to the grave).
This 'sea change' is real. The largest group of people that have not gotten the message are seed investors, venture capitalists and startup founders. I imagine 80-90 percent of seed/venture capitalists began their careers post the Great Financial Crisis so while they have heard of Howard Marks and even traded some stocks, have no context on how markets work and are connected.
I hope Howard Marks is wrong. Howard Marks hopes he is wrong. We will see.
In the meantime and I believe either way, seed investing and venture investing can still deliver incredible returns. But, large adjustments need to be made to pricing, behavior and expectations which have been slow to react to this new reality.