Howard Marks, Chairman of the US based Oaktree Capital was recently asked a question by a Bloomberg reporter – ‘does the market’s decline worry you?’ – he answered the question by writing the following in a memo to clients which we believe is a far more useful answer than the current sensational media headlines.
Does the market’s decline worry you? “The answer lies in another question: What does the market know?” Is the market smart, meaning you should take your lead from it? Or is it dumb, meaning you should ignore it? Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out (many years ago), the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market ‘knows’ tough times lie ahead.”