Howard Marks Memo – We’re Not In 1999 Anymore, Toto – 2000

The fourth and final memo of 2000 is once again focused on the insights and lessons drawn from the tech/dot-com bubble. The title for this memo H. Marks got from the movie ‘The Wizard of Oz’. As was the case in the movie, the main character of 1999 (the investor) eventually had to return to reality (i.e. the story mean reverted) .

Please comment if you have read the memo and what you thought of it. Also, if you have found a worldly wisdom in the memo that you think I should have included please comment on that as well. I’m very interested in what caught your eye while reading and why.

Worldly wisdom’s from We’re Not In 1999 Anymore, Toto – 2000


Respect cycles – There’s little I’m certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero.

That was really the problem with the bubble. Investors were willing to pay prices that assumed success forever. They ignored the economic cycle, the credit cycle and, most importantly, the corporate life cycle. They forgot that profitability will bring imitation and competition, which will cut into – or eliminate – profitability. They overlooked the fact that the same powerful force that made their companies attractive, technological progress, could at some point render them obsolete.

My thoughts: Having an understanding for how market cycles work is extremely important if one is to be a long-term successful investor. I would also add, understanding concepts such as mean reversion, base rates, and moats is important in relation to your knowledge about market cycles. A sidenote, in October 2018 H. Market will release his new book on the topic of market cycles: Mastering the Market Cycle: Getting the Odds on Your Side. Consider this a future must read for 2018!


Worry about time – Another element that investors ignore in their optimism is time. It seems obvious, but long-term trends need time in order to work out, and time can be limited. Or as John Maynard Keynes put it, “Markets can remain irrational longer than you can remain solvent.” Whenever you’re tempted to bet everything on a long-run phenomenon, remember the six-foot tall man who drowned crossing the stream that was five feet deep on average.

One of the great delusions suffered in the 1990s was that “stocks always outperform.” I agree that stocks can be counted on to beat bonds, cash and inflation, as Wharton’s Prof. Jeremy Siegel demonstrated, but only with the qualification “in the long run.”

My thoughts: Always make sure to minimise time constraints and time pressures when investing. First and foremost, make sure to not used borrowed money when investing and that you can survive without the capital that you have deployed. And finally, remember that in order to profit from the long-term you have to be there for the long-term. In other words, survival is the most important thing.


Remember that, for the most part, things don’t change – The five most dangerous words in our business aren’t “The check’s in the mail” but “This time it’ll be different.” Most bubbles proceed from the belief that something has changed permanently. It may be a technological advance, a shortage or a new fad, but what all three have in common is that they’re usually short-lived.

Most “new paradigms” turn out to be just a new twist on an old theme. No technological development is so significant that its companies’ stocks can be bought regardless of price. Most shortages – whether of commodities or securities – ease when supply inevitably rises to meet demand. And no fad lasts forever.

My thoughts: Do you see any resemblance to the situation and the arguments used in today’s market environment?


Be conscious of investor psychology – I don’t believe in the ability of forecasts or forecasters to tell us where prices are going, but I think an understanding of investor psychology can give us a hint. […] When the man on the street thinks stocks are a great idea and sure to produce profits, I’d watch out. When attitudes of this sort make for stock prices that assume the best and incorporate no fear, it’s a formula for disaster.

I find myself using one quote, from Warren Buffett, more often than any other: “The less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs.” When others are euphoric, that puts us in danger. When others are terrified, the prices they set are low, and we can be aggressive.”

My thoughts: I would even go as far as; current investor psychology of the consensus is the predictor of future performance. In other words, euphoric consensus = low future returns and terrified consensus = high future returns.


Check your own mindset – For me, mindset holds many of the keys to success. We at Oaktree believe strongly in contrarianism. As suggested in the paragraph above, that means leaning away from the direction chosen by most others. Sell when they’re euphoric, and buy when they’re afraid. Sell what they love, and buy what they hate.

Closely related to contrarianism is skepticism. It’s a simple concept, but it has great potential for keeping us out of trouble. If it sounds too good to be true, it probably is. [….] Oaktree was founded on the conviction that free lunches do exist, but not for everyone, or where everyone’s looking, or without hard work and superior skill. Skepticism needn’t make you give up on superior risk-adjusted returns, but it should make you ask tough questions about the ease of accessing them.

We think humility is essential, especially concerning the ability to know the future. Before we act on a forecast, we ask if there’s good reason to think we’re more right than the consensus view already embodied in prices. As to macro projections, we never assume we’re superior. About under-researched companies and securities, we think it’s possible to get an edge through hard work and skill.

Finally, we believe in investing defensively. That means worrying about what we may not know, about what can go wrong, and about losing money. If you’re worried, you’ll tend to build in more margin for error. Worriers make less when everything goes right, as in the tech bubble, but they also lose less – and stay in the game – when things return to earth. At Oaktree, we’re guided more by one principle than any other: if we avoid the losers, the winners will take care of themselves.

My thoughts: One should remind oneself of these investing principles and their meaning on a daily basis. Sticking to these principles in both rain an shine are as much of a bulletproof formula for long-term success as one can get.


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