Transcription
I want to start. We want to start with a central question that you pose yourself. Why are asset prices so strong in the face of what you view as net negative developments? Howard, can you share your thoughts with us?
Uh, I'm glad to be with you this morning. Of course, as as the quote you just put on the screen uh indicates, um, you know, this is all just feeling and and, uh, and, uh, an opinion. None of this is factual, but it it it does seem that that stocks are expensive relative to what I call fundamentals or you might call reality. And uh you know the outstanding reason I think is that um you know there hasn't been a serious market correction in 16 years. So uh people get out of the habit of uh of of thinking about market corrections. uh the biggest single mistake I've been thinking a lot what is the biggest single mistake investors make and I've concluded that it is that they conclude that that the way things are today is the way it'll always be and the things that have been happening will always continue to happen whereas uh reversion to the mean is is much more likely so I just think that it's worked very well uh being being an equity uh investor has worked very well doing it on leverage has worked even better. Uh concentrating in a few stocks has been gone very well. Uh investors are by nature optimistic and that optimism dies hard and uh and u you know um uh I just think that the fluctuations of the market are mostly related to psychological fluctuations. Uh and uh and people go from uh neutrality to liking stocks to liking them a lot to liking them a ton to liking them too much. And uh that's the continuation that creates u bubbles and you know we're we probably in the early days of that.
When you talk about liking Howard uh maybe liking these assets a little bit too much. Can you put into perspective the last time you saw this type of environment that left you thinking maybe some of the opportunities aren't as as great uh when it comes to buying some of these assets at current valuations? Is there another time that this sort of reminds you of in any capacity?
Well, I guess Lisa, the last time was probably around 90 uh 97 when the market was uh kind of falling in love with tech stocks and um you know uh the market was rocketing along. People were not worried about the level of valuations. People were extremely optimistic about the opportunities for the internet. Um and um you know Alan Greenspan famously cautioned uh that there might be uh irrational exuberance. Um u now I picked 97 uh because even though Greenspan was concerned about exuberance the market went on to rise for another two and a half to three years. Uh so remember I said we're in the early days. We're not we're not at a critical at a nutty uh valuation. Uh I'm I'm certainly not ringing the alarm bells as the quote that you had on the screen uh said. No reason to think there'll be a correction soon, but the point is that things are expensive. They may go on be they may go on to become more expensive, but the fact that they're expensive should not be lost.
And Howard, I think a lot of people point to in terms of the echoes of the late 90s, the tech sector of the market as being the most overvalued. What I thought was so interesting about your memo is that that wasn't your take. That that wasn't your bigger concern in the market at a time when people are counting on a certain robustness of growth and a certain kind of inflationary backdrop. Why is it that tech isn't the focus of your concern this time around?
um a tech contributes to the aura that surrounds the markets and a lot of people have been citing the fact that the so-called magnificent seven stocks like Amazon and Alphabet and uh have been contributing disproportionately to the rise and they responsible for more than seven stocks uh their dollar gains have been responsible for more than half of all the gains in the 500 stocks in the S&P. pay 7 out of 500. Um, but they're great companies. They're at high valuations. I I think that I can't say those valuations are excessive. What? But the other 493 stocks are quite highly valued. Not as highly as the magnesium 7, but nobody says they're the same quality companies. Quite highly valued relative to history. And it is the it is the uh the fact that high valuations are being applied to more average companies that I think's more alarming than the fact that exceptional valuations are being applied to exceptional companies.
Howard, there's a quote you use in this memo. I enjoyed this quote. You said, "He who knows only his side, his own side of the case knows little of that." And then I worked through the rest of the memo and there was a conclusion there about credit and I just wonder sir whether your focus on equities in this note offers you a greater perspective on how much value is offered in credit right now.
Well you know um it's it's as as John Stewart Mill said in I believe it was 1859 uh you you have to know the all the sides of the story to to understand whether your side uh holds water. Um uh and uh and I I cite the the bull case there for why the market isn't overvalued. Uh I think that's that's part of the job. But as you say, uh you know, my conclusion is that it's it's I'm not, as I said before, I'm not raising an alarm bell, but I do think it's time for some caution. And uh you know, uh this is a little bit of what we call on Wall Street talking your own book. Uh but you know what what uh what I do what what Oak tree does is mostly something called credit buying the debts of of companies. Um and debt is inherently more uh defensive than equities. And you have a promise of payment. you know what your return will be uh if if they if they pay interest in principle as promised and most of the time they do. So I just think that this is a time to put a little more defense into your portfolio and investing in credit as opposed to equities is one way to do it.
Is it still defensive, Howard, if you're looking at credit spreads that that are the tightest since 1998? I'm looking at investment grade credit spreads which are thought to be a more defensive part of the credit market. I mean does that sort of question what it means for it to be defensive where the valuations are high there as well?
Well, first of all, he's a what you see, debt or fixed income or bonds or what I call credit, all different words for the same thing is different in nature from equities because you do have a promised contractual rate of return and you can say that the promised contractual return isn't as high as it has been historically or the the increment that it provides over treasuries to compensate for the credit risk is isn't as higher as high as it has been historically. But you can't say that they don't promise 7 12%. And a promise of 7 12% you're going to pay some fees, you're once in a while going to encourage uh encounter a a credit loss. Uh I think it's highly likely to provide let's say a return in the 60s over the next 10 years. A a contractual uh guarantee approaching something in the sixes over the next 10 years is I think more defensive than being in the stock market at these elevated valuations. That's the point. Uh and uh and uh you know you you just said uh tighter than they have been since 98. Um and if you if you looked at where they were in '98 and you you hypothesized a put an investment in a portfolio of high yield bonds in '98, how did you do over the last 17 years, 27 years? And I think you did fine. That's my point. It's it has a high probability of doing fine. Whereas stocks if the valuations are elevated have some reasonable probability of doing less than fine.
Is the United States still the focal point for defensive investments?
uh you know uh I think I I said in the memo that I think the US is still the best place in the world to invest. Uh the things that make the US exceptional uh the spirit of innovation, the free markets, the rule of law, the capital markets, the the growth and dynamism, uh the great companies, these things are still all true, but as I said in the memo, we we're the best place. We may be a little less best than we used to be. Uh the world is thinking that maybe the US is a little best less best than it used to be. And um and I I can't I can't argue against that. I mean uh fundamentally as an investment environment uh I think uh things are uh are a little bit deteriorated.
Is there a place where you see has more opportunities right now just based on valuations and based on maybe a firming up of contract law and other aspects that really lead to a robust investment backdrop?
Um well, as I say, I I still think we're the best place in the world to invest. Um and and um you know we're a great car at a high price. You can get some uh cars around the world that are not as great as ours. Cheaper. Which do you prefer? uh less good at at a cheaper price or better at at a more expensive price. Um, so you know it other parts of the world do not have our dynamism. Um uh and uh lots of places in the world are overregulated compared to the United States. Um uh but if they're on sale relative to uh the US it's not unreasonable to want to have some representation in there.