Howard Marks is the founder and Chairman of Oaktree Capital and he regularly writes letters to Oaktree clients outlining his views on markets and economies. The letters read like Michael Lewis ghostwriting for Warren Buffett; insightful, direct, homespun, expert and sharply pointed. Their quality and insight have gained them a devoted readership among value investors. He recently recycled a favorite quote of his, one he calls the most important; 'What the wise man does in the beginning, the fool does in the end.' The wise man invested aggressively in late 2008 and early 2009. In contrast, he argues that the challenging search for return we presently face should incorporate caution, discipline and selectivity.

So why does he make this argument. We should anticipate that at some point on the horizon, bad news and the challenging economic backdrop may finally become overly discounted. Creating an investment opportunity where potential risk adjusted returns are quite apparent. For now, it makes sense to remain cautious, patient and alert for opportunities because 2023 could turn out to be quite volatile. It is important to appreciate that upside to the equity markets appears quite limited at this juncture. Equity valuations are high in both absolute and relative terms (especially in the United States), credit spreads remain quite tight, while many interest rate forecasts expect yields to increase. All of which limits the room for significant asset market gains.

We have exited an easy money phase and now face the twin headwinds of higher inflation and interest rates. This challenging return environment suggests that the old playbook will no longer work. The end of a 40 year old bond bull market requires a new playbook. New leadership will emerge which favors value, hard assets, short duration cash flows and good old fashioned security selection. Thankfully, a playground that I am quite familiar with.