Oaktree and the Trouble with Major Market Bottoms

The WSJ has a copy of Oaktree Capital’s Howard Marks’ latest letter to shareholders. Overall, it’s about what you expect from Marks: smart and bearish stuff, with lots of data, some hard rights and uppercuts, and a general sense, of "Oooooh, what if he is right?"

Marks has a kind of stages of grief/denial view of capital markets. He argues we’re still only in the second of three stages, and we may never get to the third, where investors are convinced that things can only get worse.

Fair enough, we’re not in his third stage yet. And we may never get there, of course, much to his chagrin. Because he concludes, as most bears do, with this:

One of these days, though, we’ll reach the third stage, and the herd will give up on there being a solution. And unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime. Major bottoms occur when everyone forgets that the tide also comes in. Those are the times we live for.

And that’s the trouble with that sort of thing. All of the pointing to catastrophic sentiment collapse, despair, etc., that people like my friend Barry like to cite is true, and they do make great buying opportunities, but they only accompany major stock market bottoms, which occur maybe a few times a century.

If your entire trading model is built around only buying such "major market bottoms" you might get one/two buying opportunities in your career, and that’s it. Granted, those are awesome times to buy, but they’re so infrequent as to be nearly useless in the real world of capital markets. It does make for a nice story though.


  1. Brent Buckner says:

    OTOH, you could have been in US gov’t long bonds and not US equities over the past decade and had a nice nap instead of riding the rollercoaster up and down….

  2. It sounds like the kind of stuff that Taleb would do.

  3. The other problem is that there are literally tens of billions of dollars of capital out there who know that 1) major market bottoms are great entry points; 2) nobody knows when the bottom occurs until afterwards; and 3) it is better to get in a bit too early rather than sit on the sidelines and miss the whole bounce…and continuously be bidding a nickel under the quote through a 100%+ upside move.
    So every decent bear market/dip we get you have a whole bunch of money piling in, which prevents truly enormous bottoms from ever forming. Like the Fed put or the P-E put…can I get credit for coining the phrase “the bottom feeder put?”

  4. Duncan, I have a contrary view — I find that bottoms are much easier to spot than tops.
    Tops are a process, a gradual shift from bullishness to a kind of easy false confidence. At the very top, there is no bell rung. Once everyone is in, what then? You can still drift higher on momentum for months if not quarters. Investors can less aggressively buy, but its not a dramatic moment.
    When a capitulatory bottom occurs, its HUGE! Numerous indicators go off the charts. If you are looking for the right things, it is actually readily apparent that you are watching a major bottom. In October 2002 we saw one; followed by a confirming double bottom in March 03; One of the most obvious September 21, 2001 was another.
    Have a look at this piece from, written in early 2003:

  5. I have been in investing since 1984, and the only capitulation bottom I can recall was in 1987. The other bottoms ended on a wimper, with the tone of the day being in the same trend as the weeks leading to it.
    It’s been my experience that not counting 1987, bottoms end on the sound of crickets.
    I went back to the archives of Real Money to check out in “old real time” the last bottom in 10/9/02. That bottom was so NOT apparent to the writers of Real Money that day, as it was just another day in the life of the bear market, with Fleck & Eavis being the go to guys. After a two day monster rally into 10/11/02, their were still plenty of doubters, with only Marcin and (gasp!) Herb Greenberg actually remarking that stocks looked cheap.
    Headlines from Realmoney “at the bottom” in 10/02:
    “Watch Out for Falling Tech Estimates”
    “Shorts’ Stature Keeps Growing”
    “Smells Like Bear Spirit”
    “Wednesday’s Market: Dow Closes at Five-Year Low”
    “Corning Sees More Telecom Weakness” (GLW was selling at $1.22 on 10/9/02, a 20 bagger for those that looked past the headline)
    “Killing the Double-Bottom Thesis”
    “Even the Boring Companies Are in Trouble”
    “New Lows Will Be the Real Test”
    “Morgan Stanley Lowers GE Estimates, warns that the company’s problems could eventually combine in a “perfect storm.”