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and I personally would like everyone to reflect a little on these things we have no way of knowing if the increases will continue but this we do know, namely that things change With time you will laugh but some people also ask for money to teach other people Howard Marx born in 1946 is an American investor and writer co-founder of oak tre capital management the funds managed by him have brought long-term annualized returns of over 20% Marx focuses mainly on risk management and says that investors should develop a strategy based on their personal situation more than that they should always ask themselves If they are more concerned about the risk of losing money or are they more concerned about the risk of missing an opportunity from their own experience Marx also tells us that it is very important to have average returns during Bull Market periods and to minimize losses as much as possible during Bear Market periods why Because losses will have a much greater impact on you Than the benefits obtained from gains, which is exactly what I always tell you whenever I have the opportunity when things are going well we are all good investors but what is very very important is what you manage to do when things are not going so well and I would like to make a small parenthesis here because again a bunch of mentors, educators and financial education teachers have appeared who give you the false impression that they know what they are doing and can teach you to do the same obviously 100% Well I have a very simple exercise for you and you can answer it in the comments if you want and which I hope will make you think at least a little bit If x makes a 100% return this year and you make 10% And next year x makes a 50% return and you make 0% who has won more you or x and we have an article called Memo published by Marx in January 2000 25 with the title on Bubble watch by the way it is a Memo that he has been publishing for over 25 years and about which Warren Buffett says that when I see a Memo from Howard Marks in my email I open it immediately to read it Because I always have something to learn and if Buffet has something to learn I can certainly put my hand in the fire that you and I have a lot to learn and He starts by defining a Market Bubble the so-called Market Bubble and he says here below that a Bubble or a Crash is more a state of mind than a quantitative calculation That is, an economic Bubble does not necessarily mean that stock prices rise to the stars that we have years of fabulous growth there It also depends on valuations and other aspects Rather according to Howard Marx's words The Bubble It is a state of mind that is characterized by four important aspects an extremely high irrational exuberance that frenzy and Euphoria that I was talking about and then people come to love certain companies or asset classes and very importantly the third is they are firmly convinced that they cannot fail the massive fear of being left behind of missing out that FOMO or Fear of missing out when you see that something continues to increase in price and you tend to you buy too so as not to be left out that feeling when you see that something is going up a lot and you also want to buy too because you have the impression that it will never go down again and you really want to participate in the increases this is called FOMO and the last aspect that results from the other three the belief that for those companies there is no price that is too expensive these four points are very well synthesized which basically Create a Bubble when some people have the impression that for a certain company that is doing very very well Currently there is never a price that is too high and nothing can go wrong I mean in Romanian you can buy in ignorance at any price because stocks only Go up and How do you still get to a Bubble here Marx divides a Bull Market into three stages these three here the period from the bottom immediately after a significant correction where some investors and almost all investors in quotes lick their wounds feel totally disoriented at this point there are very few people capable of imagining that things will get better this is because morale is down to Earth and those who do not invest a Long time horizon who do not invest disciplined informed with well-done homework are rather convinced that the stock market is a joke and everything is against them Then comes the second stage in which the economy companies and markets are doing well and all people start to notice that things are going right they start to believe that everything will be fine after which we reach the peak point When the news is mostly great companies Report excellent stocks have risen In a cheerful and obviously influenced by recent events those Bias uri that I talked to you about in a previous clip almost everyone believes at this point that things will go like this forever and nothing can go wrong and when that happens Marx says below that it is very very difficult to find something evaluated Ok in which to invest this reasonably priced next chapter The New New thing and the Famous this time is different even though we have seen in the past That bubbles often lead to some huge drops it does not matter this time it is certainly different and another very interesting remark bubbles are usually associated with new technologies with something new and when we talk of something new Theoretically it means that there is no history logically because it is new and further this means that there is nothing to temper the enthusiasm I mean if in the past we had bubbles in tulips on CDs on the internet on real estate which all led to huge declines in the end when the Bubble burst Well This time it is not like that this time it will not decline Nothing why Because this time we are talking about something else you have something revolutionary something new even if in essence it is pretty much the same as the other events in the past that generated bubbles and we have here a little story from a book by Hans Christian Anderson a man went to the emperor and sold him a suit But not every suit was a set of clothes visible only to intelligent people the problem Well the suit did not exist the man practically sold him air the emperor convinced that he could not look stupid in front of his subjects dressed in quotes with this invisible suit and started to parade through the streets completely naked the crowd in turn was afraid to say anything because in theory if they didn't see the suit it means they were stupid not if those clothes could only be seen by intelligent people so everyone admired him in silence But at some point a little child with all his innocence came out of the crowd and shouted that the emperor has no clothes and walks around naked and so the illusion fell apart moral sometimes when something seems to be going incredibly well to bring wealth and success people prefer to participate in the illusion just so they don't look stupid or be in the minority very few have the courage to come forward and tell the truth Especially if that means contradicting the crowd and up to this point I think we already agree that buffett was right about these Marx Memoirs and the even better part is that it gets even more interesting along the way so let's continue further Marx Explains his baptism in relation to a Bubble i.e.
the first Bubble he participated in in his career The nifty fiy Bubble from the 70s When it first appeared once again the term growth stocks and as a result of which stocks collapsed 90% from a P ratio of 60 90 to pi uri of 6 to 9 that period which represented his first contact with a Bubble made him establish some principles on which to base himself And which then helped him immensely in the next 50 years and these principles are three in number it does not necessarily matter what you buy but how much you pay which resembles Buffett's famous line price is what you Pay value is what you get and again I feel the need to repeat myself and I also feel the need to repeat myself valuation matters a hell of a lot Even if sometimes it seems that the second principle is not a good investment It does not mean buying good things but buying them well and the last there is no action or asset that is so good that it does not become expensive So dangerous and I personally would like everyone to reflect a little on these things there is still a little truth behind the mania that Creates a Bubble and here Marx talks about the Internet Bubble Since the 2000s it is clear that the internet was something revolutionary, something that changed the world and that today, 25 years later, we can't really live without the internet.
The problem is that most companies from that period have disappeared and only a few have survived. When a company or a stock is very popular and people expect it to continue to grow, that nothing can go wrong, and the market reflects these expectations in the price, the damage from negative surprises will be profound here too.
I have said this several times if you remember my example with the tower of playing cards, when a stock is valued perfectly, then any small wrong step, no matter how small, can lead to massive declines, meaning the tower can collapse and it doesn't collapse with two or three cards, but with more. Obviously, this is due to overvaluation.
Imagine that Nvidia, for example, is just an example. It grows 40% in revenue every year and in the next quarter it is expected to grow 38%, the price is valued as such due to these expectations. I mean very very high and the company comes and reports 25% growth only although 25% growth is huge Nvidia's share price can suddenly fall aggressively just because we have that small misstep because as How marks says here in reality trees don't grow to the sky and we have below a few words about Nvidia Why is it valued so High in a few words because investors expect Nvidia to demonstrate persistence meaning increases in revenue in profit in margins to persist and in the future to continue to grow for years in a row will this happen we have no way of knowing we will see what we know But this is what the top 20 companies in the s&p 500 index looked like in the 2000s we have here Microsoft ge cisco walmart Merc coca-cola procter and gamble aig exon Intel City Group IBM Oracle home depot Johnson and Johnson qualcomm Bristol Myers SB Pfizer at&t and verizon practice these were the 20 largest companies in America in the 2000s at the beginning of 2024 that is relatively currently only six of they are still in the top 20 Microsoft walmart exon Johnson and Johnson proctor and Gamble and home depot and more Interestingly, of the seven magnificent today, only Microsoft was in the top 20 25 years ago So as I said, we have no way of knowing if Nvidia's growth will continue but this we do know, namely that things change over time, only that investors pay any price For certain companies, the market tends to evaluate them as if they were destined to grow the same way year after year and remain leaders, only that in reality some remain others.
No, but change is often more important than persistence, says Marx, and we get lower and lower, and now we had 2023 and 2024 with 26 and 25% respectively on the s&p 500, and before these two years it has only happened four times in the history of the index to bring returns of over 20% in two years in a row only four times in about 100 years, in three of these four times the index fell then in the next two years why do I say only three of these four times because the exception is the period 95 98 when the correction was delayed until when the correction was delayed until 2000 so it did not fall immediately after those two years of 20% plus yield it fell a few years later in 2000 only that this postponement of let's say the correction ultimately led to something even worse a correction of over 40% that lasted 3i years and now nowadays it happened for the fifth time with 2023 and 2024 the best set of two years in the last 25 or so and we entered 2025 happily and the main alarm signals of Howard Marx are the following the optimism e has been at its highest levels for over two years already the valuation of the s&p 500 is above average the enthusiasm you have the expectations that the magnificent seven will continue to perform as well and finally the possibility that expensive valuations also come from the fact that investors in indices automatically buy regardless of the intrinsic value of the companies that are part of that index and below we have a very nice graph that I have presented to you before from the Guide to the markets reports issued by JP Morgan this graph basically shows us the relationship between the current valuation and the potential return over the next 10 years starting from that valuation and we have on the bottom bar on the x-axis the valuation and on the y-axis we have the possibility of an annualized total return so we see that when the valuation in this case p ratio is somewhere around 8 to 11 maximum 14 let's say between 11 and 14 well we can easily expect in the next 10 years to annualized returns of 15 20% on the other hand when pi is somewhere around 23 to 26 we can expect an annualized return close to zero and here somewhere at 23 we are currently that's the reason why I repeat whenever I have the opportunity that Valuation matters a lot and can have an extremely large impact on the return you will get in the future because after all that is why you invest not to get a certain return and below it says that it should not surprise anyone that this return is closely related to the price you decide to pay.
That is precisely why investors should not be indifferent to current market valuations. However, there are also some counterarguments to everything I have said so far and everything Marx practically wrote about these bubbles and a possible Bubble at the moment and these counterarguments are also four in number.
The p ratio for the S&P 5 100 is high but not extremely high. I would also add here that it can always become higher in the event of a contraction in earnings. And this could bring quite large decreases but this is a large topic that we will perhaps address in another episode. The Magnificent Seven are formidable companies.
So somehow the higher valuations are justified. That is very correct. Now it depends on how big he still doesn't hear many people saying that there is no price too high for anything And he also does n't think the markets have gone to extremes and here I would contradict him a little because I hear enough people you will laugh but some also ask for money to teach other people and towards the end he says that he is not an expert in technology and that he cannot say with certainty that we are in a Bubble he only factually analyzes what he observes in the market and suggests what type of thinking we should have In such moments exactly like he did about 25 years ago and I personally think that as I was saying earlier we should all reflect on these things and position ourselves so that regardless of the scenario we are ok and minimize as much as possible the risk we expose ourselves to invest constantly disciplined having patience and treat the stock market as an instrument that can bring us long-term well-being in fact in the very long term because in the short term anything can happen and absolutely no one tells you can predict where we will be a year from now I'm curious what your opinion is so let's debate in the comments I'll wait for you there and Until next time I was Claudiu I greet you Goodbye m
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