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In the 15 weeks after Lehman Brothers collapsed, one man spent $6 billion while the rest of Wall Street was hiding under its desk. Roughly $400 million every single week into the worst market in 80 years. His name is Howard Marks and he wasn't gambling. He was following a rule the whole world had just forgotten.
Marks manages Oaktree Capital, around $200 billion today. And his edge isn't a secret formula. It's understanding that markets move in cycles and knowing where you are in that cycle before you act. That one skill is what we're unpacking today. Here's the number that changes everything. The stock market's average return is around 10% a year.
But the market almost never actually returns 10% in a given year. It's usually way up or way down. Marks compares it to a pendulum. It swings from greed to fear, from too expensive to too cheap, and it barely pauses at the reasonable middle. And most investors do the exact opposite of what they should.
They buy when prices are high and everyone feels safe. They sell when prices are low and everyone's afraid. Marks saw this in the dot-com bubble. In 2000, investors paid any price for companies with no earnings because the mood was euphoric. Then the Nasdaq fell 78%. But here's what nobody tells you about that pendulum.
Marks says something that sounds almost too simple. We may never know where we're going, but we'd better have a good idea of where we are. Read that again. He's not trying to forecast the future. Forecasting is a losing game. Instead, he takes the market's temperature. How do you take the temperature?
You watch behavior, not charts. When lenders are handing out money to anyone, when nobody's asking about risk, when your neighbor is quitting his job to day trade, the pendulum is near the top. That's when Marks gets cautious. When headlines scream the end of the world, when good companies trade like they're going bankrupt, the pendulum is near the bottom.
That's when he buys. So, think about right now. The last stock you bought, were you buying because it was cheap or because everyone else was? Tell me in the comments. Are you buying today out of confidence or out of fear? One word, confidence or fear? And this next idea is the one most investors get completely backwards.
Here's the counterintuitive truth. Being right isn't enough. You have to be right when the crowd is wrong. Marks calls this second-level thinking. First-level thinking says, "This is a great company. I'll buy it." Second-level thinking asks, "Everyone knows it's a great company, so is that greatness already baked into the price?" The first-level thinker and the second-level thinker can look at the same stock and reach opposite conclusions.
In 2008, first-level thinkers saw collapsing banks and sold everything. Marks, thinking one level deeper, saw quality debt being dumped at panic prices by people who had no choice. That's why he spent $6 billion while everyone else froze. And it worked because he prepared for it. Oaktree had raised a distressed fund of nearly $11 billion, the largest of its kind ever at the time, before the crisis hit bottom.
He didn't get lucky. He got ready. Remember what I said at the start, $400 million a week into the worst market in 80 years? This is why. He knew exactly where the pendulum was. Marks wrote two rules that fit on a napkin. Rule one, most things will prove to be cyclical. Rule two, some of the greatest chances for profit and loss come when people forget rule one.
That's it. When investors believe this time is different, when they think the good times will last forever or the bad times will never end, that's when the cycle turns and punishes them. This is why Warren Buffett once said that when a memo from Howard Marks lands in his mailbox, it's the first thing he opens and reads.
Not a research report. Not a hot tip. A letter about human behavior in cycles. So, here's the transformation. Once you accept that markets are cyclical, you stop chasing. You stop panic selling at the bottom and stop euphoria buying at the top. You start doing the hardest, most profitable thing in investing, acting against the crowd, calmly, because you know where the pendulum is.
Marks didn't beat the market by predicting the future. He beat it by refusing to forget that winter always follows summer, and summer always follows winter. This is educational content, not financial advice, and remember, past performance never guarantees future results. But, the principle is timeless.
The investor who understands cycles doesn't fear them. He waits for them. So, did this flip how you think about market crashes? Do you see them as danger or as opportunity? Tell me below, danger or opportunity. And tomorrow, we're breaking down the one balance sheet number that quietly warns you a company is about to fall apart. You won't want to miss it.
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