Ever heard of legendary bond investor Howard Marks? Most people haven’t. Bond investing tends to fly under the radar—it’s important, but rarely the headline act. Well, he’s the guy who runs Oaktree Capital, and when he talks about market bubbles, you listen. Marks has lived through a few manias, from the ‘Nifty Fifty’ craze to the dot-com bust, and he argues that spotting a bubble is less about crunching numbers and more about checking the pulse of human psychology.
Think of it this way: a bubble isn’t just when prices go up fast. It’s a “temporary mania” fueled by what former Fed Chair Alan Greenspan called “irrational exuberance.” Not just the price increase—but the emotional mania as well.
According to Marks, you can look for three key psychological signs that a bubble is brewing, often corresponding to the final stage of a bull market:
- Outright Adoration: Investors treat a certain stock or asset like it “can’t fail.” It becomes adored, and everyone assumes it will succeed forever.
- Massive FOMO: The Fear Of Missing Out (FOMO) takes over. People jump in because their neighbor/golf buddy/colleague is getting rich, and they can’t stand to be left behind.
- “No Price Too High”: This is the biggest red flag. The rational analysis of value goes out the window, replaced by the conviction that the asset is so good, you should buy it at any price.
Bubbles always seem to wrap themselves around something new—be it railroads, the internet, or today’s talk of Artificial Intelligence (AI). Marks notes that newness is key. Why? Because when something is revolutionary, there is no history to temper the enthusiasm. People fall into the trap of saying, “This time is different,” and believe the old rules of valuation don’t apply.
Marks even distinguishes between two kinds of bubbles:
- Mean-Reversion Bubbles: These are just financial fads (like the sub-prime mortgage crisis). They destroy wealth and lead nowhere good. BAD BUBBLE
- Inflection Bubbles: These are based on real, revolutionary technology (like AI could be). They are necessary, as the speculative mania forces money to be poured into building the infrastructure needed for progress. But here’s the kicker: they still destroy wealth for the investors who get in at the peak. BETTER BUBBLE
So, what’s an investor to do? Marks’ advice is simple: Valuations are indicators of risk, not short-term return predictors. When risk is high, Marks believes you don’t abandon your plan—you make sure your plan can survive disappointment.
We believe valuations are worth paying attention to, but they’re rarely worth acting on in isolation. Markets will occasionally look expensive. Sometimes they will be expensive. That is not a signal to abandon a sound plan—it is the price investors pay for owning productive assets over time. The long-term return of equities has never been delivered smoothly or politely, and it never will be.
The reality is that no one knows when a bubble will burst, how far prices might fall, or how quickly markets will recover. What we do know is that the investors who fare best over time are not the ones who time their exits perfectly, but the ones who ensure their portfolios are aligned with their goals and risk tolerance before volatility (the bumpy ride) shows up.
That’s why our focus remains on the things we can actually control: diversification, understanding your time horizon, and maintaining an appropriate level of equity exposure that allows clients to stay invested through both good markets and bad ones. We do not manage portfolios based on headlines or predictions, because no one—no matter how confident they sound—can do that reliably. We manage portfolios so that clients can stay the course, confident that their plan was designed for exactly these moments.
Bubbles will come and go. So will corrections, bear markets, and recoveries. The goal isn’t to avoid every downturn—it’s to build a portfolio and a plan that doesn’t require perfect timing to succeed.
The future has always been uncertain. And yet, over time, disciplined investors (that is you at BCM!) should continue to be rewarded.
That is not optimism.
That is experience.