S&P 500 PE ratio above 23 historically resulted in 2-2% annualized returns over 10 years, with current PE ratio at 24, indicating low expected returns for the next decade.
Oaktree Capital has consistently invested in high-yield bonds for 47 years, achieving 7-8% yields comparable to 10% S&P 500 returns, but taxes reduce after-tax returns to 4-7%.
Understanding market cycles and current position can improve investment odds, as financial behavior extremes are rooted in human nature and recur.
Risk Management and Portfolio Diversification
Investors should mix S&P 500 and bonds in portfolios, as bonds offer 7-8% yields with less volatility than stocks.
Believing there’s no risk is the riskiest approach in the market, as human behavior drives market risks.
Historical Market Insights
Howard Marks’s bubble.com memo in 2000 accurately predicted the tech bubble collapse, noting signs like people quitting jobs to trade stocks and unprofitable companies being highly valued.
Investment Principles
Emotional investing is a major pitfall; being unemotional allows for more rational decision-making. Value investing, focusing on buying undervalued assets, can lead to significant returns through research, analysis, and risk management
Crisis and Bubble Investing
Investing during crises or bubbles can be high-risk, high-reward, requiring thorough research, analysis, and risk management.
Reading Recommendations
📚
Recommended books include “The Most Important Thing”, “Mastering The Market Cycle”, and “A Short History of Financial Euphoria” for investment insights.