Howard Marks on Asset Allocation: What to Do When U.S. Stocks Are Too Expensive? How to View Chinese Assets?

Recently, Howard Marks, co-founder of Oak Tree Capital Management, shared his views on current U.S. stock investment strategies and opportunities in China during an interactive interview.

He stated that in a high-valuation market like the U.S. stock market, simply adhering to the mindset of "the price is high, so I should exit" is incorrect. Instead, one should adjust strategies and find a balance between aggression and defense.

At the same time, he has been increasing his positions in Chinese assets, optimistic about their long-term value. He believes that on one hand, Chinese assets are cheaper and more attractive; on the other hand, he is optimistic about China's sustainable growth model that does not overly rely on stimulus, believing that China still has significant growth potential.

Regarding the current relationship between Trump and Musk, he believes that it has limited impact on investors and is not enough to change Tesla's prospects, so investors should not make large purchases of Tesla based on this.

Here are the key points from the interview:

• U.S. stock valuations are relatively high compared to history, which tells me to be slightly less aggressive and more defensive than usual, but not necessarily to exit.

• Buffett hasn't sold all his stocks. I believe others shouldn't either.

• We are now choosing a "bottom-up" approach to decision-making. In a market logic that is quite chaotic, we shouldn't spend time pricing an uncertain future; we should try to focus on individual companies and pay more attention to their development.

• I believe what is happening means Musk will do more than he has in the past, and then we will see if it works. But you know, this is just another unpredictable and uncertain thing, and I think most investors shouldn't do anything about it. The reasoning that Trump's relationship with Musk and Musk's role in the government will improve Tesla's prospects is very far-fetched.

• China has created what I call the "China Miracle." When entering modernization, their average GDP growth reached 10% per year.

• I have achieved success throughout my career by purchasing assets that others deemed uninvestable.

• I believe that first and foremost, China has great potential for its own development. U.S. prices are high, while Chinese prices are favorable; which is better? This makes Chinese assets more attractive, and all investments are a matter of relative choice.

Below is the original text of the interview, with some content slightly edited:

In a High-Valuation Market, Investors Should Find a Balance

Question:

Given Trump's remarks about quickly ending the conflict, are investors ignoring the escalation of the situation? It is such a chaotic world, and traders seem to underestimate geopolitical risks, even today, when everyone's attention is focused on Nvidia.

Howard Marks:

The world is chaotic, and the future is never clear. Some people spend time trying to predict the future and price it. I believe this is unclear, and we abstract from it. So, we just try to look at individual companies, figure out which will grow, which will repay loans, and trade based on that. We call this approach 'bottom-up' rather than a 'top-down' investment strategyQuestion:

You talk about intrinsic value, and everything else is nonsense. But in an overvalued market, how do you obtain intrinsic value? I mean, valuations are skyrocketing, especially in the S&P.

Howard Marks:

You say it is overvalued, and I would say it is highly priced. Overvalued is a subjective judgment; you consider how much something is worth and then compare it to actual sales. In my view, this should determine whether you are aggressive or defensive. Therefore, I think we would agree, for example, that U.S. stock valuations are relatively high compared to history, which tells me to be slightly less aggressive and a bit more defensive than usual, but not necessarily to exit.

Exiting is really a big step, and in my 55 years of experience, most of the time it is a mistake. Either you exit and it goes up, or you exit and it goes down, and when you forget to re-enter, it has already gone up while you were out. So, it’s just a matter of calibrating your behavior between aggressive and defensive; when things are a bit high, like now, be a bit more defensive than usual. But the concept of a risk switch, the idea of getting in and out of trades, is too black and white and doesn’t fit the world we live in.

Question:

The problem is, now we see a herd mentality, ordinary investors are getting into everything that institutional investors are entering. Traditionally, that’s the time to exit.

Howard Marks:

Everyone, we are not market timers; we are not macro forecasters. I insist this is true; in 2019 you could say, I think there will be a pandemic, I want to exit; in 2021 you could say, I think there will be a Russia-Ukraine conflict, I want to exit; in 2022 you could say, I think there will be a conflict between Hamas and Israel, I want to exit.

Your judgment about events may be right, but it will cost you a lot of money. We can never predict what will happen in the broader world, but we also know how the market will react.

So, stubbornly saying “the price is high, I want to exit” is a mistake. Buffett has a saying that sums it up best: don’t bet against the U.S. stock market.

Question:

Buffett has pulled over $300 billion out of the market. Why?

Howard Marks:

He says there’s just nothing to buy. But what percentage of buying is that? People look and say, Buffett sold some stocks. Does that mean we should exit? What percentage of stocks did he sell? Probably quite a small amount. So, this is not a broad statement. If it’s a bit high, I suggest not being so aggressive; if you want to sell 2% or 3% of your stocks, I understand. But Buffett didn’t sell all his stocks. I don’t think others should either.

Question:

Goldman Sachs came out and said they predict the S&P 500 will rise by 10% from now until the end of 2025. Is Goldman Sachs right?

Howard Marks:

10%, that’s quite good, isn’t it? On the other hand, I think it’s fair to say that Goldman Sachs released a report three or four weeks ago stating that the P/E ratio of the S&P 500 is high. So compared to the average return of 10% over the last century, they predict a return of 3% over the next decadeSo that is quite cautious; it’s not about exiting or selling, but rather, moderately adjusting your expectations.

On the other hand, achieving a 10% increase from now until the end of 2025 would be quite good. I think this actually indicates that short-term investments are very uncertain. No one should think they really know what is going to happen next. Most people should adopt a nearly passive attitude. The idea is that investing is good, long-term investing is good, and trying to control the in-and-out in the short term is bad. If everyone gives up on the in-and-out, you might lose some audience. But the point is, investing is a good thing. Do it early, do it more, so you can build a reserve. Don’t mess it up.

Tesla "not worth it" due to the relationship between Trump and Musk

Question:

You mentioned that it’s hard to do in the short term. Well, let’s look at it from a long-term perspective. The Trump administration, look at the nominees he suggested for the cabinet, such as Warsh possibly serving as Treasury Secretary. What do you think? How will this affect market sentiment and the development of the situation?

Howard Marks:

These things are hard to say. First, what will happen? No one knows. His appointments are not yet confirmed. They have not been approved. His policies are not yet clear. What will he do? No one really knows what he will do.

Secondly, what else will happen in the world? He is not the only focus. Things are complicated. Third, how will the market react to all these things? Fourth, the president's influence on most things is usually quite limited. Fifth, as I said before, our investments, our economic situation are good.

We want to get good situations at low prices, which rarely happens. I don’t think the current situation is crazily high, nor do I think it’s time to exit.

Question:

What do you think about the relationship between the president and Musk? For example, he was appointed to head the government efficiency department. We just saw Trump attend Musk’s SpaceX event.

What do you think about the potential for Tesla to profit from this? Do you think electric vehicles have the potential to profit from this? What’s your take on this issue?

Howard Marks:

I’m not smart enough to answer that question. I think this is a very unusual situation, one we rarely see. If you want, you can call it a “romantic brotherhood” between a president and a company founder.

There’s no doubt that Musk is smart and unconventional. People have been talking about improving government efficiency and eliminating fraud and waste for decades, but I think no one has taken any action on it.

The question is, I think what is happening means Musk will do more than he did in the past, and then we will see if it works. But you know, this is just another thing that is so unpredictable and uncertain, and I think most investors shouldn’t do anything about it.

Question:

So, there’s no reason to go heavily buying Tesla?

Howard Marks:

No, the reasoning that people think the relationship between Trump and Musk and Musk’s role in the government will improve Tesla’s prospects is very far-fetched, and I wouldn’t do that

The Long-Term Value of Chinese Assets

Question:

China has always been in the spotlight. Recently, China has taken fiscal stimulus measures; do you think China has done enough? I know you see value in some Chinese stocks.

Howard Marks:

China has created what I call the "China Miracle." When entering the modernization era, they achieved an average GDP growth of 10% per year, part of which was built on stimulus measures.

They are trying to adjust the right stimulus to achieve good growth without overly relying on it. This is not easy to do, and I hope they succeed; I know they are committed to it. They understand the importance of 5% GDP growth. Let me say, compared to the rest of the world, this is a growth rate far above average.

Question:

Why is there still so much value in China?

Howard Marks:

I think, first of all, China has great potential for its own development. Prices in the U.S. are high, while prices in China are favorable; which is better? This makes Chinese assets more attractive, and all investments are a matter of relative choice.

Question:

What do you think about China's valuations? In terms of industries?

Howard Marks:

Whenever you have a lot of construction, and this construction is highly stimulated by the availability of capital, you must go through an adjustment period during which the buildings that have been constructed will be absorbed, some need to be repurposed, and some need to grow to fit the sector; this won't happen overnight. It takes some time. The question is not whether they need to do this. The question is whether they will formulate policies aimed at creating absorption. My view is that they will.

I have built my entire career by purchasing assets that others consider uninvestable. When you do this, you have the opportunity to acquire assets at a cheap price.

Question:

So have you been increasing your positions in China?

Howard Marks:

Well, we have good investments in China and have maintained those investments for a long time. The assets available at currently depressed prices are a great starting point