Can Howard Marks spot a stock bubble twice?

MOST people assume that the S&P 500 Index will go up over long holding periods. Wharton School professor Jeremy Siegel popularised the proposition in his 1994 book Stocks for the Long Run, and index-investing pioneer John Bogle made it easy for the masses to act on Siegel’s wisdom. That idea (which is indeed true in modern US history) has generally served investors well. But even as an adherent to Siegel and Bogle’s principles, the near-universal acceptance of the “stocks always go up” mantra is starting to worry me.

In a memo published Tuesday (Jan 7) titled On Bubble Watch, legendary investor Howard Marks reflected on perhaps the most prescient call of his career: an essay published 25 years ago that warned about irrational behaviour in dot-com-related stocks. As Marks puts it, one of the key features of the Internet bubble was a can’t-lose attitude about stocks. Here’s Marks:

“I always say the riskiest thing in the world is the belief that there’s no risk. In a similar vein, heated buying spurred by the observation that stocks had never performed poorly for a long period caused stock prices to rise to a point from which they were destined to do just that.”