Billionaire investor Howard Marks sounds the alarm on an area of the market that is 'in vogue' - and explains why it resembles the tech bubble
- Howard Marks, the co-founder and co-chairman of $119 billion Oaktree Capital Management, shares a stark warning for investors who may have forgotten one of the most important lessons the tech-bubble had to offer.
- Marks sees the prevalence of sentiment behind profitless companies towards the "positive end of the pendulum's arc."
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Investors have an uncanny ability to repeat mistakes.
Time after time, past foibles are replicated in search of alpha - a truism that's older than dirt.
And although history serves as a reliable teacher, market participants' ephemeral memories often undermine their ability to apply this lesson to the future.
But Howard Marks, the co-founder and co-chairman of $119 billion Oaktree Capital Management, thinks investors can learn a thing or two from the past - and he's not shy about sharing his opinions.
In a recent memo, Marks put his highly sought-after views on display regarding one suspicious market phenomenon in particular: profitless companies.
"Today, profitless companies are back in vogue and sometimes valued in the tens of billions of dollars," he wrote.
The share of profitless companies that went public last year climbed above 80% in 2018, matching levels last seen at the height of the tech bubble in 2000, data compiled by University of Florida Professor Jay Ritter show. This year, Uber, Lyft, and Beyond Meat were among the companies with zero profits and hotly anticipated initial public offerings.
Without producing a single dollar in profits, select few companies like these have garnered insatiable demand and fanatical popularity. By virtue of unbridled eagerness, profitless firms continue to attract swaths of capital - and the trend shows no signs of slowing down.
But Marks don't necessarily think that this notion in itself is a problem.
He continued: "There's nothing wrong with this, as long as the possibility is real, not over-rated and not over-priced. The issue for me is that in a period when profitless-ness isn't an impediment to investor affection - when projected tech-company profitability commencing years from now is valued as highly as, or higher than, the current profits of more mundane firms - investing in these companies can be a big mistake."
Remember, risk and reward are inextricably linked. Betting on a firm that hasn't turned a profit could prove to be a success. But it can also result in disaster.
Some of the institutions Marks goes on to mention, including Uber and Lyft, have posted losses in the hundreds of millions. However, sentiment surrounding their businesses remains paradoxically sanguine. In addition, the over-extrapolation of value - which is the most important part of Marks' message - seems to have fallen by the wayside.
To further his point, the investment mogul draws on parallels between today's environment and the tech-bubble which exhibited the same type of zealousness.
"Today there are a lot of investors who weren't around to see the 2000 bursting of the TMT bubble, in which large numbers of Internet and e-commerce companies were given the benefit of the doubt, only to end up worthless," he said, referring to a period of time when the Nasdaq lost over 75% of its value in two-years.
Although Marks' warning is stark, sound interpretation of a profitless firm's growth prospects could prove to be profitable.
"Investor sentiment seems to be closer to the positive end of the pendulum's arc these days, but it's unlikely to stay there in perpetuity."