Billionaire investor Howard Marks lays out how bull markets form, why they're dangerous, and why they never last. Here are the 11 best quotes from his new memo.

• Howard Marks's latest memo outlines how bull markets form, their risks, and why they always end.
• The Oaktree boss emphasizes the role of human psychology in market excesses and corrections.

Howard Marks explained how bull markets form, why they're dangerous, and why they never last, in a memo to clients of Oaktree Capital Management this week.

Oaktree's billionaire cofounder and co-chairman outlined how investors' psychology leads to cycles of market excesses and corrections, argued their greed trumps their fear of losing money, and pointed to special-purpose acquisition companies (SPACs) as a case of massive hype largely ending in disappointment.

Here are Marks' 11 best quotes from his latest memo, lightly edited for length and clarity:

1. "Bull markets are characterized by exuberance, confidence, credulousness, and a willingness to pay high prices for assets — all at levels that are shown in retrospect to have been excessive."

2. "It's hard to imagine a full-throated bull market arising in the absence of something that's never been seen or heard before. The 'new, new thing' and belief that 'this time it's different' are shining examples of recurring bull-market themes." (Marks listed Big Tech companies, meme stocks, SPACs, and cryptocurrencies among the drivers of the recent bull market.)

3. "This upward spiral is the essence of a bull market. When it's underway, it feels unstoppable." (Marks was referring to the virtuous cycle of optimism fueling asset prices and vice versa.)

4. "The most important thing about bull-market psychology is that most people take rising stock prices as a positive sign of things to come. Relatively few suspect that the gains to date might have been excessive and borrowed from future returns, and that they presage reversal, not continuation."

5. "Raging bull markets are examples of mass hysteria. At the extreme, thinking and thus behavior become unmoored from reality."

6. "Bull markets don't arise out of thin air. The winners in each bull market are winners for the simple reason that a grain of truth underlies their gains. However, the bullishness tends to exaggerate the merits, and pushes security prices to levels that are excessive and thus vulnerable. And the upward swing doesn't last forever."

7. "It's essential to bear in mind that it's risk aversion and the fear of loss that keep markets safe and sane. Rising asset prices, greed, the fear of missing out, and a lack of caution typically combine to lift markets, drive out cautious investigation and deliberation, and make the markets a dangerous place."

8. "People who buy in stage one of a bull market have the potential to earn high prospective returns with little risk: the main prerequisites are money to spend and the nerve to spend it. But when bull markets heat up and good returns encourage investors' optimism, the traits that are rewarded are eagerness, credulousness, and risk-taking. In stage three of a bull market, new entrants buy aggressively, keeping it aloft for a while. Caution, selectivity, and discipline go out the window just when they're needed most."

9. "People who haven't spent much time watching markets may believe that asset prices are all about fundamentals, but that's certainly not so. The price of an asset is based on fundamentals and how people view those fundamentals."

10. "I don't think investors are actually forgetful. Rather, knowledge of history and the appropriateness of prudence sit on one side of the balance, and the dream of getting rich sits on the other. The latter always wins. Memory, prudence, realism, and risk aversion would only get in the way of that dream."

11. "SPACs are a good example of a new thing that turned out to be less dependable than investors – who fell once again for a can't-lose silver bullet – had thought." (Marks noted the average SPAC that has completed an acquisition since 2020 is trading at $5.25 a share, or nearly half its issue price of $10.)