Marks says credit instruments now offer equity-type returns with high single to low double digit yields.
“Today, you can get equity type returns from what we call credit instruments, loans, corporate corporate loans, loans for buyouts.”
Marks defines real investment accomplishment as making money with controlled risk, not just returns.
“To me, the real accomplishment is making money with the risk under control. And that's what thinking about risk, I think, helps you do.”
Marks clarifies that risky assets must appear to offer higher returns to attract investors, not guarantee them.
“assets that are expected to be riskier have to appear to offer a higher return or nobody will make those investments. That makes a 100% sense, doesn't it?”
Marks argues that if risky investments guaranteed higher returns, they would not be risky by definition.
“if riskier investments could be counted on to produce higher returns, then by definition, they're not risky. So that can't be right.”
Marks clarifies that risky assets must appear to offer higher returns, not that they deliver them.
“assets that are expected to be riskier have to appear to offer a higher return or nobody will make those investments. That makes a 100% sense, doesn't it? So that's what this relationship means”
Marks says current S&P PE ratios historically predict very low single-digit returns over next decade.
“Historically, if you bought at this PE ratio, your return over the next ten years averaged in the very low single digits. So I I think we're in a moderate return scenario.”
Marks says S&P valuation suggests very low single-digit returns over the next ten years based on historical PE ratios.
“Historically, if you bought at this PE ratio, your return over the next ten years averaged in the very low single digits.”
Marks says 2023-2025 is the seventh best three-year period for the S&P 500 in a century, signaling elevated optimism.
“The period, twenty three four five is for the S and P 500 is, I think, the seventh best three year period out of the last 100. Seventh out of a 100.”
Marks quotes Buffett preferring lumpy 15% return over smooth 12%, challenging volatility aversion.
“Buffett again. Buffett says, I'd rather have a lumpy 15% return than a smooth 12.”
Marks quotes Buffett preferring a lumpy 15% return over a smooth 12%, challenging excessive focus on volatility.
“And I would say to people, if you'd rather have a smooth 12 than a lumpy 15, you have to ask yourself what's going on.”
Marks notes the last three years rank among the top six in S&P 500 history.
“The S and P 500 stock index has been around for about a century. There have been ninety seven or ninety eight three year periods by definition.”
Marks quotes Buffett preferring lumpy 15% returns over smooth 12% if you can survive volatility.
“And if you can survive long enough to enjoy the long term benefit of the lumpy 15, it beats the hell out of the smooth 12.”
Marks explains risky assets must appear to offer high returns, but don't have to deliver them.
“What the relationship means is that an asset that appears to be risky has to appear to offer a high return or else nobody will buy it.”
Marks says optimism and credulousness dominate today's market, making excess returns harder to achieve.
“I think you would have to say, optimism, not pessimism, credulousness, not skepticism, are in the ascendancy today, and when optimism and credulousness are in the ascendancy, it gets hard to make return investments that will produce what we call excess returns,”
Marks says direct lending stopped offering excess returns one to two years ago, delivering only adequate returns.
“I would say that as of a year or so, maybe two years ago, direct lending was, as you say, you use the term alpha, it was no longer special.”
Marks outlines four ways to achieve superior returns: buying below value, financial structure, adding operational value, and premium valuations.
“You apply the right financial structure, which also which often means leverage, you add value intrinsically to the operation, and you see it go to a premium valuation relative to what you pay.”
Marks notes declining rates made financial engineering and leverage particularly effective at generating returns.
“In this period we've been through of declining interest rates, financial engineering helped a lot, merely owning assets with leverage helped a lot, things regularly went to premium valuations.”
None of their investments became massive successes like Uber.
“we did not have any of them become the next Uber or something massive,”