Ponder the following:

“Where do we stand today? In my opinion, there’s little mystery. I see low levels of skepticism, fear and risk aversion. Most people are willing to undertake risky investments, often because the promised returns from traditional, safe investments seem so meager.”

“Markets have tended recently to move up on positive developments and to recover easily from negatives. I see few assets that people are eager to get rid of, and few forced sellers; instead, most assets are strongly bid for. As a result, I’m not aware of any broad markets that I would describe as underpriced or uncrowded. … It is what it is. We’ve been living in optimistic times. The cycle has been swinging strongly upward. Prices are elevated and risk premiums are slender. Trust has replaced skepticism, and eagerness has replaced reticence. Do you agree or disagree? That’s the key question. Answer it first, and the implications for investing become clear.”

Howard Marks, July 16, 2007


The following 2 years in U.S. Stocks:


Click to enlarge…
 


The eerie similarity of the commentary above to present conditions aside, I am not predicting a peak-to-trough 57.69% decline over the next two years — nor was Marks when he penned it in the summer of 2007. I am, however, suggesting that similar conditions lead into great bear markets virtually 100% of the time. Doesn’t mean it has to happen this go around, it simply means that when the next bear does come around conditions like the present will have served as fair warning.


So what do we do? We include non-correlated-to-stocks assets in our portfolios and we hedge till conditions change. Whether they change amid a continuation of the longest bull market ever, or near the bottom of the next bear, frankly, doesn’t much matter to me. 


What matters to me is that we’ve recognized the risk and are acting accordingly.