To The Moon

$JD.com(JD)$ $Alibaba(BABA)$ $TENCENT(00700)$ $NetEase(NTES)$ $Broadcom(AVGO)$

The stock market experienced significant volatility, with the S&P 500 down 3%, retail favorites like Tesla dropping 8% (plus 1.7% in after-hours trading), and AVGO down 7%. The sell-off was triggered by the Federal Reserve’s decision to lower interest rates by 0.25% and signal only two 0.25% cuts for 2025—less than the market’s expectation. UNH is the only one that look very Green in the chart LOL!!!

The Global Economy Is Becoming Chaotic

The world is unpredictable, and the future is never clear. Legendary investor Howard Marks built his career on buying assets others deemed "uninvestable," often finding bargains by going against the crowd. With a net worth of $2.2 billion, Marks, through his firm Oaktree Capital Management, has become a master of value investing. In a recent interview, he shared his thoughts on the U.S. economy, investing in China, Trump’s influence on the stock market, and strategies for navigating an uncertain future.

The inflation experienced in recent years has primarily resulted from the pandemic, over-borrow and money printing from USA, with the Russian invasion of Ukraine playing a secondary role. Disruptions in business production capabilities coincided with abrupt shifts in consumer demand for goods and services, causing imbalances in supply and demand, leading to both surpluses and shortages across the economy.

The positive news is that inflation caused by these temporary factors appears to be easing, and overall inflation likely raise again next year after Trump become President. However, the concerning news is that the underlying rate of inflation seems to have risen modestly, increasing from around 2% annually to about 4-5% annually.

Marks’ Investment Philosophy: Bottom-Up Approach

Howard Marks takes a different approach than most investors. Instead of trying to predict macroeconomic trends, he focuses on analyzing individual companies—what he calls a “bottom-up” strategy. This approach emphasizes understanding what’s knowable, such as company fundamentals, rather than guessing how overall market movements or economic trends and unpredictable global events will affect markets.

For example, Marks highlighted three major geopolitical events in recent years—COVID-19, Russia’s invasion of Ukraine, and the Hamas-Israel conflict. These events significantly impacted the world, yet trying to time the market based on them would have led to missed opportunities. Marks cautions that while major events grab headlines, they don’t always align with market behavior. Staying invested through uncertain times is often the better strategy.

Examples of Bottom-Up Investments

Bottom-up investment philosophy is characterized by a focus on individual asset analysis, risk management, contrarian thinking, and patience. By emphasizing value and detailed scrutiny of specific opportunities, Marks aims to capitalize on market inefficiencies without being overly reliant on macroeconomic forecasts.

Pfizer (PFE) is a strong candidate for a bottom-up investment approach because its products and services are widely recognized and understood by investors. Once Meta is identified as a promising company, investors can conduct a thorough analysis of its management structure, financial health, marketing strategies, and stock price. This process includes calculating key financial ratios, examining their historical trends, and forecasting future growth.

The next step is to benchmark Meta's financials against its competitors and peers in the social media and internet industry. This comparison helps determine whether Meta exhibits unique strengths or notable anomalies compared to its rivals. Following this, Meta’s performance can be evaluated relative to the broader technology sector.

Finally, an investor would factor in general market conditions — such as comparing Meta’s price-to-earnings (P/E) ratio to that of the S&P 500 — and assess whether the market is experiencing a bull or bear phase. The analysis concludes by considering macroeconomic factors like unemployment, inflation, interest rates, and GDP growth to support the investment decision.

Distressed Debt: Investing in companies experiencing financial distress where the potential recovery value of assets exceeds market expectations.

High-Yield Bonds: Carefully analyzes the fundamentals of companies issuing high-yield (junk) bonds to identify opportunities that others overlook.

Valuation and Market Conditions

The S&P 500's Price-to-Earnings (PE) ratio is a key indicator for assessing whether the index is overvalued, undervalued, or fairly valued. Historically, the PE ratio for the S&P 500 has averaged around 15-17 over the long term. However, what constitutes "overvaluation" can vary depending on factors like interest rates, economic growth expectations, and market conditions. Overvaluation Indicators: A PE ratio consistently above 25 or nearing 30 could indicate significant overvaluation. But today the PE ratio is over 30.

One of the key challenges Marks sees today is the high valuation of U.S. stocks. The CAPE ratio—a more conservative measure of price-to-earnings ratios for the S&P 500—sits at elevated levels. However, Marks distinguishes between “high-priced” and “overpriced.” While valuations are high, he argues this doesn’t mean it’s time to sell everything. Instead, investors should adjust their strategies, becoming slightly more defensive.

Marks advises avoiding extreme decisions like completely exiting the market. Instead, focus on maintaining diversification, reducing exposure to overvalued sectors, and holding a cash buffer to capitalize on future corrections. Markets move in cycles, and a disciplined, long-term approach often outperforms attempts to time short-term market swings.

Investing in China: A Contrarian Opportunity

Marks also discussed his investments in Chinese companies like JD.com, Alibaba, and NetEase. While many view Chinese stocks as risky due to economic uncertainty and geopolitical tensions, Marks sees opportunity. He believes China’s challenges, particularly in its property sector, are temporary and that the country’s economy will eventually stabilize.

“Many people in the investment community describe China as uninvestable,” Marks said. “To me, that word is music to my ears.” His contrarian mindset has driven his success, seeking value in areas others avoid. While investing in China carries risks, Marks focuses on the long-term potential of undervalued assets.

Lessons for Investors: Stay the Course

Marks emphasizes the importance of intrinsic value over market noise. He urges investors to resist short-term thinking, avoid making decisions based on sensational headlines, and maintain a long-term perspective. Timing the market is notoriously difficult, and missing just a few of the best-performing days can significantly impact returns.

For example, staying invested in the S&P 500 from 2003 to 2022 would have turned $10,000 into $64,844. However, missing the 10 best days during that period would have reduced the total to $27,000. The takeaway? Stay disciplined and don’t let fear or speculation drive your decisions.

Marks’ insights remind us to balance caution with optimism, focus on fundamentals, and adapt strategies to current market conditions without overreacting. His message is clear: invest for the long term and avoid trying to outsmart the market with short-term moves.

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