Howard Marks Warns: The S&P 500 Is No Longer Profitable, and a Recession Looms
How This One Mistake Could Destroy Your Wealth in 2025
I’ve been writing optimistically for quite some time. Throughout this period, I’ve talked extensively about Bitcoin, which I believe makes sense and has been highly profitable, going from $16,000 (purchase price) to over $100,000. I’ve also discussed how debt is making the rich richer and the poor poorer, and how everyone should leverage debt (a little) — not to buy their first home, though.
I’ve highlighted the great potential of hard assets, and although my opinion has hardly changed, I believe that utterly irrational optimism could lead to the largest market crash since the Great Recession.
Just yesterday, for example, a coworker who is "subscribed" to an investment course told me they were advised to buy two altcoins. He didn’t recognize either of them, named Near and Hereda (or something like that). This is a clear sign that people are starting to get overly aggressive.
Do you know what I told my coworker? The worst thing that could happen to you is for this investment to go well. If it does, you’ll start investing in things you don’t understand, and when this crashes (as it will), you won’t have an investment thesis to hold your position, and you’ll exit with a 60% loss from your entry price.
Today, I want to talk about this exact process — the creation of a bubble. A few weeks ago, I read Howard Marks’ Memo, written by one of the most respected investors in the world.
In the Memo, he discussed irrational exuberance and the same process I just described about my coworker. It’s a cycle that repeats itself over and over. I still remember 2021 when everything seemed to hold value in the world of altcoins and Growth stocks.
Here are a few examples of some recommendations I received back then:
Those who paid $53 for a Polkadot token today have $6. What’s ironic about the process is that the same person who recommended buying at $53 has reinvested at $4–$5 and still justifies a 50% upside. Personally, this is not the type of investment I favor, especially when the thesis is simply: “the founder is the same as Ethereum’s.”
Who’s the founder of Gold?
Who’s the founder of the MSCI World?
You see where I’m going, right? I want to invest in something where, when the price drops, I don’t panic and run. Additionally, I want to know that the chances of bankruptcy are zero.
In the Memo, there were a series of recommendations I’d like to share with you:
The cautionary signs today include these:
The optimism that has prevailed in the markets since late 2022,
The above-average valuation on the S&P 500 and the fact that its stocks in most industrial groups sell at higher multiples than stocks in those industries in the rest of the world,
The enthusiasm being applied to the new trend of AI and perhaps the extension of that positive psychology to other high-tech areas,
The implicit presumption that the top seven companies will continue to succeed, and
The possibility that some of the appreciation in the S&P has stemmed from automated buying of these stocks by index investors, without regard to their intrinsic value.
Finally, while I’m at it, although it’s not directly related to stocks, I have to mention Bitcoin. Regardless of its merit, the fact that its price rose 465% in the last two years doesn’t suggest an overabundance of caution.
I often find that, just as I’m about to release a memo for publication, something comes along that demands inclusion, and it has happened again. On the last day of 2024, I received something from two sources that fits that description:
This last chart is key. Essentially, it tells us that at these P/E levels, returns on the S&P 500 have never been achieved before.
As you know, I firmly believe in leaving no loose ends. In life, we must be prepared for everything — both personally and financially. It’s a bit like the Stoic mindset that was so trendy a couple of years ago.
Regarding finance, some subscribers complain about continuously paying for an insurance strategy with far OTM options. I’d like to remind you that the portfolio has returned nearly 100% in two years without using this insurance.
Lastly, and tying everything together, if Howard Marks emphasizes anything in the Memo — up to three times — it’s that the key is not to buy good things, but to buy things at a good price. In fact, he notes that even the worst stock can rise significantly if purchased at a bargain. This is exactly what we aim to do the day we activate our Tail Hedge.
If you don’t want to listen to me, then take it from one of the best investors in the world.
Now, our asymmetric portfolio in detail