Howard Marks explained how bull markets form, why they are dangerous and why they never last, in a memo to customers from Oaktree Capital Management this week.

The billionaire co-founder and co-chairman of Oaktree explained how investor psychology leads to cycles of market excesses and corrections, argued that their greed outweighs their fear of losing money and pointed to the special purpose acquisition companies (SPACs) as a case of massive hype ending largely in disappointment.

Here are Mark’s 11 best quotes from his latest memo, slightly edited for length and clarity:

1. “Bull markets are characterized by exuberance, confidence, gullibility, and the willingness to pay high prices for assets, at levels that in retrospect turn out to be excessive.”

2. “It’s hard to imagine a full-throated bull market occurring in the absence of something that’s never been seen or heard before. The ‘new, new thing’ and the belief that ‘this time it’s ‘is different’ are shining examples of 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 seems unstoppable.” (Marks was referring to the virtuous cycle of optimism that fuels asset prices and vice versa.)

4. “The most important thing about bull market psychology is that most people view rising stock prices as a positive sign of things to come. Relatively few suspect that gains to date may have been excessive and borrowed from future returns, and that they portend a reversal, not a continuation.”

5. “Raging bull markets are examples of mass hysteria. In the extreme, thinking and therefore behavior become detached from reality.”

6. “Bull markets don’t just happen out of nowhere. The winners of every bull market are winners for the simple reason that a grain of truth underlies their gains. However, the uptrend tends to exaggerate the merits and pushes security prices at excessive and therefore vulnerable levels, and the rise does not last forever.

7. “It is essential to keep in mind that it is risk aversion and fear of loss that keep markets safe and sound. Rising asset prices, greed, fear of moving to aside and lack of caution usually combine to lift the markets, drive away careful inquiry and deliberation, and make the markets a dangerous place.”

8. “People who buy during the first stage of a bull market have the potential to earn high potential returns with little risk: the main prerequisites are the money to spend and the courage to spend it. But when bull markets heat up and good returns encourage investors’ optimism, the traits that are rewarded are eagerness, gullibility and risk-taking. In the third stage of a bull market, new entrants buy aggressively, keeping it up for a while. Caution, selectivity and discipline disappear just when they are most needed.”

9. “People who haven’t spent a lot of time watching the markets may believe that asset prices are all about fundamentals, but that’s definitely not the case. The price of an asset is based on fundamentals and how people perceive those fundamentals.”

10. “I don’t think investors are actually oblivious. On the contrary, knowledge of history and the correctness of prudence are on one side of the scale, and the dream of getting rich is on the other side. other. The latter always wins. Memory, caution, realism and risk aversion would only hinder this dream.”

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

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