When Marks Sees Risk On or OffCopy Anchor Link

When Marks Sees Risk On or OffCopy Anchor Link

Howard Marks does not use "risk-on / risk-off" as a formal trading signal. His version is the pendulum: investor psychology swings between paired extremes and spends little time at the midpoint. His first statement of it, in "First Quarter Performance" (April 1991), is reprinted in the July 2007 memo:

The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum "on average," it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc.

The risk-on / risk-off polarityCopy Anchor Link

In the same 2007 memo he lists the polar opposites the pendulum oscillates between: between greed and fear, between optimism and pessimism, between risk tolerance and risk aversion, between credence and skepticism, and between urgency to buy and panic to sell. The two sets are causally linked: "When a market has been rising strongly for a while, we invariably see all nine of the elements listed first."

"Risk on," in his language, is the cluster euphoria, greed, optimism, risk tolerance, credence; "risk off" is depression, fear, pessimism, risk aversion, skepticism. This is the machinery behind cycles and mr-market: the swing is a feature of crowd psychology, not of fundamentals, which is why he insists "we never know where we're going, but we ought to know where we are."

A chronology of his calls, 1991–2022Copy Anchor Link

• 1991 ("First Quarter Performance") — establishes the pendulum; names the swing "between euphoria and depression" and "between overpriced and underpriced."
• July 2003 ("The Most Important Thing") — "We must never forget about the inevitability of cycles", and "prices sometimes represent high multiples of peak prospects ... and sometimes low multiples of trough prospects." He frames the job as being "mindful of cycles (and where we stand in them)."
• July 2007 ("It's All Good") — risk-on peak. He dates the upswing to November 2002 and reads the environment as marked by "euphoria, greed, optimism, risk tolerance and credence." He closes quoting Buffett: "It's only when the tide goes out that you find out who's been swimming naked."
• September 2007 ("Now It's All Bad?") — the flip, just seven weeks later: the prevailing attitude appears to have swung from 'it's all good' to 'it's all bad.' Pessimism has replaced optimism, perhaps also to excess.
• March 2008 ("The Tide Goes Out") — names the unwinding: "the ebbing of the tide – and the exposing of those who engaged in that behavior" after "unprecedented amounts of leverage, innovation and risk taking between late 2002 and mid-2007."
• December 2022 ("Sea Change") — the structural, not merely cyclical, turn. He declares the four-decade declining-rate tailwind over and the environment shifted from a "low-return world" to a "full-return world," with credit again able to deliver equity-like returns. (See sea-change.)

Pendulum vs. sea changeCopy Anchor Link

The distinction matters. Marks separates the cyclical swing (the pendulum, which always reverts) from the structural shift (the sea-change, which does not revert). In "The Pendulum in International Affairs" (March 2022) he applies the same lens to geopolitics — offshoring versus onshoring — and reiterates why he reaches for it: "the pendulum is the best metaphor for understanding trends in anything affected by psychology."

How to read itCopy Anchor Link

For Marks, "risk on" is not a buy signal and "risk off" is not a sell signal. The observable tells — where the pendulum sits between greed and fear, what prospective returns imply, whether lenders are eager or reticent — tell you where you are in the cycle and therefore which mistakes to guard against. That is second-level-thinking applied to timing: the pendulum's position is common knowledge; acting on it before the crowd does is the edge.

SourcesCopy Anchor Link

• howard-marks/Memos-Markdown/2007-07-16 - It's All Good.md
• howard-marks/Memos-Markdown/Sea Change.md
• howard-marks/Memos-Markdown/2003-07-01 - The Most Important Thing.md
• howard-marks/Memos-Markdown/2007-09-10 - Now It's All Bad.md
• howard-marks/Memos-Markdown/2008-03-18 - The Tide Goes Out.md
• howard-marks/Memos-Markdown/The Pendulum in International Affairs.md