Howard Marks just said the most dangerous words for investors

The entire history of turbocharging investing through debt has been written during this period, Marks says. “For example, I would venture that nearly 100 per cent of capital for private equity investing has been put to work since interest rates began their downward move in 1980.”

Marks doesn’t say rates are going to levels seen during the 1980s – in fact, he doesn’t see much reason why short-term rates should be much different in five years than they are today.

But he does suggest asset appreciation will be harder to come by, he does argue leverage won’t add as much to returns, given rates will be closer to expected rates of return, and he does question whether investors really appreciate that interest rates have juiced their returns for decades.

“That is, they may have violated a basic rule in investing: ‘Never confuse brains and a bull market.’”

Marks acknowledges there isn’t much evidence for his theory that interest rates won’t decline much from today’s level, and the coming years will be tougher for investors. “Why not? My answer is that the economy and markets are in the early stages of a transition that’s far from complete.” The enduring optimism of investors – and particularly equity investors, who’ve kept stocks moving sideways for months – is proof of that.

But nevertheless, the fact Marks is making what he says is “the first sea change [in markets] that he’s remarked on” is notable, as is his advice for investors: it’s time to embrace lending over asset ownership by shifting towards credit, where, for the first time in a long time, investors can access equity-like returns with lower risk.

“The bottom line I keep going back to is that credit investors can access returns today that are highly competitive versus the historical returns on equities, exceed many investors’ required returns or actuarial assumptions, and are much less uncertain than equity returns,” Marks says.

“Unless there are serious holes in my logic, I believe significant reallocation of capital toward credit is warranted.”

Marks isn’t alone in his call that a new investment regime is upon us. And in a way, he isn’t so much arguing that this time is different, but that the past 40 years were different – what we’re returning to is normalcy, where capital allocation actually matters.

But what’s really interesting is that Marks believes a riskier period can actually be navigated with a lower-risk asset class.