One of our core tenets at American Money Management is we can’t predict the future. We don’t know what the equity markets will do this year, next year, or the year after that.
No one can.
Capital markets are dynamic systems. There are too many participants involved and too many variables interacting and influencing each other to make accurate predictions about the future.
What we can do is take the temperature of the capital markets. To see where we stand along the risk spectrum. Are capital markets pro-risk, anti-risk, or somewhere in between?
This is the position of Howard Marks, Chairman of Oaktree Capital. I can’t remember in which one of his memos he put this in but Howard Marks created a checklist for gauging the capital markets’ appetite for risk. I recreated Howard Marks’ checklist below.
Market Risk Checklist
I recently went through the checklist and I found myself checking all the boxes on the left side.
I view the market as being very pro-risk.
I tried to be objective as possible when filling out the checklist but I can’t escape my biases. I could have easily over estimated how much risk the market is taking. If you work with a team or a couple other people, I would recommend each person complete the checklist on their own and then compare each other’s answers.