December Newsletter

ONE OF THE FOREMOST INVESTORS OF MODERN times—whose thoughtful memos have become required reading in the financial community—is a gentleman named Howard Marks. Nearing age 80, Mr. Marks is co-founder and co-chairman of Oaktree Capital Management, the world’s leading investor in distressed securities.

Like all outstandingly successful investors, Mr. Marks is first and foremost a student of human nature. And among his many wonderfully astute observations is this gem:

“Security prices fluctuate much more than do the intrinsic values and prospects of the underlying companies, and the main reason for this is the extreme volatility in the way people feel about risk.”

This seems to me genuinely profound, because it speaks directly to investors’ most common misperception of risk. To wit: they mistake emotion-driven declines in stock prices for permanent impairment in the enduring values of the companies.

Then, as stock prices crater in the late stages of a bear market, investors lose the ability to distinguish between temporary declines in those prices and permanent loss in the value of the companies. And when that happens— crying out the four classic words “This time it’s different”—they flee into cash.

Of such capitulation—massive panics feeding on themselves, irrespective of fundamental values—all the great market bottoms have been made.

Investment advisors try to point out to their fear-stricken clients that the greatest long-term advances in stock prices have historically been born out of just such climactic panics. One need look no further than the Global Financial Crisis: a 17-month, 57% decline in the S&P 500, which bottomed on March 9, 2009. It was by far the largest price decline in mainstream equities since the period 1929-32.

Yet out of the ashes has come one of the longest and strongest uptrends in stock prices of all time—an advance which is still ongoing. If you were a long-term holder of the

S&P 500 in March 2009, even with dividend reinvestment your account value was about half what it had been at the October 2007 peak. But $100,000 left to compound in March 2009 (taxes paid from another source) was recently worth in excess of $1.1 million—having grown in the interim at an average rate of 16% per year

And to persevere in March 2009, all you really had to do was to strenuously doubt that the enduring value of the companies—in this example, 500 of the strongest, best managed, most innovative companies of all time—had suffered a permanent impairment of anything remotely approaching 57%.

An even more dramatic demonstration of the bifurcation of stock prices and intrinsic values is offered by the 33-day, 34% decline in the S&P 500 when the firestorm of COVID enveloped the world. Granting that the global economy was shutting down and earnings visibility had utterly vanished, it

was still more than possible to ask, “Do I think the enduring values of these companies have in the space of a month lost one out of every three dollars?” And of course—urged on by their financial advisor—almost anyone might easily have said, “That just doesn’t seem probable.” A mere five months later, the Index was back to its previous peak. It’s three times higher than that now

Thus it would seem that, in a crisis, the shortest, straightest path to rationality may be Mr. Marks’s quietly devastating observation that the ongoing values of companies and their stock prices are subject to very significant discrepancies, once investor sentiment reaches a crowded consensus. In real-life conversations with fearful investors over the years I’ve been having them, I’ve found it helpful to simply ask:

“Does your garden die in the winter?”

Like all analogies, this one is far from perfect, but my experience is that at the very least it abruptly redirects the conversation—away from the unknowable resolution of the crisis du jour, and toward an intuitive sense of the enduring value of the companies one owns for the long term.

For in fact, perennial plants don’t die, even in harsh, prolonged winters. During the growing season, they store energy in their roots, bulbs and elsewhere. That energy allows the plants to go dormant in winter; they begin growing and blooming again when temperatures moderate. Or think of trees, losing all their leaves each fall and growing new ones the next spring.

Successful businesses tend to function similarly. When economic or financial adversity strikes, their earnings will suffer—at times significantly—while their highly compensated management teams move to shore up capital, reduce headcount, sell or shutter losing business lines,

acquire assets strategically from ailing competitors— and above all, continue innovating.

Again, I think the Global Financial Crisis offers a superb window into this phenomenon. In 2006—the last full year before the subprime mortgage collapse began in earnest—the S&P 500 earned $87.72. In 2009, the terminal year of the crisis, it earned $59.65—a whopping 32% decline.

The Index’s dividend kept growing into 2008, and ended that year at $28.05. Even with significant (and rare) dividend cuts in the teeth of the crisis, the Index’s dividend bottomed at $22.31 the following year—down 21%. (Companies hate like the dickens to reduce dividends even temporarily, and tend to do so only as a last resort.)

Now, look at the enormity of what we’ve just established. Peak to trough, the annual earnings and dividend of the S&P 500 went down 32% and 21%, respectively. Yet as we’ve seen, from October 2007 to March 2009, the Index of their stock prices declined 57%.

Anecdotal though this comparison is, it tends to validate with a vengeance Mr. Marks’s finding: stock prices are significantly more volatile than the intrinsic values and prospects of the underlying companies.

Indeed, your garden doesn’t die in the winter. And a broadly diversified portfolio of America’s most successful companies has survived—and gone on to thrive—in the bleakest economic/financial winters. Past performance may not guarantee future results—and it surely doesn’t—but history is, at the very least, highly suggestive in this regard.

© 2025 Nick Murray. All rights reserved. Used by permission.