Howard Marks, one of the most respected value investors out there, warned his clients to move into lower-risk investments to protect against future losses.
"Given my view of the environment, the only reason to be aggressive today is because defensive investing implies low prospective returns. But the question is whether pursuing high expected returns through aggressiveness can be counted on to be rewarded," Marks wrote in the investor letter Wednesday. "If the answer is no, as I believe, then this is a time for caution."
The co-chairman of Oaktree Capital is famous for his prescient investment memos, which predicted the financial crisis and the dot-com bubble implosion.
"When the market is rational, low-risk investments will always appear to offer prospective returns lower than those on high-risk ones. But in tough times, the former are less likely to bring losses than the latter," Marks said. "In my opinion that makes them right for today."
He also cited the following key stats on why the market's current valuation is "lofty":
1. "The S&P 500 is selling at 25 times trailing-twelve-month earnings, compared to a long-term median of 15."
2. "The Shiller Cyclically Adjusted PE Ratio stands at almost 30 versus a historic median of 16. This multiple was exceeded only in 1929 and 2000 – both clearly bubbles."
3. "The 'Buffett Yardstick' – total US stock market capitalization as a percentage of GDP … hit a new all-time high last month of around 145, as opposed to a 1970-95 norm of about 60 and a 1995-2017 median of about 100."
To be sure, the manager emphasized he doesn't know exactly when a correction will happen.