Version 3.0, published Oct 21, 2026: 5 observations, 6 sources.
Howard Marks's philosophy, applied to ETFs
In the tradition of Howard Marks, this seat prints 5 observations from ETFIQ data, each dated, and gives no verdict, version 3.0 of Oct 21, 2026. What is the market's temperature?
Bio
Howard Marks holds a B.S.Ec. degree, cum laude, in finance from the Wharton School of the University of Pennsylvania and an M.B.A. in accounting and marketing from the University of Chicago's Booth School of Business.
He spent 16 years at Citicorp Investment Management. From 1969 to 1978 he was an equity research analyst and later director of research; from 1978 to 1985 he was a vice president and senior portfolio manager running convertible and high-yield securities. From 1985 to 1995 he led the teams at The TCW Group responsible for distressed debt, high-yield bonds and convertible securities.
In 1995 Marks co-founded Oaktree Capital Management; Oaktree lists him and Bruce Karsh as its co-founders, and dates Marks's start in high-yield bonds to 1978 and Karsh's joining him in distressed debt to 1988. Oaktree's biography of Marks says that since the firm's formation he has been responsible for the firm's adherence to its core investment philosophy and has contributed to its big-picture decisions. He is Oaktree's co-chair, a director of Brookfield Corporation and chair of Brookfield's Investment Solutions Group, and a CFA charterholder. He is an emeritus trustee of the University of Pennsylvania, where he chaired the investment board from 2000 to 2010, and a trustee and investment committee member of the Metropolitan Museum of Art.
Marks is best known for his memos to clients. The first, "The Route to Performance," is dated Oct 12, 1990, and was written while he was at TCW; Oaktree keeps the series in a public archive. He has written two books: *The Most Important Thing* (2011) and *Mastering the Market Cycle* (2018).
This profile states no returns for Oaktree's funds.
Philosophy
Marks starts from what investors cannot know. In "You Can't Predict. You Can Prepare." (Nov 20, 2001), he wrote that he dismisses economic forecasts, which he thinks add no value, and that he believes thoroughly in cycles and the need to prepare for them. The reconciliation is in the memo's title: no one can say when the next turn will come, but an investor can judge where the market stands in its cycle and act accordingly.
The image he returns to is a pendulum. Markets swing between euphoria and depression, between pricing assets too high and pricing them too low, and they spend little time at the midpoint that best describes them on average. He set out the idea in an early client memo of April 11, 1991, and restated it in "The Happy Medium" (July 20, 2004). The swing creates the opportunity: when fear is widespread, prices fall below value, and when optimism is widespread, risk is underpriced.
His second theme is risk. Academic finance measures risk as volatility because volatility can be measured. Marks argues that this misses what investors actually fear, which is the possibility of permanent loss. A fall in price that the investor can ride out is temporary; a loss becomes permanent when the holder is forced or frightened into selling at the bottom, or when the investment cannot recover for fundamental reasons. The catch, he wrote in "Risk Revisited" (Sept 3, 2014), is that the probability of loss cannot be measured in advance, only estimated, and it cannot be known even afterward. In his 2006 memo "Risk" he made a related point: to attract money, riskier investments have to offer the prospect of higher returns, but nothing says those returns must arrive; what makes them riskier is a wider spread of outcomes, losses among them.
Read together, the memos describe taking more risk when the pendulum has swung toward fear and prices are low, and less when it has swung toward greed and prices are high. Judging where it stands, he wrote in "Taking the Temperature" (July 10, 2023), depends more on clear-eyed observation than on computers or calculation. In "It Is What It Is" (Mar 27, 2006) he set out the signs to watch in pairs: lenders eager or reticent, terms easy or restrictive, spreads narrow or wide, investors optimistic or pessimistic, asset prices high or low. ETFIQ's seat follows him: it prints the signs ETFIQ's data can observe, each dated, and gives no verdict.
Marks's ideas developed over three decades rather than changing direction. The pendulum appears in his second client memo, in 1991, and the distrust of forecasts is explicit by 2001. By 2014 he was revisiting risk after giving it three of the twenty chapters of *The Most Important Thing*, and the title of his second book names cycles as its subject.
Key works
- Memos to clients, from "The Route to Performance" (Oct 12, 1990) to the present, archived by Oaktree. - "You Can't Predict. You Can Prepare." (Nov 20, 2001). - "The Happy Medium" (July 20, 2004). - "Risk" (Jan 19, 2006). - "Risk Revisited" (Sept 3, 2014). - "Taking the Temperature" (July 10, 2023). - "It Is What It Is" (Mar 27, 2006), with "The Poor Man's Guide to Market Assessment" on p. 5. - *The Most Important Thing* (Columbia University Press, 2011); *The Most Important Thing Illuminated* (Columbia University Press, 2012, with commentary by others). - *Mastering the Market Cycle* (Houghton Mifflin Harcourt, 2018).
What we cannot know
Oaktree's funds are mostly private and their returns are reported to clients rather than the public, so whether Marks's own investing followed the memos' advice at each turn cannot be checked from public sources.
Source quality
Strong. Three decades of dated memos in his own words, from Oaktree's own archive, and his firm's own biography. No performance record is used.
In his words
“We can ride out volatility, but we never get a chance to undo a permanent loss.”
The Marks-style Cycles & Risk seat
Marks-style Cycles & Risk is one seat of the IQ Investment Committee. It applies Howard Marks's own memos to ETFIQ data.
What the investor published
In ETFIQ’s words, with the source of each. Sourced to Howard Marks's own memos.
Risk is the possibility of permanent loss, not the ups and downs of a price. (Howard Marks, Risk Revisited (Oaktree Capital Management memo, Sep 3, 2014, 2014), p. 1)
Riskier assets have to look as if they will pay more, or no one would own them, but they cannot be counted on to deliver it: a wider range of outcomes includes losses. (Howard Marks, Risk (Oaktree Capital Management memo, Jan 19, 2006, 2006), page 2)
Markets swing like a pendulum between overpriced and underpriced, and rarely rest at the midpoint. (Howard Marks, The Happy Medium (Oaktree Capital Management memo, July 2004 (Oaktree's file is dated Jul 21; its archive list shows Jul 20), 2004), p. 1)
Taking the market's temperature means watching for excess at the extremes, and it rests more on observation than on calculation. (Howard Marks, Taking the Temperature (Oaktree Capital Management memo, Jul 10, 2023, 2023), pages 9 and 10)
The temperature can be read from paired signs: lenders eager or reticent, credit terms easy or restrictive, spreads narrow or wide, investors optimistic or pessimistic, asset prices high or low. (Howard Marks, It Is What It Is (Oaktree Capital Management, memo to clients, Mar 27, 2006, 2006), p. 5)
Research behind the measures
Peer-reviewed research on how each measure is taken. It never adds a criterion, and where it weakens one the criterion says so.
Jeremy J. Siegel (2016), The Shiller CAPE Ratio: A New Look, Financial Analysts Journal 72(3), 41-50 (doi:10.2469/faj.v72.n3.1). Changes in how GAAP earnings are computed make recent CAPE forecasts too pessimistic; on consistent earnings (national accounts profits) the model forecasts better and higher returns.
David C. Brown, Shaun William Davies and Matthew C. Ringgenberg (2021), ETF Arbitrage, Non-Fundamental Demand, and Return Predictability, Review of Finance 25(4), 937-972 (doi:10.1093/rof/rfaa027). ETF creations and redemptions signal non-fundamental demand: a portfolio short high-flow ETFs and long low-flow ETFs earned 1.1 to 2.0% a month, so money flowing in predicts reversals, not further gains.
What the seat observes
Asset prices: the S&P 500's P/E (the S&P 500's P/E: The S&P 500's trailing price-to-earnings ratio stated as the index states its own: the total market value of IVV's holdings over their total trailing earnings, losses included, with the share of weight measured. ETFIQ keeps no history of it yet, so it is printed as today's level only.) One of the signs in Marks's guide, and the one he reads in "On Bubble Watch": the forward P/E chart (p. 8), "well into the top decile" (p. 9), against a post-war average of roughly 16 (p. 6). His figure is the forward P/E; ETFIQ's is the trailing P/E of the index's holdings, stated as the index states its own (market value over earnings), so the two are not compared, and ETFIQ keeps no history of it yet. Research, context, not a test of the measure: Jeremy J. Siegel (2016), The Shiller CAPE Ratio: A New Look, Financial Analysts Journal 72(3), 41-50. Changes in how earnings are computed move the level of a valuation ratio over decades, so a level needs its own history beside it before it reads as high or low.
Spreads: high-yield bonds over Treasuries (the high-yield spread: The extra yield on US high-yield bonds over Treasuries, percentage points, on the latest day, with its percentile over the last 20 years. Pending: FRED does not yet answer ETFIQ's reads, and no second source is held.) Narrow or wide, in the guide's words (p. 5). Pending until a source for it answers ETFIQ's reads.
Lenders eager or reticent: money into high-yield bond ETFs (three months of flows into high-yield bond ETFs: Net flows into high-yield bond ETFs over the latest three months as a percent of their assets at the window's start, with the share of assets that covers.) ETFIQ's nearest observation of how eager investors are to lend to risky borrowers: three months of flows into high-yield bond ETFs. Marks reads lenders' eagerness directly (p. 5); this is a narrow stand-in. Research, context, not a test of the measure: David C. Brown, Shaun William Davies and Matthew C. Ringgenberg (2021), ETF Arbitrage, Non-Fundamental Demand, and Return Predictability, Review of Finance 25(4), 937-972. Heavy ETF creations preceded weaker returns: flows are an observation, not a forecast.
Investors optimistic or pessimistic: money into stock ETFs (three months of flows into stock ETFs: Net flows into stock ETFs over the latest three months as a percent of their assets at the window's start, over the funds whose daily flows ETFIQ reads, with the share of assets that covers.) Three months of flows into stock ETFs, as one observation of the mood the guide lists (p. 5).
Interest rates: the FOMC's target range (the policy rate range: The FOMC's target range for the federal funds rate on the latest day, lower and upper bound.) Low or high, in the guide's words (p. 5): the policy rate today.
Compare and model modes
In model mode: The seat builds nothing: it gives no state to choose funds by.
How the seat is tested
The cases this seat must pass before it ships, with the result each must give.
Any fund, on any day: no state, as the seat observes. The seat prints the observations and gives no state.
A bond fund: no state, as the seat observes. The same observations, and no state.
Changes to this seat
Version 1.0, Oct 21, 2026: First version.
Version 1.1, Oct 21, 2026: The pendulum is read on ten years of earnings against today's price, not on the earnings yield minus the 10-year Treasury yield, which research (Asness, 2003) found does not forecast long-run returns.
Version 2.0, Oct 21, 2026: Return per point of drawdown removed (the memo it cited says risk as permanent loss cannot be measured, and a drawdown is the fluctuation Marks says is not the risk); the rate cushion and payout coverage moved to the ETFIQ Skeptic, because they are ETFIQ's measures, not Marks's; the seat reads the pendulum alone, for stock funds, with Siegel (2016) beside it.
Version 3.0, Oct 21, 2026: The seat observes and does not vote. Ten years of earnings against price, alone, rested on a memo that says the temperature is not a calculation; the seat now prints the signs in Marks's own guide that ETFIQ can observe, dated.
Where to next
Scope
Every fund: the observations are the market's, the same on a day for every fund, and the seat gives no state.
A market-level reading: The observations are the same for every fund on a day and are printed once, as the backdrop.
This seat observes and does not vote. Marks takes the market's temperature by observation, not calculation ("Taking the Temperature", 2023, pp. 9-10), so this seat prints the signs in his own guide ("It Is What It Is", 2006, p. 5) that ETFIQ's data can observe, each dated, and gives no state. They are the same for every fund on a day and print once, as the market's backdrop. Lenders' terms and new issuance, two of his signs, are not observed.
Source strength: Strong: the investor’s own books, letters or memos. Marks's own memos, read in full on Oaktree's site. He says the temperature is judged by observation, not calculation, so the seat reports his signs as observations and never as a verdict.
Lenses apply publicly known investing principles to ETFIQ data. No investor named is affiliated with or endorses ETFIQ. Not investment advice.
Sources
The published work each criterion is sourced to
| Source | What it provides | Read | Spec |
|---|---|---|---|
| Howard Marks, Risk | Riskier investments must appear to offer higher returns, but nothing makes those returns arrive; risk means a wider range of outcomes, losses among them | Oaktree Capital Management memo, Jan 19, 2006, 2006 | document ↗ |
| Howard Marks, Risk Revisited | Risk as the possibility of permanent loss, not volatility; its probability can be estimated but not known | Oaktree Capital Management memo, Sep 3, 2014, 2014 | document ↗ |
| Howard Marks, The Happy Medium | The pendulum: markets swing between euphoria and depression, overpriced and underpriced, and spend little time at the midpoint | Oaktree Capital Management memo, July 2004 (Oaktree's file is dated Jul 21; its archive list shows Jul 20), 2004 | document ↗ |
| Howard Marks, Taking the Temperature | Judging where the market stands by watching for excess and extremes, and his caution that this rests more on observation than on calculation | Oaktree Capital Management memo, Jul 10, 2023, 2023 | document ↗ |
| Howard Marks, It Is What It Is | "The Poor Man's Guide to Market Assessment" (p. 5): paired signs, lenders eager or reticent, terms easy or restrictive, interest rates low or high, spreads narrow or wide, investors optimistic or pessimistic, asset prices high or low, prospective returns low or high | Oaktree Capital Management, memo to clients, Mar 27, 2006, 2006 | document ↗ |
| Howard Marks, On Bubble Watch | Valuation as one sign: the S&P 500's forward P/E against the next ten years' returns (p. 8, a J.P. Morgan Asset Management chart), "well into the top decile" (p. 9), and its post-war average of roughly 16 times (p. 6) | Oaktree Capital Management, memo to clients, Jan 2, 2025, 2025 | document ↗ |
What this cannot tell you
How to check any of this
This seat’s criteria, thresholds, weights and cases are in the committee file, the same file the committee reads.
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ETFIQ, Howard Marks's philosophy, applied to ETFs, data as of Oct 21, 2026. https://etfiq.com/investment-committee/howard-marks/
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