In April, when the market fell, Howard Marks said: "Never short China," and the returns on U.S. stocks will be quite considerable in the coming decades

On the evening of July 10, Chen Guangming, founder of Ruifeng Fund, and Howard Marks of Oak Tree Capital shared their views on the economies and capital markets of China and the United States at an event hosted by CICC Wealth.

The investment workbook representative summarized the key points as follows:

1. The notion of "the end of American exceptionalism" or "the end of the era of overweighting the U.S." is not accurate. Globally, there is still no place more suitable for large-scale investment than the United States. I believe that for the next few decades, the U.S. will still be a place with very considerable investment returns.

2. Future tariff levels are likely to be higher than in the past. This round of tariffs was introduced suddenly, on a large scale, and comprehensively. It is expected that the range of tariffs will gradually narrow in the future, and the market will adapt.

3. It is important to step up during difficult times. This is referred to as "catching the falling knife," but the key is to remain calm, strong, and take action during turmoil.

When the tariff policy was announced in early April this year, the market reacted negatively, and some investors chose to exit. We viewed it as a "discount on goods," and when department stores have sales, we should be more proactive in purchasing.

1. DeepSeek is competitive in the A-share market in China, but it should not be complacent or overvalued. One characteristic of a bubble is underestimating the likelihood that market leaders will face competition. The profitability and moats of the U.S. tech giants, the "Seven Giants of U.S. Stocks," are strong, but they also face ongoing competition.

2. In the long run, both the U.S. and China are engines of economic growth, driving companies to create value. What often leads us to misjudge is market volatility, which is driven by investor sentiment.

Buffett said, "Never short the U.S." I would add: don't short China either.

Most people cannot time the market accurately; true long-term wealth is created by your "time" in the market, not by "timing."

1. Investors can expect that U.S. interest rates will remain stable within the current range for a considerable period.

2. If investors focus too much on the market, they may mistakenly believe that the market determines investment performance, paying attention to and reacting to volatility, even entering and exiting the market prematurely. I believe this is a mistake.

In the long run, our returns come from quality companies, not the market.

Truly professional investors, especially value investors, must always focus on value itself, rather than being swayed by market sentiment.

1. We are looking for opportunities where psychological biases lead to prices being below value. I believe this has already become a reality in China, just like our market during the turmoil in April. I think value investors can take advantage of these opportunities.

2. Buying well is better than just buying good. When a bull market arrives, be more cautious and lower your risk appetite. When a bear market comes, when everyone feels it is uninvestable, we stand on the opposite side, buying many excellent Chinese companies and holding them.

The following is the essence compiled by the investment workbook representative (WeChat ID: touzizuoyeben), shared with everyone:

Future tariff levels will be higher than in the past, and the market will adapt

Chen Guangming:

Recently, there has been a popular view that "the end of American exceptionalism." What do you think about the current investment value of the U.S. stock and capital markets?

Howard Marks:

Since our conversation last year, a lot has changed in the world. The U.S. economy is still performing well and is vibrant. However, after Trump's election, there has been a broad shift in U.S. policy, leading to market volatility and uncertainty.

The biggest variable lies in trade policy and tariffs. Trump has a strong stance on trade and tariffs, which has been a topic he has emphasized for the past forty years.

He believes that other countries are taking advantage of the U.S., and that the U.S. needs to correct this through increased tariffs to improve the trade balance. His frequent adjustments to tariff policies are something that financial markets dislike the most.

In early April, the market reacted strongly, but it has largely recovered since then. The market is gradually accepting the fact that when it is dissatisfied with extreme measures, Trump will moderately adjust his stance, and investors respond positively.

I believe there will be more tariffs introduced in the future; he firmly supports tariffs, and the level of tariffs is likely to be higher than in the past.

Ideally, tariffs should be moderate, predictable, and targeted. But the reality is that this round of tariffs was introduced suddenly, on a large scale, and comprehensively. It is expected that the range of tariffs will gradually narrow in the future, and the market will adapt.

The notion of "the end of American exceptionalism" is not accurate; the returns on U.S. stocks are still very attractive now and for the next few decades.

The "American exceptionalism" you mentioned is key. For the past 80 to 100 years, the U.S. has been a leader in the global economy, due to factors such as economic vitality, free markets, rule of law, technological innovation, natural resources, and capital markets. These factors have collectively established the U.S.'s position and allowed American companies to lead the world in market capitalization.

Of course, the number of publicly listed companies in the U.S. is greater, but this does not fully measure the overall scale or strength of enterprises.

Now, "American exceptionalism" is being questioned. Nevertheless, I still believe that the U.S. is a very worthwhile place to invest and will continue to be so. The question is whether it can still be as excellent as it was in the past?

Some current government actions have indeed raised doubts about whether the U.S. is still a reliable global player. However, most core factors still hold true. Globally, there is still no place more suitable for large-scale investment than the U.S.

Currently, the U.S. dominates global investment portfolios. In the future, some may reduce their investment weight in the U.S., but the notion of "the end of American exceptionalism" or "the end of the overweight U.S. era" is not accurate. I believe that for the next few decades, the U.S. will still be a place with very attractive investment returns.

Actively catching the "knife" from the sharp drop in April, viewing it as a "discounted product"

Chen Guangming:

On April 2, Trump announced global tariff increases. Oak Tree Capital specializes in value and contrarian investing. In the context of frequent changes in tariffs and potential future changes, how do you view the impact of policy changes as an American investor? What impact does it have on Oak Tree Capital's investments?

After the announcement of the tariff policy in April, global markets clearly retreated, with even safe-haven assets like government bonds and gold declining. Generally, we refer to increasing positions during such declines as "catching the knife." Did Oak Tree Capital attempt to "catch the knife" in April? How do you balance returns and risks?Howard Marks:

As value investors, whether at Oaktree or yourself, the core principle is that investing starts with the asset itself, not the macroeconomy. Oaktree Capital is not a top-down investor; we first assess the economy, then look at the market, and finally seek out quality companies to invest in. This has never changed.

While certain aspects of the U.S. may weaken, the exceptionalism of the U.S., along with the reliability of its economy and companies, has not ended. We can still find companies with strong growth potential and good solvency, and we should act when prices are attractive.

When the tariff policy was announced in early April this year, the market reacted negatively, and some investors chose to exit. We viewed it as a "discount on goods"; when department stores have sales, we should be more proactive in purchasing.

Therefore, in the weak environment of April this year, we did deploy capital, and this move benefited from the subsequent recovery.

We believe it is important to step up during difficult times. This is referred to as "catching a falling knife," but the key is to remain calm, strong, and take action during turmoil.

Significant Increase in Chinese Holdings in April

Howard Marks:

As a value investor, how did you respond to the Chinese market in a similar market environment?

Chen Guangming:

I strongly agree with Mr. Howard's viewpoint. Price fluctuations can sometimes be severe, but we focus more on the intrinsic value of companies, which does not change significantly with price swings. Excellent companies continue to generate free cash flow.

In April, Chinese assets experienced significant volatility due to tariff uncertainties, and we made a noticeable increase in our holdings for two main reasons:

First, after the trade wars of 2018 and 2019, China's exports to the U.S. have significantly decreased, with only about 3% of listed companies' revenues coming from U.S. exports, and the export markets have become more diversified.

Second, we believe that it is impossible for China and the U.S. to completely and rapidly sever trade ties; irrationally high tariffs are unsustainable.

We think that the sharp market decline is more a reflection of short-term changes in risk appetite, and it does not have a significant impact on the long-term fundamentals. Similar to the "Seven Sisters" of the U.S. stock market, DeepSeek has also faced competition and should not be overvalued.

Chen Guangming:

Since the launch of DeepSeek this year, investor sentiment towards the Chinese market has become more optimistic. Some say DeepSeek has influenced the AI monopoly of American tech giants. How do overseas investors view the changes in Chinese technology?

Howard Marks:

I am not an information technology expert, and Oaktree Capital generally does not invest in high-tech sectors.

I believe the takeaway from this is that the U.S. no longer monopolizes technological advancement; other countries, especially China, also have a voice. DeepSeek is a Chinese company, demonstrating that China is competitive in fields like AI.

One characteristic of a bubble is underestimating the likelihood that market leaders will face competition. DeepSeek is an example of competition. Investors should remember that when an industry or company is strong, it will always face competitive threats; they should not be complacent or overvalue it.

Although I am not a tech expert, the profitability and moats of the U.S. tech giants, the "Seven Heroes" of the U.S. stock market, are strong, but they also face competition, and the emergence of DeepSeek serves as a reminder

China's Innovation Potential is Huge

Howard Marks:

How do you view the development of technology in China, and will you include related targets in your investment portfolio?

Chen Guangming:

I am familiar with the founder of DeepSeek, and his input-output far exceeds expectations. This case illustrates that the innovation of many companies in China is underestimated, and similar innovations are happening across various industries.

Overall, I am optimistic about investment opportunities in Chinese technology and other industries.

China's innovation has always been at the forefront of the world, making it one of the most innovative places globally, alongside the United States. Technological innovation, breakthroughs in AI, and the explosion of innovative drugs all indicate that China's innovation potential is enormous. At the same time, China has the most complete, efficient, and low-cost industrial chain, continuously and rapidly iterating.

Even when the A-share market is sluggish and valuations are very low, Oak Capital remains firmly optimistic about the Chinese market. The optimistic side of the Chinese market is gradually emerging, and in the future, more investors, especially overseas investors, will recognize China's long-term potential and competitiveness.

Based on our confidence in Chinese enterprises, entrepreneurs, and the people, we believe that China's long-term competitiveness will continue to rise, and the capital market will ultimately reflect China's long-term rising economic strength, achieving better shareholder returns in the end.

Howard Marks:

You just mentioned the differences between China and other countries. You are known for your expertise in value investing and have recently achieved significant results in value investing in China. Can you tell us what the differences are between value investing in China compared to the United States or emerging markets?

Chen Guangming:

From the fundamental principles of value investing, it is the same worldwide and is very simple to understand: buy at a price below intrinsic value to achieve investment returns.

However, as a practical science, the difficulty of value investing mainly lies in the judgment of intrinsic value. In different countries, the assessment of intrinsic value may have some differences.

For example, in China, the stability and sustainability of intrinsic value are relatively weak, or the changes are more frequent, leading to relatively shorter business development cycles. In this sense, the investment difficulty is greater, requiring more careful assessment and timely updates of the assessment of a company's intrinsic value based on new information and changes.

Secondly, as an emerging market, price fluctuations in China are greater. Therefore, if value investing is done well and the judgment of intrinsic value is more accurate, theoretically, greater fluctuations can actually lead to better investment returns. Conversely, the emergence of more value investors will also reduce price fluctuations in the market.

Of course, precisely because the Chinese market is an emerging market with greater volatility, the challenges to human nature are greater, requiring a higher ability to restrain one's emotions, more resistance to greed and fear, and a higher demand for resisting temptation and pressure, which means a higher requirement for resisting human nature.

Additionally, the uncertainty of intrinsic value is also greater, which is one of the important reasons for the larger fluctuations. It also requires investors to enhance their abilities to more accurately and effectively grasp the assessment and judgment of intrinsic value.

Howard Marks:I believe our consensus is that the key to investing lies in the ability to objectively assess true value. When market fluctuations cause prices to deviate from value, we should take advantage of these fluctuations rather than be defeated by them. I'm glad you feel the same way.

As you know, a few years ago, global investors declared China to be an uninvestable country. This was an example of overreaction. Investors like you and us at Oak Tree Capital who held or increased their positions in China during that phase have, I believe, been rewarded so far and will continue to be rewarded.

What we are looking for are opportunities where psychological biases lead to prices being below value. I think this is exactly the case in the Chinese market, just like our market during the turmoil in April. I believe value investors can take advantage of these opportunities.

Interest Rates Expected to Remain Stable for a Longer Period

Howard Marks:

Many people are currently worried about the U.S. Treasury market, with rising debt and a lack of buyers, especially for long-term Treasuries. What is your view? What impact does this have on credit bonds familiar to Oak Tree Capital?

Since last year, many domestic investors have been positioning themselves in U.S. dollar bonds. How should investors view fluctuations in exchange rates, considering we are foreign investors who may also need to consider the impact of exchange rates?

Howard Marks:

From early 2009 to the end of 2021, the Federal Reserve's benchmark interest rate was near zero for most of the time, averaging only 0.5%, which is extremely rare in history. In contrast, while rates are high now, they are actually quite normal in historical context.

Currently, the yield on the 10-year U.S. Treasury has risen from about 4% before tariff policies to 4.5%, and has basically maintained this level. This 0.5 percentage point increase reflects market concerns about the uncertainty brought by tariff measures.

This uncertainty does exist. No one knows what will happen in the next six months or two years. The title of the memo I wrote on April 9 was "No One Knows (Continued)," which reflects my view.

Nevertheless, I believe that within the current interest rate range, U.S. rates will remain relatively stable and will not rise significantly.

There are indeed concerns about the reliability of U.S. Treasuries. Recently, the U.S. credit rating was downgraded, but this "downgrade" has more theoretical implications, meaning the probability of default has risen from 0.5% to 1%, but default remains extremely unlikely.

In absolute terms, U.S. rates are not high. I do not believe rates will rise unless there is severe inflation that forces the Federal Reserve to adopt a more aggressive tightening policy, but there are currently no signs of that.

I believe investors can expect that for a longer period, rates will remain stable within the current range. This is different from the continuously declining or extremely low rates of the past decade. Rates are now stabilizing, no longer declining, and will not be extremely low again.

The current interest rate environment is actually quite normal, which reassures me. More importantly, the higher interest rate levels allow institutions like Oak Tree Capital that invest in credit assets to achieve substantial returns. During the ultra-low interest rate period, returns were hard to come by, but now credit asset yields are satisfactory.

"Never Short China"

Chen Guangming:

You have been in the industry for over 50 years. Do you think the past five years have been particularly difficult for investing? How do you face uncertainty, and what kind of investors can adapt to such a market?Howard Marks:

That's a good question. It is this uncertainty that leads to psychological fluctuations and causes market prices to deviate significantly from their relative values, which is precisely our opportunity.

Over the past five years, or even twenty years, the world has been susceptible to external shocks: financial crises, excessive leverage, declines in the financial sector, pandemics, the Russia-Ukraine conflict, conflicts in the Middle East, inflation, and severe fluctuations in interest rates. The environment has experienced a lot of turmoil.

Perhaps the volatility is more intense now than in the past. But one fact cannot be overlooked: the future is always uncertain. Many times, people are afraid to invest due to the fear of uncertainty. This is quite common.

However, it is precisely when uncertainty makes the market cheaper that we should be more resolute in our investments—even knowing that the future is always uncertain.

In the long run, both the United States and China are engines of economic growth, driving companies to create value. What often misleads us is market volatility, which is driven by investor sentiment.

Buffett said, "Never short America." I would add: don't short China either.

Long-term, patient, and responsible investing is far more successful than predicting the future or timing the market. Most people cannot time the market accurately; what truly creates long-term wealth is your "time" in the market, not the "timing."

Be more cautious during a bull market, and take the opposite stance during a bear market

Howard Marks:

How do you view the fluctuations in attitudes towards the Chinese market? And how do you navigate these fluctuations?

Chen Guangming:

Mr. Howard Marks has made a classic point. Whether in the U.S. or China, as long as excellent companies continue to create value, it is best to approach the capital market with a farmer's mindset, cultivating it over the long term, rather than trying to catch the timing like a hunter.

In the past five years, the Chinese capital market has been very volatile and has not fully recovered yet. Staying vigilant during a bull market is thanks to Mr. Howard Marks' guidance. At that time, Mr. Marks mentioned that when he first entered the industry, it was the peak of the "Nifty Fifty" in the U.S., and the conclusion he drew was that "buying good companies is not as good as buying them well."

This phrase has taken root in my mind. In 2020, the Chinese market was somewhat similar to the "Nifty Fifty" situation, where good companies were quite expensive, so I remained cautious.

By 2021, the bull market continued, and the focus shifted to some sectors with very good industry trends, which we refer to as track investment. The competitiveness of those companies was questionable; they were simply benefiting from favorable industry trends, and I was more cautious about these because the judgment of intrinsic value was uncertain.

So during the bull market, I maintained vigilance and caution. Additionally, based on the cyclical theory written by Mr. Marks, I was also cautious about the macroeconomic cycle because the main driving force of the Chinese economy in the past—the real estate cycle—was facing adjustment pressures.

Of course, in the long run, we believe the economy will continue to rise, and we should see more positive aspects. However, during the phase of economic structural adjustment, when the traditional economy reaches a high point and faces downward pressure, simply put, it means being more cautious during a bull market and lowering risk appetite.

When a bear market arrives, when everyone feels it is uninvestable, we take the opposite stance, buying many excellent Chinese companies and holding them. Through this value investing approach, my investment portfolio has relatively smoothly and steadily navigated this cycle. It is value investing that has helped me

The market does not determine investment performance; our returns come from quality companies in the long run, not the market.

Howard Marks:

I want to emphasize the most important message: investment returns come from long-term economic growth and the long-term performance of excellent companies, not media reports.

If investors focus too much on the market, they may mistakenly believe that the market determines investment performance, leading them to pay attention to and react to volatility, even entering and exiting the market prematurely. I think this is a mistake.

In the short term, the market is influenced by investor psychology, and volatility exaggerates changes in company conditions, causing us to deviate from long-term goals.

As I have always said, investing is about investing in the economy, growing companies, and companies with strong repayment capabilities. In the long run, our returns come from quality companies, not the market.

Six Principles of Investment Philosophy

Chen Guangming:

Oaktree Capital has been established for 30 years. As the founder, you may also be considering succession. What challenges does company succession face, and what experiences can you share?

Howard Marks:

When we founded Oaktree, we knew each other very well and were clear about the culture we wanted to establish. Oaktree's investment philosophy has six core principles that have remained unchanged for decades:

• Risk control comes first;
• Consistency is key;
• Focus on areas that the market has not fully understood;
• Concentrate on a few areas, not trying to do everything;
• Do not make investment decisions based on macro judgments, nor predict economic or market trends;
• Do not attempt to time the market.

This philosophy has proven to be very effective over 40 years of collaboration.

Source: Investment Workbook Pro Author: Class Representative

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