Oaktree's Howard Marks says AI frenzy isn't a bubble — at least not yet

Howard Marks, co-founder of Oaktree Capital Management, states that while AI valuations are high, he does not currently consider the sector to be in a bubble, as he has not detected the 'psychological excess' or 'mania' characteristic of such events. He acknowledges significant investor optimism driving valuations but cautions against the 'bubble psychology' observed during the dot-com era, where many companies failed despite the technology's transformative impact. Marks believes AI will deliver substantial value, but its precise timing and form remain uncertain, and current market behavior does not yet meet his criteria for a manic phase.

Analysis

Howard Marks, co-founder of Oaktree Capital Management, asserts that the current artificial intelligence market, while exhibiting high valuations, does not yet constitute a bubble. He specifically notes the absence of "psychological excess" or "mania," which he considers the primary ingredients for a true bubble. Marks characterizes current valuations as "high but not crazy," distinguishing them from irrational exuberance.

Drawing parallels to the late 1990s internet boom, Marks highlights that while the internet fundamentally transformed the world, the vast majority of internet and e-commerce companies from that era ultimately became worthless. He warns against a recurring "bubble psychology" where investors overvalue companies based on a small chance of massive success, or assume all players, including laggards, will prosper. This suggests a need for selective investment rather than broad market enthusiasm.

Marks acknowledges that AI is likely to "deliver a lot" but emphasizes the significant uncertainty regarding its timing, form, and specific impact. His assessment indicates that while the underlying technology's potential is substantial, the market's current behavior has not reached the critical mass of manic speculation required for a bubble designation. This cautious optimism underscores the speculative nature of current AI investments.

Key Decisions for Investors

• Investors should maintain a discerning approach to AI-linked equities, recognizing high valuations but avoiding broad-brush assumptions of a bubble, as per Marks' assessment.
• Prudent portfolio management dictates a focus on companies with clear, sustainable competitive advantages and realistic growth trajectories, rather than speculative plays based on low probability of extreme success.
• Monitor for increasing "psychological excess" or "mania" in AI valuations, as Marks suggests this would signal a shift towards a true bubble environment.