Billionaire investor Howard Marks looks back on 5 times he outwitted the market from 2000 to 2020—here are 3 key lessons he learned

If you ask Howard Marks how he made his $2.2 billion fortune, he might describe decades of work as an analyst at Citicorp (a subsidiary of Citigroup), leading the high-yield debt and convertible securities office at TCW Group in the ‘80s and early ‘90s, or even his lucrative investments in luxury properties. But of course, the key calls Marks made after founding Oaktree Capital Management in 1995 have made the bulk of his earnings. In fact, he now says just five prophetic predictions built his reputation as a legend on the Street. The septuagenarian detailed these five specific market calls between 2000 and 2020 in a new memo titled Taking the Temperature Monday. The mostly contrarian takes ended up netting Marks billions, but the lessons learned may be even more valuable. For Marks, a great investor is able to use their knowledge of economic history, the inner workings of financial markets, and psychology to get an idea of the current mood or temperature among investors. When that mood becomes too bullish, it’s time to seek safety. But when it’s overly bearish, it’s time to look for bargains. It’s a contrarian riff on the famous Warren Buffett quote, “be fearful when others are greedy, and greedy when others are fearful.” In the five instances detailed below, including his prescient warnings prior to the Global Financial Crisis and dotcom bust, Marks noted that “the markets were either crazily elevated or massively depressed,” which enabled him to “recommend becoming more defensive or more aggressive with a good chance of being right” and make a killing in the process. He wrote that he learned several lessons by looking back at his five big calls, and Fortune has highlighted three of the most important ones.

1 – 2000, the dotcom bubble

In 1999, as the dotcom bubble grew day by day, legendary financial journalist Edward Chancellor released a book that helped make his reputation: Devil Take the Hindmost, which details the history of speculation from ancient Rome through the railway mania of the 19th century. When Marks read Chancellor’s book that year, he wrote that was “struck by the similarities” between the speculative bubbles of old and the meteoric rise of tech stocks at the time. Seeing this market distortion, Marks wrote a memo to clients titled bubble.com in January 2000, just two months before the bubble began to burst, warning that internet-linked equities were overvalued and that speculative mania had taken hold of investors. “The lure of easy profits, the willingness to leave one’s day job to cash in, the ability to invest blithely in money-losing companies whose business models one can’t explain – all these felt like themes that had rhymed over the course of financial history, leading to bubbles and their painful bursting.  And all of them were visible in investor behavior as 1999 came to an end,” he wrote. After Mark’s warning, the S&P 500 went on to fall 46% between March of 2000 and October 2002, while the tech-heavy NASDAQ Composite dropped roughly 80%.

2 – 2007, The Global Financial Crisis

Between October 2004 and July of 2007, Marks repeatedly warned that there was a “slow developing trainwreck” on the way. He noted that the Federal Reserve has turned to ​​accommodative monetary policy after the dotcom bubble burst, which led savings accounts and typical safe haven assets to offer poor returns, pushing investors towards more risky investments. And eventually the belief that “home prices only go up” began to take hold among consumers in a repeat of speculative bubbles of the past. By July 2007, Marks published a memo sarcastically titled It’s All Good, where he warned that investors were feeling far too optimistic and ignoring risks, meaning a recession was likely on the way. Five months later, the Global Financial Crisis (GFC) began, leading Bear Stearns and Lehman Brothers to collapse and the S&P 500 to fall 53% from its high in 2007 to its bottom in June 2009. Marks explained that he didn’t have inside knowledge of the issues in the subprime mortgage market that ultimately sparked the GFC, and his “cautious conclusions” were simply based on “taking the temperature of the market”—essentially recognizing when investors have became, to paraphrase former Federal Reserve Chair Alan Greenspan, irrationally exuberant.

3 – 2008, Buying the GFC dip

Ever the contrarian, Marks decided it was time to buy after the subprime mortgage crisis crippled the U.S. housing market and kicked off the GFC. He described how, between January 2007 and March 2008, Oaktree collected an $11 billion “reserve fund” to buy distressed debt, and began shopping in September 2008. “I think the outlook has to be viewed as binary: will the world end or won’t it?” Marks wrote in a memo at the peak of market pessimism in 2008. “We will invest on the assumption that it will go on, that companies will make money, that they’ll have value, and that buying claims on them at low prices will work in the long run. What alternative is there?” Of course, he went on to make billions buying all those distressed assets. And the S&P 500 has soared roughly 500% since its GFC lows.

4 – 2012, Ignoring equities’ exaggerated death

In 2012, many investors were still recovering from the GFC. Marks noted at the time that it “weighed heavy” on their psychology. This excessive bearishness led him to recall a 1979 Businessweek article titled The Death of Equities. He said that the piece followed years of persistent inflation and poor stock market returns and had extrapolated a pessimistic outlook from the current environment. But 1979 was definitely far from the death of equities. The S&P 500, for example, has surged nearly 4000% since the end of that year. In 2012, Marks saw all the same patterns in investor psychology that had led to overly bearish market predictions in the late ’70s, so he penned a piece titled Déjà Vu All Over Again detailing his belief that “positive scenarios” for stocks were more likely than another downturn. “From 2012 – the year of Déjà Vu All Over Again – through 2021, the S&P 500 returned 16.5% a year,” he noted. “Once again, excessively negative sentiment had resulted in major gains. It’s as simple as that.”

5 – 2020, Buying the COVID dip

When COVID-19 began to spread around the globe in early 2020, Marks, like everyone else, was unsure about what the future held. But when the stock market tanked and panic began to spread on Wall Street, the billionaire had a feeling that, once again, it was time for a contrarian stance. His bullish view was confirmed after a trader on his team, Justin Quaglia, said that he was seeing forced selling of bonds from companies that needed the cash to stay afloat with the economy locked down. “We finally had the rubber band snap,” the trader said. For Marks, it was a contrarian buy signal that meant the worst was likely over. “We’re never happy to have the events that bring on chaos, and especially not the ones that are underway today,” he wrote in a late March memo. “But it’s sentiment like Justin describes above that fuels the emotional selling that allows us to access the greatest bargains.” Again, Marks was proven correct, as the S&P 500 has risen over 90% since its COVID lows in March 2020.

3 key lessons learned

Drawing from his decades of experience in the markets, Marks broke down a few of the most important lessons for investors at the end of his memo. First and foremost, the billionaire said that investors need to be students of history—only then can they “engage in pattern recognition” and begin to take advantage of the often predictable nature of business cycles by “taking the temperature of the market.” “Ironically, when viewed over the long term, investor psychology and thus market cycles – which seem flighty and unpredictable – fluctuate in ways that approach dependability,” he wrote. After becoming a student of economic and market history, Marks said that investors will begin to understand another important lesson: all business cycles stem from “excesses and corrections.” He argued that markets are mainly driven by investors’ emotions, rather than mechanical processes, which means that there are times of excess when people become so optimistic that they seek to “justify the dangerous view that ‘there’s no price too high.’” But these overly bullish periods are typically followed by a correction as investor psychology turns to fear. “[A] strong movement in one direction is more likely to be followed – sooner or later – by a correction in the opposite direction than by a trend that ‘grows to the sky,’” he explained. Secondly, during times of market excess or bearish corrections, Marks wrote that he believes investors need to be able to control their emotions and avoid falling victim to peer pressure. He noted that illogical narratives will often form during these periods, such as “there’s no price too high” or “stocks have fallen so far that no one will be interested in them.” “Remember that in extreme times…the secret to making money lies in contrarianism, not conformity,” he wrote. “When you come across a widely accepted proposition that doesn’t make sense or one you find too good to be true (or too bad to be true), take appropriate action.” Finally, and perhaps a bit ironically, Marks stressed time and again throughout his lengthy memo that attempting to predict the future of the global economy, even for the best of investment managers, is a nearly impossible task and should be done infrequently. “[T]he bottom line is that, at Oaktree, we approach these things with great humility, diverging from our neutral assumptions and normal behavior only when circumstances leave us no other choice. ‘Five times in 50 years’ gives you an idea about our level of interest in being market timers.  The fact is, we do so hesitantly,” he wrote. For the sports fans, Warren Buffett has an analogy that perfectly describes Marks’ view. In the 2017 HBO documentary Becoming Warren Buffett, the billionaire says investing is just like being a batter in a baseball game where there are no called strikes. “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!’ Ignore them.” This story was originally featured on Fortune.com