Howard Marks, Oaktree Capital — 2025-12-09
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Memos from Howard Marks 2025-12-09T08:00:00.0000000Z" pubdate title="Time posted: >12/9/2025 8:00:00 AM (UTC)">Dec 9, 2025
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Ours is a remarkable moment in world history. A transformative technology is ascending, and its supporters claim it will forever change the world. To build it requires companies to invest a sum of money unlike anything in living memory. News reports are filled with widespread fears that America's biggest corporations are propping up a bubble that will soon pop.
During my visits to clients in Asia and the Middle East last month, I was often asked about the possibility of a bubble surrounding artificial intelligence, and my discussions gave rise to this memo. I want to start off with my usual caveats: I'm not active in the stock market; I merely watch it as the best barometer of investor psychology. I'm also no techie, and I don't know any more about AI than most generalist investors. But I'll do my best.
One of the most interesting aspects of bubbles is their regularity, not in terms of timing, but rather the progression they follow. Something new and seemingly revolutionary appears and worms its way into people's minds. It captures their imagination, and the excitement is overwhelming. The early participants enjoy huge gains. Those who merely look on feel incredible envy and regret and – motivated by the fear of continuing to miss out – pile in. They do this without knowledge of what the future will bring or concern about whether the price they're paying can possibly be expected to produce a reasonable return with a tolerable amount of risk. The end result for investors is inevitably painful in the short to medium term, although it's possible to end up ahead after enough years have passed.
I've lived through several bubbles and read about others, and they've all hewed to this description. One might think the losses experienced when past bubbles popped would discourage the next one from forming. But that hasn't happened yet, and I'm sure it never will. Memories are short, and prudence and natural risk aversion are no match for the dream of getting rich on the back of a revolutionary technology that "everyone knows" will change the world.
I took the quote that opens this memo from Derek Thompson's November 4 newsletter entitled "AI Could Be the Railroad of the 21 st Century. Brace Yourself," about parallels between what's going on today in AI and the railroad boom of the 1860s. Its word-for-word applicability to both shows clearly what's meant by the phrase widely attributed to Mark Twain: "history rhymes."
Understanding Bubbles
Before diving into the subject at hand – and having read a great deal about it in preparation – I want to start with a point of clarification. Everyone asks, "Is there a bubble in AI?" I think there's ambiguity even in the question. I've concluded there are two different but interrelated bubble possibilities to think about: one in the behavior of companies within the industry, and the other in how investors are behaving with regard to the industry. I have absolutely no ability to judge whether the AI companies' aggressive behavior is justified, so I'll try to stick primarily to the question of whether there's a bubble around AI in the financial world.
The main job of an investment analyst – especially in the so-called "value" school to which I subscribe – is to (a) study companies and other assets and assess the level of and outlook for their intrinsic value and (b) make investment decisions on the basis of that value. Most of the change the analyst encounters in the short to medium term surrounds the asset's price and its relationship to underlying value. That relationship, in turn, is essentially the result of investor psychology.
Market bubbles aren't caused directly by technological or financial developments. Rather, they result from the application of excessive optimism to those developments. As I wrote in my January memo On Bubble Watch , bubbles are temporary manias in which developments in those areas become the subject of what former U.S. Federal Reserve Chairman Alan Greenspan called "irrational exuberance.''
Bubbles usually coalesce around new financial developments (e.g., the South Sea Company of the early 1700s or sub-prime residential mortgage-backed securities in 2005-06) or technological progress (optical fiber in the late 1990s and the internet in 1998-2000). Newness plays a huge part in this. Because there's no history to restrain the imagination, the future can appear limitless for the new thing. And futures that are perceived to be limitless can justify valuations that go well beyond past norms – leading to asset prices that aren't justified on the basis of predictable earning power.
The role of newness is well described in my favorite passage from a book that greatly influenced me, A Short History of Financial Euphoria by John Kenneth Galbraith. Galbraith wrote about what he called "the extreme brevity of the financial memory" and pointed out that in the financial markets, "past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present." In other words, history can impose limits on awe regarding the present and imagination regarding the future. In the absence of history, on the other hand, all things seem possible.
The key thing to note here is that the new thing understandably inspires great enthusiasm, but bubbles are what happen when the enthusiasm reaches irrational proportions. Who can identify the boundary of rationality? Who can say when an optimistic market has become a bubble? It's just a matter of judgment.
Something that occurred to me this past month is that two of my best "calls" came in 2000, when I cautioned about what was going on in the market for tech and internet stocks, and in 2005-07, when I cited the dearth of risk aversion and the resulting ease of doing crazy deals in the pre-Global Financial Crisis world.
First, in neither case did I possess any expertise regarding the things that turned out to be the subjects of the bubbles: the internet and sub-prime mortgage-backed securities. All I did was render observations regarding the behavior taking place around me.
And second, the value in my calls consisted mostly of describing the folly in that behavior, not in insisting that it had brought on a bubble.
Struggling with whether to apply the "bubble" label can bog you down and interfere with proper judgment; we can accomplish a great deal by merely assessing what's going on around us and drawing inferences with regard to proper behavior.
What's Good About Bubbles?
Before going on to discuss AI and whether it's presently in a bubble, I want to spend a little time on a subject that may seem somewhat academic from the standpoint of investors: the upside of bubbles. You may find the attention I devote to this topic excessive, but I do so because I find it fascinating.
The November 5 Stratechery newsletter was entitled "The Benefits of Bubbles." In it, Ben Thompson (no relation to Derek) cites a book titled Boom: Bubbles and the End of Stagnation . It was written by Byrne Hobart and Tobias Huber, who propose that there are two kinds of bubbles:
. . . "Inflection Bubbles" – the good kind of bubbles, as opposed to the much more damaging "Mean-reversion Bubbles" like the 2000's subprime mortgage bubble.
I find this a useful dichotomy.