Buy Cheap Without Calling the Bottom
Accumulate below value while accepting that cheap assets can become cheaper.
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 6
- Confidence
- 98%
This framework replaces bottom-calling with disciplined accumulation below intrinsic value. Because a bottom is defined by what never traded lower afterward, it can only be recognized in retrospect. Investors should therefore estimate value, begin buying when the discount is sufficient, and preserve enough capital to add if the asset becomes cheaper without a corresponding deterioration in fundamentals. Each decline triggers a thesis review, not an automatic purchase or panic sale. The distinction between cheap and immediately rising is essential: an undervalued asset may continue falling before the market recognizes its worth. Success requires patient capital, staged position sizing, and explicit invalidation criteria so conviction does not become blind averaging down.
Origin
Marks described Oaktree's crisis investing and the challenge of buying assets that continued to fall. The firm prepared standby capital before the 2008 collapse and deployed it rapidly as distressed opportunities expanded.
Core principles
- 01The bottom can only be identified afterward.
- 02Cheap and immediately rising are not synonymous.
- 03Value, not price momentum, should govern purchases.
- 04Capital and conviction must be reserved for further declines.
How to run it
- 1
Establish a value range
Estimate intrinsic value and specify the assumptions that support it before prices become emotionally disruptive.
Pro tip Include a stressed recovery or downside case.
Watch out Do not anchor value to the asset's former market price.
- 2
Set staged entry levels
Define discounts at which to initiate and expand the position, preserving capital for greater opportunities.
Pro tip Make early purchases smaller when uncertainty is unusually high.
Watch out A full-size first purchase leaves no flexibility if prices fall further.
- 3
Buy when cheap
Initiate the position when the price offers suitable compensation, even though the exact bottom remains unknowable.
Pro tip Focus on expected return over the investment horizon, not tomorrow's quotation.
Watch out Do not wait for certainty; it usually arrives after the bargain disappears.
- 4
Reassess every decline
Determine whether the lower price reflects worsening value, changing risk, or intensified fear.
Pro tip Separate thesis-changing facts from market-wide forced selling.
Watch out Never add merely because the position is below cost.
- 5
Add if value persists
Increase exposure when the thesis remains sound and the price-to-value gap becomes more favorable.
Pro tip Use predefined position and liquidity limits.
Watch out Cheap assets can remain depressed longer than expected.
- 6
Wait for recognition
Allow time for recovery, restructuring, cash generation, or improving psychology to close the valuation gap.
Pro tip Track fundamental milestones rather than daily price fluctuations.
Watch out Eventually the analysis must be proved right; patience cannot rescue a false valuation.
In the wild
Oaktree raised an eleven-billion-dollar standby fund and initially invested gradually. At Lehman's bankruptcy only twelve percent had been called, leaving substantial capacity. The firm then deployed roughly six and a half billion dollars over fifteen weeks as distressed prices and opportunities expanded.
→ Reserved capital and willingness to act enabled large-scale purchases during extreme dislocation.
An investor buys a security at nine because analysis indicates materially higher value. If the price falls to eight and then seven while the underlying thesis remains intact, the widening discount can justify additional purchases rather than a reflexive exit.
→ Staged buying improves the average entry price without pretending to identify the bottom.
Common mistakes
Waiting for the exact bottom
The bottom is only knowable in hindsight, so waiting for confirmation can eliminate the opportunity.
Confusing cheap with an immediate rebound
Undervaluation does not imply that the market price will rise tomorrow.
Averaging down blindly
Additional purchases are justified only when updated analysis shows that value remains intact.
Is it for you?
Best for
Patient investors deploying capital into falling but fundamentally analyzable assets.
Not ideal for
Leveraged investors who cannot survive further declines or meet extended liquidity needs.
From the transcript
“You never know when you're at the bottom.”
“You can buy when it's cheap. That's all you can do”
“the cheap and going up tomorrow are not synonymous.”
From the episode
Interview with Howard Marks: Masters in Business (Audio)