Expensive Optimism: Why Caution and Hedging Still Matter

“If everything’s priced for perfection, what happens when reality returns?”

The Calm Before What?

Markets are roaring.Stocks are breaking records.Risk appetite is back.

And yet — inflation is sticky, interest rates are rising, geopolitics are tense, and debt levels are sky-high.

Something doesn’t add up.

Howard Marks recently asked a timely question:Why are asset prices so strong in the face of so many net negative developments?

His answer is subtle but critical — it’s not the fundamentals driving this. It’s psychology.

Investors Forget to Be Afraid

Marks says the biggest mistake investors make is this:

They assume the way things are today is how they’ll always be.

After more than a decade of easy money, low rates, and central bank backstops, investors have forgotten how to hedge. They’ve stopped preparing for risk.

Instead, they’re chasing what’s worked — and it looks like everything is working.

But history doesn’t move in straight lines.And when optimism becomes habit, markets become fragile.

The Valuation Mirage

It’s not that there aren’t great companies out there. There are.

But everything looks expensive — even the average. Marks isn’t sounding the alarm.He’s sounding the reminder:

Even if things go on to become more expensive, the fact that they already are should not be ignored.

In other words, the question isn’t when a correction comes.The question is whether you’re positioned for one.

Why Hedging Isn’t About Fear

Hedging gets misunderstood. It’s not about pessimism or disaster bets.

It’s about building a portfolio that can bend without breaking.

When bonds are volatile, inflation is sticky, and central banks are out of room — hedging is the rational response.

You don’t wait for a storm to buy an umbrella.

Whether that means holding cash, reducing duration, adding gold, or rotating into credit — hedging means preparing, not panicking.

Defensive Doesn’t Mean Weak

Marks points to credit — not because it’s exciting, but because it’s reliable.

Even with spreads tight, credit offers something rare in today’s market: structure and predictability.

A promise of 6–7% contractual return over 10 years may not sound thrilling — but it sounds responsible.

Especially when the equity side is priced for perfection.

What About the US?

Marks still sees the US as the world’s best place to invest — but with caveats.

Innovation, capital markets, and legal protections are still exceptional. But even great businesses can be overloved and overpriced.

Being the “best house” doesn’t help much if it’s already the most expensive.

Valuation still matters. Even in the US.

Big Questions to Consider

• Are you being rewarded enough to take risk?

• Is your portfolio built for something other than more of the same?

• What part of your capital is protected if the mood shifts?

Takeaways for Investors

Rising prices ≠ rising value

The market is being fuelled by confidence, not caution.

Hedging is about balance, not doom

You don’t need to predict disaster to protect against it.

Credit is a quietly powerful tool

When equities stretch, fixed income helps ground you.

Valuations matter — even for the best

Great assets can still be poor investments if bought too dear.

Thanks for reading — and more importantly, for thinking about what others aren’t.