Private equity chief Stephen A. Schwarzman, the founder of $545 billion Blackstone Group (BX), seems more conservative these days as it gets later in the market cycle.
In an interview with Yahoo Finance, he acknowledged that the consumer, which makes up about 70% of the U.S. economy, continues to be strong. But he warned of weakness in manufacturing even as stock and bond prices sit near record highs.
"Usually when everything's doing records all the time, and there's a lot of geopolitical uncertainty, it's usually like a wake-up call," he said. "It's not red, but it's yellow. And it makes you be more conservative when you're investing. It makes you think more about downsides. It makes you want to buy higher-quality things because your chance of accidentally being lucky, which happens at the bottom of the cycle, is much lower."
He added that this is a time where the U.S. will likely still be growing somewhere around 2% or maybe a "tiny bit less."
Three simple rules
In his new memoir "What It Takes," Schwarzman outlined his three "simple rules" for identifying market tops and bottoms.
First, market tops are "easy to recognize" because overconfident buyers are of the mindset that "this time is different" when it's usually not. Second, cheap debt is fueling acquisitions and investments, and leverage levels accelerate. Third is "the number of people you know who start getting rich" and the number of investors "claiming outperformance."
"Loose credit conditions and a rising tide can make it easy for individuals without any particular strategy or process to make money 'accidentally,'" he wrote. "But making money in strong markets can be short-lived. Smart investors perform well through a combination of self-discipline and sound risk assessment, even when market conditions reverse."
In his four decades on Wall Street, Schwarzman has lived through seven market downturns: 1973, 1975, 1982, 1987, 1990-1992, 2001, and 2008-2010.
He explained that spotting a market bottom can be difficult and trying to time it is usually a bad idea.
"Most public and private investors buy too early and underestimate the severity of recessions,” he wrote. “It's important not to act too quickly.”
His best advice is to invest when markets have recovered at least 10% from their lows.
"Asset values tend to increase as economies gain momentum. It's better to give up the first 10% to 15% of a market recovery to ensure that you are buying at the right time."
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.