Mastering the Market Cycle: Getting the Odds on Your Side

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What the wise man does in the beginning, the fool does in the end. This statement tells you 80% of what you have to know about market cycles and their impact. Marks reminded the audience how critical it is not to be dominated by emotions. “I think that the greatest investors I know, starting with Warren Buffett, are unemotional,” he said. “Most of the errors in our business are errors of emotion. Certainly, the consensus swings far too radically. We can do much better, but the starting point has to be that our emotions are under better control than those of the crowd.”

Mastering the Market Cycle: Getting the Odds on Your Side" by Howard Marks is a must-read for any investor who wants to gain a deeper understanding of the cyclical nature of financial markets. Anywhere you see a burst bubble, there is probably an overly permissive investor behind it. This happened with tech in 1999, real estate in 2007, and (Nathan’s Note) perhaps tech again in 2021. It seems to me that it can be helpful to choose different levels of “zoom” for understanding the cycle risks any particular company faces: company economic cycle, industry economic cycle, country economic cycle, global economic cycle. This is important to understand because the ability to grow is usually dependent on the availability of capital. When the credit window is shut, it can be difficult for many businesses to grow. Skepticism calls for pessimism when optimism is excessive, and it also calls for optimism when pessimism is excessive. Chapter 9: The Credit CycleOne of the things I appreciate about this book is that it is written in a clear, concise manner that is accessible to both novice and experienced investors. Marks uses real-world examples and analogies to illustrate his points, making complex concepts easy to understand. However, this stage can also present opportunities for savvy investors, as assets may be undervalued and present attractive buying opportunities. The Role Of Emotions In Market Cycles As for emotions, Marks said,it starts with the question of whether or not you accept that the big errors and the big swings in investing come from psychology or emotion, not from changes in fundamentals. If you do, then ask whether you accept the importance of being on the right side of that. Finally, do you accept that if you behave like everybody else, you clearly can’t perform better than the others? Another key basis in mastering the cycle is to understand that things don’t just happen one thing after another in – unfortunately irregular – cyclical patterns. What happens in one stage of a market cycle is instead causing it to move on to the next stage. Cycles are chains of cause-and-effect relationships. After a pair of introductory chapters the main part of the book is devoted to describing a large set of interrelated and parallel such cycles: the economic cycle, the profit cycle, the risk attitude cycle, the credit cycle and so on. Underlying all these is the cyclical patterns in investor psychology – a topic clearly nearest to Marks’ heart. To a large extent Marks reads various psychological markers and positions himself in the cycle by these. Next comes one chapter that tries to assemble all the above cycle inputs into the full mosaic of the market cycle. The book finishes with a few concluding more practical chapters and a needlessly cut-and-paste type of summary.

Good timing in investing can come from diligently assessing where we are in a cycle, and then doing the right thing as a result. Well, these blinks aim to answer such questions. Often underappreciated and usually poorly understood, cycles – whether in a particular market or an entire economy – are the linchpin of superior investment performance. By the end of these blinks, you should have a feel for how they work and, therefore, be that much closer to becoming a superior investor.

7. The Pendulum of Investor Psychology

Surfing market cycles can be challenging, but there are strategies that investors can use to potentially increase their chances of success. There are clearly others who have made contributions to the understanding of market cycles such as Hyman Minsky, various Austrian economists, the books from Marathon Asset Managed edited by Edward Chancellor plus many others. However, since Marks is so focused on reading non-fundamental and non-economic signposts I think the most complementary book might be Big Debt Crisis by the more Borg-ish Ray Dalio with his “economic machine”-concept, who obviously mostly zeros in on the central bank dominated cycle of monetary policy. Few people are always even keeled and unemotional. For this reason, few investors are capable of staking out a midpoint position that balances greed and fear, and staying there. It makes sense because that’s generally what humans do: fixate on whatever information happens to be the most salient, and under-weight information outside our current frame.