cycles
Where we stand in the cycle
The rule
Markets do not move in straight lines. They move in cycles. The greatest risk sits right at the top, exactly when everyone feels safest.
Where it flips
Reading the cycle turns bad if you try to call the exact top and bottom. You can read the mood without predicting the turn. Mixing up the two gets you tossed around.
Marks' main lesson: mood, borrowing, and prices swing back and forth like a pendulum. They always overshoot fair value, in both directions. When everyone is hopeful and a sector is the star of every screen, prices are high and future returns are low. The danger is greatest just when it feels smallest. When everyone is gloomy, prices are low and the odds tilt in your favour. You cannot time the turn. But you can read the crowd's mood and lean the other way, buying less as excitement builds, and buying less fearfully when everyone else is scared.
A worked example
A sector index doubles in a year. Every channel calls it the future. New investors pour in near the top. That is the high-excitement zone of the cycle, where the next few years' returns are quietly being used up in advance. [illustrative]
How to spot it
- ·the mood of the crowd noticed
- ·caution rising as excitement rises
- ·no belief that a trend runs in a straight line forever
Howard Marks · Mastering the Market Cycle