Mastering The Market Cycle: Getting the Odds on Your Side

by Howard Marks

Cycles have more potential to wreak havoc the further they progress from the midpoint—i.e., the greater the aberrations or excesses. If the swing toward one extreme goes further, the swing back is likely to be more violent, and more damage is likely to be done, as actions encouraged by the cycle’s operation at an extreme prove unsuitable for life elsewhere in the cycle.

But that aspect of the Crisis need never recur for the lessons of the Global Financial Crisis to be valuable. Rather, the themes that provide warning signals in every boom/bust are the general ones: that excessive optimism is a dangerous thing; that risk aversion is an essential ingredient for the market to be safe; and that overly generous capital markets ultimately lead to unwise financing, and thus to danger for participants.