Mastering The Market Cycle: Getting the Odds on Your Side

by Howard Marks

we can most gainfully spend our time in three general areas: trying to know more than others about what I call “the knowable”: the fundamentals of industries, companies and securities, being disciplined as to the appropriate price to pay for a participation in those fundamentals, and understanding the investment environment we’re in and deciding how to strategically position our portfolios for it.

When we’re getting value cheap, we should be aggressive; when we’re getting value expensive, we should pull back.

A knowledge advantage regarding the tendencies is enough to create success in the long run.

“You Can’t Predict. You Can Prepare.”):

The superior investor is mature, rational, analytical, objective and unemotional. Thus he performs a thorough analysis of investment fundamentals and the investment environment. He calculates the intrinsic value of each potential investment asset. And he buys when any discount of the price from the current intrinsic value, plus any potential increases in intrinsic value in the future, together suggest that buying at the current price is a good idea.

It all seems so obvious: investors rarely maintain objective, rational, neutral and stable positions. First they exhibit high levels of optimism, greed, risk tolerance and credulousness, and their resulting behavior causes asset prices to rise, potential returns to fall, and risk to increase. But then, for some reason—perhaps the arrival of a tipping point—they switch to pessimism, fear, risk aversion and skepticism, and this causes asset prices to fall, prospective returns to rise, and risk to decrease. Notably, each group of phenomena tends to happen in unison, and the swing from one to the other often goes far beyond what reason might call for.

The rational investor is diligent, skeptical and appropriately risk-averse at all times, but also on the lookout for opportunities for potential return that more than compensates for risk.