Mastering The Market Cycle: Getting the odds on your side

by Howard Marks

It’s all a matter of ebb and flow. In investing, things work until they don’t. Or as Ajit Jain of Berkshire Hathaway told me about investing the other day, “it’s easy until it isn’t.” Cheap small-caps outperform until they reach the point where they’re no longer cheap. Trend-following or momentum investing — staying with the winners — works for a while. But eventually rotation and buying the laggards takes over as the winning strategy. “Buying the dips” lets investors take advantage of momentary weakness, up until the time when a major problem surfaces (or the market simply no longer recovers), causing price declines to be followed by further price declines, not quick rebounds. Risky assets outperform — coming from valuations where they were excessively penalized for their riskiness — until they’re priced more like safe assets. Then they underperform until they once again offer adequate risk premiums. The bottom line is clear: nothing works forever. But it’s essential to recognize that when everyone becomes convinced that something will keep working forever, that’s the very time when it’ll become certain not to. I say, “In investing, everything that’s important is counter-intuitive, and everything that’s obvious to everyone is wrong.”