Mastering The Market Cycle: Getting the odds on your side

by Howard Marks

The following passage from The Most Important Thing may serve to wrap up regarding the outlook for cycles’ recurrence: Cycles will never stop occurring. If there were such a thing as a completely efficient market, and if people really made decisions in a calculating and unemotional manner, perhaps cycles (or at least their extremes) would be banished. But that’ll never be the case. Economies will wax and wane as consumers spend more or less, responding emotionally to economic factors or exogenous events, geopolitical or naturally occurring. Companies will anticipate a rosy future during the up cycle and thus over-expand facilities and inventories; these will become burdensome when the economy turns down. Providers of capital will be too generous when the economy’s doing well, abetting over-expansion with cheap money, and then they’ll pull the reins too tight when things cease to look as good. Investors will overvalue companies when they’re doing well and undervalue them when things get difficult. … Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do. People often act as if companies that are doing well will do well forever, and investments that are outperforming will outperform forever, and vice versa. Instead, it’s the opposite that is more likely to be true.