Mastering The Market Cycle: Getting the odds on your side

by Howard Marks

Likewise, the following progression outlines what happens in a market downswing. The economy is slowing; reports are negative. Corporate earnings are flat or declining, and falling short of projections. Media report only bad news. Securities markets weaken. Investors become worried and depressed. Risk is seen as being everywhere. Investors see risk-bearing as nothing but a way to lose money. Fear dominates investor psychology. Demand for securities falls short of supply. Asset prices fall below intrinsic value. Capital markets slam shut, making it hard to issue securities or refinance debt. Defaults soar. Skepticism is high and faith is low, meaning only safe deals can be done, or maybe none at all. No one considers improvement possible. No outcome seems too negative to happen. Everyone assumes things will get worse forever. Investors ignore the possibility of missing opportunity and worry only about losing money. No one can think of a reason to buy. Sellers outnumber buyers. “Don’t try to catch a falling knife” takes the place of “buy the dips.” Prices reach new lows. The media fixate on this depressing trend. Investors become depressed and panicked. Security holders feel dumb and disillusioned. They realize they didn’t really understand the reasons behind the investments they made. Those who abstained from buying (or who sold) feel validated and are celebrated for their brilliance. Those who held give up and sell at depressed prices, adding further to the downward spiral...