In this article, I am going to discuss on cycles and reasons for the occurrence of the cycle. For becoming a successful investor, we need to understand cyclicity of the market, earnings, business, etc., then only we can able to protect ourselves from the destruction of our wealth as well as we can able to grow our wealth.
We as a human also born, grow up and die. These cycles keep on continue. And like that company also came into existence, grow up and once it will close or might get some revolution.
(Click here for human life cycle – https://www.youtube.com/watch?v=SdprpVCIhu0)
As like our life, Economy, businesses, products, earnings of businesses, etc. also rise and fall. It also moves in a cycle. Many a time people forget that everything moves in a cycle and that situation provides us an opportunity for protecting and creating a wealth. We should always keep in mind that nothing in the world keeps on rising in a straightway. It will rise to an extreme level and falls to an extreme level.
The margin of the company increases when the price of the iron ore increases and margin fall with the fall in the price of the iron ore. We must have to understand the cycle for protecting our wealth.
The main reason for the cyclical behavior of the economy is human involvement. Human nature is not mechanical but humans are emotional and inconsistent. Many a time Humans take the decision based on their feelings, emotions which itself cyclical in nature.
When we feel good, we remain optimistic about the situations and reverse when we feel bad then remain pessimistic about the situations. Our psychological involvement pushes cycle to the extreme points and after that extreme point, cycle corrects itself to the reverse direction and then again come to the mean value.
If we see carefully, then we can able to understand that more worst loan given at a good time rather at the bad time. Because people forget the cyclical nature of the economy, industries, businesses, etc. also the credit available at cheaper rate. And additionally, people break discipline. They start to borrow extensively which will be resulted into the burst of the credit cycle.
Credit cycle –
When we are happy then we might get happier for some period and then our mood turns to the sad and vice-versa. Our mood also keeps on fluctuating and that turns out to be our happiness or sadness. Sometimes we become extremely happy or sad, but that situation does not remain similar for forever. It will change, it will get normalized.
So, if the cycle is in a good phase, then it might be remaining more good for the period and then correct for the bad phase and vice-versa. It will not remain good or bad for forever. It will come to the mean value at some point in time.
The cycle only stops occurring while people take all decisions by being unemotional and rational. But it is not always happening and such human decisions which will be resulted in the cyclical behavior of the market /economy. And this is only the major reason for keeps on occurring cycles.
High profit into the business attracts the competition. This competition will turn high-profit margin into the low-profit margin. And business will fall into the problem. Many players get close and get out of the business. Consolidation of among the players will happen and few players survived in the business. Those survived players will again be getting a good amount of business and the again cycle starts moving. No business keeps on growing for forever with the same pace of growth.
The growth of Indian IT is falling compared to initial days. Also, players among the industry and startup are rising rapidly.
We always need to keep in mind that everything moves in a cycle and when we forget it, we will be at the risk of losing our capital.
Read for more detail: The Most Important Thing Illuminated by Howard Marks