Cycle changes for the different time period, details, extent but it will be ups and downs forever which changes the investment environment & behavior.
There are cycle moves in an identical phase such as a low to the middle point, middle point to a higher point, higher point to middle point with correction, middle point to lower point and then again to the middle to a new high. It is not necessary that the cycle starts from the low and ends at high or at again low, but it can start with any point and end up at any point.
Actually, the cycle never starts nor ends. We need to know why this upswing starts, where we are into the cycle, are we near the end of up/downturn, etc. Such answers need to be sought for the better judgment of the cycle.
Details of every cycle can change such as speed, time, reason, duration, etc. but cycle repeats.
Mr. Marks has quoted a story that blind persons touch the different parts of the elephant and make a story based on that touched part. Mr. Marks has explained that we are also similar to them, we also do not try to put things together and make a judgment. We must remember past events and keep in mind the cyclical nature of things. We also keep on thinking that the bull/bear run will continue forever but we need to focus on the previous cycles and understand the cycle that no phase-in cycle remains forever.
Cyclical development into one area also affects the other area of the cycle. That is if growth in an economy starts going down then the central bank will also work on reducing interest rates which involves a different cycle.
We must have to understand that cycles are interconnected and one affects others, others affect another. We can study individual cycles for the analysis purpose but for the conclusion, we need to combine all together. Without putting everything together, we cannot reach a conclusion that where we stand at the cycle.
We have seen that it takes time when we pump air into the balloon but it takes very little when air goes out from the balloon. Similarly, asset booms take time to occur but the majority of the time bust happens very rapidly.
Every boom and bust having a similar lesson that excessive optimism is a dangerous thing; that risk aversion is an essential ingredient for the market to be safe; that overly generous capital markets ultimately lead to unwise financing, and thus to danger for participants.
Generally, we do not learn lessons from past mistakes and doing the same things with the expectation of different results. This is never going to happen. Every time when asset prices start moving towards the bubble territory then people start running to take the asset with the missing feeling. And similarly, when asset prices are near to bust then all running away from the asset. This is a common and repeatedly occurred event. And every time, people keep believing that it’s different this time. But it’s never different but yes the majority of people are different in the different cycles which make them a force to think that it’s different this time. Those who have survived during the different cycles must know that every cycle having the same characteristics and it will always be going to occur.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks