THE FUTURE OF CYCLES – 17 – MASTERING THE MARKET CYCLE

Cycles in economies, companies, and markets

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If we follow above points mentioned by Mr.Howard Marks then definitely we can take advantage of market cycle and able to generate above-average return.

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “HAVING A SENSE FOR WHERE WE STAND”

The above link will help to understand how good news flows and media get crazy with higher index targets. In the above link I have compared 2017 with 2007 and given indication in 2017 for the upcoming bubble.

Nifty 12000 – Here, we can see that the media start celebrating when the market has approached new high. Such acts motivate to retail investors and that will lead to more market participation.

We can get an indication of the market bubble when we observe our surroundings.

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Investors try to predict bottom and still in the Fear Of Missing Out (FOMO). I am getting calls from many of people who are unaware with market, own little knowledge of market but tend to predict stock moments. They approach me with catching bottom, ask for advice (not actually, they want to get confirm with me) that they should invest right now otherwise they will miss out current opportunity.

People are involved in any of the decision-making processes whether it is in the economy, investing world, or anything else. So those human emotions also getting involved in the process. This resulted in more euphoric behavior at the wrong time and more desperate behavior at the wrong time by people. That will have resulted in the cycle. If the machine involves in the economy then it will not have a cyclical move.

The market has never moved in a straight line in the past and never will be in the future. So that we need to understand the cycle and need to take benefits from it. People think that excess bull or bear remains but that excess behaviour has to correct and that will have resulted in the cycle.

We can keep journal for events happens to our surrounding, major corporate deals, the behavior of people with us knowing that we are an investment professional, hot sectors which attracting major participation, junk starts flying, innovation in valuation matrix, etc. We cannot predict when the bubble will burst, but we can save ourselves from getting burst during bubble takes a journey towards burst. When we initially prepare ourselves for the upcoming bubble – burst then it will be going to happen that others will consider us a fool but we should accept being a fool rather than face huge damage to our wealth.

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

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

07 – THE PENDULUM OF INVESTOR PSYCHOLOGY – MASTERING THE MARKET CYCLE

Psychology/emotions affect corporate profits and investment cycles as well. We have seen the pendulum swings in both the extreme and investment world also moves in the same way.

Between euphoria and depression, between celebrating positive developments and obsessing over negatives, and thus between being overpriced and underpriced.

And few other observations of the pendulum – between greed and fear, between optimism and pessimism, between risk tolerance and risk aversion, between credence and scepticism, between faith in value in the future and insistence of concrete value in the present, and between the urgency to buy and panic to sell.

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Above is average return but what about good and bad cycle?

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When people feel good about the investment, Optimistic about it then they are in the greed and buy more which resulted in the increase of assets prices. On the other hand, when they do not feel good about the investment, pessimistic about it then sell their assets which reduces the prices of assets. Sometimes market plays between a range where greed and fear both having a stronghold.

When investors do not feel fear then prices of assets keep on raising up. Similarly happens during the tech boom 1999-2000, subprime in 2003-2007 and current scenario.

Somehow the greed evaporated and fear took over. “Buy before you miss out” was replaced by “Sell before it goes to zero.” When greed is high then people find for next Infosys, top-performing private sector banks but when fear is higher than seeing each as a next Yes bank, DHFL.

Other factors such as euphoria and depression are an extension of greed and fear. Continuing greed translated into the euphoria and fear into the depression.

When prices of assets raise then people believe in any stories prevailing in the market but reversely when prices falling then cheap assets does not get the attention of investors.

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Superior investors are wise enough and they buy assets when it available at the discount from intrinsic value and there will be a potential to increase in intrinsic value.

For making such investment decisions, they need to keep a balance between greed and fear. Very few investors remain cool and unemotional to stay at the midpoint of fear & greed. Else, the majority of people remains greedy when everyone is optimistic and fearful when everyone is pessimistic. The pendulum moves from one extreme to the other and remains quiet for midpoint. For becoming a superior investor, we need to be unemotional to such swings. Emotional people will require a great deal of self-awareness and self-restraint for becoming a successful investor.

People generally remains biased with their emotions to reach any conclusion.

INTEREST RATE CUTS: DOES IT PROVIDE LONG-TERM BENEFITS?

Many times, it has been noticed that news over both extreme – positive and negative but market keep on rising.

So that, Interpretation of the data has importance. During the depression time, positive news getting ignored and negative news only getting rewarded. Reversely, during the euphoric situation, negative news getting ignored and positive news only getting rewarded. Saving ourselves from such traps results in the superior investment returns and long-term survival of our wealth.

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

03 – THE REGULARITY OF CYCLES – Mastering The Market Cycle

The world is full of randomness and people behave differently at different times so that it is difficult to predict the exact future. If we study the science and mathematics cycles then those have predictable sets of rules and moves in a regular way. But economics, companies, and participants are relying on the psychological influences so that they do not behave in a regular way. When emotions have an involvement then things become more difficult to predict.

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So that Greed and Fear of the investors remain regular in every cycle. This affects the prices of the assets.

As per the Cambridge dictionary, the definition of cycle “a group of events that happen in a particular order, one following the other, and are often repeated.”

We can see that many factors affect the occurrence of the events and that makes it difficult to predict the exact for the future. Current global scenario, we have an ample number of factors that can affect the cycle such as crude, the decision of the USA, domestic economic conditions, etc.

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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

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “AVOIDING PITFALLS”

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We have seen in all article series of “The Most Important Thing” that Mr. Howard Marks is always keeping focusing on the avoiding losses. If we can able to avoid losses then our investment success will come to us.

When we are going to focus on the risk and avoidance of risk then there is a chance of under-performance of our investment portfolio during the bull phase of the market. But also we can able to get protected from the worst situations coming into the future. We can able to get survived into the market for a longer period of time.

For avoiding losses, we need to avoid the pitfalls which invite the losses. And sources of pitfalls can be analytical/intellectual or psychological/emotional.

Looking at the analytical/intellectual error – such error occurs while we collect too less information, uses wrong analytical methods, wrong approach, computational error, etc. Such errors wrongly direct the result and tend us to make a wrong decision.

One type of analytical error which is called by Mr. Howard Marks is “Failure of imagination”. This error means we cannot able to imagine or little in imagine full range of outcomes or not understanding consequences of occurrence of the extreme events.

“Failure of imagination” is the inability to understand the different range of outcomes in advance. In investing, we need to be dealing with the future and many a time, we try to assume that future will be similar to the recent past.

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Most of the time future looks like the past so assuming it does not harmful to us. But what happens while future will not repeat the scenario as similar as happens in the past, either we have to lose huge money or no money made by us.

Events might occur or might not occur or it take times to occur compared to what we have assumed.

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While we largely depend on the certain outcomes to happen in our investment then not occurrence of those events can kill our investment. So that we should always try to focus that if certain events do not occur then also we should not lose our huge money. We should focus on controlling our risk.

During sub-prime crisis also things do not work as it should work which resulted in a global meltdown. During sub-prime also investors believe that risky situations do not go to happens and securities are backed by assets based mortgage which encourages the risky behavior of investors. Majority of the investors did not expect that value of backed assets also can befall.

We should make an investment which can protect us against deflation and hyperinflation situations. We should not always a stick to the cash, treasury or gold to avoid pitfalls. But as a when requires, we should shift from defensive to offensive and offensive to defensive.

It is important to avoid pitfalls but there must be a limit which differs from each and every investor.

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Psychological factors are most interesting sources of investment error. These factors tend to extremely high or low prices of an asset, sometimes very irrational. (My Article on Psychological errors – BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”)

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One of the psychological factors is GREED. Excess of greed tends to be higher security prices. We want to make a more money and for that, we keep on buying an asset though it’s price trading at a higher range. We believe that assets will keep on appreciating into the future.

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The second psychological error can be an error of not noticing. Sometimes we have a plan to steadily invest in the stock market. And we ignore the undisciplined buying by others has created a boom.

The third error can be not consistent with doing a wrong thing but failing to do a right thing. Average investors just being a fortunate enough by avoiding pitfalls. While superior investors avoid it and also take an advantage of it.

Our psychology resists us from accepting novel rationale and keep believing that “It’s different this time.”

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The way pendulum swings, people forget to be skeptical every time rather believe that things keep on doing well.

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The combination of Greed and optimism lead us towards the adoption of strategies which provides a higher returns without taking a higher risk. Pay higher prices for the securities with the hope of still left with an appreciation.

Just knowing about the pitfalls provide helps to us to some extent but the implementation of it leads towards success.

We should always learn the lesson and remember it throughout our journey. Mr. Howard Marks pointed out eleven lessons such as –

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We should always be focusing on the things surrounding us. Excess supply of investment funds will lead to the situation called – “too much money chasing too few ideas”. Such situations can be dangerous for our financial health and we need to be careful during such situations.

When people become careless, investors not worried or skeptical about events, everyone becoming more bullish, increasing leverage. But we have to always keep in mind that such scenario will be going to reverse, it will never remain forever of the same magnitude.

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It is near to impossible to avoid downfall but we can able to reduce our pain.

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When we loss less than others then it provides a benefit to us such as we can able to maintain equanimity with others, able to avoid a psychological pressure and can able to generate higher profit by buying at a lower price.

Surviving during the declines provides us an opportunity to buying an asset at the low price. But for achieving success through this formula, we need to avoid pitfalls.

The way errors can appear to us is infinite but some of them are quoted by Mr. Howard Marks. Such as data or calculation error in the analytical process, ignoring the full range of outcomes or probability of occurrence of events, psychological factors (I.e. greed, fear, envy, ego, etc.), extreme risk-taking or risk avoidance behavior, etc. The second level thinkers can able to understand errors and also can able to detect over or underpriced assets. They can take a proper benefit of it and also take benefits of errors from others.

Errors are moves around us, sometimes assets prices reach a higher level or reach the lower level, sometimes such extreme scenario happens with entire market, sometimes to individual securities. Sometimes an error occurs while we do something and sometimes doing nothing leads to an error. So that error is around us and without any errors, there will be no occurrence of any events.

All above-discussed points don’t indicate rules for avoiding pitfalls but it provides us an awareness, flexibility, adaptability, and mindset to take the cue from our surrounding environment. There are times where few of our acts resulted in errors.

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And sometimes reverse to such acts.

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Read for more detail: The Most Important Thing Illuminated by Howard Marks