THE FUTURE OF CYCLES – 17 – MASTERING THE MARKET CYCLE

Posted on May 31, 2020 by Jimit Zaveri under Bibliophile: Mastering The Market Cycle

Cycles in economies, companies, and markets

MMC17 01-min

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.

MMC17 04

MMC17 05

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

Checklist about market cycle – 13 -MASTERING THE MARKET CYCLE

Posted on April 12, 2020 by Jimit Zaveri under Bibliophile: Mastering The Market Cycle

We cannot predict the future and cannot see the future so that can we prepare for the future? How can we be positioning our investments? Answers to these questions lie in the understanding of the cycle and at where we stand at the current cycle.

MMC13 01-min

It’s not always what we buy that matters but at what price we are buying that matters a lot.

MMC13 02-min

MMC13 03-min MMC13 04-min MMC13 05-min

These checklists help us to an understanding regarding cycle and where we stand at the cycle. That understanding helps us with what we should do and what can be the portfolio positioning. These checklists also help us to remove some mistakes such as buying little when risk is low so that capital allocation decision also can be improved. The capital allocation also one of the key elements to becoming a successful investor.

We all see the everyday events which were covered by the media but we also need to put effort to understand that what it is going to indicate to us. These efforts help a lot to us. I got saved in recent market turmoil due to understanding of the cycle which I have practised after reading “The Most Important Things”.

I want to quote my learning from the most important things here to explain this concept with a few additions.

The earlier scene in the year 2017-18

Auto Good-min

The current scenario in the year 2019-20

Auto Worst-min

We need to focus on the current scenario what it is indicating to us, not to worry about the future. If the current scenario tells us to stay away and we are into the third phase of the bull market then we need to adjust our portfolio accordingly. And if the current scenario suggests the third phase of the bear market then we need to adjust our portfolio positioning accordingly. We cannot track each and every information flowing around the world but we need to understand which of them are important and help us to reach the conclusion.

When market and psychology of the investors flying then do not care for the valuations. People argue that old valuation techniques do not work in the current period. Another argument is that we should look at the business, not stock so that valuation does not matter. But what happens to this logic when bear take a charge?

Old technique again starts taking place. Higher P/E looks as an unhygienic for the health of the portfolio and low P/E tempted to the investors.

Infobeam & 8K-min

We can see that during the bull period even non-qualitative companies also traded at the multiple of quality companies.

There are qualitative and quantitative two phenomena which we can study to understand where we stand in the cycle. We always need to ask the question to ourselves how the assets priced and how the investors around us behave? That means the quantitative part refers to the valuation of the assets. And qualitative part refers to the behaviour of investors around us & understand it.

MMC13 07-min

Example – one of the E-Commerce company of India

Infibeam-min

Infibeam Chart-min

When the market is booming, the psychology of investors is positive, economy growing, people are eager to make an investment then low-quality securities also getting issued by providing a better rating.

MMC13 08-min

We have to be contrarian, have to learn to go against the wind prevailing in the market.

When market falling, people tend to stay away from it. They argue that keep away from catching a falling knife. But when dust gets settled and we realize that the final bottom has made, a bargain will also be gone.

There is no way to know when and at what price exact bottom has made. We come to know about the bottom only after it has made.

MMC13 09-min

We should avoid buying with leverage money because when pendulum moves towards extreme pessimism then we cannot able to know where it will stop and we get a margin call, due to the leverage. We get a disastrous outcome of such an act.

John Maynard Keynes is reputed to have said: “The market can remain irrational longer than you can remain solvent.”

When the economy is in a troublesome period and investors psychology also negative then only, we get a good asset at a bargain price.

We have a two-risk scenario – one is a risk of losing money and the other one is a risk of missing out an opportunity. Investors have to make a balance between the risk. When market moving higher in the cycle, we have to focus more on the risk of losing money and when market-moving lower in the cycle, we have to focus on the risk of losing the opportunity. When there is a high chance of losing money then we have to play defensively and when there is a chance of missing out an opportunity then we need to play aggressively.

The cycle is going to happen and how we respond to it is the key matter. Successful investors are those who have survived under the different market cycle and that cycle makes them more thoughtful.

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

09 – THE CREDIT CYCLE – MASTERING THE MARKET CYCLE

Posted on March 1, 2020 by Jimit Zaveri under Bibliophile: Mastering The Market Cycle

A good company does not need to always remain a good investment. We have to focus on the good deal which has a good price with limited risk and potential for return is substantial.

Changes in the availability of the credit create a fluctuation among the economic activities which tends to have resulted in the economy and profits cycle. The credit cycle has an immerse important for economic development. Corporates require additional capital to grow further and unavailability of capital make it hard for them to grow.

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Similar situations we have experienced recently with the financial companies where they have brought short term borrowings to support long-term lending. And their failure to the repayment of short-term borrowings has created a crisis.

The occurrence of the credit cycle

Cycle credit

This leads to again starting the same cycle. It takes time to complete the entire cycle but it will complete for sure.

As the Economist said earlier this year, “the worst loans are made at the best of times.”

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Money & GDP

Reduction into the money supply into the economy has led to liquidity crisis and slowdown into the economy.

Money is also a commodity as other commodities so that when the competition starts getting increased, financial institutions have to make availability of money at cheaper rates. This brings down the margins of the financial institutions. Cheaper money invites to more borrowers and borrowing without discipline resulted in the huge negative consequences. When anything easily available then we do not value it particularly and that leads to destruction.

We cannot predict the time and the extent of the cycle but sure enough that cycle will going to occur and also, we can say that we are either near to occurrence or not.

It is difficult to take a call on the economy while investing but we can keep track of the supply/demand picture relating to capital. For knowing where we stand in the cycle, we need to track the credit cycle. Mast bull market getting inspired by the availability of the credit without any care for the future consequences. And the most bear market is the result of the unavailability of finance for the different projects.

When margin calls hits for the levered firms then they were forced to sell their assets or need to bring additional capital to survive. Such period forced people to sell debt securities and that will have resulted in the lower prices of debt securities. At such a lower price, yield becomes so attractive that investors can start taking buying position on it.

When we see an environment like fear of losing money, unwillingness to lend and invest regardless of merit, shortages of capital everywhere, economic contraction and difficulty refinancing debt defaults, bankruptcies and restructurings, low asset prices, high potential returns, low risk and excessive risk premiums then it is a natural time to start investing.

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So that when we see these events then we have to be ready to be cautious because these events invite an increase in debt level, issuance of unsound & overpriced securities etc. These all become a starting step of a bust. When the credit cycle is in an expansion phase then we have a huge issuance of the securities that means people accepting new issuance. But extensions of it in the way of unsound & overpriced securities. Also, we heard stories like next Infosys, next Microsoft, management performing like Warren Buffett, etc. etc.