Mastering the Market Cycle

At Priya Wealth Management, we believe that you have to invest across the full life-cycle of markets to capture superior risk-adjusted returns. Howard Marks is a renowned American investor and the co-chairman/ co-founder of Oaktree Capital Management. Mark’s “memos” or investment newsletters are legendary in the investment community for their critical analysis and market insight. He is the author of 3 best-selling books including his latest offering “Mastering the Market Cycle”.

Why do we need an understanding of Market Cycles?

• Investing is a game of probabilities – a deeper understanding of market cycles enhances the odds that we will be successful
• Marks, with 40 years of experience, says that the most common questions he is asked by his clients relate to the concepts of Market cycles
• The dominant question is: “How do I position myself within the current market cycle?”

Lessons

• Humility is an asset to every investor
• At its most fundamental level, an investor never truly knows what the outcome of an investment will be.
• All Investors are making guesses – the task is to ensure that you are making educated ones.
• Long-term forecasting is a fruitless exercise and Mark’s advises investors to focus on what he labels “the knowable”
• Short-term predictions should stem from this information
• Cycles are similar to natural patterns, though they aren’t nearly as predictable
• The major driver of short-term market fluctuations is investor psychology
• Mark’s uses the South Sea bubble to emphasise the point

In January 1720, Isaac Newton held the position of Master of the mint. During this time, the stock of the South Sea Company stood at £128. Newton owned the stock and sold his holdings following what he correctly perceived as extreme speculation. By June of 1720 the stock had sky-rocketed to £1,050. Newton, widely recognised as one of the most influential scientists of all-time and a genius was unable to deal with the emotional stress associated with selling his holdings and repurchased the stock close to its all-time high. Unfortunately he lost more than £20,000 in the subsequent crash.

• If you start hearing things like “the market cant fail” and “this time it’s different”, you’d do well to proceed with caution
• Likewise, when investors are feeling hopeless and fearful in the wake of a market crash this may offer the optimal entry point from a risk premium perspective

How should we characterise Cycles?

Mark Twain said that “History doesn’t repeat itself, but it often rhymes”. Howard Marks asserts that no two cycles play out in exactly the same way. However, they do all tend to follow the same repetitive pattern.

• Market Cycle patterns may be clear in the long-term, but, in the short term, there is a great deal of variance.
• Market have different cycles in the long term than in the short term
• One of the main reasons for short-term market volatility is human emotion
• Human emotion in relation to investing fluctuates between euphoria-driven greed and despair-driven fear
• Long-term economic growth is driven by the number of hours worked and productivity per working hour
• The second way to boost GDP in the long-term – increasing productivity per hour – hinges on technology

Why “Mastering the Market Cycle” makes our short-list?

Market cycles follow a particular pattern: in the long term, they tend to grow, following what’s known as a secular trend. In the short term they fluctuate and oscillate around this secular trend. Superior investment returns can be achieved through a respect and more important an awareness of what drives these short and long term cycles around this secular trend.Pryia