Mastering the Market Cycle: Getting the Odds on Your Side

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And not the banker who loaned the money for its construction and then repossessed the project from the developer in the down-cycle. This cycle in investors’ willingness to value the future is one of the most powerful cycles that exist. Likewise, most collapses are preceded by a wholesale refusal to finance certain companies, industries, or the entire gamut of would-be borrowers.

But the author contends that the superior investor should, and often does, consider a third component: financial cycles. This pattern is perhaps best demonstrated by taking an extreme example: the dot-com bubble, and subsequent crash, of 1995 to 2002 – a boom-bust cycle that was driven, to a large extent, by the incaution of venture capitalists. Well, we can say of financial cyclicality what Mark Twain is reputed to have said of history: it doesn’t repeat itself, but it does rhyme.Spring turns to summer, summer to autumn, autumn to winter, and winter, finally, leads back to spring. Often underappreciated and usually poorly understood, cycles – whether in a particular market or an entire economy – are the linchpin of superior investment performance.

In investing, success teaches people that making money is easy, and that they don’t have to worry about risk—two particularly dangerous lessons. For instance, imagine the real estate market has crashed, and developers are defaulting on debt and being forced to abandon their building projects.Thus an overheated auction in the credit market—as elsewhere—is likely to produce a “winner” who’s really a loser. Corporate management is not immune to the swings from risk-averse to risk-tolerant either (see the financial crisis). These questions should help determine the tilt of a portfolio: more aggressive when the odds are in our favor and more defensive when the odds are against us.

Stages of a Bear Market: 1) when a few people believe things won’t stay better forever, 2) when most people see things are getting worse, 3) when everyone believes things can only get worse. Distressed debt is bought on the anticipation that the new ownership interest in the company (after it emerges from bankruptcy) is worth significantly more than the value of the distressed debt. In investing, there is nothing that always works, since the environment is always changing, and investors’ efforts to respond to the environment cause it to change further.When risk tolerance takes over and lenders compete avidly for opportunities, the bidding is likely to become overheated. This link is being provided as a convenience and does not constitute an endorsement or approval by Oaktree of any products, services, or opinions of the corporation, organization or individual. While most investment professionals take the standard out – that ‘you can’t time the market’ – in Mastering the Market Cycle Howard Marks, a living investment legend, takes the contrarian point of view that not only can you time markets, but it’s imperative that you do so. Stages of a Bull Market: 1) when few people believe things will get better, 2) when most people see things improving, 3) when everyone believes things will stay better forever.