Mastering the Market Cycle: Getting the Odds on Your Side

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The crash stage of the market is characterized by a period of rapid decline and increased investor panic. The boom stage of the market is characterized by a period of rapid growth and increased investor optimism.

Mastering the Market Cycle: Getting the Odds on Your Side" by Howard Marks is a must-read for any investor who wants to gain a deeper understanding of the cyclical nature of financial markets. Because down-cycles are painful and up-cycles can lead to inflation (which ends up being painful), the government plays an active role in shaping the market cycle. It does so through two mechanisms: monetary policy and fiscal policy. A few forecasts of significant deviation turn out to be correct and valuable, leading their authors to be lionized for their acumen. This book focuses on the third. It is harder to gain an edge over investors in judging the environment — where we are in the market cycle — than in the first two areas. But it is not impossible.Warren Buffet said “the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs” and “be fearful when everyone is greedy, and greedy when everyone is The average investor doesn’t know much about cycles, hasn’t been around long enough to have significant personal experience with them, doesn’t read financial history to learn about them, and thus is adversely affected by cycles. It is very easy to achieve average investment performance and it is quite hard to perform above average. Howard Marks is one of my favorite writers on investing and I enjoy reading his memos throughout the year. Mastering the Market Cycle has insights for learning to see the big picture in the economy and investing. Imagine you’re a financial investor – a successful one, with your own capital-management firm and over 40 years experience in the market. What questions do you think your clients would ask you the most?

Superior investors have favorably skewed distributions of outcomes, but not batting averages of 1,000. Chapter 15: Limits on CopingWhen the market is high in its cycle, investors should emphasize limiting the potential for losing money. When the market is low in its cycle, they should emphasize reducing the risk of missing opportunity. During this stage, investors are more likely to adopt a wait-and-see approach, as they believe that the market will continue to fall. Fear can lead to panic selling and a market crash, while greed can lead to irrational exuberance and a bubble. Howard tells the story of Sir Isaac Newton and how he lost a lot of money during “the South Sea Bubble” from his memo bubble.com, January 2, 2000. Chapter 13: How to Cope with Market Cycles Alan: Okay. Well, thanks Andy. Thanks Lisa. Thank you Howard Marks. Andy and Lisa told me to trust that Howard is listening right now, even though we can't see him yet. So I'm just gonna start going. We are really fortunate to have Howard Marks here. Lisa kind of mentioned at the outset that we'd been planning with Howard to join us for over a year, and due to some personal matters he wasn't able to join us in person, unfortunately. But he did volunteer to do this via video link, and I think it'll be a neat experience and something we're looking forward to.

Marks has a well-earned reputation for prescience and patience.A decade ago, he and his Oaktree partnerBruce Karsh made a hugely successful beton distressed corporate debt during the financial crisis. While most asset managers suffered from investor withdrawals, Oaktree was raising money.Alan: Okay, so I'm gonna start here with some of the questions we've gotten from the audience. Again, I just encourage folks to continue to think of questions and we'll get through as many as we can here. First one here, I think this is interesting, it's a question we probably all ask ourselves from time to time, what investment mistake have you made that comes to mind and what did you learn from it? During this stage, investors are more likely to take on greater risk and engage in speculative behavior, as they believe that the market will continue to rise. Marks’s successful positioning of portfolios over long cycles — shifting between aggressive and defensive at the five major turning points in markets that he has experienced during his career — has been a big contributor to Oaktree’s success. He provides real-life examples to illustrate his thinking. For some reason, that resonates with me, and I find it easier to admit what I don’t know than to persevere as if I did,” he said.