Having A Sense For Where We Stand

Market cycles present the investor with a daunting challenge because:

• Their ups and downs are inevitable.
• They will profoundly influence our performance as investors.
• They are unpredictable as to the extent and especially timing.

What are we to do about cycles?

First possibility: Rather than accept that cycles are unpredictable, we should redouble our efforts to predict the future. (this is a bad idea)

Second possibility: Accept that the future isn’t knowable, throw up our hands and simply ignore cycles. Invest with total disregard for cycles. This is the “buy and hold” approach.

Third possibility: This is the right option by a wide margin, in Howard Mark’s opinion. Try to figure out where we stand in terms of each cycle, and what that implies for our actions.

In the world of investing, nothing is as dependable as cycles.

If we don't know in advance how and when the turns will occur, how can we cope?

1. Stay alert for occasions when a market has reached an extreme.
2. Adjust our behavior in response.
3. Refuse to fall into line with the herd behavior that renders so many investors dead-wrong at tops and bottoms.

Be alert to what is going on.

Take the temperature of the market.

Strive to understand the implications of what is going on around us.

Look around and ask yourself:

• Are investors optimistic or pessimistic?
• Do the media talking heads say the markets should be piled into or avoided?
• Are novel investment schemes readily accepted or dismissed out of hand?
• Are securities offerings and fund openings being treated as opportunities to get rich, or possible pitfalls?
• Has the credit cycle rendered capital readily available, or impossible to obtain?
• Are price/earnings ratios high or low in the context of history?
• Are yield spreads tight, or generous?