If you’re not listening to the Masters in Business podcast, you’re missing out. The podcast has become a free, weekly course on investing, business, psychology, and more. I set aside time some time each week to listen. If you have any interest in learning more, subscribe and do the same. You won’t regret it.
There’s a lot of insightful stuff covered in this episode, but I only want to touch on one thing. Marks believes most things move in cycles – the economy, the markets, and investor behavior.
Rule #1: most things prove to be cyclical. Rule #2: some of the greatest opportunities from gain and loss comes when other people forget rule #1.
He went on to explain this by breaking down the three stages of a bull market:
Stage 1: Only a few people believe things could ever get better.
Stage 2: Most people understand improvement is taking place.
Stage 3: Everyone believes it will get better forever.
Investors have consistently cycled from pessimism to optimism and back throughout history because they tend to forget the past once they reach Stage 3 (and many are too scared to believe things will get better in Stage 1 like they have in the past).
The idea that this time is different, things won’t change, it will always stay better has been repeated too often. Yet, people continue to make the same mistakes.
You have to understand your psyche and the psyche of those around you.
If you can recognize where we are in the cycle, you have an advantage over most investors. One way to protect yourself is to watch out for serial bad behavior from the herd.
You see this in the love-hate relationship people have with stocks and the stock market. Most people love stocks (most optimistic) near the top of the cycle. They hate stocks (most pessimistic) near the bottom of the cycle.
When you see a change in behavior, you can use it to prepare yourself for the next stage of the market.
Of course, recognizing the changes will come from experience – your time in the market. But reading broadly is the best way to help you accelerate that process.
Marks recommends a few books to start: A Short History of Financial Euphoria, Fooled by Randomness, Against the Gods, Poor Charlie’s Almanac, The Warren Buffett Way, and Outsiders. I’ll add Marks’ book The Most Important Thing to the list.
- Are Stocks Overvalued? A Survey of Equity Valuation Models – Research Affiliates
- What You Pay, Not the Growth You see, is the Biggest Driver of Future Returns – Value Perspective
- Good Enough – M. Housel
- Think Long Term – Seeking Wisdom
- We Eat Dollar Weighted Returns – Aleph Blog
- Daniel Kahneman: ‘What would I eliminate if I had a magic wand? Overconfidence’ – Guardian
- It’s OK To Ignore Your Portfolio – L. Swedroe
- The Mirage of the Financial Singularity – R. Shiller
- China’s Looming Stock Market Disaster is Part 1929 America, Part 1989 Japan – Quartz
- Warren Buffet, Bill Gates and Melinda Gates (Video) – C. Rose