Howard Marks’s latest book, Mastering the Market Cycle, is a compendium on the different cycles investors contend with. The book stands as a lesson on observation over prediction. It’s a solid addition to his classic The Most Important Thing.
Since I just started on my notes on the book, I thought I’d leave market cycles for another day. Instead, I want to share some highlights from the book.
I avoided his more popular idioms, as well as quotes from his memos that he always includes in his books, and focused on the secondary lessons that stood out.
Let’s dive in:
When total fear replaces a high degree of confidence, excessive risk aversion takes the place of unrealistic risk tolerance.
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At bottoms, it can be extremely hard to take actions that require conviction and staunchness.
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During panics, people spend 100% of their time making sure there can be no losses…at just the time that they should be worrying instead about missing out on great opportunities.
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The riskiest thing in the world is the belief that there’s no risk. By the same token, the safest (and most rewarding) time to buy usually comes when everyone is convinced there’s no hope.
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Security prices generally fluctuate much more than earnings. The reasons, of course, are largely psychological, emotional and non-fundamental.
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If I could ask only one question regarding each investment I had under consideration, it would be simple: How much optimism is factored into the price?
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It’s hard to fully understand most phenomena in the investment world unless you’ve lived through them.
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Superior investing doesn’t come from buying high-quality assets, but from buying when the deal is good, the price is low, the potential return is substantial, and the risk is limited.
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Few things are as costly as paying for potential that turns out to have been overrated.
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The greatest way to optimize the positioning of a portfolio at a given point in time is through deciding what balance it should strike between aggressiveness and defensiveness.
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The odds change as our position in the cycles changes. If we don’t change our investment stance as these things change, we’re being passive regarding cycles; in other words, we’re ignoring the chance to tilt the odds in our favor.
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In my opinion, it’s entirely reasonable to try to improve long-term investment results by altering positions on the basis of an understanding of the market cycle. But it’s essential that you also understand the limitations, as well as the skills that are required and how difficult it is.
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In the real world, things generally fluctuate between “pretty good” and “not so hot.” But in the world of investing, perception often swings from “flawless” to “hopeless.”
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There’s only one form of intelligent investing, and that’s figuring out what something’s worth and buying it for that price or less.
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The risk in investing doesn’t come primarily from the economy, the companies, the securities, the stock certificates or the exchange buildings. It comes from the behavior of the market participants.
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We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.
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The key questions can be boiled down to two: how are things priced, and how are investors around us behaving?
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Falling for the sure thing — the asset that will provide return without risk, or what I call the “silver bullet” — is one of investors’ greatest recurring failings.
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Exiting the market after a decline — and thus failing to participate in a cyclical rebound — is truly the cardinal sin in investing.
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There is no such thing as a market that is separate from — and unaffected by — the people who make it up. The behavior of the people in the market changes the market. When their attitudes and behavior change, the market will change.
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Remember, when there’s nothing clever to do, the mistake lies in trying to be clever.
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Just as risk tolerance is unlimited at the top, it is non-existent at the bottom.
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Understanding how investors are thinking about and dealing with risk is perhaps the most important thing to strive for.
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In investing, success teaches people that making money is easy, and that they don’t have to worry about risk—two particularly dangerous lessons.
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Short-term investment performance is largely a popularity contest, and most bargains exist for the simple reason that they haven’t yet been taken up by the herd and become popular.
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Companies, like people, have the potential to respond to success with behavior that dooms that very success.
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In investing, everything that’s important is counter-intuitive, and everything that’s obvious to everyone is wrong.
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The truth is that sometimes euphoria and optimism cause most investors to view things more positively than is warranted, and sometimes depression and pessimism make them see only bad and interpret events with a negative cast. Refusing to do so is one of the keys to successful investing.
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The most important thing to note is that maximum psychology, maximum availability of credit, maximum price, minimum potential return and maximum risk all are reached at the same time, and usually these extremes coincide with the last paroxysm of buying.
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Detecting and exploiting the extremes is really the best we can hope for… That means, however, that you shouldn’t expect to reach profitable conclusions daily, monthly or even yearly.
Source:
Mastering the Market Cycle
