Mastering the Market Cycle: Getting the Odds on Your Side

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But on the other hand, when the market goes down and fundamentals are negative and prices are retreating and people feel worse and worse and worse, that's when they should be buying, but that's when they're getting more and more depressed. So you have to be a contrarian, and one of the ... Contrarianism takes many forms, but I think the most important form of contrarianism is refusing to succumb to the same emotions that are driving the market. We are all, including me, we are all subjected to the same influences. We all read the same news. Well, some of us only read from the left, and some only from the right, but there aren't an infinite number of media outlets. We all hear the same facts, or alternative facts. We all see the market going up or down the same. We all make money or lose money at a given point in time. 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.

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.

Introduction

During this stage, investors are driven by the fear of missing out and are willing to pay exorbitant prices for assets that are not supported by fundamentals. Patterns are a natural part of nature. Some are easy to predict, like seasons and tides. Market cycles are harder to predict because they depend on human psychology. But if you pay close attention you can use them to your advantage, rather than suffer from the chaos they can cause. I wish he had more stories here of actual decisions he faced in his career and how he used his sense of cycle timing to make the call. Did he make bad calls in his career that were formative learning experiences? Were there any particular triumphs he’s most proud of? This is all very abstract and impersonal.

Real estate has emotional up-cycles and down-cycles just like any other asset, but what makes it interesting and unique is the significant time lag involved in bringing new supply to market. Unlike issuing new debt or equity, it takes years in real estate between “let’s do it” and “the deal is done”, due to the difficulties in finding land, getting approvals, design, construction, etc. The book is divided into three sections, each of which focuses on a different aspect of market cycles. The first section provides an overview of the concept of cycles, including the different phases and the drivers of each phase. The second section delves into the psychological and emotional factors that influence investor behavior during market cycles, including the role of greed and fear. The third section offers practical advice on how to invest during each phase of the cycle, including strategies for mitigating risk and capitalizing on opportunities. For instance, imagine the real estate market has crashed, and developers are defaulting on debt and being forced to abandon their building projects. You might be able to snatch up structures whose worth in materials alone exceeds the price at which you’re buying.

Well, these blinks aim to answer such questions. Often underappreciated and usually poorly understood, cycles – whether in a particular market or an entire economy – are the linchpin of superior investment performance. By the end of these blinks, you should have a feel for how they work and, therefore, be that much closer to becoming a superior investor. Oaktree formed its first fund for distressed debt investing in 1988. “Often conditions are exacerbated by exogenous events that sap confidence and damage the economy and the financial markets,” Marks explains. In 1990, the Gulf War, the bankruptcy of many prominent and highly leveraged buyouts, and the imprisonment of Michael Milken (the principal investment banker behind high-yield bonds) provided the ideal opportunity for putting capital to work.