Mastering The Market Cycle: Getting the odds on your side

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Basically this is a specialized part of the credit cycle, described in the last chapter, that Marks has particular expertise in. 11. The Real Estate Cycle If you study past cycles, understand their origins and remain alert for the next one, you will become keenly attuned to the investment environment as it changes. You’ll be aware and prepared while others get blindsided by unexpected events or fall victim to emotions like fear and greed. The combination of positive psychology and the increase in activity causes asset prices to rise, which encourages more activity, further price increases and greater risk bearing. Company’s gains can lead to losses and losses can lay the groundwork for gains. There is a cycle in business success. Chapter 17: The Future of Cycles

Risk is all about uncertainty. Even though many things can happen, only one will happen. Chapter 2: The Nature of Cycles 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. If the economic cycle is stable, and the profit cycle a bit less so, then the availability of credit swings wildly between “excessive” and “impossible” because of investor psychology and attitude toward risk discussed in previous chapters. The notes below are from the memo The Long View from January 9, 2009, which has more detail explanation and some illustrations.

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I don’t believe in macro forecasts,” he said. “It is one of the views that I hold most strongly.”Why so? The way investors are collectively viewing risk, and behaving in regard to it, is of overwhelming importance in shaping the investment environment in which we find ourselves. The state of the environment is key in determining how we should behave with regard to risk at that point. Mastering The Market Cycle uses the metaphor of a window. In short, sometimes it is open and sometimes it is closed and in fact, people in the financial world make frequent reference to just that: “the credit window” .. As in the place you go to borrow money. When the window is open financing is plentiful and easily obtained. When it is closed, financing is scarce and hard to get. Finally it’s essential to always bear in mind that the window can go from wide open to slammed shut in just an instant. There’s a lot more to fully understand this cycle. Including reasons for these cyclical movements and their impact – but that’s the bottom line. First capital or credit, is an essential ingredient in the productive process. Thus the ability of companies (and economies) to grow usually depends on the availability of incremental capital. If the capital markets are closed, it can be hard to finance growth One of the things that's the strongest about investing is that when trends get going and keep going for a while, it starts to feel like they're going to go on forever, but the longer they go on, the higher they go, what it really means is that the end is even closer than it used to be. It just never feels that way.

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 fearful.” Howard has posted a 14 point list explaining the real estate cycle in the memo Ditto, January 07, 2013. His latest book, Mastering the Market Cycle, explores the subject of cycles. As Jason Zweig observed in hisWall Street Journalreview, “Mr. Marks admits his book is a kind of tug of war between his certainty that ‘we don’t know what the future holds’ and his belief that ‘we can identify where the market stands in its cycle.'”During this stage, investors are more likely to take on risk and engage in speculative behavior, as they believe that the market will continue to rise. Overly generous capital markets ultimately lead to unwise financing and thus to danger for participants

If valuations aren’t out of line with history, the market cycle is unlikely to be highly extended in either direction. The odds change as our position in the cycle 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 favour. Investing is a matter of preparing for the financial future. It’s simple to define the task. We assemble portfolios today that will benefit from certain events that unfold in the years ahead. Everything else being equal, the bigger the boom – the greater the excesses of the capital markets in the upward direction – the greater the bust. Timing and extent are never predictable, but the occurrence of cycles is the closest thing I know to inevitable. Chapter 10: The Distressed Debt Cycle In this chapter Marks also goes into significant detail about how the global financial crisis happened, and how at the bottom of the cycle forces were in place to cause a rebound. Alan: Okay, so next question from the audience. This is a reader of your first book, The Most Important Thing, and the question is: do you now know what the most important thing is? The question is based on the conclusion of your book.

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Lower-quality issuance eventually is tested by economic difficulty and gives rise to increased defaults.

And what I wanted to ask you about is patience and the importance of patience because in your book, I don't know if you explicitly say it but you're talking about the market cycle, which implies market timing, but I know you're not talking about market timing. So you have to ... so there's this element of patience that has to ... 'cause you could be right, you know, early, and then have to wait for some time. So I'm just curious about how you've been able to have that patience. Is it process? Is it personality? Is it people? What's driven your success with that? Changes in the availability of capital or credit constitute one of the most fundamental influences on economies companies and markets. Even though credit cycle is less well known to the man on the street, it is one of the most important and profound influence, according to Mastering the Market Cycle. Much of investing is subject to gross generalizations and sweeping statements. Usually stressing positives due to greed and this seems particularly true in real estate. Everyone is heard things like “they’re not making any more land’, “you can always live in it”, and “its a hedge against inflation”. Mastering The Market Cycle explains that people eventually learn is that regardless of the merit behind these statements thEveryone feels these emotions, but the superior investor does their best to keep these emotions in balance at all times rather than swinging between one and another with the market. 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.