Mastering the Market Cycle: Getting the Odds on Your Side

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Alan: Okay. Well, thanks Andy. Thanks Lisa. Thank you Howard Marks. Andy and Lisa told me to trust that Howard is listening right now, even though we can't see him yet. So I'm just gonna start going. We are really fortunate to have Howard Marks here. Lisa kind of mentioned at the outset that we'd been planning with Howard to join us for over a year, and due to some personal matters he wasn't able to join us in person, unfortunately. But he did volunteer to do this via video link, and I think it'll be a neat experience and something we're looking forward to. So you can forget long-term forecasting. It’s much wiser to pay attention to what the author calls “the knowable” and base your short-term predictions off that knowledge.

Marks’s memoshave a cult following on Wall Street and beyond, and anyone whose read them knows he is fond of adages. And true to form, he pulled out one in response to Bond’s question. This stage is often followed by a market crash, as investors realize that the prices of assets are not sustainable. 3 – The Crash Stage – Anxiety, Denial, and Panic Waiting for the market bottom is folly. You should buy when price is below intrinsic value. If the price goes lower, buy more.

Another key basis in mastering the cycle is to understand that things don’t just happen one thing after another in – unfortunately irregular – cyclical patterns. What happens in one stage of a market cycle is instead causing it to move on to the next stage. Cycles are chains of cause-and-effect relationships. After a pair of introductory chapters the main part of the book is devoted to describing a large set of interrelated and parallel such cycles: the economic cycle, the profit cycle, the risk attitude cycle, the credit cycle and so on. Underlying all these is the cyclical patterns in investor psychology – a topic clearly nearest to Marks’ heart. To a large extent Marks reads various psychological markers and positions himself in the cycle by these. Next comes one chapter that tries to assemble all the above cycle inputs into the full mosaic of the market cycle. The book finishes with a few concluding more practical chapters and a needlessly cut-and-paste type of summary. 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 However, it is important to note that the bull market stage can be followed by a bear market, as conditions change and investor sentiment shifts. 7 – The Overvaluation Stage It’s fascinating how the market is constantly overreacting in a positive or negative direction, and very rarely underreacting or appropriately reacting. This obviously informs my agenda in reading this book, and will therefore shape the information I choose to highlight and what I choose to exclude. Specifically, I want to see if this book can help answer the following questions:

If valuations aren’t out of line with history, the market cycle is unlikely to be highly extended in either direction.

Patience is one of the most important things in our business,” Marks said. “And what I like to point out is that sometimes we have a sense for what’s going to happen. We never know when. Most of the important things that happen in our business . . . are primarily attributable to changes in psychology, not fundamentals . . . And psychology cannot be predicted and certainly cannot be timed.”