Investing: Don’t forget about the cycle

With all this volatility it’s hard to really know where we stand in the cycle and what this year and the future could hold. The beginning of 2018 also had a euphoric start but, this feeling was quickly stubbed out in the following two months. So, we could be forgiven for treading cautiously in markets today.

Invest with cycles in mind

If you read any of Howard Marks’ (co-founder of Oaktree Capital) books or memos you begin to realise one of the most important things to know as an investor is never forget about the inevitability of cycles.

“Economies and world affairs rise and fall in cycles. So does corporate performance. The reactions of market participants to these developments also fluctuate cyclically. Thus price swings usually overstate the swings in fundamentals… So prices sometimes represent high multiples of peak prospects (as they did with technology stocks in the ‘90s), and sometimes low multiples of trough prospects. Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do. People often act as if companies that are doing well will do well forever, and investments that are outperforming will outperform forever, and vice versa. Instead, it’s the opposite that’s more likely to be true.” The most important thing, 2003

Even though the art of investing revolves around making decisions about the future, it is very difficult to accurately and consistently predict. So, as an alternative, we must evaluate where we are in the current cycle to have any chance of understand the possibilities that lay ahead.