🔍 Mastering the Market Cycle
Lessons from 50 Years of Investment Experience (Not mine 😋)
The most popular video on our not-so-popular YouTube channel is titled - “Mastering Market Cycle, Lessons from One of the Greatest Investors in the World”
It’s based on a book by a Legendary Investor: Howard Marks
And if I were to put the entire book in a few words, those words would be :
Markets move in cycles and our portfolio should be adjusted -on a scale of Defensive to Aggressive- according to where we are in the cycle!
Sadly he did not elaborate on What defensive or aggressive means in the context of a Retail Investor (surprise!) except that :
Aggressive means putting more money on the table 🫰🏼
Defensive means taking money off the table 💸
With that basic background, in this post I want to share the key learnings specifically from Chapter 12 of the book titled :
🗂️ Putting it all together - Market Cycle 🌟
Here we go!
🌟 Prices are primarily impacted by Fundamentals and Psychology
A combination of several sub-cycles impacts Fundamentals and Psychology.
These sub-cycles are :
Cycle in Profits
Cycles in Attitude towards Risk
Cycle in Investor Psychology
Real Estate Cycle etc. (there are more…)
They blend in unique and idiosyncratic ways to create the movements of the Stock market.
If Markets were only dependent on fundamentals, Stock prices should have been relatively less volatile and more stable.
After all, earnings do NOT change daily and the quarterly highs and lows tend to be much smoother over a long period.
The fact that stock prices are volatile, then, proves that much of the movement is psychological and/or non-fundamental driven.
A random combination of the fundamentals and Psychology mesh together and manifest as cycles, which can be summed up by these 9 words.
“First the innovator, then the imitator, then the fool” - Warren Buffett
In the book, Mr. Marks helps us understand the Market cycle as being defined by these 3 broad stages (work in the reverse direction as well) :
🌟 Where we are positioned in the Cycle will determine our Expected Returns. And our portfolio position must be “calibrated” accordingly.
If we become aggressive at the wrong point in the Market Cycle, the hope for Capital Appreciation turns into the realisation of capital punishment!
For a Retail Investor investing in India, these lessons boil down to this :
There is no doubt we are in a long-term Bull Market and I am bullish on India, just like most of us but that doesn’t mean we can “buy at any price”.
It also doesn’t mean there won’t be hiccups along the way.
As for the Market Cycle and where we are, while it’s not always easy and obvious, there were enough signs to conclude that the small/Midcap space was getting overheated.
In the Long Term, the Small Cap nausea we’re experiencing will not matter but if you were buying/have bought at elevated levels into small-cap/midcap funds (stocks), it would not be rational to expect miracles.
🌟 On December 12th, I wrote a note to myself highlighting the “froth” that the SEBI chief has recently highlighted. Frankly, most of us kind of knew things were getting a little wild, so I’m not saying I was alone in seeing this.
Anyway, as a result of this strategy shift, I started removing some of the smaller positions (Momentum-based positions) and converted about 5% of the portfolio into Cash.
To be honest, while the note suggests that I was cognisant of the Small Cap / Midcap skew and while I did stop using some of the more “aggressive” strategies I was using up to the point, I think I failed to calibrate the portfolio as well as I would’ve liked in theory.
You live and learn! 🤷🏾♂️
On a related note, If you’re curious to learn How to diagnose your portfolio, You can check out this post.
And lastly, here’s the video i mentioned at the beginning.
Looking forward to hearing your take in comments
Regards
Rahul
Disclaimer : This is NOT financial advice. I am not a SEBI registered advisor. All content is Purely for Educational purposes.