Mastering Market Cycles - Howard Marks

Howard Marks is one of the most clear thinker in the world of investing. He is famous for his bond market strategies. he regularly writes Investment Memos at: https://www.oaktreecapital.com/insights/howard-marks-memos. If you want to become a better analyst at understanding market & economic cycles his memos are a must read. His book "The Most Important thing" is also a fantastic material to understand human & investor thinking pattern and behavior.

Mastering the Market Cycles focuses on understanding why the periods of recessions & growth occurs frequently wearing all the lenses of market participants - the economists, the investors, the regulators. The book tries to explain the main factor driving the booms & bust is human tendency to extrapolate the recent past and imbalance in defining risk at the time of bear & bull markets. This book clearly portrays why markets will also be inefficient.

Important Points from the book

1. Every Asset class goes through a cycle - Up & Down this book teaches why such Up & down occur how to spot them & how investors can improve their returns

2. Its extremely difficult to forecast Macroeconomic variables like interest rate, inflation, GDP etc there's a reason even Central bankers & Presidents of the country fail consistently at the same

3. Three golden rules to make money:

a) Understand fundamental of industries & business better than market

b) Have a strict rule of what valuation to pay

c) success doesn’t lie in being right but rather in being more right than others

4. In down cycle as prices fall odds are in favor of investors and hence we should invest more & Vice Versa

5. Experienced investors – like everyone else – don’t know exactly what the future holds but they do have an above average understanding of future tendencies & probabilities

6. Cycles are self correcting - in good periods investors get too excited and buy at any price due to recent good returns (termed as bull market) which causes lot of losses in future and when investors are having losses they get griped by fear and everyone just keeps on selling and prices get cheaper and cheaper (termed as Bear Markets)

7. The Economic Cycle

a) Growth of economy = output of an economy = product of hours worked * output per hour

b) These factors usually change relatively less from year to year, and only gradually from decade to

decade

8. Prices fluctuate due to two things

a) profits and cash flows of the company and

b) investor's psychology towards risk & optimism

c) Sometimes even when a company has bad performance but investors are too excited about the

future the price of that business might increase a lot and vice versa

9. Events affects psychology which affects Events

10. Rising asset prices make investors feel good, encouraging them to go out and spend in the real economy, this in turn drives earnings which drives asset prices higher, which in turn reduces the cost of capital to business, which in turn increases profitability. The cycle stops when some investors realize people have expected too much from current economy simply put if a company can make total profits of 1000 rs in coming 10 years people are willing to pay that 1000 rs today

11. TO DETECT MARKET CYCLES look at how other investors are behaving. The key though is to do this dispassionately

12. Investors needs to balance between two risk:

a) The risk of losing money and

b) The risk of missing opportunity

13. No one knows when the bottom has been made in times of declining prices since it is defined as the day before the recovery begins

14. The tendency of people to go to excess will never end & since those excesses eventually have to correct - market cycles occurs frequently

15. Economies and markets have never moved in a straight line in the past, and neither will they do so in the future and that means investors with the ability to understand cycles will find opportunities for profit.