All that goes up must come down, and vice versa. This is how governments, economies, companies and financial markets work. Be it stock, debt, credit or property market, the upswing and the downturn always follow each other - nay, one event 'causes' the other. Understanding that market ebb and flow and developing a suitable plan will make you a better investor than most, says Howard Marks in his latest book Mastering the Market Cycle. The investor-writer (he is also the Co-founder of Oaktree Capital Management) explains how a cycle in the financial market moves from aggressive buying to distress selling and how every time the community chanting 'this time, it is different' has to eat its words. From dotcom bubble to global meltdown, the examples are numerous and cannot be ignored.
In spite of the unbroken chain of cause and effect, ebb and flow, no two cycles are the same; neither can one predict the zenith or the nadir of a particular cycle. But in every market cycle, there are periods of extreme exuberance and despondency which determine the flow of investments. So, one's best chance lies in getting the timing right between the two extremes. For instance, Oaktree Capital started buying heavily in late 2008 when there was gloom all over. And this helped the firm earn huge returns when the market peaked. Although Marks and his partners could not see the financial crisis coming, they did feel something was amiss. So, they kept raising capital and went on a buying spree after the market crashed.
The writer also says that one must strive to know better than others all things 'knowable' - fundamentals of companies and industries. But it will not be enough to guarantee results. A fundamentally strong company may go through a long spell of gloom if the economy is in a bad shape. "I can't say an understanding of cycles is everything in investing or the only thing, but for me, it's certainly right near the top of the list," he writes. History doesn't repeat itself, but it does rhyme - this popular adage attributed to Mark Twain well describes what the book is all about, according to Marks. He then shares a 'guide to market assessment', which is 'non-scientific' and 'somewhat jocular', but can help in 'taking the temperature of the market'. The book also contains the author's popular memos (even Warren Buffett reads them) and references to his previous work. On the flip side, the content is somewhat repetitive. The book does not throw up new ideas but does a decent job of hammering home what is important and often forgotten.